Archimedes is reported to have said: ‘Give me an [appropriate] point of leverage and 1 will turn the world.’ The remark highlights a fundamental truth that the picture of strategic behavior obtained by an observer depends on the knowledge-seeking model (paradigm) through which he perceives reality.
At the present time, study of management is in the midst of a ‘paradigmatic revolution.’ In this chapter, we explore two aspects of this revolution.
The Contingency Perspective
The major aim of an effort to understand a previously unstudied part of reality is to reduce the complexity of the real world to a model which is comprehensible and manipulable by man. But experience shows that complexity, like Salome’s seven veils, must be peeled off one layer at a time. First to be perceived is a highly smoothed and aggregated shape of the underlying reality. Then come models of increasing complexity and sophistication which deepen the observer’s understanding.
As is typical of all young sciences, the first step in the study of organizations was directed to identifying the typical behavior of organizations.
Sociologists, who studied response of complex organizations to environmental change, came to the conclusion that organizations are myopic , resistant to change, bureaucratic, inertial. They adapt to environment in a reactive, incremental manner. When hit by a sudden discontinuity, they go into a cataclysmic crisis.
Economists, who undertook to study a subclass of complex organizations, called the business firm, arrived at a totally different perception. For them, the firm was an aggressive, perpetual seeker of maximum profit.
The picture became complicated when sociologists joined economists to formulate a behavioral theory of the firm. The firm that emerged from this research was very close to the original model of the sociologists: Its behavior had to be triggered by problems; it could handle only one goal at a time; and it engaged in ‘local search’ for solutions to problems. The choice of the preferred solution was ‘satisficing,’ which meant that the firm accepted the first satisfactory solution that came along.
A matter of central importance to the present discussion is that the authors of this research labeled their results in the singular: A behavioral theory of the Firm (Cyert and March 1963-G), implying that all firms exhibit the same change-denying conservative behavior.
This conclusion is in direct contradiction to the equally singular ‘economic theory of the firm,’ in which all firms are seen as aggressive profit maximizers.
Nor is it possible for a manager in Google, Apple, Amazon, Microsoft, and numerous Chinese firms to recognize themselves in the mirror held up to them by the behavioral theory .
But, if the next of Salome’s veils is removed, at the higher level of understanding it becomes apparent that the contradiction is only apparent and not real. There are, in fact, numerous firms which are accurately described by the behavioral theory . There are also profit maximizers, and there are restless entrepreneurial firms described by the economist Schumpeter, who are creators of novel technologies, markets, and industries.
Thus, when the second veil is peeled off, managerial reality appears to consist of a range of different behaviors. Under this paradigm, attention is no longer focused on the average aggregate behavior of firms, but on the variety of behaviors, and on conditions under which they are appropriate.
The study of management is currently in a transition to this second level. A new paradigm, rather grandiosely described as contingency theory, is rapidly becoming the epistemological leverage in studies of both management and of business firms.
Readers of Ansoff’s prior work—Strategic Management—will recall that it was rooted in the contingency approach. As a rough approximation, of the order of two thousand different strategic behaviors were explored in the book.
This book is in the same tradition. The major contingent variables are: key success factors, turbulence levels in the environment, strategic aggressiveness of the firm, and its capability profile. Unlike the preceding book, which studied the full range of behaviors which are observed in practice, this book is focused on behaviors which should be chosen in light of the environmental imperatives, on the one hand, and the objectives and resources of the firm, on the other.
This book is a step in the emergence of practical management technology from a ‘single Model T’ age. Until recently, a manager seeking help was offered a variety of competing approaches by consulting firms and by academics, each claiming that his approach was the best. In this book, we have related the merits of different approaches to the needs and circumstances of the firm.
Simplicity, Complexity, and Requisite Variety
As the succeeding veils are peeled off, the researcher comes closer and closer to perceiving the shape of Salome. But the complexity of the picture also increases. In the later stages, as minor details and undulations are added, the researcher is in danger of losing perception of the shape and grace of the beautiful dancer, because of his preoccupation with anatomical details. Thus, at a certain point, further proliferation of complexity (removal of the final veils) becomes dysfunctional. To use another analogy, the researcher can no longer see the wood for the trees.
How much complexity is enough for an effective response to the environmental challenges is today one of the central and vexing questions, not only in strategic management, but also in society as a whole. One answer, which had President Reagan for its patron saint, is that the responses have become too complex and that complexity should be rolled back.
An eloquent call for a return to simplicity in management was made in a 1960s Fortune magazine by Theodore Levitt who accused the railroad and the petroleum industries of having an over simplistic perception of the boundaries of their respective businesses.
As the reader has seen in the preceding chapters, the position taken in this book is that simplicity is not a ‘free good,’ as the economists would say, and that the price of oversimplicity is a failure to make a timely and effective response to environmental challenges and opportunities.
For example, use of control and extrapolative budgeting systems as the primary management tools was not only adequate but appropriate in the 1920s. But in the last quarter of the twentieth century, a firm whose management persists in the belief that the future is extrapolative, and the prospects are for a ‘resumption of growth,’ is, as a minimum, headed for surprises and, as a maximum, for extinction. (Recall the statement by the current chairman of General Motors, when he took office several years ago: ‘General Motors has unlimited growth horizons and it is the world’s best managed company,’ and compare this statement to the declining trend in the company’s market share.)
To assure success and continuity, the speed, subtlety, and complexity of a firm’s response must be in tune with the critical success factors and the turbulence level in the environment.
When low price and reliable products determine the market share, the firm will succeed by keeping its products undifferentiated and focusing its energies on minimizing production costs. But when turbulence is high and product innovation is frequent, success depends on product differentiation and aggressive marketing, and adherence to the single product strategy leads to a loss of competitive position.
When environmental discontinuities are infrequent, and change is slow relative to the speed of response by the firm, management can succeed by responding to discontinuities after they have surfaced and impacted on the firm. But on turbulence levels above 4, when discontinuities are frequent and fast, management must begin listening to complex weak signals.
But it must also be recognized that complexity is no more of a ‘free good’ than is simplicity. In the first place, complexity is expensive. Thus, as we have discussed, issue management places a much smaller workload on the firm than does the more complex strategic position management. But beyond the cost, there are limits to the complexity which an organization can manage.
Through the years, aggressive and successful firms not only welcomed, but sought complexity . In the last quarter of the twentieth century, there are increasing signs that the complexity of some large diversified firms has become both incomprehensible and unmanageable. When this occurs, the only way a firm can practice the requisite variety principle is not by increasing further the complexity of its response, but by reducing the range of environmental challenges which it undertakes to handle. In other words, the firm must ‘undiversify.’ Recent and frequent reports in the business press have been reporting of contractions in scope and divestments by some of the world’s leading companies. This is a weak signal which suggests that, in the future, management will increasingly put limits on the complexity of their firms to preserve their manageability.
The Original Concepts of Strategic Management
This chapter is based on Ansoff’s research (1972-F) which was the first to introduce the concepts of strategic management. Ansoff argued that operating and strategic behaviors call for substantially different ‘organizational architecture’ and that when both behaviors have to be accommodated in the same firm, the two architectures conflict. It may be of benefit to the reader to review Ansoff’s 1972-F tentative insight into the nature of strategic management with the practical methodology discussed in this chapter.
Two Styles of Organizational Behavior
Environmental serving organizations (ESOs) such as the business firm exhibit a variety of behavioral styles. This discussion will focus on two typical contrasting styles: the incremental and the entrepreneurial.
Incremental behavior is exhibited by a large percentage of business firms and virtually by all nonbusiness, purposive organizations such as hospitals, churches, and universities. As the name implies, the incremental mode is directed toward minimizing departures from historical behavior, both within the organization and between it and the environment. Change is not welcome, rather it is to be either controlled, ‘absorbed,’ or minimized.
Since social change is inexorable, few organizations succeed in containing it fully. In the incremental style, the response to change is reactive in which action is taken after the need for change has become clear and imperative. This is what Cyert and March have aptly called a ‘problemistic search ’ for solutions (Cyert and March 1963-G). The solutions are sought locally: through minimizing the increments of change from the previous status quo. The search for alternatives is sequential, and the first satisfactory solution is acceptable (satisficing behavior in Simon’s terms: March and Simon 1958-F).
Both profit and nonprofit organizations exhibit incremental behavior . However, there is a significant difference between the business firm and the other environment-serving organizations. A majority of firms which behave in the incremental mode are also efficiency seeking. The minority that ceases to seek efficiency do not survive in the long run. Conversely, the nonbusiness organizations tend to be bureaucratic. Rather than seek efficiency, they tend to develop set rules and procedures for ‘how business is done.’ Thus, while incrementalism in the firm is used to enhance the effective utilization of resources, in other organizations it is directed to the maintenance of the organizational status quo.
The incremental mode is widely observable. As a result, it has been the focus of research on organizational behavior.
Entrepreneurial Behavior
The second mode of behavior is entrepreneurial. It entails a drastically different attitude toward change rather than suppresses and minimizes it an entrepreneurial organization seeks change. Instead of reacting to problems, future threats and opportunities are anticipated; instead of local solutions, global search is conducted for alternative courses of action; instead of a single alternative, multiple ones are generated; instead of satisficing, the decision process is to choose the best from among available alternatives. Rather than seek to preserve the past, the entrepreneurial organization strives for a continuing change in the status quo.
Entrepreneurial behavior is much less frequently observable than incremental. In nonbusiness organizations, it usually occurs when the organization is first created and the early post-birth period is devoted to definition of the organizational purposes and to the creation of the administrative structure. Following the creative period, the organization progressively settles into the incremental mode. Entrepreneurial behavior does not occur except under conditions of extreme crisis caused by severe erosion of the social utility of the organization.
In the business sector, the birth of a firm is an entrepreneurial creative act. The fact that in the 200 years of industrial history birth and death of firms has been a much more frequent phenomenon than birth and death in the public sector (with the exceptions of the periods during World War I and World War II in which the frequencies were reversed) is one reason why entrepreneurial behavior is usually ascribed to the business firm.
Another reason is that the occurrence of crises that threatens the survival if the organization persists in the incremental mode is much more frequent in the business firm. This can be traced to the fact that the firm, uniquely among purposive organizations, depends on its continued ability to make a profit. The nonprofit firms are not subject to the direct market test : The funds that support their operations are not coupled in a direct and measurable way to the continued utility of their products or services.
Among firms, frequency of concern with survival is determined by the life span of its technology-demand life cycle. This can vary from less than one year (for a typical video game), to less than five years (for a cell phone), to half a century (for the fax machine), to a century (for aircraft manufacturers), and to millennia (the demand for coal and natural gas).
The average life span of products, markets, and entire industries has been steadily and dramatically decreasing during the past 100 years. The resulting frequent threats to survival have been increasingly forcing some firms into continual entrepreneurial behavior.
The third reason why entrepreneurial behavior is more frequently observable in business is the fact that a small minority of firms (e.g., Berkshire Hathaway, Royal Dutch Shell, HSBC Holdings, GE, and many of the so-called conglomerates) are observed to behave entrepreneurially continuously in a deliberate search for growth through change.
However, if the entire spectrum of modern business firms were to be analyzed, the occurrence of entrepreneurial behavior would still constitute a relatively small percentage of the total. When this small percentage is added to the totality of nonprofit organizations, the incremental mode appears predominant.
This is probably the reason why entrepreneurial behavior has received relatively little attention from organizational theorists. This is also the reason why some students of organizational theory have argued that not only is the incremental mode the only observable one but that it also should be consciously and deliberately followed by organizations.
During the last fifty years, while students of organizational theory have focused their attention on the incremental mode, an increasing number of firms have been forced to turn entrepreneurial in order to assure success and survival. As a result, a large body of business-generated literature has appeared which recommends the entrepreneurial mode as not only feasible but the preferred way to deal with the increasing rate of environmental change.
Differences in Organizational Profiles
Comparison of organizational profiles
Behavior Profile attribute | Incremental | Entrepreneurial |
|---|---|---|
Objective goals | Optimize profitability extrapolation of past goals | Optimize profitability potential determination through interaction of opportunities and capabilities |
Constraints | 1. Environment 2. Internal capability | 1. Limitations on ability to affect change in the environment 2. Ability to acquire or develop requisite skills 3. Ability to accommodate differing modes of behavior |
Rewards and penalty system | 1. Rewards for stability, efficiency 2. Rewards for past performance 3. Penalties for deviance | 1. Rewards for creativity and initiative 2. Penalties for lack of initiative |
Information | 1. Internal: performance 2. External: historical opportunity space | 1. Internal: capabilities 2. External: global opportunity space |
Problems faced leadership Style | Repetitive, familiar 1. Popularity 2. Skill to develop consensus | Nonrepetitive, novel 1. Charisma 2. Skill to inspire people to accept change |
Organizational structure | 1. Stable or expanding 2. Activities grouped according to resource conversion process 3. Search for economies of scale 4. Activities loosely coupled | 1. Fluid, structurally changing 2. Activities grouped according to problems 3. Activities closely coupled |
Management problem-solving: (a) Recognition of action need | 1. Reactive in response to problem 2. Time-lagged behind occurence of problems | 1. Active search for opportunities 2. Anticipatory |
(b) Search for alternatives | 1. Reliance on past experience 2. Incremental departures from status que 3. Single alternative generated | 1. Creative search 2. Wide ranging from status quo 3. Multiple alternatives generated |
(c) Evaluation of alternatives | Satisficing—first satisfactory accepted | Optimizing—best of a set of alternatives selected 1. Risk-seeking |
(d) Risk attitude | 1. Minimize risk 2. Consistency with past experience | 2. Risk portfolio balance |
Transitioning from one profile to the other involves far-reaching changes, is time-consuming, costly, psychologically disturbing to individuals, and frequently requires a realignment of power. An attempt to accommodate both styles within the same organization produces conflicts and strain. A natural question is, therefore, which of the two modes is appropriate to a particular organization. In business literature, recent concern with strategic planning, which is a systematic approach to entrepreneurial behavior , has tended to create the impression that the incremental mode is conservative and stagnant while the entrepreneurial mode is aggressive and growth oriented. On the other hand, as already mentioned, some organizational theorists argue that the incremental mode is organic and natural to complex organizations, and that in complex environments the entrepreneurial style is not possible because of limitations of human rationality.
In this book, we argue that while in the past the modes have alternated sequentially in response to changing environmental challenges, in the future business firms will have to learn to accommodate both at the same time.
Strategic and Operations Management
Environment-serving organizations such as the firm are in constant two-way interaction with the environment. They take in an assortment of resources from the environment, add value to them, and deliver them back to the environment in the form of goods and/or services.
The activity of the organization consists of time-phased flows of the various resources, buffered by reservoirs (stocks, money, people, and information) that help balance and maintain the flows. The flows are not unidirectional but are looped with both positive and negative feedback.
Successful environment-serving organizations are open systems. The ‘open’ property is made necessary by two factors: (1) Continued organizational survival depends on its ability to secure rewards from the environment which replenish the resources consumed in the conversion process, and (2) continued maintenance by the organization of its social legitimacy. This latter requirement arises from the fact that in addition to their products and services, organizations produce side effects on the environment (such as air pollution or student protests), which may socially be undesirable. Inside the organization, there are two major streams of activity (or two subsystems): (1) logistics subsystem that is engaged in conversion of the input resources into goods/services, and (2) managerial subsystem that is concerned with guidance and control of the activities of the organization.
While the logistic subsystem typically handles different assortments of resources (physical materials, money, information, and human resources), the ‘working material’ of the managerial subsystem is information. The body of information handled by the logistic subsystem overlaps but is distinct from information required for managerial activity.
Within the managerial subsystem, there are two principle managerial regimes: strategic management and operations management.1
The strategic management activity is concerned with establishing objectives and goals for the organization, and with maintaining a set of relationships between the organization and the environment which (a) enable it to pursue its objectives, (b) are consistent with the organizational capabilities , and (c) continue to be responsive to environmental demands.
One end product of strategic management is a potential for future fulfillment of the organization’s objectives. Within the business firm, this consists of (a) the input to the firm: availability of financing, manpower, information, and ‘raw’ materials; (b) at the output end: developed products and/or services, tested for their potential profitability; and (c) a set of social behavior rules that permit the organization to continue to meet its objectives.
In addition to the future performance potential, another end product of strategic management is an internal structure and dynamics capable of continued responsiveness to changes in the external environment. In the business firm, this requires (a) a managerial capability to sense and interpret environmental changes, coupled to a capability to conceive and guide strategic response and (b) logistic capability to conceive, develop, test, and introduce new products and services.
Physical facilities, their capacities, and capabilities, and technology.
Information processing and communication capacities and capabilities.
Organizational tasks assigned to individuals and groups of individuals.
Rewards and punishments for the performance of assigned tasks.
Power structure and dynamics.
Systems and procedures.
Organizational culture , norms, values, and models of reality that guide organizational behavior.
Attitudes toward change.
Risk-taking propensity.
Cognitive problem-solving skills appropriate to strategic activities.
Social problem-solving skills appropriate to bringing about organizational change.
Work skills (e.g., product design and development, pilot manufacturing, and test marketing).
Motivation to engage in strategic activities.
To determine and bring about strategic change in the organization.
To build an organizational architecture conducive to strategic change.
To select and develop individuals (both workers and managers) motivated and capable of creating strategic change.
While strategic management activity is concerned with creating a strategic position that assures future environmental viability of the organization, operations management is concerned with exploiting the present strategic position to achieve the organizational objectives. In the business firm, the strategic manager is concerned with continued profitability potential; the operations manager is concerned with converting the potential into actual profits.
In operations management, the major activity is to establish and bring about levels of organizational output that will best contribute to the objectives.
The end product of operations activity is delivery of products/services to the environment in exchange for rewards. In the firm, the contributing activities are purchasing, manufacturing, distribution, and marketing. The managerial roles include determination of overall operating goals , motivation, coordination, and control of others in the firm (both managers and workers) in the process of achieving the goals.
Just as in strategic management, operations management involves creation and maintenance of appropriate organizational architecture and selection and development of individuals with the appropriate motivations and skills. But these are quite different for the two types of management.
Strategic social architecture is change seeking, flexible, and loosely structured, while the operations architecture is change resistant, efficiency seeking, and highly structured.
While the strategic manager is a change seeker, risk-propensive, divergent problem solver, skillful in leading other into new and untried directions, the operations manager is a change absorber, cautious risk-taker, convergent problem solver, skillful diagnostician, coordinator, and controller of complex activities. His leadership skills are different from those of the strategic manager. Rather than change direction of the organization, he provides motivation to excel and improve over past performance.
Comparison of organizational architectures
Operating | Strategic | |
|---|---|---|
Culture | Production/marketing orientation: Success = aggressive competition + efficient production | Strategic/flexibility orientation: Success = invention + anticipation/creation of needs |
Manager | 1. Profit maker 2. Goal achiever 3. Controller | 1. Entrepreneur 2. Innovator 3. Charismatic leader |
Management system | 1. LRP/budgetin 2. Historical performance control | 1. Strategic planning/SIM* 2. Strategic management 3. Strategic control |
Information | Demand profitability trends | New threats, opportunities |
Structure | 1. Functional/divisional 2. Stable | 1. Project/matrix 2. Dynamic |
Power | 1. Decentralized | 1. In general management |
2. In production/marketing | 2. In R&D 3. In new ventures 4. In strategic planning |
Table 1.2 further shows that systems, information, organizational, and power structures are also significantly different between strategic and operations management.
A comparison of Tables 1.1 and 1.2 shows that there is a close affinity between the organizational behavior profiles and the respective management regimes: strategic management calls for the entrepreneurial profile and operations management for the incremental profile.
- 1.
How to determine the combination profile that will optimize the firm’s chances of success. This problem is handled in Part II.
- 2.
How to assure an effective transition from one profile to another. This problem is handled in Chapters 18 and 20.
- 3.
How to assure a happy coexistence of a combination of profiles. This is addressed in Chapter 20.
Summary
Behavioral science literature describes two types of organizational behavior: incremental and entrepreneurial. Management of the business firm involves two complementary activities: strategic, which develops the firm’s future potential; operating behavior, which converts the existing potential into profits and growth.
Strategic management requires entrepreneurial organizational behavior, and operating management succeeds through incremental behavior .
During the first half of the twentieth century, strategic behavior and operating behavior were alternate efforts of the firm. During the second half of the twentieth century, firms increasingly needed to accommodate both behaviors at the same time. But the social architects required by the respective behaviors are distinct and different. Therefore, firms will need to develop complex architectural designs that can accommodate both.
Exercises
- 1.
What kinds of obstacles and difficulties would you expect in trying to accommodate both incremental and entrepreneurial behaviors within the shell of a single firm?
- 2.
What solutions would you suggest for overcoming the obstacles?
- 3.
Why does a great majority of nonprofit organizations behave incrementally? Is it possible to make them behave in the entrepreneurial change-seeking mode? Can you provide recent examples of such organizations? What made them behave entrepreneurially?
- 4.
What are the differences between strategic planning and strategic management?