What goals fit well with your strategy?3If the organization’s strategy does not align with its goals, then there are misfits that need to be addressed. What are the misfits and what can you do about them? As an example, suppose your chosen organization has a defender strategy which has a focus on exploitation. This strategy is a fit with the efficiency goal. Now go back to Chapter 1 to verify that your goals were primarily efficiency. If so, your organizational strategy and goals fit. There is no misfit. On the other hand, if your goals do not fit the defender strategy, then you have a misfit, which calls for some change to bring your organization into alignment. Suppose your goals are to be both efficient and effective. Then a better strategy would be an analyzer, either with innov- ation or without innovation. Now you have a choice either to change your organization’s goals to fit the defender strategy, or to change the strategy to an analyzer to fit your goals.
Table 2.1 shows the mapping of strategy types and organizational goals. These correspond to the four quadrants of our organizational design space. Each of the four columns in the table marked A, B, C, and D shows situations of fit among the strategy and goal components of the organizational design space. In other words, for an organization to have good fit, your strategy and goals should fall within the same column in this table.
First, take the strategy you identified in this chapter as given and see which matching goal is acceptable. If your goal matches your strategy, then the organization has no misfits; however, if strategy and goals are not in the same column of the table, then there is a misfit between the organization’s strategy and goals, and one or the other should change in order to bring the organiza- tion into alignment. What would be required by your organization to adopt a revised goal?
Second, try the reverse approach. Take the goal you identified in Chapter 1 as given and see what matching strategy is acceptable, given the information in Table 2.1. If there is a misfit, what would be required by your organization to adopt this revised strategy? For example, is a greater emphasis on exploration feasible or a switch from exploitation to exploration? Think through the possibilities in light of your firm’s particular situation.
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The balancing of the information-processing demand with capacity has been discussed in the research literature in terms of fit and misfit (Venkatraman, 1989; Burton et al., 2002).
Finally, think about whether it would be preferable for your organization to change the strategy or change the goal. How would you implement such changes? As you move ahead in the book, we will develop a more complete picture of your organization and examine alternatives for managing and changing your organization as needed.
In later chapters, we will add organizational design alternatives which will expand the table presented here. The organizational design space will become more complex, but you will be able to develop more complete and better alternatives for achieving an organization’s goals. In the next chapter, we will complete Step 2 by examining the environment of the organization.
Summary
This chapter has continued our step-by-step approach by examining the strat- egy of an organization. You first described the strategy of an organization in terms of degree of exploration and exploitation, categorized as: reactor, defender, analyzer without innovation, analyzer with innovation, or pro- spector. You then examined the fit of the strategy with your goals as assessed in Chapter 1. If there are misfits between the organization’s strategy and goals, you should think about actions you might take to either adjust the strategy or adjust the goals so that these can be aligned.
In the next chapter, we will examine the organizational environment.
Table 2.1 Fit between strategy and organizational goals Corresponding
quadrant in organizational
design space A B C D
Strategy types Reactor Defender Prospector Analyzer with innovation Analyzer without innovation Organizational goals
Neither Efficiency Effectiveness Efficiency and effectiveness
Glossary
Ambidexterity: a dual simultaneous focus on exploitation and exploration. Analyzer with innovation: a strategy that is similar to a prospector but with more
emphasis on exploitation.
Analyzer without innovation: a strategy that is similar to a defender but with more emphasis on exploration.
Defender: a strategy that focuses on exploitation and innovation only in narrow, limited areas.
Environment: the marketplace, the regulatory and legal situation, the opportunities and other aspects of the context in which the firm operates.
Exploitation: refinement, efficiency, selection, and implementation by the firm. Exploration: search, variation, risk taking, and innovation by the firm.
Organization: a collection of people identified socially as a firm or one of its subunits; deliberately formed, goal-directed, bounded, and functions on a relatively continuous basis.
Prospector: a strategy that takes an aggressive approach to innovation, systematically searching for new opportunities. It experiments regularly with change.
Reactor: a strategy that lacks an intentional strategy toward innovation. It makes adjustments when forced or when there is an urgent need or problem. Strategy: the firm’s position on exploration and exploitation.
Structure: the partition of tasks by work roles and the reporting relationships among the work roles.
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Introduction
In our step-by-step approach, you have described the goals and strategy for your unit of analysis. In this chapter, we focus on the environment that surrounds an organization. The environment is everything outside the boundary of the organizational unit of analysis. When you think about the environment for a firm, think about what could have an effect on the way the organization performs. It could be: its customers, its competi- tors, its suppliers, the financial market, or the political system. If your unit of analysis is a department, then the other departments in the organization are a part of its environment. The environmental imperative states that the organizational design is determined in large part by the environment of an organization. In brief, the environment is for the most part given for a firm, and the firm should then adjust its design to fit the environment. The performance of the firm depends upon how a firm makes the organiza- tion fit with the environment. Scott (1998) calls this the rational view of organizing. This also fits with the open systems view of organizational design:
Open systems theory can be defined as a theory of organization that views organiza- tions not as simple “closed” bureaucratic structures separate from their surroundings, but as highly complex entities, facing considerable uncertainties in their operations and constantly interacting with their environment. This system also assumes that organizational components will seek “equilibrium” among the forces pressing on them and their own responses to their forces. (Milakovich and Gordon, 2001, p. 165)
There are a number of ways to describe an organization’s environment. Early on, Ashby (1956) described the environmental variety as the number of distinct elements, whereas Lawrence and Lorsch (1967) used uncertainty. Burton and Obel (2004) used a four-dimensional description: complexity, which is the number of factors in the environment and their interdependency; uncertainty, which is the variance among the factors; equivocality, which is the ignorance and confusion about the existence of some factors; and hostility, which is the extent of malicious external threats. These four factors are modifications of earlier descriptions. Lawrence (1981) began with four descriptors: instability, ignorance of data, number of variables, and interdependence of variables. He then reduced these four to two: unpredictability and complexity. Duncan (1972) used environmental change or dynamism, and environmental complex- ity. Later, Bourgeois and Eisenhardt (1988) defined a high-velocity environ- ment as one where changes are rapid and discontinuous so that information is often unavailable. More recently, Siggelkow and Rivkin (2005) also described the environment in terms of turbulence and complexity.
Among all of these descriptions, there are some common aspects. First, they are general properties of an organization’s environment, not a detailed listing of all of the elemental factors themselves. Second, the measures are perceptions made by the management of the firm; they are not necessarily objective. This does not mean they are inaccurate, but that management creates its own understanding of the environment and the implications for design. Third, whatever the particular environmental description used, the environment is a large determinant of the organizational design, i.e., the environmental impera- tive means that the environment is a major determinant of how an organiza- tion should be designed. Contingency theory and the principle that structure follows strategy discussed in Chapter 2 – all follow the common theme that there must be a fit between the environment and the organization.
The environment creates both limits and opportunities for a firm’s strategy and, subsequently, its structure. Lawrence and Lorsch (1967), for example, argued that increased environmental uncertainty leads to increased organiza- tional differentiation. They define differentiation to mean that an organization has departments that are different in both tasks and orientation. Lawrence and Lorsch studied three well-defined industries that they categorized as ranging from low to high uncertainty. They found that increased uncertainty in the environment required increased differentiation in the organizational structure in order for the organization to be efficient. Then integration is required to make the different departments work in coordination. Integration devices
typically include rules and procedures, configurational plans, the authority of the hierarchy, and decision-making committees.
The way you should define the environment is in terms of what you know affects your organization. If a firm is a monopolist, it does not have any relevant competitors. On the other hand, if a firm is in a very strong competitive market, the most significant dimension in its environment may be its competitors. If a firm sells goods in a seasonal industry, then cycles of consumer demand are an important dimension of its environment. Thus some dimensions describe the environment of one firm whereas other dimensions describe the environment of another firm. Some organizations have many important and somewhat interrelated factors in their environment, whereas others have much simpler environments with few and unrelated factors. Fur- ther, some factors have a direct effect on firm performance and some have an indirect effect. A change in exchange rates may directly affect the costs and revenue of particular activities or products. Similarly, a change in government subsidies may directly determine the viability of an industry. For example, sales of windmills in the US are directly dependent on US government subsid- ies. In the early days of the Bush administration it was unclear whether the administration would continue to support the windmill industry or not. The choice of the government in this case had a direct and significant impact on the companies producing windmills. Recently, the Obama administration has placed an increased emphasis on multiple energy sources, including wind. Other factors have more indirect effects. For example, the deregulation of the aviation industry had the effect that new competitors could enter the market, but it was not clear how they would enter, when they would enter, or what strategies a mature airline could initialize to prevent or postpone particular types of competitors from entering the market. Here the deregulation affected the environment but in a more indirect way, and there was uncertainty about what would happen.
The environment thus refers to the forces surrounding an organization that impact its performance. For the firm as a whole, the environment usually is the competitive marketplace. For a department or business unit, it includes upper management and the other units of the firm that affect the business of the department. For a team, the environment is the department, other organiza- tional units in which the team operates, and possibly other teams that influence the team’s workload and its success in carrying out its tasks. It is important to assess an organization in terms of its immediate environment and to do so as part of the ongoing process of organizational design. If a firm switches
industries, its environment will change (as it moves into a new marketplace). If a firm undergoes internal reorganization, the environment for a given depart- ment, business unit, or team may change. Likewise, if one business unit operates in country A while another operates in country B, there are likely to be different environments due to differences in customs, regulations, and so forth, across the two countries. Again, the environment of an organization should be assessed in terms of the forces affecting the organization, whether these forces lie within the larger organization in which the focal organiza- tion operates, or whether these are forces that lie outside in the external marketplace.
When you think about the forces that describe a firm’s environment, can you predict how they will affect the firm? Do you know what competitors will do? Can you predict what new regulations the political system will initiate in the future? Sometimes you can and sometimes you cannot. If the European Parlia- ment has agreed upon a new framework, you can estimate to a certain extent how local regulations will change. But you may not know when the local governments will pass the new laws. If you are a vertically integrated company you may be able to control the value chain to some degree, but in other situations you may be very dependent on your suppliers and you may not know their reaction. When the financial crisis hit the banking industry in 2008, it was not clear what the implications would be. Would the crisis be short- or long-term? Would the financial crisis be followed by an economic crisis? Would there be governmental interventions, and what might they be? Thus the environment has some degree of uncertainty. Obviously, good information can be very valuable, but such information did not exist.
It may be rather straightforward to state which factors in the environment are likely to affect the actions and performance of a firm, but it may be much more difficult to estimate the degree of uncertainty associated with those factors. Some of the uncertainty may be stated in probabilistic terms, whereas other parts of the uncertainty may be much more difficult to estimate prob- abilistically. For example, there may be new aspects of the environment that your chosen organization has never before experienced. This could be a new technology or a new type of regulation.
The characterization of an organization’s environment in terms of complex- ity and uncertainty is important and relevant because an increase in both the complexity of the environment and the uncertainty of the environment increases the demand for information processing in the organization. If there is a high degree of complexity, more elements have to be monitored and the
effect of change has to be estimated. If there is a high degree of uncertainty, more plans may have to be established and a higher degree of flexibility may be needed.
Should the description of an organization’s environment be objective or subjective? This issue was addressed many years ago and is still a difficult problem (Bourgeois, 1980). We often talk about environmental forces as if they are objectively determined when in fact they may not be so. You will often find that firms in the same industry, confronting the same environment, behave differently. Some companies in the industry perform badly while other com- panies show an excellent performance. One reason why this occurs is that they perceive and categorize the same environment very differently. As an example, within the US airline industry Southwest Airlines has defined its competitors as customers who drive to their destinations, whereas other airlines have defined their competitors purely in terms of other airlines. In this way, Southwest Airlines perceives and categorizes its environment very differently than, say, Delta or American Airlines.
Why is that? One reason could be the cognitive capacity of the individuals in the firm that allows one firm to understand the environment much better than the other. Or it could be that the environmental scanning is done much better in one company than in the other. Or the differences could be deliberate inten- tions of management. As an example of the latter, Southwest has always assumed that it must compete with the low price of driving to a destination; thus, the airline has undercut fares of competing airlines by huge margins, even when the industry was expanding. In the 1980s when other airlines were offering discount fares from Dallas, Texas to Houston, Texas for $76, South- west priced their fare at $17, because this fare was less than the cost of driving. Southwest management deliberately defined its competitive environment in terms of the low cost of driving from Dallas to Houston; whereas other airlines defined their environment in terms of the prices of what other airlines charged to fly the same route, which was $76 or more. Thus, different airline companies in the same market defined their environments very differently and pursued different strategies.
In order to survive, organizations continually monitor their environment. You may be able to predict much more precisely a firm’s environment by talking to customers, or suppliers, or politicians, or specialized research firms. By going to trade shows or following basic research activities you may be able to predict technological developments. By tracking industry information you may be able to predict industry trends. By meeting with government officials
you may be able to anticipate or influence political events. One thing is for sure: knowing more allows you to better understand your firm’s environment and anticipate its impact on the firm.
To describe an organization’s environment, we use two dimensions: com- plexity and unpredictability. Complexity is measured as the number of factors in an organization’s environment and their interdependency. Environmental com- plexity increases as the number of factors increases and/or the interdependency among the factors increases. Unpredictability is lack of understanding or ignor- ance of the environment in terms of the nature of the factors and their variance; greater variance means less predictability. Consider the example of General Electric (GE), where the environmental factors for its thirteen product groups are relatively independent. (For instance, the market for jet engines is independ- ent of the market for lighting.) In addition, some markets are more predictable than others. (For example, the market for lighting is easier to forecast than the market for jet engines, which is subject to new airplane orders and the global market for air travel.) GE’s environment has a large number of relatively independent environmental factors, some of which are difficult to predict.
The two dimensions of complexity and unpredictability were chosen because they can be related to a vast literature of empirical studies of organizations, and they fit well with our information-processing view of organizational design. An increase in each of the environmental dimensions increases the demand for