Balancing order and entropy: the role of innovation and organizational disorder in performance across startups and banking

Purpose This study aims to examine how organizations balance operational stability (order) and controlled disorder (entropy) to foster innovation and high performance. It investigates the necessary role of entropy and innovation across two distinct sectors – technology startups and banking and financial services – to determine sector-specific strategies for optimizing performance. Design/methodology/approach The study uses necessary condition analysis (NCA) to assess the “sweet spot” required for high performance. Data were collected from 50 technology startups and 72 banking and financial service institutions. The analysis evaluates whether entropy and innovation function as necessary conditions for achieving competitive advantage in each sector. Findings The findings indicate that innovation is a stronger predictor of performance across both sectors. The effect size of innovation is large in banking ( d = 0.52) and moderate in technology startups ( d = 0.44), underscoring its critical role in highly regulated industries. Entropy, while necessary, has a more moderate effect in both sectors, serving as a foundational enabler rather than a direct driver of performance. Research limitations/implications This research advances the understanding of entropy as an enabler rather than a determinant of performance, refining theories of ambidexterity, dynamic capabilities and organizational adaptation. The findings support the notion that optimal performance emerges from balancing exploration (innovation-driven entropy) and exploitation (stability and efficiency). Practical implications Technology startups require moderate entropy to sustain creativity while ensuring enough structure for scalability, while banking institutions must deliberately introduce controlled entropy to counteract rigidity and foster innovation. Both sectors must ensure that innovation is actively nurtured and not stifled by excessive control or mismanaged disorder. Originality/value This study challenges conventional views by demonstrating that organizations must actively manage entropy, rather than merely minimize it, to sustain innovation and performance. It applies NCA as a novel method to assess necessary conditions for organizational success, offering a structured approach to understanding when and how entropy contributes to innovation and firm performance.