The environment-strategy-organization nexus

3rd May 2019

Outside Fortress Europe Excerpts
This third and final EndNote Global Business Strategy Blog essay is based upon unabridged excerpts from Chapter Ten, Theories of Organizational Behaviour and Strategic Management, in  Outside Fortress Europe: Strategies for the Global Market.

 


Outside Fortress Europe Excerpt

Introduction
In the dawn of the AI era it remains an essential truth that organizations are managed by people – fallible human beings – and, though much of the strategy literature tends to gloss over this fundamental fact, it is necessary to understand the issues at this micro-level of analysis to fully comprehend the real-world practice of strategic management alongside the more anal obsessiveness with strategy as an abstract construct relating to planning and decision-making.

An exploration of strategy, management and organization
This human dimension of strategic management was captured extremely well by strategy contrarian Henry Mintzberg at the height of the strategy formalisation boom in the 1970s in his provocative and award-winning Harvard Business Review article, The Managers Job: Folklore and Fact, in which he presented his observations of what managers really do on a day-to-day basis (Mintzberg, 1975). In this article, strategy was presented as more water-cooler chit-chat, less portfolio analysis. On a more serious note, just as the strategy literature was tending towards ‘analysis paralysis’ and the pursuit of hard facts, Mintzberg drew attention to the ‘softer’ side of strategy, i.e. the notion that managers, alongside engaging in other frivolities, actually talk to each other:

…managerial work involves interpersonal roles, informational roles, and decisional roles. These roles require developing peer relationships, carrying out negotiations, motivating subordinates, resolving conflicts, establishing information networks, making decisions with little or ambiguous information, and allocating resources.

In essence, then, the ‘soul’ of strategic management is embodied within the multi-faceted day-to-day activities of the ‘strategic manager’. Mintzberg has more recently published a very well-received text which reflects upon and builds on his original work, Managing, a book highly recommended for a ‘fast-track’ review of this important dimension of strategic management in an era where ‘big data’, and ‘artificial intelligence’ are tending to de-humanise what is and will remain a very human dimension of most people’s working lives (Mintzberg, 2011).

The strategic manager
The introduction above suggests that the ephemeral nature of strategy can be made more tangible by inter-functional learning and knowledge creation at every level within the organization, breaking down barriers internally and externally. Ultimately, though, this will require an exceptional orientation among the people involved in the task of management. At the level of the individual, Hinterhuber and Popp, in a provocative article published in the Harvard Business Review, Are you a Strategist or Just a Manager?, identified the following characteristics possessed by “strategically inclined” managers:

  1. An entrepreneurial vision;
  2. A corporate philosophy;
  3. An ability to encourage employees to act freely in the interest of the whole company;
  4. The drive to build an organization that fits their vision;
  5. The confidence to involve line managers in strategic planning;
  6. The ability to integrate their strategies with the corporate culture;
  7. The inclination to point out directions and take new approaches;
  8. Luck;
  9. The willingness to contribute to society and themselves.

Referencing a military strategist, General Helmut von Moltke, chief of the Prussian and German general staffs from 1858 to 1888, the authors go on to argue that the most important characteristics of a strategist are twofold:

  1. The ability to understand the significance of events without being influenced by current opinion, changing attitudes, or personal prejudices;
  2. The ability to make decisions quickly and to take the indicated action without being deterred by perceived danger.

Regardless of their distinctive characteristics or personality traits, it must be acknowledged that, to be successful, a strategist must have clear goals and that, in business practice and across all functions and hierarchical positions, these must embrace the core purpose of strategic management: the creation of customer value.

Creating customer value
In a significant contribution to the strategic management literature, especially the interface between academic theory and consultancy practice, it has been argued that ‘value-creating systems’ and ‘value constellations’ provide a company with competitive advantage and strategic direction and, if that direction is market-oriented, strategy can and should funnel energy towards creating and delivering value to customers (Ramirez and Mannervik, 2016). The point of departure from traditional management studies – and the benchmark reference – is the ‘value chain’ as conceived by Harvard professor Michael Porter (1985) which we introduced as a worthy tool for productivity assessment in Chapter Seven, A Practical Framework for Global Business Strategy Success. Porter’s model was devised to profile the process of adding value to resources in a structured fashion which would enable companies to map, build and sustain competitive advantage.

Value chain analysis identifies differences in production costs and the price to be charged to the next customer in the supply chain, thus allowing strategies to be developed which could capture any surplus which is available through bargaining power and negotiation. A key advantage of the value constellation schema is that value chains proposing alternative ways of satisfying the same need can be formulated for comparison. Value chain logic also highlights the potential to redefine the business through substitution of parts of the chain to add value, e.g., outsourcing a primary activity such as outbound logistics or even fundamental operations such as manufacturing, for example, the Apple-Foxconn outsourcing strategic alliance. Finally, it can reveal transaction barriers which, if removed, promote purchase behaviour.

By analysing all the company’s activities, the value chain also has the potential to provide a holistic view of resource allocation, thus providing an integrated perspective on competitive strategy. Despite its prominence in the literature, the relevance of Porter’s original value chain concept in the age of discontinuity was directly challenged by Ramirez and Mannervik:

This understanding of value is as outmoded as the old assembly line that it resembles and so is the view of strategy that goes with it. Global competition, changing markets, and new technologies are opening up qualitatively new ways of creating value. The options available to companies, customers, and suppliers are proliferating in ways Henry Ford never dreamed of.

The authors propose an alternative model, one which is claimed as more appropriate by virtue of its dynamic nature. The justification for a ‘new’ model is the observation that many companies are no longer confining themselves to adding value: the most successful are recreating value through recognition of a ‘value constellation’. This latter concept derives from the notion that transactional processes have become less sequential, more reciprocal and synchronous as well as more entwined in mobilised, informed networks.

Examples of value constellations provided by the authors include Ikea, the Swedish furniture company, and the private network of pharmacies operating in Denmark. The latter transformation resulted in the complete reconfiguration of the operating business system, in the process making the pharmacies much more than just an outlet for drugs. Healthcare cost containment was placing the pharmacies at risk of being nationalised while at the same time patients were becoming more demanding. The pharmacies built on their core strengths, creating a service which established new relationships based on healthcare information provision. Initiatives included expanding the range of products on offer, upgrading customer-information services, creating an anti-smoking campaign backed by courses, offering newly developed home health-care services and the development of a database on drug side-effects and interactions.

Many traditional members of the healthcare value chain felt that the pharmacists had encroached on their part of the ‘production line’, but the extraordinary success of the reconfiguration was an illustration of extracting more value from the supply chain. In the current climate, national health services worldwide, especially in the more advanced economies including the NHS in the UK, are exploring the value of such shifts in the disaggregation of integrated healthcare systems as we approach 2020 (a clichéd year-of-coincidence excessively associated with corporate vision) and beyond.

Does strategic fit provide market-driven value?
In Figure 1 below we present the schematic of the ‘environment-strategy-organization nexus’.

(See the inaugural foundation GBS Blog essay of 1st March 2019: Risk, uncertainty, the strategy challenge and organizational response. Here we laid out the framework which has provided the broad structure and content of this  GBS Blog Album).

Figure 1: The environment-strategy-organization nexus

The notion of strategic and/or organizational fit suggests a stagnant model which is arguably inappropriate for an era of discontinuity. The latter phenomenon, by definition, describes the constant changes between and within the relationships that form the bonds of the environment-strategy-organization nexus as presented in Figure 1. However, uniting continuity and change identifies the core strategic management problem: value must be created without losing degrees of freedom within the nexus, i.e. without distorting its delicate equilibrium. The solution to the problem is less clear-cut than the simpler task of its identification. The key challenge, though, is to prevent loss of degrees of freedom between cross-functional areas in the minds of the strategists, this to be achieved by fostering organizational learning and sagacity rather than the constant pursuit of some ephemeral notion of universal wisdom. In a nutshell, organizations need to reposition or even re-invent their value propositions to create a better fit between the company’s competencies and the value-creating activities of its customers.

In their comprehensive study of corporate transformation, Wikstrom and Normann (1994) addressed the concepts of knowledge and value in a model which integrates the concept of value stars, customer orientation and organizational learning to provide an “active generative knowledge function”. The aim is to improve systemic opportunities for the identification and absorption of external knowledge. This is particularly appropriate when coping with discontinuity:

The accelerating rate of change and the increasing complexity of the corporate environment both call for greater flexibility on the part of the company. Corporate knowledge bearers must learn quickly to create, absorb and apply new knowledge. A fundamental condition for the generation and maintenance of new knowledge is that organizational boundaries become blurred and penetrable.

The authors conclude with a biological analogy in which cross-functional knowledge generation is compared with cross-species pollination, thus bearing new fruit. A better analogy lies within the domain of genetics in which the transfer of DNA produces mistakes known as mutations. These create change which, if beneficial, is likely to pass onto the next generation – the evolutionary game-plan of survival of the fittest.

In a management context, the analogous loss of fitness is organizational entropy, perfectly demonstrated by the rapid demise of market titans such as Nokia, Blackberry, Toys R Us and the huge fall from grace of the once-mighty GE. Theory in management science is based on interpretations of good and bad practice (Rumelt, 2017). From their seminal research on value constellations, Normann and Ramirez (1998) concisely summarise the Darwinian implications of disequilibrium in the environment-strategy-organization nexus: “In the new logic of value, this dialogue between competencies and customers explains the survival and success of some companies and the decline and failure of others”.

Much of the research we have discussed in these last two sections was inspired by the leading management thinker Richard Normann who published a ground-breaking reflection of his work as management academic and business consultant shortly before his premature death in 2003: Reframing Business: When the Map Changes the Landscape (Normann, 2001). His colleague Rafael Ramirez, cited above, has continued to develop these pioneering concepts on the interface between academia and management consultancy. The following quotation from Normann’s book summarises a managerial philosophy which transcends the often-delicate relationship between management theory and management practice and is a call for reflection, as well as action:

The organization which does not reflect and conceptualize what it does but is only geared to encouraging action will become what I think of as ‘the hysterically hyperactive organization’, with compartmentalised politics, and lack of aggregation and structuring of knowledge as a result. Frustration and cynicism will ensue, and leadership will lose its legitimacy.

This concise and insightful comment disguises the more mundane day-to-day realities of organizational life in a context of discontinuity and business environment turbulence.

Maintaining dynamic equilibrium in the environment-strategy-organization nexus
It is clear from the preceding discussion that the nexus of environment, strategy and organization is dynamic in nature and that organizational success is a function of managerial ability to maintain equilibrium amongst the three system components. As the pace of change in the environment quickens so the speed of re-configuration becomes critical. It has been demonstrated that, in turbulent business environments, companies pursuing an incrementalist approach to strategy will experience strategic drift. In these instances, the firm’s strategy – and, by inference, its structure – has not kept pace with environmental change. Explaining this phenomenon, it is argued that the organization is constrained by a cultural paradigm which does not accommodate the admission of threats that might require the paradigm to change. In practice, a flawed perception of reality emerges, key environmental dynamics are filtered out and seen as unimportant, thus suppressing the appropriate strategic response. In a similar vein, Oxford academic Richard Tanner Pascale (1990) has explained the subsequent failure of the ‘excellent companies’ eulogised by his former McKinsey colleagues Tom Peters and Robert Waterman as a function of strategic rigidity, arguing that their strategies did not change as quickly or as much as environmental dynamics demanded.

In a ground-breaking book proposing the strengths of incrementalism as an approach to strategic change, Quinn (1980) argued that an organization’s paradigm was itself flexible enough to adapt incrementally, i.e., to update itself in response to environmental change. In practice, however, it has been demonstrated that such incremental paradigm change simply does not happen. At a more fundamental level, in his rejection of the received wisdom of the time and in a highly prescient indication of things to come, Prof. Mintzberg in his Harvard Business Review article Crafting Strategy, argued that the very existence of an explicit strategy is likely to create resistance to strategic change, another factor creating the antecedents of strategic drift.

In outlining their ‘Quantum Theory of Strategic Change’, Miller and Freisen (1984)  argued that many large companies follow their original strategic positioning for very long periods, interrupted by occasional but sudden and substantive strategic reorientation. Research has also demonstrated that organizational growth cycles are not smoothed patterns of continuous expansion; rather, they are characterised by alternating periods of long-term evolutionary (incremental) development and much shorter periods of revolutionary (discontinuous) change. To summarize, patterns of organizational development combine a prolonged process of ‘converging change’ (incremental system change) with interruptions in the form of “frame-breaking change” (revolutionary system change).

From the preceding discussion it is apparent that a consensus of sorts has emerged amongst researchers that, over time, organizations constantly strive to change both strategy and structure in response to dynamic business environment contexts. They do so with varying degrees of success, constrained to a greater or lesser extent by previous experience. The process of adaptation has been characterised by continuity and change, with the latter occurring in contrasting periods of incrementalism and discontinuity. It is abundantly apparent that the time periods between discontinuous changes are decreasing and that environmental turbulence is increasingly multi-dimensional whereas in the past it has principally been a function of one key driver at a time, for example, disruptive technology. Moreover, it is clear that the interactions between multiple change variables are more important than individual changes in and of themselves.

The notion of combinations of individual incremental changes driving discontinuous change more generally also has roots within different research disciplines. Within mathematics, for example, ‘Catastrophe Theory’ has been developed from the subset of topology, the aim being to explain discontinuous change by the interactions among several continuous changes. A simple ‘catastrophe’ occurs where only two variables (control factors) change smoothly but yield discontinuous behaviour. Woodcock and Davis (1978) have drawn on catastrophe theory to explain a variety of outcomes from disparate activities, for example, crowd behaviour, aggression in dogs and, in an economic context, the relationship between competition and prices. More generally, the profusion of ‘chaotic’ behaviour has stimulated intense interest among researchers from the ‘pure’ and ‘social’ sciences (see Giddens and Sutton, 2017 for a discussion of the distinction), a common objective being to explain unpredictable behaviour originating from systems whose output would otherwise appear to be entirely predictable.

We can contend that the establishment of a good ‘fit’ between strategy, structure and environment does give a sharp focus to an organization. However, it can also threaten it with stagnation. The principal problem is rooted in the organization’s historical paradigm and, more specifically, it is an outcome of the pursuit of what behavioural theories of the firm describe as ‘satisficing’ objectives aimed at achieving consensus as a means to reconcile and avoid contention. Eventually, this suboptimal strategic management process locks the organization out of the new paradigms which might be essential for its survival. This stagnation effect is supported by empirical and anecdotal evidence from numerous researchers and management practitioners and daily examples can be found in the ‘Companies’ sections of the Financial Times and The Wall Street Journal.

Concluding remarks
The previous sections have outlined the need for flexibility in organizational response to ensure ongoing success in turbulent global business environments. This ‘survival of the fittest’ notion is powerful but does tend towards a reification of organizational form. At the end of the day ‘organization’ is an abstract concept; an organization is simply a collection of human and capital assets with a stated purpose. Remove this rationale and the organization will cease to exist. The challenge of organizational change, then, as Professor Peter Drucker (1974) has convincingly argued, is a challenge of management.

A variety of contemporary environmental factors have raised the importance of the change dimension as a significant factor impacting upon organizational survival. These, in turn, have led managers to re-evaluate the entire range of business processes and, more specifically, to seek ways of ‘re-engineering’ them but with only varying degrees of success and many transformational failures.

 

Outside Fortress Europe Excerpt References

Drucker, P. F. (1974). Management: Tasks, Responsibilities, Practices. London: Heinemann Professional Publishing.
Giddens, A., & Sutton, P. W. (2017). Sociology (8th ed.). Cambridge: Polity Press.
Hinterhuber, H. H., & Popp, W. (1992). Are you a Strategist or Just a Manager? Harvard Business Review, (January-February), 105-113.
Miller, D. C., & Freisen, P. H. (1984). Organizations: A Quantum View. Englewood Cliffs, NJ: Prentice Hall International.
Mintzberg, H. (1975). The Manager’s Job: Folklore and Fact. Harvard Business Review, 53(4), 49-61.
Mintzberg, H. (1987). Crafting Strategy. Harvard Business Review, (July-August), 66-75.
Mintzberg, H. (2011). Managing. Harlow: Financial Times/Prentice Hall.
Normann, R., & Ramirez, R. (1998). Designing Interactive Strategy: From Value Chain to Value Constellation. Chichester: John Wiley & Sons.
Pascale, R. T. (1990). Managing on the Edge: How Successful Companies Use Conflict to Stay Ahead. London: Viking.
Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.
Ramirez, R., & Mannervik, U. (2016). Strategy for a Networked World. London: Imperial College Press.
Rumelt, R. (2017). Good Strategy/Bad Strategy: The difference and why it matters. London: Profile Books.
Wikstrom, S., & Normann, R. (1994). Knowledge and Value: A New Perspective on Corporate Transformation. London: Routledge.
Woodcock, A., & Davis, M. (1978). Catastrophe Theory: A Revolutionary New Way of Understanding How Things Change. Harmondsworth: Penguin.

 


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