Strategy Process (Advances in Strategic Management vol. 22)

STRATEGY PROCESS i ADVANCES IN STRATEGIC MANAGEMENT Series Editor: Joel A. C. Baum Recent Volumes Volume 15: Discip...

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STRATEGY PROCESS

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ADVANCES IN STRATEGIC MANAGEMENT Series Editor: Joel A. C. Baum Recent Volumes Volume 15:

Disciplinary Roots of Strategic Management Research Volume 16: Population-Level Learning and Industry Change Volume 17: Economics Meets Sociology in Strategic Management Volume 18:

Volume 20:

Multiunit Organization and Multimarket Strategy The New Institutionalism in Strategic Management Geography and Strategy

Volume 21:

Business Strategy over the Industry Lifecycle

Volume 19:

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ADVANCES IN STRATEGIC MANAGEMENT VOLUME 22

STRATEGY PROCESS EDITED BY

GABRIEL SZULANSKI INSEAD, Singapore

JOE PORAC Stern School of Business, New York University, USA

YVES DOZ INSEAD, France

Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo iii

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r 2005 Elsevier Ltd. All rights reserved. This work is protected under copyright by Elsevier Ltd, and the following terms and conditions apply to its use: Photocopying Single photocopies of single chapters may be made for personal use as allowed by national copyright laws. Permission of the Publisher and payment of a fee is required for all other photocopying, including multiple or systematic copying, copying for advertising or promotional purposes, resale, and all forms of document delivery. Special rates are available for educational institutions that wish to make photocopies for non-profit educational classroom use. Permissions may be sought directly from Elsevier’s Rights Department in Oxford, UK: phone (+44) 1865 843830, fax (+44) 1865 853333, e-mail: [email protected]. Requests may also be completed on-line via the Elsevier homepage (http://www.elsevier.com/locate/permissions). In the USA, users may clear permissions and make payments through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; phone: (+1) (978) 7508400, fax: (+1) (978) 7504744, and in the UK through the Copyright Licensing Agency Rapid Clearance Service (CLARCS), 90 Tottenham Court Road, London W1P 0LP, UK; phone: (+44) 20 7631 5555; fax: (+44) 20 7631 5500. Other countries may have a local reprographic rights agency for payments. Derivative Works Tables of contents may be reproduced for internal circulation, but permission of the Publisher is required for external resale or distribution of such material. Permission of the Publisher is required for all other derivative works, including compilations and translations. Electronic Storage or Usage Permission of the Publisher is required to store or use electronically any material contained in this work, including any chapter or part of a chapter. Except as outlined above, no part of this work may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the Publisher. Address permissions requests to: Elsevier’s Rights Department, at the fax and e-mail addresses noted above. Notice No responsibility is assumed by the Publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. Because of rapid advances in the medical sciences, in particular, independent verification of diagnoses and drug dosages should be made. First edition 2005 British Library Cataloguing in Publication Data A catalogue record is available from the British Library. ISBN-10: 0-7623-1200-9 ISBN-13: 978-0-7623-1200-9 ISSN: 0742-3322 (Series)

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CONTENTS LIST OF CONTRIBUTORS

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STRATEGY PROCESS: INTRODUCTION TO THE VOLUME Gabriel Szulanski, Joseph Porac and Yves Doz

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PART I: COGNITIVE AND EMOTIONAL FOUNDATIONS OF STRATEGY MAKING AN EMOTION-BASED VIEW OF STRATEGIC RENEWAL Quy Nguyen Huy

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AN ATTENTION-BASED THEORY OF STRATEGY FORMULATION: LINKING MICRO- AND MACROPERSPECTIVES IN STRATEGY PROCESSES William Ocasio and John Joseph

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TOP MANAGERIAL COGNITIONS, PAST PERFORMANCE, AND STRATEGIC CHANGE: A THEORETICAL FRAMEWORK Jerayr Haleblian and Nandini Rajagopalan

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SEQUENCE OF THINKING AND ACTING IN STRATEGY-MAKING J. Ignacio Canales and Joaquim Vila`

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INTERORGANIZATIONAL MONITORING: PROCESS, CHOICES, AND OUTCOMES Giuseppe Labianca and James F. Fairbank v

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CONTENTS

PART II: INSTITUTIONAL AND RESOURCE FOUNDATIONS OF STRATEGY MAKING THE DEVELOPMENT OF THE RESOURCE-BASED FIRM BETWEEN VALUE APPROPRIATION AND VALUE CREATION Arabella Mocciaro Li Destri and Giovanni Battista Dagnino ADAPTIVE AND CREATIVE STRATEGY LOGICS IN STRATEGY PROCESSES Patrick Regne´r MANAGING THE MNC AND EXPLOITATION/ EXPLORATION DILEMMA: FROM STATIC BALANCE TO DYNAMIC OSCILLATION Catherine Thomas, Renata Kaminska-Labbe´ and Bill McKelvey

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PART III: CONTEMPORARY EMPIRICAL STUDIES OF STRATEGY MAKING COMMUNICATION DISSONANCE AND PRAGMATIC FAILURES IN STRATEGIC PROCESSES: THE CASE OF CROSS-BORDER ACQUISITIONS Olivier Irrmann

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STRATEGY-MAKING AS A COMPLEX, DOUBLE-LOOP PROCESS OF KNOWLEDGE CREATION: FOUR CASES OF ESTABLISHED BANKS REINVENTING THE INDUSTRY BY MEANS OF THE INTERNET Marıá P. Salmador and Eduardo Bueno

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Contents

TOP MANAGERS AND THE PRODUCT IMPROVEMENT PROCESS C. Annique Un and Alvaro Cuervo-Cazurra STRATEGY CONTENT AND PROCESS IN THE CONTEXT OF E-BUSINESS PERFORMANCE Tim R. Coltman, Timothy M. Devinney and David F. Midgley EMERGENT STRATEGIES AND THEIR CONSEQUENCES: A PROCESS STUDY OF COMPETITION AND COMPLEX DECISION MAKING Quintus R. Jett and Jennifer M. George

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PART IV: META-COMMENTARIES ON METHODOLOGIES FOR STRATEGY PROCESS RESEARCH COMPARATIVE CAUSAL ANALYSIS IN PROCESSUAL STRATEGY RESEARCH: A STUDY OF CAUSAL MECHANISMS IN ORGANIZATIONAL DECLINE AND TURNAROUNDS Kalle Pajunen

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FUTURE DIRECTIONS FROM THE PAST: MANAGEMENT AND ACCOUNTING DISCOURSE IN HISTORICAL PERSPECTIVE Luca Zan

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PRACTICES OF ORGANISING: INSIDE AND OUTSIDE THE PROCESSES OF CHANGE Eamonn Molloy and Richard Whittington

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LIST OF CONTRIBUTORS Eduardo Bueno

Universidad Autońoma de Madrid, Madrid, Spain

J. Ignacio Canales

School of Management, University of Saint Andrews, Scotland, UK

Tim R. Coltman

University of Wollongong, NSW, Australia

Alvaro Cuervo-Cazurra

Carlson School of Management, University of Minnesota, MN, USA

Giovanni Battista Dagnino

University of Catania, Catania, Italy

Arabella Mocciaro Li Destri

University of Palermo, Palermo, Italy

Timothy M. Devinney

Australian Graduate School of Management, Sydney, Australia

Yves Doz

INSEAD, France

James F. Fairbank

Penn State Erie, The Behrend College, PA, USA

Jennifer M. George

Jesse H. Jones Graduate School of Management and Department of Psychology, Rice University, TX, USA

Jerayr Haleblian

Anderson Graduate School of Management, University of California, Riverside, CA, USA

Quy Nguyen Huy

INSEAD, Fontainebleau, France

Olivier Irrmann

Department of Management, HEC Montreal, Canada

Quintus R. Jett

Thayer School of Engineering, Dartmouth College, NH, USA ix

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LIST OF CONTRIBUTORS

John Joseph

Kellogg School of Management, Northwestern University, IL, USA

Renata Kaminska-Labbe´

CERAM Sophia Antipolis, France

Giuseppe Labianca

Goizueta Business School, Emory University, GA, USA

Bill McKelvey

Anderson Graduate School of Management, University of California, Los Angeles, CA, USA

David F. Midgley

INSEAD, Fontainebleau, France

Eamonn Molloy

Saı¨ d Business School, University of Oxford, Oxford, UK

William Ocasio

Kellogg School of Management, Northwestern University, IL, USA

Kalle Pajunen

Tampere University of Technology, Tampere, Finland

Joseph Porac

Stern School of Business, New York University, USA

Nandini Rajagopalan

Marshall School of Business, University of Southern California, CA, USA

Patrick Regne´r

Institute of International Business, Stockholm School of Economics, Stockholm, Sweden

Marıá P. Salmador

Universidad Autońoma de Madrid, Madrid, Spain

Gabriel Szulanski

INSEAD, Singapore

Catherine Thomas

University of Nice Sophia Antipolis, France

C. Annique Un

Johnson Graduate School of Management, Cornell University, NY, USA

Joaquim Vila`

IESE Business School, Barcelona, Spain

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List of Contributors

Richard Whittington

Saı¨ d Business School, University of Oxford, Oxford, UK

Luca Zan

Department of Management, University of Bologna, Italy


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STRATEGY PROCESS: INTRODUCTION TO THE VOLUME THE CHALLENGE OF STRATEGY PROCESS RESEARCH Enduring scholarly interest in the process of strategy-making stems from an abiding assumption that some ways of strategizing are more efficacious than others, and thus lead to higher firm performance in the long run; higher than luck alone would bring. Expressions of interest in and endorsements of the strategy process are abundant in the academic literature. As Pettigrew (1992) points out, Hofer and Schendel’s pioneering definition of strategic management is processual in character emphasizing the development and utilization of strategy. Rumelt, Schendel, and Teece (1994) list the policy process question – how does policy process matter? – as a fundamental question of the strategic management field. Porter (1996) expresses preoccupation with the leadership and organizational challenges of managing the process. And, Hamel (1988) exhorts the field to devote as much attention to the conduct of strategy, i.e., the task of strategy making, as they have to its content. For senior managers and leaders, the question of how to make effective strategies stands usually at the top of their agenda. Not surprisingly then, the quest to uncover stable principles of good strategy making has attracted much support and interest over the years. Researchers who responded to the strategy process challenge had known many moments of exhilaration and disillusion, the exhilaration of discovery, and the disillusion from the often grotesque ratio of effort to outcome and the indifference of a scholarly community heavily reliant on a large sample variance approach. Indeed, empirical research in strategy process has often required large, often heroic and invariably idiosyncratic, longitudinal data collection efforts aimed at exploring the link between the strategy process and the quality of decisions, and ultimately the performance of firms. Such quests, potentially revealing and insightful but often risky from the researcher’s career perspective, presented formidable, methodological, and practical hurdles. Moreover, the theory yielded by such ambitious quests, xiii

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INTRODUCTION TO THE VOLUME

while comprehensive, was often complex, messy, and notoriously fragile. The accumulation of scientific evidence in strategy process thus progressed slowly because of the relative paucity of studies and also because of their idiosyncratic nature. Scholarly insights took longer to accumulate, perhaps too long to serve as the sole basis for helping the eager practitioner in search of simpler but applicable advice.

BENEATH THE SURFACE As a result, a significant and often highly visible part of the field is characterized by a controversial normative orientation. Bold claims of two dominant flavors – strategic change or protecting and extending existing strategies (Chakravarthy, 2003) – are typically made with modest and often selective empirical evidence. Such prescriptions tend to be highly influential until they are outdated, out fashioned, or shown to be hazardous when poorly understood boundary conditions governing their use are exceeded.1 Barabba, Pourdehnad, and Ackoff (2002, p. 5) put it eloquently: ‘‘a significant proportion of the advice produced by such management gurus is either incorrectly inferred from data (but nevertheless, may be true) or is unsubstantiated by genuine evidence.’’ Enduring effective strategy-making prescriptions are rare, or as some would claim impossible. Indeed, a prescription that would guarantee supra-normal profits consistently would de-facto become the strategic management field’s own version of the proverbial money machine. As a result, the field as a whole seems to have ebbed in and out of favor with practitioners. This instability has stimulated poignant condemnations from several noted contributors to the field who sound their own versions of the naked emperor complaint. Mintzberg’s (1994) dissection of strategic planning denounces the ‘‘missing detail,’’ neglect of synthesis, which he deems crucial to understanding strategy making. Hamel publicly exposes the ‘‘dirty little secret’’ of the strategy field, the dearth of insight about where strategies come from (Jackson, 1997). Chakravarthy (2003, p. xii) points out that: ‘‘the process through which strategies are shaped, implemented, and changed remains ill understood.’’ This reality led some to deride the prevailing approaches to theorizing in business policy and strategy research as a confused and infantile art that was unlikely, by itself, to cumulate or pass the test of time (Camerer, 1985). Mere access to senior management seemed insufficient grounds for academics to muse about decision-making at the top. Once the excitement and energy that comes from observing strategy making in situ dissipates not much else was expected to remain.

Introduction to the Volume

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But beneath this dramatic and unstable facade lies a gradual, patient, and seemingly more stable, hard-at-work, academic enterprise. Scholarly strategy process research apparently goes on, perhaps more than ever, suggesting that there is something fundamental and deeply interesting and profound about how strategies are made, where they originate in organizations, and how the process of strategy-making impacts the performance of organizations. Casual counts of journal articles and books focused on strategy making suggest that this is a rich and increasingly active area of investigation. Cognition, emotion, strategizing, strategy practices, strategy as organizing, organizing as strategy, complexity, architectures, patching, innovation, and the like are terms that are commonly associated with it in the contemporary literature. Indeed, the strategy process area seems to be a fertile meeting ground for many types of scholars interested in problems of strategy and organization. Yet, the academic visibility of this part of the strategy process community has been partly hampered by its internal fragmentation. So the field is characterized by relatively homogenous, stable, and sometimes exclusive subgroups that protect zealously a set of fundamental beliefs about rationality, reductionism, agency, and other aspects of the process; a set of beliefs that are seemingly treated as non-discussable. These sometimes rigid divisions can cost visibility. Indeed the question of process was excluded from a landmark book discussing the fundamental questions of the strategic management field because of irreconcilable differences between subgroups of scholars (Rumelt et al., 1994, pp. 527–530). Academic visibility, so the belief goes, has suffered also because of the relative paucity of studies, and because scholarly journals are averse to this ‘‘kind’’ of research.

PEARLS OF WISDOM Yet, fragmentation not withstanding, the contours of an enthusiastic strategy process community are increasingly apparent; a community that is less anxious to prescribe and more inclined to collect patiently the fruits of academic inquiry, more eager to subject itself to the test of time. There, in that community, wisdom and insights about the nature of strategy making have cumulated from patient observation of the strategy process and some of those insights are indeed beginning to meet the test of time, as a new generation of researchers is building upon them to design their own research. A case in point is Bower’s (1970) resource allocation process model. Bower’s model remains in use after 35 years. The basic idea is that the

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resource allocation process is a complex, multilevel phenomenon that fundamentally shapes a firm’s strategy. Burgelman (1983) extended the model to distinguish between strategic activity that falls within the bounds of institutionalized corporate strategy and that which emerges from subunit activity in a way that makes the model congruent with an evolutionary perspective. Subsequent scholars strengthened the model by examining and applying it to other critical aspects of the strategic process.2 As Chakravarthy (2003) points out, the Bower and Burgelman’s model fleshes out the important connection between the corporate context and the premise of decisions. They also review a number of classification processes, which include taxonomies for studying the strategy process. Like the Bower’s model, some of those other taxonomies have served as points of departure for subsequent empirical work in strategy process. Such modeling and taxonomical efforts serve as the starting point for ongoing research. We will return selectively to some of them later in the preamble to our review of the papers in this volume.

RE-DISCOVERING STRATEGY PROCESS RESEARCH The three of us, despite our ongoing interest and involvement in the strategy process field, were taken by surprise by the scale and energy of this somewhat discrete strategy process research world. We re-discovered its full extent by accident in a workshop that the three of us organized at the 2002 Academy of Management conference in Denver, Colorado. Our first surprise was the size of the audience and its composition. We expected a modest audience composed by the usual suspects of the strategy process field. Sure enough, Joe Bower, Robert Burgelman, Paul Nutt, Andrew Pettigrew, and V.K. Narayanan acting as the SMS liaison were all there. But also, there were a new generation of talented junior faculty and Ph.D. students from a broad range of schools who presented ongoing work. And it was one of the best attended workshops that year! We opened the workshop by asking senior researchers in the field to reflect on their experience. In response, Robert Burgelman asserted that process manifests itself in concrete substantive areas of organized activity over time. Hence it is necessary, he said, to study a real phenomenon. The study of process is the study of simultaneously occurring activities and of their linkages. On the link between process and content, he commented that process generates content and that content disciplines process. Yves Doz added that strategy process is particularly interesting in large firms where

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multiple managers are interacting in complex decisions in real time. Those decisions are conflictual and cannot be routinized. He recommended that conceptual work should be done at the middle range. There is a need for relatively low level conceptual constructs that help make the data relevant. Effective researchers should put sufficient emphasis on descriptive insights and low to mid level conceptualization. Further he recommended focusing on surprises and anomalies. Paul Nutt reflected on some of the difficulties that he experienced when conducting strategy process research. In particular, he stressed the extraordinary efforts that were required to obtain the necessary detail, because it is important to collect the information in real time and when the process is actually happening. Study piety by studying a pious man in a religious moment, he said. He also commented on the challenge of staying above a sea of details and keeping it all in perspective. To this end he recommended juxtaposing process and content. Finally, we heard from Liisa Valikangas and Amy Muller, both consultants from Strategos, who pointed out that an important way in which companies come up with strategies is by buying them from consultants. So research should focus also on how consultants come up with strategies and how they sell them to companies. Andrew Pettigrew closed the workshop by saying that strategy process was much more accepted today than it was 10–15 years before. And that was the cause for celebration. He also called for critical reflection. He saw the need to ask whether strategy process research of any kind has actually made a difference. He saw the need to ask why one should bother to conduct strategy process research at all. We became intrigued and wanted to dig deeper into what was really going on. What kinds of research and theoretical framings were people relying on? What were some of the new insights into strategy making that were emerging from the new generation of researchers in the field? Was the field becoming more ‘‘micro’’ by generating insights into the cognitive and emotional foundations of strategy making, or has interest shifted to broader organizational and institutional influences on strategy-making activities in and between organizations? And were there new methodologies that mitigated the difficulties of studying strategy making empirically?

THIS BOOK This volume is the culmination of our three-year effort to explore and uncover this relatively hidden or at least less visible side of the strategy process

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field. The origins of this volume trace back to that 2002 workshop. That workshop attracted over 60 scholars from wide ranging theoretical and methodological perspectives who spent an entire afternoon discussing strategy process, presenting their work, discussing methodological and theoretical challenges, and assessing the prospects for the field. We were excited by the tremendous enthusiasm for process research among workshop participants and by the richness and diversity of the intellectual discussion, which drew on theoretical developments from fields as diverse as complexity theory, social movement research, and cognitive psychology.3 Anchored in the gloom and doom of the public condemnations of the field, we emerged from that workshop convinced that we were fortunate to be witnessing the beginning of an energetic and widespread resurgence of interest in processrelated topics, a resurgence which had transcended national boundaries and that was occurring all around the world. The feedback that we received about the workshop reinforced that impression. Many of the participants expressed in their verbal and written comments to us a desire to keep the conversation going. So we decided to organize a follow-up conference the next summer at INSEAD in France. We chose a European venue to encourage scholars from around the world to send in submissions for consideration, and we were particularly keen to sample from the many very interesting research projects we knew were underway in Europe on strategy making in organizations. We invited participants based on refereed abstracts. Of the 71 abstracts submitted in response to an open call, we selected 35 and invited the authors to present their work in a two-day session in Fontainebleau in August 2003. Besides quality, our selection criteria also emphasized variety of theoretical and methodological perspectives at the conference. We clustered the papers in groups of 4 or 5 that shared the same level of analysis or that were otherwise similar. Each session had a discussant. Those specialized discussions were then followed by three lively plenary debates on strategy process.4 After the conference, we invited the authors of those 35 papers to revise them in light of the feedback that they had received at the conference and then re-submit them for consideration for this volume. To select the papers, we relied on a round robin half-blind review process where each paper was sent to two of the other conference participants. Reviewer comments were then used to winnow down the final set of papers to the 16 chapters that are included in this volume. We made final acceptance decisions after the authors had incorporated the feedback from the reviewers. We have asked the authors of some of these papers to revise them yet again for length, clarity, or both.


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Taken together, the 16 chapters that we have selected for inclusion are, in our opinion, rather representative of the face of current scholarly strategy process research. We have emphasized to everyone involved that we would do our best to neutralize our own personal biases. We were keen on representing the field in the volume as close as possible to the way that ‘‘the community’’ actually saw it. As a consequence, we have tried many different classifications and ordering schemes for the chapters, once we knew what chapters were going to be included. We eventually settled on a relatively standard classification scheme that has proven most useful since the initial 2002 workshop, through the 2003 conference in France, and the round robin review process resulting in final chapter selections. We believe that it effectively conveys a sense of the similarities and differences between the chapters and the diversity of perspectives and research in this area. Our classification scheme has four categories. The first has to do with the micro-foundations of the strategy-making process, the second with more macro-level processes associated with it, the third includes examples of empirical studies of strategy making, and the fourth captures commentary about appropriate techniques and methods for studying strategy making in action. Accordingly, the chapters in the first section of this volume (Huy, Ocasio, and John, Haleblian and Rajagopolan, Canales and Vila`, and Fairbanks and Labianca) explore the cognitive and emotional micro-foundations of strategic thinking, and more broadly, the strategy-making process. Those in the second section focus on the larger context of organizations by theorizing about strategy making within more complex organizational resource accumulation and utilization processes (Dagnino and Mocciaro, Regne´r, and Thomas, Kaminska-Labbe´, and McKelvey). Those in the third section of the book provide detailed empirical studies of strategy-making processes using a variety of methodologies and analytic lens (Irmann, Salmador, and Bueno, Un and Cuervo-Cazurra, Coltman, Devinney, and Midgley, and Jett and George). Finally, those in fourth section are essentially meta-commentaries on research on strategy making, particularly the sorts of methodologies that are required to uncover meaningful data regarding how strategies unfold over time and in situ (Pajunen, Zan, Molloy, and Whittington). The reminder of this introductory chapter provides a broader context for the present volume by reviewing the key historical issues in each of these four topical domains. We also highlight how the remaining 16 chapters are rooted in and extend longstanding conversations in the study of strategy making. Our goal is not so much to summarize the various contributions to the volume as it is to provide theoretical and historical perspective. To this

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end, we begin each section describing each topical domain with some very brief thoughts about the history of research in that domain, emphasizing the one or two key issues that have motivated scholarly work in that area. We next discuss each of the chapters included in that domain, and draw out linkages between the chapters and prior research and theoretical efforts.

The Cognitive and Emotional Foundations of Strategy Making Cognition is a fundamental facet of the strategy process. Porac et al. (1996) trace the cognitive turn in organization studies to two factors: (1) the work of Herbert Simon and its associates for showing how the quality of managerial decision-making could be contingent on the managers’ psychology and (2) the relaxation of a strictly realist view of the world in which the environment imposes itself on passive perceivers in favor of a view where observers actively construct their environments thus making the environment at least partially contingent on the person or group who perceives it. As Kaplan, Murray, and Henderson (2003) explain there is a fundamental connection between strategy process and cognition because when characteristics of the situation are not sufficiently delineated to dictate action, it is the executive’s mental model of the environment that must become a basis for strategic choice. As per Huff’s (2005) account, interest in cognition peaked in the 1980s then waned and it now seems to be undergoing a resurgence. Indeed, Eisenhardt and Zbaracki (1992) emerged from a comprehensive review of the literature of strategic decision-making with a proposed research agenda that emphasized cognition, first and foremost. Gavetti and Levinthal (2000) argued that when experience or information are insufficient, strategic decision-making must rely partially on an imagination-driven forward-looking logic of consequence, which they thought was neglected in the extant work. March and Simon (1958) establish an important link between decisionmaking and emotion through a rather general definition of conflict, which arises when standard mechanisms for decision-making experience a breakdown, when individuals or groups experience difficulty in selecting an action alternative, i.e., experience a decision problem.5 Despite the fact that strategy process research is rooted in cognitive approaches to decision-making and managerial thinking, one of the trends that came to our attention in developing this volume is the growing attention being given to ‘‘interest driven’’ and emotional influences in strategy making such as power and politics, status dynamics, and emotional contagion and


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management. On the one hand, this trend follows from similar developments in psychology and sociology, and is thus not particularly surprising. On the other hand, given the complexity of strategy-making processes extended over space and time, one must wonder a bit about the feasibility of studying and theorizing the role of emotions in complex organizational decision-making. There appears to be considerable methodological and empirical hurdles to overcome in building emotion-based theories of the strategy process. Nevertheless, emotional influences on strategy making are intriguing given their implication that strategy processes might be directed, in part, by primitive psycho-social forces that are only partially under the control of the strategists themselves. These forces must be taken into account, managed to the extent possible, and certainly understood as vital elements in the process of creating strategic alternatives, committing resources, and implementing change. For this reason, we chose to begin the exploration of the micro-foundations of strategy making with Quy Huy’s chapter, ‘‘An Emotion-Based View of Strategy Renewal.’’ Professor Huy, perhaps as much as anyone else these days, has been heavily involved in studying the role of emotions in strategy and organizations, particularly their role in strategic change. His chapter crystallizes insights gleaned from his research by suggesting that emotions can play both constructive and destructive roles when organizations are engaged in strategic transformation, and that the balance between these roles has much to do with how emotional processes are managed by the organization. According to Huy, successful strategic change is a function of collective mobilization, creativity, retaining key employees, and a receptivity on the part of the organization to embrace new ways of doing things. Each of these activities is facilitated by appropriate emotional substructures. Collective mobilization is encouraged by the elicitation of hope on the part of organizational members, creativity is stimulated by enjoyment and fun, openness to change is enhanced when management shows sympathy toward employees regarding the disruptions that take place during change, and employee retention is made stronger when organizational practices heighten attachment and identification with the goals of the organization. Huy’s key insight is that the ability to create these facilitating emotional substructures is a particular kind of organizational ‘‘dynamic capability’’ that allows the emotionally skilled organization to manage change and renewal effectively. Professor Huy’s chapter is followed by Ocasio and John’s piece entitled, ‘‘An Attention Based Theory of Strategy Formulation: Linking Micro and Macro Perspectives in Strategy Processes.’’ This ordering nicely captures the theoretical transition between the emotional and cognitive foundations of

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strategy in the sense that Ocasio and John’s key argument is that strategy making is heavily influenced by formal and informal organizational ‘‘channels’’ that structure managerial attention, and thus the process of strategy formulation. Like emotions, attentional channels influence strategy making almost unconsciously, as ingrained routines and governance processes automatically sift through environmental and organizational cues, prioritize issues, and focus managerial decisions on those issues that have made it through this filtering process. Ocasio and John borrow from psychology the term ‘‘selective attention’’ to characterize strategy making, and it is indeed more than coincidental to note that selective attention has historically been considered one point of intersection between the emotional and intellective processes of the brain. Ocasio and John take the notion of selective attention one step further, though, by suggesting that selective attention leads to selective retention of strategic initiatives and issues, and this retention forms one basis for a firm’s competitive advantage. By linking selective attention with selective retention, the authors seem to traverse the boundary between strategy process and strategy content in the sense that the resources and capabilities that endow a firm with an advantageous competitive position are the result of a selective attention and retention cycle that has its roots in formal and informal organizational routines. The next two chapters in this section of the volume are excellent followups to Ocasio and John’s arguments about managerial selective attention to strategic stimuli. The contributions by both Haleblian and Rajagopalan, and Labianca and Fairbank are focused on the particular stimuli to which strategists attend when shaping the direction of their organizations. In their chapter ‘‘Top Management Cognitions, Past Performance, and Strategic Change: A Theoretical Perspective,’’ Haleblian and Rajagopalan highlight the important role of performance benchmarks in strategy making by suggesting that past performance creates double-sided forces on the strategy formulation process. On the one hand, persistently low performance creates pressures for changing strategic direction in order to improve the organization. On the other hand, persistently high performance creates pressures for strategic change by encouraging strategists to set stretch goals to enhance the organization’s performance even more. However, while high or low performance cues thus have the potential to trigger strategic action, Haleblian and Rajagopalan suggest that the intervening strategy formulation processes involved are quite different in the two cases. Persistently poor performance triggers a reactive attributional process that guides the strategist’s causal diagnosis of the situation. This diagnosis then determines whether the strategist will intervene to initiate a different course of action or


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stay the course in cases where poor performance is attributed to events beyond the control of the organization. Persistently strong performance, on the other hand, heightens the strategist’s internal feelings of accomplishment and efficacy, and thus creates the conditions for proactive strategic change by encouraging challenging performance goals and stretch objectives. In this way, the authors contend that performance stimuli alone are not sufficient to explain the link between past performance and future strategy. Rather, it is how the strategist interprets and explains past performance that is the immediate trigger for organizational change. Whether such interpretations are endogenous or exogenous to the attentional channels detailed by Ocasio and John is an interesting theoretical question to ponder. Of course, the argument that past performance triggers strategic change begs the question of how organizations evaluate whether their performance is high or low. In their chapter, ‘‘Interorganizational Monitoring: Process, Choices, Outcomes’’ Labianca and Fairbank take on this general question by suggesting that organizations evaluate their performance in relation to other organizations in the environment. These authors argue that even internal aspirational targets are set within the context of interorganizational comparisons, and that such comparisons inform both internal and external stakeholders. According to Labianca and Fairbank, interorganizational monitoring is useful for categorizing an organization and defining its position in interorganizational space. On the basis of these categorizations, organizations then choose to compete with, emulate, and/or imitate other organizations that they deem relevant to their performance aspirations and objectives. Labianca and Fairbank suggest that organizations have a good deal of latitude in structuring their interorganizational comparisons, and that variability exists in both the depth and breadth of their monitoring proclivities. The authors use the example of a business school initiating a doctoral program to illustrate their point that organizations selectively monitor others in the environment according to the task at hand and the stakeholder audience to which the performance comparison is targeted. We end this section of the volume appropriately with a contribution by J. Ignacio Canales and Joaquim Vila` entitled, ‘‘Sequence of Thinking and Acting in Strategy-Making.’’ In one way or another, all of the preceding chapters in this section have argued that the emotional and/or cognitive processes involved in strategy making are important because they shape critical organizational outcomes such as the likelihood and/or efficacy of strategic change. And yet, the focus of these chapters has been primarily on detailing the emotional and cognitive inputs to strategy-making processes rather than the linkages between these processes and strategic actions and

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outcomes. The linkages between strategy making, strategic action, and organizational outcomes are important topics in the next section of the volume. However, the chapter by Canales and Vila` represents a nice transitional set of arguments since their concern is with the micro-processes that connect thinking and acting together in the strategic management of organizations. According to Canales and Vila`, strategy making is characterized by a dialectic between deliberate (primarily cognitive) and more emergent (primarily action oriented) processes that serve to bind strategy to action and outcomes over the course of time. Although thought and action are not necessarily coupled closely together in all cases, they can become so as thinking energizes action and action generates information that initiates reflective changes to earlier strategic frameworks. As action becomes more automatic and routinized, Canales and Vila` emphasize the importance of ‘‘triggering events’’ that interrupt strategic activity systems and induce strategists to move toward a more reflective mode of thinking that has the potential to initiate modifications to existing mental models. These events can be disconfirming and unexpected cues from the environment, or more deliberate requests to step back from and reconsider an organization’s strategies and priorities. Canales and Vila`, then, see strategy making as an ongoing activity system that is periodically interrupted by triggering events that induce changes in the content of strategies over time. One of the implications of the Canales and Vila` paper is that organizations are characterized by a dialectic between periods of relative stability and periods of change and reorientation. This dialectic, in fact, has always been a central issue in theories of strategy and organization because of the tensions it creates when managing and organizing the oppositional forces involved. Properly designed strategic processes must be both dynamic and static. And, they must exploit existing and stable opportunities as well as explore, and even create, entirely new possibilities in the future. No doubt, this is easier said than done, and for this reason, a great deal of scholarly work has been done on the problem. The chapters contained in the next section of this volume represent some interesting recent efforts along these lines.

Institutional and Resource Foundations of Strategy Making The extensive selection – adaptation literature provides a useful backdrop to understand the institutional and resource foundations of strategy making.


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An important theme in this literature is the extent to which intentionality matters (Lewin & Volberda, 1999). Such literature provides ways to conceptualize the extent and the limitations of managerial discretion. For example, in-depth accounts of the role of executive leadership in decision-making highlighted that an important role of the executive was to create, decision premises, i.e., a context where others would take decisions (Barnard, 1938; Simon, 1947). Such institutional features gained further texture with the work of historians such as Chandler (1962) and conceptual clarity with concepts such as corporate context (Bower, 1970) and strategic context (Burgelman, 1983). Penrose (1959) and the early thinkers in the field of international business such as Hymer (1960) developed what we would today call a resource – or competence – perspective to strategy making, i.e., how the resource endowment of the firm affects its decision-making. An interesting perspective on adaptation and on the limitations of managerial discretion was provided by March (1991) who highlighted the dilemma between the exploration of new possibilities and the exploitation of old certainties, and the complications of allocating resources between the two. The exploration/exploitation framing struck a chord with strategy scholars as it suggests a sharp distinction between value creation and value appropriation. Value creation involves disruptive and new ideas that result in new markets and value chains being enacted, while value appropriation involves competitively capturing existing value in markets that already exist. In their chapter entitled, ‘‘The Development of the Resource Based Firm: Between Value Appropriation and Value Creation,’’ Destri and Dagnino compare and contrast the process issues involved in value appropriation and value creation, using recent work on the resource and knowledge-based views of the firm as their conceptual anchor. These authors point out that work on value appropriation is grounded in processes that are stable in nature and that are quite consistent with neoclassical conceptions of equilibrium competitive positions. Collections of firm specific resources and capabilities act as isolating mechanisms that build defendable competitive positions over time. Value creation, however, is dynamic and disruptive, and must be modeled as a more open-ended and subjective process of search and learning. In value creation, the key process problem is not so much how to deploy existing resources and capabilities as isolating mechanisms but how to recombine existing resources and capabilities in innovative ways to open up entirely new value chains. While different theoretical constructs have been used to understand value creation and appropriation, Destri and Dagnino argue strongly that Austrian economics provides a framework of constructs that can explain value creation and appropriation in an

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integrated fashion. Along the same lines as Canales and Vila`, Destri and Dagnino suggest that the key here is to recognize that strategy processes are characterized by both periods of relative stability and periods of relative change. Strategy process, therefore, is cyclical in nature, with value creation and appropriation both reinforcing each other over long evolutionary periods in a firm’s history. Destri and Dagnino go beyond Canales and Vila`, though, by making the leap from the micro-level of cognition and strategic thinking to the institutional level of resources, capabilities, and values. In his chapter, ‘‘Adaptive and Creative Strategy Logics in Strategy Processes’’ Patrick Regne´r carries on this line of argument by suggesting that the difference between creative recombination versus exploitation of existing resources is reflected in different strategic ‘‘logics’’ that become embedded in quite distinct organizational systems. What Regne´r calls the ‘‘adaptive’’ logic emphasizes the exploitation of existing resources within existing market structures. This logic is embedded in an organizational design that tends toward more formal and centralized planning, more top-down decisionmaking, and an emphasis on allocative efficiencies. Regne´r contrasts this with a ‘‘creative logic’’ that is oriented around the search for new resource combinations and new markets. According to Regne´r, firms pursuing creative strategy making tend to have less formal and more horizontal organizational structures, decision-making that is dispersed throughout the firm, and an emphasis on flexibility and innovation rather than efficiency in organizational processes. In arguing this point, Regne´r brings the discussion of value creation and appropriation, resource recombination and creation versus resource exploitation, down to the level of the organizational structures and processes that are more or less required to enact each strategic logic. Strategy making is thus an organizational and institutional process as much as it is an activity performed, or a mental model possessed, by individual strategists or top management teams. In their chapter entitled, ‘‘Managing the MNC and Exploitation/Exploration Dilemma: From Static Balance to Dynamic Oscillation,’’ Thomas, Kaminska-Labbe´, and McKelvey complete the institutional section of the volume by extending this argument further. They consider creative versus adaptive logics within the context of the multinational corporate (MNC) form. These authors point out that a central problem in the design of multinational corporations is the balance between the exploitation of global efficiencies and the exploration of local market opportunities. Thomas et al. suggest that both logics must be present in order for the MNC to function effectively over time. The key question is the balance and emphasis placed on each of the logics at various points in an MNC’s evolution. Thomas et al.


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suggest that an organizational design that may be particularly effective in managing the simultaneous demands of exploration and exploitation is what they term a ‘‘tangled hierarchy.’’ Tangled hierarchies interweave top-down and bottom-up influence processes by creating layers of hierarchies with different properties within each other. For example, a centralized and vertically controlling hierarchy might exist along with a more horizontal set of relationships that are just as well understood and codified. At a given point in time, and depending on situational demands, one of these hierarchies will dominate decision-making and action within the organization. Tangled hierarchical processes are thus characterized by an oscillation between different influence regimes. Thomas et al. suggest that the problem of balancing global exploitation and local exploration in the MNC can thus be recast as a problem of oscillation between top-down and bottom-up hierarchical dominance. Rather than attempting to design an optimal ‘‘balance’’ between creative and adaptive logics, then, Thomas et al. suggest that the design problem is really a question of deciding on an optimal oscillation rate between the hierarchies associated with each logic. The authors go on to concretize their argument with a case study of oscillation in one particular MNC over time.

Contemporary Empirical Studies of Strategy Making Several methodologies are prevalent in empirical studies of strategy making. By far the most popular method is the single or multiple case study approach, followed by in-depth field studies, computer simulations, and experimental studies aimed at policy capturing; cf. Eisenhardt and Zbaracki (1992) for a comprehensive review of methods used in strategic decisionmaking studies. Important insights have been derived through all of these methods. While studies that embark in theory building or grounded theorizing in strategy process are increasingly accepted as a legitimate scholarly undertaking, the testing of theories of strategy process has proven particularly challenging because of the inherent difficulty of measuring process and performance over time. Thomas et al.’s illustrative case study of hierarchical oscillation in an MNC, which closes the previous section makes for a nice transition to this section of the volume consisting of five empirical studies of strategy making processes in action. We have chosen these five papers because they represent a fairly broad swath of the topics that are currently being investigated empirically by strategy process researchers around the world. The topics are

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thus necessarily varied, with no particular ordering. Together these chapters are representative of methods and topics in contemporary empirical strategy process research. In his paper entitled, ‘‘Communication Dissonance and Pragmatic Failures in Strategic Processes: The Case of Cross-Border Acquisitions’’ Olivier Irrmann tackles the thorny problem of integrating international acquisitions into productive organizational subunits of the acquiring firm. It is well known by now that most mergers and acquisitions are only partially successful at best, and one key factor that has been mentioned to account for this underperformance is the difficulty of integrating two separate companies with distinct cultures, organizational infrastructures, and histories. Irrmann rightly argues that the integration problems entailed in cross-border mergers and acquisitions are particularly acute, and further suggests that these problems are rooted in cultural differences in communication patterns and styles. In a study of French and Finnish firms, Irrmann concludes that three sources of communicative ‘‘dissonance’’ make cross-border integrations difficult: differences in communication style (or how to communicate particular issues), communication content (or what to say in a given context), and communication media (what communication channels to use and when). Irrmann’s insights are important here because, as he points out, the prior literature on integration problems has tended to focus on general company differences in ‘‘culture,’’ ‘‘structure,’’ and ‘‘reward systems.’’ While Irrmann does not discount the importance of these variables in the integration process, his more ‘‘micro’’ approach to studying communication differences reveals that daily interaction patterns and preferences might be just as influential. As such, Irrmann’s paper adds even more grist to the argument that the best laid merger and acquisition plans must eventually pass the test of integration implementation for any benefits to be realized. Marı´ a Salmador and Eduardo Bueno consider the problem of strategy making in complex and fast-moving environments in their paper, ‘‘StrategyMaking as a Complex Double Loop Process of Knowledge Creation: Four Cases of Established Banks Reinventing the Industry by Means of the Internet.’’ In many ways, their research is quite consistent with the arguments by Canales and Vila`, Destri and Dagnino, and Regne´r that strategy making is an ongoing cycle of action and reflection, exploitation, and exploration. Salmador and Bueno study the implementation of internet banking by different financial services groups in Spain. This venue is particularly revealing of strategy-making processes given the many uncertainties and ambiguities of internet commerce in general. The authors track the micro processes of strategy making in this technologically complex and volatile environment


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and show how banks enacted their emerging strategic space via embedded cycles of action and experimentation, reflection, and codification of the lessons learned by such experimentation, the encouragement of creativity and new ideas, and the implementation of simple rules and routines that helped to cut through the complexities of the new market. In this way, Salmador and Bueno’s study provides empirical detail for the arguments in earlier chapters on strategy making in this volume. The focus of Un and Cuervo-Cazzura’s chapter on ‘‘Top Managers and the Product Improvement Process’’ is the role of senior managers in product evolution rather than new-product development. Noting that the strategy and organizations literature has tended to emphasize the role of middle managers and bottom-up creative processes in organizational innovation and new product development, Un and Cuervo-Cazurra argue that product improvement differs from new-product development in that existing products are already contributing to a firm’s profit position. Thus, top managers have an incentive to get involved. Moreover, the authors suggest that product improvement often requires changes in existing organizational routines, and the involvement of top managers is sometimes required to break down the political barriers preventing such changes from occurring. For these reasons, Un and Cuervo-Cazurra suggest that top managers might play a crucial role in guiding product evolution, and they test this argument in a sample of 30-product improvement projects within six different firms. The authors conclude that top managers have a number of key functions in product evolution such as the evaluation of product performance, the initiation of product improvement processes, and the monitoring of resulting improvement initiatives. Un and Cuervo-Cazurra’s paper reminds us that top managers cannot be ignored as important sources of innovation in organizations. Quintus Jett and Jennifer George explore the relationship between strategy and environmental dynamism in their chapter entitled, ‘‘Emergent strategies and their Consequences: A Process Study of Competition and Complex Decision Making.’’ It has often been suggested in the strategy literature that dynamic environments constrain deliberate and planned strategy-making processes because such environments change too quickly for long-range plans to be enacted. This has led to the argument that dynamic environments call for much more open-ended and emergent strategies that evolve over time. Jett and George use a business simulation game to track the nature of strategic thinking and decision-making over time in a competitive environment. Addressing the difference between emergent and deliberate strategy-making processes in organizations, the authors show

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how the best performing top management teams in their study used a combination of emergent experimentation and deliberate forward thinking to shape the direction of their company. According to Jett and George, deliberate and emergent strategies are not mutually exclusive, and in fact might even be complementary in the sense that forward looking anticipations often act to structure and direct more open-ended exploratory thinking. The last chapter in this section, ‘‘Strategy Content and Process in the Context of E-Business Performance’’ by Coltman, Devinney, and Midgley, examines the relationship between certain organizational and environmental attributes and organizational performance. These authors focus upon the classic distinction between strategy content (e.g., environmental pressures, resources, and capabilities) and strategy process (e.g., managerial beliefs) and suggest that both process and content are important determinants of a firm’s performance. They test this argument within the context of e-business implementation. They find that both industry pressures to implement ebusiness processes in an organization as well as managerial commitment to the benefits of doing so are both important determinants to the success of the implementation. Coltman et al. conclude that the content vs. process distinction unnecessarily tends to orient strategy scholars to one or the other set of constructs in their research. Coltman et al. see great value to remembering that both sets of variables are important in shaping a firm’s future performance trajectory. That is, the resource and environmental constraints that impose themselves on a firm are important variables that influence the firm’s fate. However, how strategists within the firm interpret and understand those constraints and their commitment to any resulting course of action are critical as well. Meta-Commentaries on Methodologies for Strategy Process Research The three previous sections of the volume contain chapters that are largely arguments pertaining to particular aspects of strategy making, or, as in the immediately preceding section, are actual research studies that subject such arguments to empirical testing. Lurking in the background of these arguments, however, are a number of issues regarding the appropriate techniques and methods for studying strategy making in action. The prior sections reveal a number of methods and analytical lenses, from case studies to experimental simulations to questionnaire surveys. Aside from the typical questions that such methods usually evoke (e.g., questions of reliability and validity), are there broader issues at stake that are important to keep in mind as one embarks on strategy process scholarship?


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In this regard, an obvious and fundamental question that Van de Ven (1992) asks is what is the meaning of ‘‘process’’ that guides the research design. Is process a variance theory, a category of concepts that refer to actions, or a sequence of events that describes how things change over time? A more pragmatic but equally vehement suggestion comes from Pettigrew (1992), an advocate of a longitudinal comparative case-study approach, who emphasizes the importance of reducing complexity through research design when exploring the link between process and outcome by sticking with the careful comparison of a small number of (6–10) cases and choosing clear outcome measures. Research in strategy process, he says, is the pursuit of the proximate, not final causes, and of multiple intersecting conditions, an argument that resonates with Robert Burgelman and Yves Doz’s comments during our original workshop in Denver on the importance of theorizing at the middle range. Reflecting on his own extensive experience researching strategy process, Mintzberg (1979) recognizes an emerging strategy of ‘‘direct’’ research, a purely descriptive approach based on small but in-depth samples, which is purely inductive, and insists that systematic data be supported by anecdotal data. A final ‘‘meta’’ issue to keep in mind for strategy process research is the level of analysis. In a sense, the main concern with large sample data collection has to do with how detailed each data point really is. Research based on careful, detailed, in-depth comparisons amounts to opening up the black box of the firm and becoming more ‘‘micro.’’ Herbert Simon once urged economists to reduce the reliance on sophisticated statistical methodologies to extract information from noisy data and instead collect data at a lower level of analysis, i.e., to become more micro. We echo Williamson’s (1985) response to Herbert Simon’s challenge: how micro is micro? The authors of the three chapters in this last section of the volume raise such broader issues about methodology in their papers. All three chapters are essentially manifestos arguing for a particular meta-theoretical stance in the study of strategy making. For this reason, we have labeled the chapters ‘‘meta-commentaries’’ and have combined them into this concluding section of the volume. In the first chapter, Pajunen champions the idea of explanation with causal mechanisms in processual strategy research. He first describes the data analytic techniques of event-structure analysis (ESA) and Boolean comparison/qualitative comparative analysis (QCA) as well as the idea of two-level theories. He then suggests how these approaches can be linked and applied in the analysis of organizational processes and causal mechanisms. He demonstrates the application of the methodology by analyzing two organizational decline and turnaround processes.

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Luca Zan then takes a strong historical orientation in his chapter, ‘‘Future Directions from the Past: Management and Accounting Discourse in Historical Perspective.’’ Zan advocates the value of a historical perspective on the strategy process. By examining shipbuilding in Venice he shows that complex organizational settings and strategies existed even then. He challenges the notion that complexity as a cornerstone of strategic management is a recent invention. He challenges the foundations and hence the novelty of strategy research. Most of it he says is wrapping up with new labels and rediscovering what has already been said. Whatever is left is true innovation. He asks, what can history learn from strategic management? He then asks another important question: where can one find the strategy process in an organization? He claims that strategy process is not just a kind of cognitive social thing but that it has a strong material element that it is embedded in the routines of the organization. Strategy process he claims is to be found in the detailed embedded practices, the calculative routines, and the productive routines, which can be found in the accounting practices of the shipbuilders in Venice. In the third and last chapter of this section, Molloy and Whittington start from a simple but very powerful premise. Reorganizing happens more often, so some of it becomes routinized and is manifested in standardized practices. These practices however are adapted to the realities of the organization. Apparently bridging routines to reality is where a lot of inspiration and imagination has to be devoted. What looks like a small part of the reorganization is actually a big soak of imagination. And that is where the process resides. Of course, this paper evokes the specter of overwhelming level of detail in data collection.

CONCLUDING THOUGHTS This volume is the fruit of our journey through contemporary strategy process research and theory. In a sense, this chapter reflects a hard-won consensus among the three of us. We came from different vantage points into strategy process. We know that the literature is voluminous and extensive and we do apologize to the many contributors whom we have cited only indirectly (through the review of others) or to whom we failed to reflect properly their hard-won and passionate contributions to the field of strategy process. We emerge from this journey convinced that the field is rich and vital. We had lively discussions among ourselves and with others, discussions that touched many themes. Two of those themes however seemed to recur and

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we want to mention them here. The first was the enthusiasm for the field and whether it is likely to persist. We believe that the answer is a resounding yes! In a sense, the prospects of the field reflect the prospects of conducting credible empirical research, which in turn reflect the prospects for data availability. Our prognosis is based on an assumption of increasing availability of information about strategy process. That is because strategy process happens more often than it used to and it is becoming increasingly participative. Hence process will be more observable. The second theme was the necessity of deriving normative prescriptions even when supporting evidence is precarious. Clearly, demanding full scientific proof, i.e., demonstrating correlation and causality, is a tall, possibly unrealistic, requirement in the near term for the field of strategy process. So, it is likely that a normative orientation will continue despite the fragile underlying empirical backing. We believe that for the field to thrive researchers need eventually to give back to the phenomena they study and normative advice is an important way to do so. The question that should be asked however is: who should be entitled to provide such normative advice? Are there minimum ‘‘descriptive’’ qualifications that a researcher should aspire to before providing normative guidance? Is a modicum of familiarity with the phenomena at all necessary to do so? Should on the other hand total disregard for systematic data collection and analysis nullify such efforts? Should those who prescribe based solely on intuition or anecdote be ignored? Which minimum pre-requisites should those who aim to prescribe be asked to meet? We do have our thoughts about these and many other issues in strategy process research but we will keep them to ourselves. We tried to reflect the community and what the community thinks. And it is in this spirit that we part company and leave you now to enjoy the chapters and find your own answers to such questions. We hope you will enjoy the scholarly community of strategy process research as we have discovered it.

NOTES 1. See, for example, James Brian Quinn’s (1989) commentary on the application of Logical Incrementalism 2. See Bower et al. (2005) for a summary of the RAP model, its extensions, and its applications. 3. For more details on the PDW please visit http://sw-mos.insead.edu.sg/ workshop3/PDW.htm. 4. For more details on the INSEAD conference visit http://sw-mos.insead.edu.sg/ workshop3/aism.htm.

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5. See Eisenhardt and Zbaracki (1992) for a thorough review of the power and politics perspective of strategic decision-making. As they point out, ‘‘The heart of the political perspective is the process by which conflict is resolved among individuals with conflicting preferences.’’ Thus conflict provides a useful link between strategy process and emotion.

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March, J. G., & Simon, H. A. (1958). Organizations. New York: Wiley. Mintzberg, H. (1979). An emerging strategy of direct research. Administrative Science Quarterly, 24(December), 582–589. Mintzberg, H. (1994). The rise and fall of strategic planning: Reconceiving roles for planning, plans, planners. New York, Toronto: Free Press, Maxwell Macmillan Canada. Penrose, E. T. (1959). The theory of the growth in the firm. Oxford [Eng.], Basil: Blackwell. Pettigrew, A. M. (1992). The character and significance of strategy process research. Strategic Management Journal, 13, 5–16. Porac, J. F., Meindl, J. R., & Stubbart, C. (1996). Introduction. In: J. R. Meindl, C. Stubbart & J. F. Porac (Eds), Cognition within and between organizations (pp. ix–xxiii). Thousand Oaks, CA: Sage. Porter, M. E. (1996). What is strategy? Harvard Business Review, (November–December), 61–157. Quinn, J. B. (1989). Strategic change: Logical incrementalism. Reprint with comment. Sloan Management Review, 30(4), 45–60. Rumelt, R. P., Schendel, D. E., & Teece, D. J. (Eds) (1994). Fundamental issues in strategy: A research agenda. Boston, MA: Harvard Business School Press. Simon, H. A. (1947). Administrative behavior; a study of decision-making processes in administrative organization. New York: Macmillan. Van de Ven, A. (1992). Suggestion for studying strategy process: A research note. Strategic Management Journal, 13, 169–192. Williamson, O. E. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. New York, London: Free Press, Collier Macmillan.

Gabriel Szulanski Joseph Porac Yves Doz Editors


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PART I: COGNITIVE AND EMOTIONAL FOUNDATIONS OF STRATEGY MAKING

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AN EMOTION-BASED VIEW OF STRATEGIC RENEWAL Quy Nguyen Huy ABSTRACT This paper challenges the dominantly pessimistic view of emotion held by many strategy scholars and elaborates on the various ways in which emotion can help organizations achieve renewal and growth. I discuss how appropriate emotion management can increase the ability of organizations to realize continuous or radical change to exploit the shifting conditions of their environments. This ability is rooted in developing emotion-based dynamic capabilities that facilitate organizational innovation and change. These emotion-based dynamic capabilities express or arouse distinct emotional states such as authenticity, sympathy, hope, fun, and attachment to achieve specific organizational goals important to strategic renewal, such as receptivity to change, the sharing of knowledge, collective action, creativity, and retention of key personnel.

In regard to highly dynamic markets in which the industry structure and boundaries are unclear and players are ambiguous and shifting (e.g., Eisenhardt, 1989), there has been a growing recognition that an organization’s odds to survive and grow in the long term may depend less on its industry structure and positioning (e.g., Porter, 1980), competitive moves Strategy Process Advances in Strategic Management, Volume 22, 3–37 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22001-6

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(e.g., Brandenburger & Nalebuff, 1995), or specific and difficult-to-imitate resources (e.g., Wernerfelt, 1984) than on the organization’s rapid capacity to renew itself by matching or even creating environmental changes when appropriate (Brown & Eisenhardt, 1997; Teece, Pisano, & Shuen, 1997). While a number of scholars suggest that ambitious organizational change is extremely difficult and risky (Hannan & Freeman, 1984; Singh, House, & Tucker, 1986; Hambrick & D’Aveni, 1988), there has been an emerging school of thought, which argues that organizations can systematically renew themselves by learning and developing stable patterns of collective action to change their activities if and when needed so as to avoid their core competencies becoming core rigidities (Leonard-Barton, 1992). The organizational processes that enable such systematic change are called ‘‘dynamic capabilities’’ (e.g., Eisenhardt & Martin, 2000; Teece et al., 1997). Dynamic capabilities display a deliberate, stable, and learned quality that distinguishes them from other change processes that may be more ad hoc, unstructured, and poorly articulated (Zollo & Winter, 2002). While strategy scholars have explored some of the mechanisms that shape dynamic capabilities (e.g., Blyler & Coff, 2003; Zollo & Winter, 2002; Zott, 2003), few have elaborated on how emotion relates to dynamic capabilities, and how emotion-based dynamic capabilities can be used to achieve strategic change and renewal. Research on emotion in organizations suggests that emotion represents an important dimension in major change processes. At an individual level, people often resist change because of feelings of anxiety about the unknown, excessive attachment to the past, or fear of potential negative consequences (Lewin, 1947; Argyris, 1990; Schein, 1996). At the organizational level, a major change in strategy is often accompanied by concurrent shifts in other organizational dimensions, such as structure, systems, and personnel, to preserve alignment (Ginsberg, 1988; Mintzberg & Westley, 1992). Strategic change not only causes a pervasive redistribution of resources and power but also demands a ‘‘paradigm shift’’ that challenges members’ basic assumptions about the organization (Bartunek, 1984; Reger, Gustafson, Demarie, & Mullane, 1994). These assumptions define intersubjective reality and provide a way of dealing with ambiguous, uncontrollable events (Schein, 1992). Organization members are emotionally invested in these non-negotiable assumptions that shape their cognitive structures for sensemaking and meaning-giving. Challenging this source of cognitive and emotional stability represents an attack on core identity and, thus, triggers strong defense mechanisms, such as anxiety and defensiveness (Schein, 1992).

An Emotion-Based View of Strategic Renewal

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For instance, even in the cases of reported successful corporate transformations such as that conducted at GE under Jack Welch, GE senior management recognized that the change had been longer and harder than expected because fearful employees in the early 1980s fought its leaders to a standstill through covert guerrilla warfare and managers felt ill equipped to deal with emotions at the level of organizational action (Tichy & Sherman, 1994). Although this issue is peripheral to their research focus, other field researchers have briefly flagged the influence of emotion. For example, Eisenhardt (1989) suggested that managers’ emotional inability to cope with uncertainty in high-velocity markets represents a major factor that slowed them down. Mintzberg and McHugh (1985) and Burns and Stalker (1994) also noted that many organizations and employees could not sustain the high level of anxiety, uncertainties, ambiguities, and frustration that characterize organic adhocracies and moved eventually to more psychologically comfortable bureaucracies. These findings suggest the importance of emotion management in the conduct of strategic renewal. A traditional narrow focus on negative emotions and their dysfunctional effects may have led some organizational scholars to seek ways to eliminate negative emotions rather than to elicit positive emotions (Cameron, Dutton, & Quinn, 2003). Therefore, less is known about the effects of positive emotions in organizations. While I recognize the potentially adaptive effects of certain negative emotions such as fear on receptivity to change (Kotter, 1995; Lewin, 1947), I will focus on the role of certain positive emotions and their effect on some important organizational processes underlying strategic renewal. Emotion has been often treated as an individual level construct. For example, it has been advanced that highly emotionally intelligent people are likely to be more adaptable and occupy leadership positions than people who are less emotionally gifted (Goleman, 1995). Intelligence is often viewed as an innate, personal, and relatively stable attribute that is difficult to enhance (Salovey & Mayer, 1990). In contrast, the emotion-based dynamic capabilities that I propose here can be codified at least in part, refined through accumulative use and experience, and imparted to and practiced by many people in an organization as part of their learned behavior. In aggregate, these dynamic capabilities represent an organizational competence that can be developed and improved, one that transcends individuals’ differences in their relatively stable innate emotional intelligence. The higher the level of organizational attention and resources allocated to the development and diffusion of emotion-based dynamic capabilities over time, the higher the organizational ability to manage strategic renewal.

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An emotion-based view of dynamic capability seeks to make three contributions to the strategy literature. First, the model nuances a dominantly indifferent or dysfunctional role of emotion in strategy by suggesting certain situations in which emotion can facilitate adaptive strategic adjustments. The strategy literature has often emphasized a cognitive, calculating economic rationale that relies on knowledge and systematic evaluation of alternatives and consequences (Porter, 1980; Dixit & Skeath, 1999). Emotion is often portrayed as impairing clear thinking and effective strategic action. For example, emotional attachment to old strategies can lead to organizational inertia and decline (Burgelman, 1994; Chandler, 1962; Johnson, 1988); emotional persistence often leads to escalating commitment to attempted strategies, which can exacerbate the cost of eventual failure (Staw & Ross, 1987); or affective undertones can induce biases in organizational politics and cause dissension that impairs collective action (Jehn, 1995; Pettigrew, 1985). Second, through the specification of organizational processes dealing with emotion, the model proposes organizational level constructs that are distinct from individual variables. These processes can be institutionalized as organizational routines, they can be diffused to and performed by many organizational members, and are thus relatively independent of the composition of individual members and their variable innate emotional intelligence. These organizational constructs can be observed and measured in the same manner as other concrete organizational behaviors. Third, the model adds to the nascent dynamic capability literature by articulating emotion-related processes that facilitate organizational innovation and change in a way that avoids criticisms of tautology, conceptual vagueness, and difficult-to-test theory leveled at the resource-based view (Priem & Butler, 2001). The remainder of the paper is organized as follows. First, I will discuss the psychological underpinnings relating emotion to action and change (Izard, 1991; Frijda, 1996; Lazarus, 1991). Second, I argue that individual emotions can aggregate to become collective emotion in work settings through mechanisms such as emotional contagion that influence group behavior (Barsade, 2002). Third, drawing on the insights of punctuated equilibrium theory (Tushman & Romanelli, 1985), continuous change (Brown & Eisenhardt, 1997), emotional capability theory (Huy, 1999), and the social psychological literature on organizational creativity (e.g., Mainemelis, 2001), I propose a set of emotion-management routines that help organizations to move through different transition stages of strategic renewal. These routines, which I call emotion-based dynamic capabilities, will help organizations


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overcome the psychological stages of organizational transitions known as ‘‘endings,’’ ‘‘neutral zones,’’ and ‘‘new beginnings’’ (Bridges, 1986), These emotion-based dynamic capabilities help organizational members to come to terms with disengaging from past competences (endings stage), tolerate the prolonged anxiety of exploring viable strategies (neutral zone), and finally to learn new competencies, achieve continuous innovation, and identify with a renewed organization (new beginnings and after). These emotion-based dynamic capabilities elicit authenticity, sympathy, hope, fun, and attachment.

HOW EMOTION INFLUENCES COGNITION AND BEHAVIOR IN THE CONTEXT OF CHANGE Change arouses emotions that motivate action responses. Emotions focus people’s attention on an event and prompt the search for adaptive actions. Lazarus’s (1991, 1993) emotion theory suggests that this involves a twostage appraisal process. First, through primary appraisal, people evaluate the significance of a new event in relation to their own goals and concerns. If they appraise the potential consequence as beneficial, pleasant emotions are aroused. However, they experience unpleasant emotions if they appraise the consequence as potentially harmful. Emotions can lead to paralysis because of fear, although they often generate a readiness to act (Frijda, 1996). Emotions serve first as relevance detectors, focusing people’s attention on change events, then as motivators of action. Second, potential action response is determined through secondary appraisal, whereby people evaluate their own capabilities for dealing with a relevant change event. If they believe they have adequate resources, they are more likely to respond actively. Otherwise, they may adopt a passive/avoidance approach, which is sometimes interpreted as a form of resistance to change (Lazarus, 1993; Huy, 2002). While cognitive appraisals are often necessary to arouse emotions (Scherer, 1988; Clore & Ortony, 2000), recent theoretical and empirical advances in psychology, social psychology, and neurobiology suggest that an emotion lens complements the cognitive perspective: emotion can influence cognition and behavior in important ways (Forgas & George, 2001). First, emotions allow translating cognitive judgment into behavior and thus act as a mediator between cognition and behavior, especially in ambiguous or uncertain matters that require judgment (Bay & Greenberg, 2001). Many

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strategy issues cannot be adequately solved just by quantitative calculation of expected costs and benefits (Mintzberg, 1994). Loewenstein, Weber, Hsee, and Welch (2001) argued that emotional reactions to risky situations often diverge from cognitive assessment of those risks, and when such divergence exists, emotional reactions often drive behavior. Emotions help people to make a leap of faith and face the challenges of major change or uncertain innovation (Westen, 1985; Zajonc, 1980). Emotions confer flexibility in action by enabling people to reorder priorities as situations change and to set long-term goals especially when choices involve incomplete data or incommensurate alternatives (Damasio, 1994). Second, emotions have been found to influence behavior independently of cognition. Under similar cognitive contexts, individuals who experience a positive affect (a longer and more diffused experience of a similarly valenced emotional state, that is, positive/pleasant or negative/unpleasant) display more helpful and friendly behavior than people in a neutral or negative affective state (Isen, 1999; George, 1990; Brief & Motowidlo, 1986). This may occur because pleasant emotions can help boost one’s personal resources, including physical, intellectual, and social psychological energy, believed to be required to address the challenges of helping others (Lazarus, 1993). Beyond its effect on behavior, emotions have also been found to influence cognition. For instance, in their ‘‘feeling as information hypothesis,’’ Schwarz and Clore (1988) suggested that people rely on their immediate feelings in forming judgment about an event (by asking themselves, ‘‘How do I feel about it?’’). Raghunathan and Pham (1999) suggested that sad and anxious feeling states prime an implicit desire for uncertainty reduction during decision-making processes, and this ultimately influences people’s choices between risk and reward. Meyer, Brooks, and Goes (1990) found that people tend to recall material from memory that is consistent with their affective state at the time of recall, suggesting a mood congruence recall effect. Under similar cognitive conditions, positive affect, in general, enhances cognitive elaboration and flexibility, and thus enhances problem solving and creativity (Isen, 2001; Fredrickson, 1998). Emotion links to motivation a goal-directed behavior through selfregulation, which involves dynamic and recursive processes of goal setting, goal striving, and goal adjusting from feedback (cf. Seo, Barrett, & Bartunek, 2004; Bandura, 1991). A growing body of research suggests that the involvement of human emotions in self-regulation is necessary and extensive (Cacioppo, Gardner, & Bernstson, 1999; Izard, 1993; Damasio, 1994; Lazarus, 1991). The affective system can be activated outside conscious


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awareness (Winkielman, Zajonc, & Schwarz, 1997; Zajonc, 1980). As a result, Seo et al. (2004) argued that the purely cognitive perspective of motivation theories constrains our understanding of work motivation that assumes discrete choice processes, and that people always deliberate and plan before they act (Loewenstein et al., 2001). Yet there are situations in which some people engage in action first and think and justify it later, especially when they have little previous knowledge of possible choice alternatives and likely outcomes or when action is required under urgent situations.

FROM INDIVIDUAL TO GROUP EMOTIONS Emotions aroused by strategic change are not only felt at the personal, idiosyncratic level. Faced with a change event, a large number of employees in different work roles can collectively experience certain shared group emotions. Individual emotions converge into group emotions through several mechanisms. First, employees who share a common organizational culture have similar beliefs, leading to similar appraisals and ways of feeling (Schein, 1992). Second, a group translates tendencies into collective expressions more easily than individuals acting alone, because group membership boosts people’s feelings of power by making them feel bolder through anonymity (Barsade & Gibson, 1998). Third, emotional contagion could be at work. Individuals could unconsciously respond to others’ emotional displays by imitating and exaggerating them. The perceived threats involved in strategic change increase needs for affiliation, particularly among people who believe they are confronting the same situation (Gump & Kulick, 1997). Group members identify strongly with one another and experience each other’s emotions, for synchrony conveys empathy. The group’s emotional charge amplifies through mutual interaction that promotes group cohesion and continuity (Hatfield, Cacioppo, & Rapson, 1992). In this regard, organizational groups can express shared emotions and act upon them. Huy’s (2002) field research also suggests that inadequate attention to change recipients’ emotions could lead to work group underperformance even if there are other change agents who are strongly committed to realizing change. At one extreme, weak commitment to change in a highpressure strategic change context could lead to organizational inertia and decline. At the other extreme, too much or too rapid change without attending to employees’ emotions could lead to work-group chaos and organizational underperformance. This suggests that appropriate emotional

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balancing is particularly important for strategic renewal. This article contributes to this nascent literature by proposing the concept of emotional sequencing, that is, elaborating some of the emotion-management routines that attend to change recipients’ emotions in the early stages of strategic renewal often punctuated by disruptive radical change (Tushman & Romanelli, 1985), as well as in the subsequent stages of more steady, continuous innovative change (Brown & Eisenhardt, 1997; Floyd & Lane, 2000).

BUILDING AN EMOTIONAL CONTEXT TO FACILITATE ORGANIZATIONAL TRANSITIONS Emotion management has been traditionally studied in the context of regular work operations (e.g., Martin, Knopoff, & Beckman, 1998), often involving interactions with customers (e.g., Hochschild, 1983; Rafaeli & Sutton, 1991; Sutton, 1991), but is less examined in change contexts (e.g., Huy, 2002). In times of disruptive change, akin to aircraft emergency procedures that are taught to airline crew to deal with infrequent but critical events, managers with personnel supervisory responsibilities could be made aware of the importance of active and appropriate emotion management of their employees and how and when to apply them. Put differently, managers have to be aware of their own work and social context to apply specific emotion-management actions with particular work groups and to calibrate these actions according to their employees’ work and personal conditions. While, a part of managerial practice involves trying to establish an enabling context to achieve managerial objectives, this does not imply that managers should expect to be able to dictate and manipulate every emotional state that each individual experiences at any moment in the work place (Van Maanen & Kunda, 1989). Faced with the same event, not every individual experiences the same emotions with the same intensity for the same period of time (Noer, 1993). Appropriate emotion management requires a manager’s close understanding of each of her employees’ personal contexts (Hochschild, 1983). By enacting appropriate emotion-management routines with groups of employees in different situations and with different needs, managers can at best create a facilitating emotional context. In other words, they can create a work environment in which there are a number of employees (not necessarily everyone) who appreciate the goals and effects of these deliberate emotion-management actions and who experience the intended emotions at least for some time during their work


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What is important to understand in the context of the proposed model is that each emotion-management action is not intrinsically ‘‘good’’ or necessary on its own. While I posit that certain actions are more likely to express or elicit the specified emotion based on social psychological assumptions (Ortony, Clore, & Collins, 1988), there is a risk that, depending on the context, different groups could appraise the same action differently and experience different emotions (Hochschild, 1979; Parkinson, 1996). For example, in a context of high mistrust or anger, follow-up actions that express sympathy to employees may be viewed with suspicion and may not reduce their resistance to change in the short term. Put differently, the effectiveness of each emotion-management action can be principally assessed by the desirable emotion and resulting behavior it is intended to elicit. Conversely, the same action is considered ineffective if it causes recipients to react negatively. For example, the action exacerbates employees’ mistrust of change managers about their ‘‘real’’ motives or managerial competence. I will now discuss specific emotion-management actions that create an emotional context in which a number of employees feel or express authenticity, sympathy, hope, fun, and attachment at work and the ways in which these actions facilitate some of the important processes underlying strategic renewal (Huy, 1999). Authenticity is important in that it helps to build a climate of transparency and trust in the organization. Perceived lack of authenticity is likely to lead members of organization to mistrust even intrinsically well-meaning actions and renders emotion-management actions ineffective; expression of sympathy helps increase receptivity to change; hope enhances organizational alignment and collective mobilization; fun enhances organizational creativity and innovation; attachment helps reduce large turnover of key valuable personnel (see Fig. 1). Furthermore, building skillful emotion-management practices among a large and heterogeneous body of employees is likely to require a long-term, sustained organizational effort. Because organizations have finite resources and need to prioritize their developmental activities, a steady development of emotion-management routines related to strategic renewal seems necessary.

ORGANIZATIONAL PROCESSES EXPRESSING AUTHENTICITY INCREASE ORGANIZATIONAL LEARNING Organizational processes that express authenticity are those that facilitate consistency between organizational rhetoric, actions, and feelings in the

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Receptivity to change Express Sympathy

Retain key people

O Org.Learningrg. Elicit Attachment

Express Authenticity

Elicit Hope

Collective mobilization

Elicit Fun

Organizational Creativity Fig. 1.

Emotion Eliciting Actions for Strategic Renewal.

pursuit of organizational goals. For any emotion-management strategies to work as procedural organizational routines, they have to be appraised by employees as transparent and fair (Brockner, Tyler, & Cooper-Schneider, 1992). Otherwise, recipient employees could treat such actions as manipulative and react with even more mistrust and cynicism to the change effort. A context of authenticity is necessary for effective emotion management. More narrowly, emotional authenticity refers to an organization’s ability to facilitate the variety of authentic emotions that can be legitimately displayed (and felt) during a strategic change process. Under stressful change, employees are likely to experience emotional dissonance if they are only allowed to express a narrow range of emotions. Emotional dissonance is the internal conflict generated between genuinely felt emotions and emotions required to be displayed in organizations (Wharton & Erickson, 1993; Morris & Feldman, 1996). Achieving emotional authenticity often demands effortful change in mindset and behavior as people in organizations have frequently been socialized to display, and sometimes to internalize, desirable organizational feelings (Hochschild, 1983; Van Maanen & Kunda, 1989). During major change transitions, people who were asked to reflect on their ‘‘true feelings’’ as opposed to ‘‘typical feelings’’ reported that they learned more about themselves and that true feelings helped them clarify their primary personal values and guide their behavior and way of relating to others (Morgan & Averill,


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1992). The need for authenticity in thoughts, feelings, and actions is likely to become more salient to employees during organizational transitions because the contemplated changes are likely to challenge a person’s fundamental beliefs about her organizational role and what the organization should be and do (Bartunek, 1984). Curtailing a full range of emotional display may be viable in a slow change environment, as it speeds up execution by reducing hesitation and doubt. Nevertheless, emotional suppression can impair collective learning during strategic change. Under major change, it may be more productive for managers to relax emotional display rules and express more authenticity in order to restore some continuity in their subordinates’ lives. To protect themselves, however, managers may strategically choose to observe traditional rules in their dealings with certain superiors – executives who still frown upon intense emotional displays, especially unpleasant ones. Display of positive emotions tends to be encouraged while display of negative ones is sanctioned, as the latter are feared to cause poor group performance (cf. Jehn, 1997). For example, during a process of stressful strategic change, the Chief Operating Officer of a large company sent a confidential memo to all managers stating, ‘‘expressions of cynicism [about change] will not be tolerated. We are in positions of leadership and must display enthusiasm at all times [to everyone].’’ Many managers privately found such an articulation odd or even amusing. They would not have survived the previous streamlining of middle management ranks had they not long ago figured out the implicit rules of emotional display (Huy, 2002). Some managers, through years of socialization during periods of relative stability, have become skilled at feigning the appropriate emotions for surface work. Organizations should thus encourage authentic emotional displays done in a socially appropriate way. For instance, certain change managers mitigated their feelings of disappointment and fatigue about change by sharing these among themselves (Huy, 2002). At the same time, certain line managers maintained operational continuity by attending to the psychological well-being of subordinates and their families and encouraged employees to share their feelings privately with their supervisors, or in small support groups. This practice is known as ‘‘bounded emotionality,’’ that is, acknowledging the inseparability of private and work feelings and consciously attending to them (Putnam & Mumby, 1993). People may resist change for non-work-related reasons yet feel compelled to invoke a work-related rationale because the latter is deemed more legitimate. To illustrate, Huy’s (2002) research found that in the context of

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massive downsizing and relocation of work locations, service employees claimed they were opposed to reorganizing customer service because it did not make sense from a business strategy perspective. In fact, these employees were worried about the effects of relocation on their family’s welfare but dared not express these concerns in public. The managers then organized emotion management in information sessions for separate small groups of employees. Employees were encouraged to verbalize in small groups (outside the scrutiny of their superiors) their private feelings about how change had affected them. Then the managers invited each group to make a drawing about how the change felt collectively, and they displayed the drawings around the room. There were drawings of anxious-looking people in lifeboats, of caravans lost in the desert, big thunderstorms, and of a small sun hiding behind black clouds. It was only then that individual people started to realize how similar their feelings were, and they started to laugh and joke about them. A facilitator showed them Bridges’ (1980) transition model and explained that it was normal and common to have these feelings. The sessions encouraged emotional authenticity by liberating employees to experience a wide range of emotions and to surface and accept their deep feelings. The sessions were also therapeutic in that they elicited pleasant lowactivation feelings (Russell & Carroll, 1999) such as calm and sympathy and attenuated unpleasant high-activation emotions such as fear and helplessness. They gave the recipients the additional energy to continue their jobs. The employees reported that they felt more at peace with themselves and had more sympathy for their peers and superiors. These emotion-attending actions helped reduce further absenteeism and decline in employee morale, which is consistent with the findings in other research (Brockner, 1992; Noer, 1993). Moreover, emotional authenticity is likely to increase feelings of psychological safety because it expresses a climate of mutual respect in which people feel comfortable about being themselves (Edmondson, 1999). Mild pleasant emotions like calm can facilitate problem solving. Calm people are more likely to make associations among ideas and to see more complex relations than people in an agitated state (Isen, 2000). Conversely, excessive agitation and emotional demands on recipients can lead to emotional numbness and low sensitivity to new ideas and experimentation (Morris & Feldman, 1996). It follows that the more organizational members feel free to display authentic emotions during strategic change, the higher the level of learning is likely to be (Huy, 1999, 2002). The less they feel free to display authentic emotions during strategic change, the higher the emotional dissonance and the higher the proportion of employees disabled by burnout,


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thus leading to a decrease in organizational learning and creativity. The success of sustainable strategic change relies ultimately on the institutionalization of new and better ways of thinking and doing (Argyris, 1993), whereas lack of authenticity is known to stifle voluntary cooperation and innovation (Dougherty & Bowman, 1995). Display of authenticity could become more effective to the extent that recipients of change appraise that change managers respect and care about them, which could be demonstrated by actions demonstrating sympathy.

ORGANIZATIONAL PROCESSES EXPRESSING SYMPATHY INCREASE RECEPTIVITY TO CHANGE Under constraints of time and resources that often prompt the need for strategic change, effective emotion managers try to calm highly agitated employees before eliciting enthusiastic support for change. For example, change managers in one IT firm realized in mid-course that communicating the company’s vision for change had little meaning without acknowledging the emotional needs of change recipients and how the vision would affect their personal welfare (Huy, 2002). Agents need first to be aware of, and recognize, the rich range of emotions that could be aroused, and the potential effects of recipients’ emotional states on important organizational outcomes and what to do about them (Huy, 1999). This heightened sensitivity requires the display of sympathy. Sympathy represents a less demanding emotional process than empathy, since it refers to the ability of an individual to feel for the general suffering of another, with no direct sharing of that person’s experience (Eisenberg, 2000). Expressing sympathy in strategic change involves actions that show respect for the change recipients’ identities and demonstrate care about recipients’ welfare. For example, to the extent that certain valued elements from the past organizational culture must be deleted (Albert, 1984), mourning may help ease the transition. To illustrate, change managers set up mourning rituals that preceded the actual closing of employees’ cherished work sites; they used heritage and succession rituals and last suppers served by managers. Recipients of change felt more at peace with themselves after these mourning ceremonies, because they felt that they had been treated with respect (Huy, 2002). Change agents who ignore the crucial mourning period and rush the organization through this phase risk a backlash, as happened to distressed

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AT&T employees in the post-breakup phase (Moses, 1987). In 1984, AT&T faced the government’s decision to divide the one-million-people strong institution into smaller units known as Baby Bells (Tunstall, 1985). These employees were proud of their company’s achievements, values, and history and could not fully understand or accept the forced break up of a great American institution. The physical aspect of the massive structural break up was implemented quickly. However, executives in the post-break-up phases were eager to move on to a new phase and cut down on emotion management of their employees. The mourning period was curtailed. This resulted in lingering widespread emotional stress among employees and caused major organizational damage, as the internal report on AT&T employees written by a psychologist revealed: We have very ‘disturbed’ managers. Managers who are forced to make work force reduction decisions without any guidance, training, or support are becoming cynical. Or those who really care are being torn apart when making decisions that they are unprepared to make. Open hostility is surfacing as never before and its focus is toward the company rather than toward the competition or the marketplace where such energies can be productively channeled. The amount of suppressed, covert hostility lurking just below the surface in many people is truly frightening. Unfortunately, much of the frustration, anger, and depression is taking its toll on the non-work lives of our people. Frequently, its manifestations are deteriorating physical and psychological health. The impact on managers’ health in the future can’t be ignored and may be approaching crisis proportions. At the same time, we have noted a marked increase in symptoms of depression among managers we have studied. Today’s survivors are often disillusioned, frustrated, bitter, and, most of all, lacking in hope. One can’t help wondering what kinds of managers they will be like in the future as they populate senior levels at AT&T (Moses, 1987, pp. 35–36).

What happened to AT&T employees? Bridges’ (1980) work on personal transition suggests careful management in all three phases of transition, that is, ‘‘endings,’’ then ‘‘neutral zones,’’ and finally ‘‘new beginnings.’’ These phases seem to have been ignored in managing AT&T employees’ emotions. The ‘‘endings’’ phase is characterized by disenchantment, where organization members recognize that ‘‘positive feelings toward past situations cannot be replicated in the future.’’ But successful transition depends critically on patient management of people in the neutral zone, when they feel disconnected from other people and things of the past and emotionally unconnected with the present. This second phase is marked by disorientation (the past is no longer appropriate but the future direction is not yet clear) and frightening disintegration (everything is collapsing). At the extreme, letting go of all the attributes of the organizational identity is equivalent to death and nothingness.


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Passage from one phase to another is not automatic. Managing actively the transition between the ending phase and the neutral zone is important. In order to pass through this phase successfully, organization members will need sufficient time to reflect on the past and develop new perspectives for the future. Each employee has to come to terms with issues such as what went wrong, why it needs changing now, and thinking about the new beginning. The time allotted to mourning should be adequate, neither too long nor too short. The organization has to encourage shared meaning construction about the proposal for change, and people should be helped to find their new roles in the new order and be provided with the means to develop newly required competencies. Inclusion of all members should be encouraged and mistakes and losses openly acknowledged (Bridges, 1986). Greater awareness of repressed feelings and the expression of them gradually bring clarity and emotional closure (Tannenbaum & Hanna, 1985). Denying the emotional impact of the pain and bypassing the catharsis and grieving phase may lead to an organization being paralyzed by survivor sickness, marked by suppressed frustration, covert anger and depression, lack of spontaneity and creative energy, and living day-by-day (Noer, 1993). In summary, emotion-management actions expressing sympathy are enabled by an organization’s allocating adequate resources to train and support personnel supervisors to perform actions such as: (1) organizing one-to-one listening to any concerns that recipients feel uncomfortable voicing in public; (2) coaching supervisors to respond in an sympathetic rather than judgmental way as well as to attend to recipients’ personal and work-related concerns, especially when these are caused by the change process; attendance to employees’ private lives is crucial to enhancing their receptivity to strategic change, because during such disruptive change, employees tend to be less concerned about the organization’s new strategy than the potential effects of the new strategy on their personal and family welfare (Huy, 2002); (3) organizing mourning sessions for cherished values that are no longer appropriate while extolling values that have been preserved; and organizing regular small-group meetings to inform as well as to listen to recipients’ feedback on both task and emotional needs. Genuine efforts expended toward achieving a new synthesis and understanding reduce employees’ resistance and increase their receptivity to proposals for change. Although displays of authenticity and sympathy can help reduce recipients’ resistance to change and their propensity to express their true thoughts and feelings, collective action to realize change may not necessarily take place. Mobilizing people for collective action to realize ambitious change goals requires the arousal of another important emotion: hope.

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ORGANIZATIONAL PROCESSES AROUSING HOPE INCREASE COLLECTIVE MOBILIZATION Hope is an emotional state that is elicited by appraisal of future positive prospects for self (Ortony et al., 1988). Hope buffers people against apathy and depression and strengthens their capacity to persist under adversity; it bolsters people’s beliefs that they have both the will and the means to accomplish goals (Snyder et al., 1991). As previously discussed, strategic change often challenges organization members’ identity, roles and privileges, thus triggering anxiety (Argyris, 1990). Anxiety, in turn, can degenerate into depression, which blocks all learning efforts as people perceive that they cannot achieve valued outcomes and are pessimistic about potential improvement in their situation (Schein, 1996). To fight against anxiety and depression, people seek to restore peace of mind, which comes from the belief that one has control over threats that may arise, either by changing objective circumstances or by altering the psychological impact of the situation (Mischel, Cantor, & Feldman, 1996). For example, medical research suggests that patients who have illusory beliefs that they can exercise partial control over their treatment enjoy important psychological and physiological benefits (Bandura, 1997). Huy (2002) research found that certain change agents aroused hope and action by promoting wide participation of, and active consultation with, recipients right from the beginning of the planned change. They developed some enthusiastic supporters in recipient groups who, in turn, championed their cause inside their respective units in language that their local peers could relate to. As a result, they achieved a wider receptivity for the proposed change and voluntary cooperation in adapting the change to the specific local conditions to make it work better. Hope helps convert employees as passive recipients of change into proactive agents of change who shape their own future. Why? Perhaps because people who feel that they can influence the direction of change are also likely to feel more confident about their own future (Beer, Eisenstat, & Spector, 1990). For instance, after committing to a goal, people will normally pay selective attention to information relevant to its realization and generally evaluate its consequences positively (Gollwitzer, 1990). This shields them from the distractions of competing alternatives and paralyzing self-doubts (Kuhl & Beckman, 1985). Research also suggests that perceptions of personal control are related positively to maintaining the effort devoted to challenging tasks, such as the pursuit of ambitious change


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projects (Aspinwall & Taylor, 1997). Amabille, Hill, Hennessey, and Tighe (1994), in their study of artists, also found that intrinsically motivated people showed greater commitment and devoted more time to task completion. Motivated individuals showed deep levels of involvement in problems by focusing on solving them, minimizing distractions, and getting absorbed in work (Ruscio, Whitney, & Amabile, 1998). Organizational actions that arouse hope among employees include establishing meaningful change goals; creating small wins to rekindle optimism and self-confidence; frequent and cheerful interaction between change agents and employees; uplifting rituals, such as rousing speeches and award ceremonies; and a compelling strategic vision (Ashkanasy & Tse, 2000; House, 1977). The higher the degree of encouragement to instill hope among all organizational members, the higher the degree of collective mobilization there is likely to be (Shamir, House, & Arthur, 1993). While hope can facilitate collective mobilization, it may also promote groupthink (Janis, 1972) and action devoid of adaptive creativity. Radical change is often necessary because of organizational decline due, in part, to an organization’s inadequate innovative ability to service shifting market demands (Tushman & Romanelli, 1985; D’Aveni, 1989), yet it is often difficult to achieve innovation in the wake of disruptive change. In effect, researchers found that organizational innovation declined during and after negative organizational change (Amabile & Conti, 1999; Dougherty & Bowman, 1995). Threat-rigidity theory (Staw, Sandelands, & Dutton, 1981) explains that under threatening conditions, organizations undergo a mechanistic shift and are likely to rely on centralized control leading to the perception of reduced autonomy, and greater conservatism leading to perception of higher risks for creative behavior. Threatened employees can become narrow minded, risk averse, and therefore less creative in their work (Cascio, 1993; Noer, 1993). Therefore, emotion-management attention should be shifted to relax perceptions of threat and arouse another emotion, fun.

ORGANIZATIONAL PROCESSES AROUSING FUN All innovation begins with creative – that is, new and useful – ideas, the successful implementation of which is called innovation. Beyond the individual characteristics of people, the social psychological intraorganizational context can influence both the level and frequency of creative behavior (Amabile, Conti, Coon, Lazenby, & Herrron, 1996; Woodman, Sawyer, & Griffin, 1993).

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Research on creativity suggests that people who experience flow or timelessness are likely to be more creative. Csikszentmihalyi (1975, p. 43) defines flow as the experience of a series of actions in which one feels in control and in harmony with them and the feeling after which one nostalgically says, ‘‘That was fun.’’ Mountain climbers, motivated artists, and researchers are likely to experience a high level of flow when they are totally immersed in their tasks, lose their self-consciousness and sense of time and thus experience ‘‘timelessness’’ (Mainemelis, 2001). Fun replenishes people’s energy in their long and arduous work to reach a distant vision with uncertain outcomes, and enjoying the process of doing one’s work helps people to persevere in the face of difficulties and disappointments (Csikszentmihalyi, 1997; Deci & Ryan, 1985). Fun as an emotional state results from the motivated search for pleasant experiences and aesthetic appreciation and is one key attribute of emotional intelligence (Salovey & Mayer, 1990). Fun fuels intrinsic motivation, which represents one of the necessary preconditions for creativity (Amabile, 1988). From a neuropsychological perspective, fun permits the rapid generation of multiple images so that the associative process is richer. A happy person engages more often in exploratory behavior, which is necessary for creative discovery. By contrast, neurologists have found that sadness slows image evocation, thus narrowing the associative process and reduces creativity (Damasio, 1994). It is thus critical that managers of strategic renewal allocate special attention on rekindling employees’ creative energy by enacting a consistent set of actions that display playfulness. Playfulness refers to the organizational ability to arouse fun in employees to create a context that encourages the generation of creative ideas leading to organizational innovation (Amabile et al., 1996; Huy, 1999). Fun here does not just refer to the superficial process of telling jokes, office parties, or sports events, which elicits superficial and fleeting pleasure and provides temporary release but exerts little long-term effect on work creativity and innovation (Csikszentmihalyi, 1997). Fun here refers to ‘‘deep fun,’’ which results from the experience of flow when one engages in personally motivating and challenging activities. Fun in the work context allows safe experimentations and, like jokes, institutionalizes disorder within order and the expression of taboo issues within a legitimate framework. Emotional playfulness induces a state of relative emotional equanimity to juggle tensions between foolishness and cold rationality (Weick & Westley, 1996). What usually kills or blocks one’s creativity is the lack of courage to explore novel or countercultural ideas and paralyzing fears about the cost of failures. Reduced self-consciousness


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experienced in timelessness and institutionalized playfulness reduces such fears and facilitates experimental actions integral to learning and creativity (Kolb, 2000). The literature on organizational creativity has suggested a number of organizational actions that create a playful climate conducive to moments of timelessness (Mainemelis, 2001). These actions can be categorized at three different levels: task, organization, and work group.

Task-Level Factors First, one can design tasks with a series of clear goals that describe an end within the task rather than one that is separate and remote from the task. These goals help focus one’s attention and reduce distractions and worries about future consequences (Shalley, 1991). Second, achievement of these goals can be assessed through intrinsic and almost immediate feedback. Some tasks naturally provide such intrinsic feedback, such as conducting an orchestra or coaching a sports team in play. Boredom and anxiety can also arise if one does not receive immediate feedback about how well one is doing on an activity that one cares about. Consequently, in the case of long-term tasks with uncertain outcomes (e.g., R&D), organizations can help individuals or groups to structure their long-term tasks in such a way that the task itself provides feedback as opposed to feedback received from sources external to the task (e.g., intermediate steps in an experiment, subsections completed in a manuscript) (Csikszentmihalyi, 1990). Third, supervisors can help balance the challenges of the tasks and the person’s skills level to provide the employee with a dynamic ‘‘optimal challenge,’’ to prevent the extremes of boredom when the goal is felt to be too easy and despair when the goal is felt to be impossible (Deci & Ryan, 1985).

Organizational-Level Factors Beyond task-specific factors, employees’ perceptions of their work environment influence whether they experience timelessness. First, perception of autonomy or freedom: employees should perceive they have a choice in selecting at least some tasks that provide them with an optimal challenge and in how to go about accomplishing those tasks (Mainemelis, 2001; Oldham & Cummings, 1996). Second, employees should perceive that they do meaningful work, that is, the fit between the requirements of the person’s

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work role and her individual values and preferences (Spreitzer, 1995). Work perceived as meaningful increases the intrinsic motivation, excitement, and attention of the individual vis-a`-vis the task, while work perceived as meaningless leads to apathy (Conger & Kanungo, 1988). These two conditions require supervisors to act as personal coaches to their employees and to know them well enough in order to help them maintain their autonomy in optimal-challenge tasks that are compatible with the individual’s evolving preferences and skills.1

Work Group Support Beyond broad organizational practices, deep fun leading to creativity can be further enhanced within a work group itself. A group’s process skills are necessary to lever individual creative inputs and involve team processes such as team citizenship, heedful communication and constructive feedback, active conflict management, and respect of every team member’s input (Taggar, 2002). Organizations can offer training and incentive systems to monitor and enhance employees’ behavior in creating a facilitating social setting. To the extent that there exists mutual openness to ideas from members of diverse backgrounds, open sharing of ideas could be energizing and contribute to the perception of flow and fun (Parnes & Noller, 1972). Group members feel more integrated and coordinate better with one another, and this enhances group creativity (Woodman et al., 1993). Shared commitment to the project and constructive challenging of ideas enhance intrinsic motivation and fun because two primary features of intrinsic motivation are a focus on the work itself and a positive feeling of challenge in that work (Amabile, Hill, Hennessey, & Tighe, 1994). Once an innovative spirit has been (re)kindled in an organization, managers should work hard at maintaining it and retaining innovative employees. This retention is already helped by an emerging innovation climate. Indeed, employees working in innovation-oriented cultures have been found to demonstrate higher levels of satisfaction, commitment, and intent to remain (Odom, Box, & Dunn, 1990; Quinn & Spreitzer, 1991). Beyond satisficing economic incentives, which are unlikely to elicit or sustain people’s intrinsic motivation in the long run, managers could develop emotional rewards that would create in their employees a strong sense of identification with and loyalty to their organization, thus leading to the sustained innovation that allows organizations to produce distinctive


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products and services ahead of their competitors. In effect, Dougherty and Bowman (1995) found that turnover of employees who hold some of the organizational memory could reduce the organization’s innovative capability.

ORGANIZATIONAL PROCESSES AROUSING ATTACHMENT Organizational processes that elicit employees’ feelings of attachment to their organization refer to systematic and sustained collective actions that create and enhance an employee’s personal identification with the organization (Dutton, Dukerich, & Harquail, 1994). In order to maintain a sense of identity, individuals have to feel a basic level of security and comfort which can be achieved through attachment to symbolic objects (e.g., teddy bears for babies; professional identity, clothing, houses for adults) that bridge a person’s internal and external worlds (Winnicot, 1965). There are at least three sets of organizational actions that elicit attachment to organizations: first, actions compatible with socially desirable traits that enhance employees’ external recognition and self-esteem (e.g., protection of environment, charitable causes, and success, including innovative achievements); second, actions that demonstrate that the organization cares about the long-term development and welfare of its employees and their significant others, such as job development, education, health concerns (including sports facilities), and medical, pension, and family benefits. Further, emotional identification can be reinforced through recruitment selection and retention routines. Third, design of a good fit between the employee’s work expectations and the supporting work environment (Shalley, Gilson, & Blum, 2000). For instance, for jobs that rely heavily on creative requirements, there should be a matching work environment that leverages an individual’s creative input effectively as described in the previous section on fun and creativity. I now discuss how various groups of emotion-management actions relate temporally to each other during various stages of strategic renewal.

EMOTIONAL SEQUENCING While various emotion-management actions can be enacted at the same time at various levels of intensity in an organization, limited organizational

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attention and resources suggest that the relative degree of emphasis of a particular set should vary according to the particular transition stage that a particular work group happens to be in. According to Bridges (1986), organizational renewal has to transit through various psychological stages that elicit different emotions: endings (of the past), neutral zone (searching for a new strategic direction), and new beginnings (a new strategic direction has been found and seems to work). I call such stage-dependent emphasis of a particular set of emotion-management actions ‘‘emotional sequencing.’’ Put differently, emotional sequencing refers to the chronological order in which particular emotions are aroused to convert fearful recipients at the early stages of change into energized, creative, and loyal organization members in the later stages of strategic renewal. In the beginning phase of disruptive radical change (Tushman & Romanelli, 1985), actions expressing sympathy should be emphasized during the ‘‘endings’’ phase as well as the ‘‘neutral zone’’ of organizational transition to reduce employees’ agitation and improve their receptivity to the proposed changes. Once this is achieved, arousing hope enables collective mobilization, as energetic group action is often required to realize ambitious change. Actions arousing hope dominate in the concluding phase of the ‘‘neutral zone’’ and the ‘‘new beginnings.’’ To reduce the risk of obstinate and ineffective action, learning from interim feedback is necessary; and organizational learning can be enhanced through emotional authenticity, which reduces mistrust and cynicism about managers’ intentions and actions. Actions arousing fun prevail during the new beginnings phase and the period after it, which I call the stabilizing phase. In the concluding phase of positive change that represents strategic renewal, reenergized and creative employees are more likely to stay with their organization if they experience strong attachment to it. Thus, actions eliciting attachment should be emphasized during the stabilizing phase and selectively applied on key individuals in all phases of change. This renewal cycle will be eventually followed by another endings phase that starts a new cycle of strategic renewal. Effective implementation requires knowing both the distinct effect of each set of emotion-management actions and its aggregated effect according to a temporal order; such sequenced steps often characterize effective enactment of dynamic capabilities (Brown & Eisenhardt, 1997; Eisenhardt & Martin, 2000; Zott, 2003). While each set of emotion-management actions to arouse a distinct emotion represents a dynamic capability, emotional sequencing, that is, the organizational ability to use an appropriate combination of emotion-management actions in an overlapping or sequential manner


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in specific organizational contexts and transition stages can be considered as a higher ability or second-order dynamic capability. Organizations can develop a repertoire of emotion-management actions as contingent procedures that can be imparted to managers. These procedures enable the organization to transcend the need for a large number of emotionally intelligent individuals in influential positions who might work at cross-purposes and apply their emotional skills to maximize their personal benefit (Jackall, 1988). Managers can be trained to perform emotionmanagement routines in an appropriate sequence to allay recipients’ fear and anxiety at the onset of strategic change and gradually arouse more pleasant emotions that facilitate collective action, organizational learning and creativity, and loyalty to the organization. At this stage, it seems that emotional sequencing routines have not been widely developed or skillfully practiced in organizations. Many organizations have been formally designed as emotional vacuums and display, at least on the surface, unemotional and instrumental business logic (Weber, 1947). While this Cartesian mode of management may produce satisfactory performance in some organizations and allow, at best, modest innovation in slowly changing environments, emotion sequencing as a dynamic capability seems necessary to create an organizational context that facilitates creativity and rapid change. This requires emotion-aware executives to systematically allocate organizational resources to enable collective actions that develop emotional sequencing routines, which, with time, will shape the organization’s emotional intelligence. Future research can validate whether the proposed sequence of emotional arousal does in fact facilitate strategic change and renewal, as well as the boundary conditions under which such emotional sequencing is effective.

CONCLUSION AND FUTURE RESEARCH In this article, I have argued against a dominantly pessimistic view of emotion held by many strategy scholars and elaborated the various ways in which emotion can help organizations to achieve strategic change and renewal. This ability is rooted in developing emotion-based change routines, alternatively referred to as emotion-based dynamic capabilities. I suggest the beginnings of a framework that relates emotion-management actions arousing specific emotional states to process outcomes relevant to the management of organizational transitions in strategic renewal. These elements are

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shown in Fig. 1 and can be formally summarized in the following propositions for future testing. Proposition 1. Organizational actions that express authenticity enhance change recipients’ trust in change managers and increase sharing of knowledge and organizational learning. Proposition 2. Organizational actions that express sympathy increase change recipients’ receptivity to the proposed change. Proposition 3. Organizational actions that elicit hope increase change recipients’ collective mobilization for change. Proposition 4. Organizational actions that elicit fun increase organizational creativity. Proposition 5. Organizational actions that elicit attachment increase loyalty and retention of key employees. Proposition 6. The above emotion-management actions are more likely to be effective if change recipients perceive authenticity in emotion management that reduces their cynicism and mistrust of managerial manipulative attempts to reduce recipients’ welfare. Proposition 7. The higher the level of organizational resources and attention devoted to the diffusion and monitoring of these emotionmanagement actions, the higher the level of organizational adaptation and flexibility that enable timely strategic renewal. Proposition 8. Organizations that implement emotional sequencing are more likely to achieve a higher level of strategic renewal than organizations that do not. Improving the emotional capability of organizations will no doubt require a new awareness of the importance of emotion in organizational life and potentially significant investment in training, quality monitoring, and institutionalizing ‘‘best practices.’’ Such practices could be construed as additional good Human Resource Practices that need to be diffused. This may require some managers of personnel to upgrade their people management skills and put an additional challenge on their already burdensome tasks. However, to the extent that it is the organization’s events and actions that generate emotional trauma in employees’ lives, it would seem adaptive and responsible that an organization attends to its employees’ emotions to reduce potential mental and physical dysfunctionalities that are costly to both


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the organization and the individual employee. Future research can explore the level of organizational resources and efforts involved in building the organization’s emotional capability, and the challenges associated with it, and whether the benefits outweigh the costs. In this respect, an emotion-based view of dynamic capabilities or change routines opens new avenues for research in the under-explored area of emotion management and strategic change and renewal. I suggest that beyond self-reported questionnaires and lab experiments that have advanced our knowledge on emotion, the study of emotion in work organizations can be enriched by a repertoire of measurement tools that complement each other. Emotion management in natural work settings and, more importantly, the organizational consequences of such actions can be studied in a number of different ways – both objectively and subjectively. For instance, the level of organizational attention to the development of emotional sequencing routines may be measured by the proportion of organizational resources allocated to emotion-attending activities such as budget, specialized support groups, emotion training, or executive time. The effect of emotional attachment on employee retention can be measured with perceptual surveys for expressed emotion as well as company records on the turnover rate of key workers past a certain level of tenure and through various measures of organizational identification. Actions expressing sympathy can be measured by the time change targets spent in the mourning process and the time change agents and targets spent together to reconcile different sets of new and old organizational values. In addition, the overt nature of emotion-related behaviors lends itself more easily to outsider and peer observation and assessment (and thus to enhanced construct validity) via triangulation of private interviews, survey methods, company reports, and ethnographic research in natural settings, all of which allow researchers to validate and enrich participants’ selfreports (see Huy, 2002). The same measurement methods can be applied to the study of change processes and change outcomes. For example, the duration of (as well as costs of) launching change can be measured in part by the time it takes to convince the change targets to participate constructively in realizing the proposed change. This measurement is made in addition to perceptual surveys validated through in-depth interviews. The proposed emotion-management constructs lend themselves to multi-method research and triangulation, thus enhancing validity and reliability. Beyond overt emotion-management actions, the more private emotional states could be studied through a triangulation of methods, such as selfreport accounts and surveys, nonverbal observations, and expressions of

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such states in support groups or focus groups. Such emotional states are important to capture as they could serve as mediators of behavior, and help predict the direction of people’s thinking and behavior regarding the support they lend to the change effort (Huy, 2002). Such emotional states could act as precursors to other consequential organizational behavior related to strategic change, such as work groups’ collective mobilization, learning from experiments and interim failures, sharing and development of knowledge, and emergent creative initiatives (Nonaka, 1994; Nonaka & Takeuchi, 1995). In this regard, the model contributes to the nascent dynamic capability literature that forms part of the resource-based view of the firm (Barney, 2001; Wernerfelt, 1984): it relates specific sets of emotion-management actions to distinct outcome processes related to strategic change and renewal, such as sharing of knowledge, creativity, or employee retention, in a way that addresses the criticisms of tautology and conceptual vagueness leveled at the resource-based view (Priem & Butler, 2001). Future research can reexamine many established literatures such as organizational learning (e.g., Argote, McEvily, & Reagans, 2003), crisis management (e.g., Weick, 1988), strategic decision making (e.g., Eisenhardt, 1989) including perception of strategic opportunities and threats (e.g., Barr & Glynn, 2004) in light of the recent empirical and theoretical advances on emotion research. Such reexamination has produced fresh insights in many areas such as work satisfaction (e.g., Fisher, 2000), work motivation (e.g., Seo et al., 2004), or leadership (e.g., Ashkanasy & Tse, 2000). In this regard, the link between emotions and strategic processes could perhaps be fruitfully studied in high-emotion variance and high-stake contexts, such as strategic change or mergers and acquisitions, decision-making and crises in financial markets such as the recent ‘‘dot.com’’ burst, major social conflicts, entrepreneurial ventures, combat army units, sports teams, or hospital emergency units. Future research can also explore individual differences that lead some managers to vary in their emotion-management skills. This variance may arise because of past personal or work experiences that taught them the importance of emotional caring, or because they possessed emotional intelligence competencies such as emotional attending, discriminating, and repairing (cf. Salovey, Mayer, Goldman, Turvey, & Palfai, 1995). Research on whether and how to include recipients in designing potentially negative change and how to reduce the risks of covert sabotage by the included recipients could also be fruitful. One can also try to tease out the effects of organizational conditions from individuals’ responses that appear to resist or embrace specific change initiatives or projects, and not just organizational change in a generic sense.


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In this paper, I only address partially the ethical aspect of emotion management via the concept of authenticity, which conveys transparency and builds trust. Emotion, like cognition and behavior, could be used in both good and bad ways. How emotion management is used depends on the ethical qualities of the actors. Future research can also explore more comprehensively, the ethical dimensions of managing employees’ and other stakeholders’ emotions to achieve organizational or business purposes. The marketing or transformational leadership literatures (e.g., Ashkanasy & Tse, 2000; Bass, 1998) have often extolled the desirable emotional influence of charismatic leaders without fully exploring the leaders’ ethical character and the potential benefits and dangers of emotional charisma.

NOTES 1. To further support and sustain these fun-eliciting actions, organizations can enact and diffuse practices that encourage risk taking and idea generation, such as: (1) Explicit instructions or authorization to display creative behavior that pervade all organizational levels (Kanter, 1983; Parnes, 1964). For instance, 3M issued long standing rules allowing researchers to work on personal initiatives; its senior managers diffused myths of mavericks who persisted for years in developing their products covertly despite top management’s refusal, no penalty for well-intentioned mistakes. (2) Fair, supportive evaluation of new ideas (Cummings, 1965): constructive, informative evaluation enhances intrinsic motivation (Deci & Ryan, 1985), whereas expectations of highly threatening, critical evaluation has been shown to undermine creativity in experimental studies (Amabile, Goldfarb, & Brackfield, 1990). (3) Reward and recognition of creativity (Abbey & Dickson, 1983); while contracted-for-reward can undermine creativity because it impairs intrinsic motivation, reward that is perceived as a ‘‘bonus’’ to recognize one’s competence and enable people to do more ambitious work in the future can enhance creative behavior (Amabile, Hennessey, & Grossman, 1986). (4) Practices that facilitate exposure to other potentially relevant ideas such as participative decision making, crossdisciplinary teams, boundary spanning activities with external idea generators such as research centers, ventures, customers (Parnes & Noller, 1972). Beyond enacting creativity-enabling factors, managers can also facilitate an organization’s creativity by reducing internal strife, conservatism, a controlling mindset, and by removing disabling formal management structures (Kimberly & Evanisko, 1981; Adler & Borys, 1996).

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AN ATTENTION-BASED THEORY OF STRATEGY FORMULATION: LINKING MICRO- AND MACROPERSPECTIVES IN STRATEGY PROCESSES William Ocasio and John Joseph INTRODUCTION Macro- and microorganizational perspectives on strategy processes are typically treated as distinct lines of inquiry. This paper proposes an attention-based theory (March & Olsen, 1976; Ocasio, 1997) of strategy formulation processes to bridge both perspectives. In particular, it links evolutionary perspectives on strategy (Burgelman, 1991, 2002) and strategic choice (Child, 1972) perspectives on organizational and strategic decision making (Bower, 1970; Carter, 1971; Cyert & March, 1963; Frederickson, 1986). Our treatment of the strategy process extends theory by viewing strategy processes as assemblages of tightly and loosely coupled networks of operational and governance channels (Allison & Zelikow, 1999; Ocasio, 1997), strategy formulation as a fluid and distributed process, and environmental, organizational level and individual level forces as consequential. Like Lovas and Ghoshal (2000), we view strategy formulation as a process of guided evolution. Unlike Lovas Strategy Process Advances in Strategic Management, Volume 22, 39–61 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22002-8

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and Ghoshal who view strategic intent as the objective function that guides evolution, we view strategy formulation processes as more fragmented and contested, with multiple foci of attention, rather than an explicit objective function, and both top-down and bottoms-up processes capable of generating changes in the strategic direction of the firm. Top-down perspectives on strategy formulation from Andrews (1971), Prahalad and Bettis (1986), Hamel and Prahalad (1989), and Lovas and Ghoshal (2000) focus on how strategy formulation is guided by policies and plans, dominant logic, or strategic intent of the top management of the firm. While attention is not an explicit focus of any of these perspectives, each can be interpreted as showing how the top management of the firm shapes the organization’s agenda and focus, identifying issues and goals that guide organizational attention. In their retrospective account on dominant logics, Bettis and Prahalad (1995) make the connection with attention more explicit, positing that dominant logics provide a perceptual filter that channels managerial attention and choice-making behavior. In this paper, we will make the connection between organizational attention and the managed evolution of strategy more explicit. But rather than positing an exclusive role for top management in shaping organizational attention, we argue that attention is guided by distributed processes and the channels of decision making through which information flows and by which people engage in dialog. It is through these channels that the organizational managers communicate and make critical and discrete decisions that involve organizational resources. Channels allow actors to conjecture the future state of the environment, guide operations, establish rewards, and utilize feedback on key initiatives given a particular set of organizational and individual capabilities and priorities. Given the significance of these mechanisms, it is appropriate that the processes and their conduits become central to our investigation. It is, therefore, the form and characteristics of the firm’s operational and governance channels – the vehicles for corporate decisionmaking processes – that are our focus. We propose that strategy formulation emerges from the pattern of organizational attention embedded in the interacting network of concrete operational and governance channels at both the corporate and business unit level. These operational and governance channels include formal decisionmaking channels, such as board of directors meetings, board committee meetings, Executive Committee meetings, operating committee meetings, capital and operating budgeting requests, financial performance reviews, strategic planning reviews, and employee evaluations. They also include ad-hoc channels for mergers and acquisitions, changes in organizational

Attention and Strategy Formulation

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structure, joint venture activity, and informal interactions, not a regular part of formal processes. The objective of this paper is to explain the dynamics of corporate strategy formulation through the lens of an attention-based view and through a focus on channels. The paper explains how the firm’s two types of channels – operational and governance channels – and its economic and social structures regulate the attention of its decision makers and thus impact the micro processes of strategy formulation. It further links decision making in channels to the macro processes of strategy evolution. We posit that strategy formulation is ultimately about the selective retention of strategic initiatives made in corporate decision-making channels in which actors are embedded, and that through this network, retained initiatives become enduring activities of the firm and strategy finds practical expression. We extend existing theory by exploring how decision-making channels may be tightly or loosely coupled from each other and how that results in an overall pattern of corporate strategy.

FIVE PROPOSITIONS In developing an attention-based theory of strategy formulation, we propose five orienting propositions. These propositions are designed to guide further theoretical development and empirical research and to link a theory of strategy formulation as attentional processing (Ocasio, 1997) with a theory of strategy process as guided evolution (Lovas & Ghoshal, 2000). These propositions are as follows: (1) Decision making is guided by selective attention to organizational issues and initiatives. (2) Selective attention to organizational issues and initiatives is situated in a dynamic network of operational and governance channels. (3) Formal channels guide the creation of informal channels. (4) Tight and loose coupling of the network of channels guides strategy formulation through the selective retention of strategic initiatives. (5) Selective retention of initiatives in channels is a source of competitive advantage. In the following sections of our paper, we will elaborate on each of these five propositions.

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1. Decision Making is Guided by Selective Attention to Organizational Issues and Initiatives. According to the attention perspective, organizational members have limited attentional capacity (Simon, 1947), a constraint which has implications for how they address the issues facing the organization. Attentional capacity is limited because of decision makers’ general receptivity to stimuli and their ability to focus on competing sensory inputs. Decision makers are most receptive to what is consistent with their current frame of reference (March & Simon, 1958). They vary in their assumptions, values, and cognitive styles (Hambrick & Mason, 1984) and knowledge of alternatives and consequences (March & Simon, 1958) and, as a result, are selective in the issues and initiatives they consider (Ocasio, 1997). Decision makers are also limited by their activity load or how much they can attend to at a given point in time. When inputs fall outside the scope of normal business activity and require greater mindfulness, attention to details or steps in the process is required (Shiffrin & Schneider, 1977; Ocasio, 1997). Higher cognitive demands require the selective focusing of attention on a limited set of issues and initiatives and a limited number of combinations of those issues and initiatives. We focus on issues – the organization’s problems and opportunities – because they are the primary impetus of organizational action. Dutton and Dukerich (1991, p. 518) observe that organizations ‘‘respond to their environments by interpreting and acting on issues. Patterns in actions in response to issues over time create patterns of organizational actiony’’. Shared perceptions of these patterns are what ultimately guide the allocation of attention in organizations and the formulation of strategy. Langley, Mintzberg, Pitcher, Posada, and Saint-Macary (1995) also suggest that decision processes are best viewed through the lens of issues. The authors advocate a focus on issues because of the difficulty of putting boundaries around decisions and because issues more accurately reflect the content of discourse within organizations. Decision makers constantly evaluate issues against both specialized performance metrics and personal objectives. Issues, which may affect the entire firm or may be unique to each channel, are considered in terms of their degree of routineness and importance to the business unit and organization. Issues may arise as a result of the failure to meet aspiration levels (Cyert & March, 1963) or from external events in the environment (Hoffman & Ocasio, 2001) and selective attention to events shift the formation of organizational issues. Thus, organizational attention can be focused on both internal organizational issues and concerns or external environmental opportunities. Organizational attention is both backward and forward looking, seeking to


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solve organizational problems and failures (Cyert & March, 1963), and to provide links with perceived opportunities and threats in the environment (Andrews, 1971; Gavetti & Levinthal, 2000). Initiatives are action alternatives for addressing issues and the fundamental source of variation in firm activities. For Burgelman (1991) autonomous strategic initiatives occur as a result of new combinations of existing individual and organizational capabilities. Individuals that engage in autonomous behavior are triggered by external stimuli, are in positions which allow them access to technological and market changes, and have the ability to commit financial resources. Bower (1970) notes that new projects arise as a result of a perceived gap between what is expected and what is required to accomplish the job. Mintzberg and Waters (1985) suggest that the source of such behavior is most likely found in the intentions of individuals. Inspired insights, informed by intuition and judgment that restructure thinking have implications for enterprise-level strategy formulation. Chandler (1962, p. 304) vests the innovation process in the personalities and experience of executives ‘‘closest to the problem’’. In all, the literature suggests that the source of variation of strategic proposals lies with political decision makers, directed by finite resources, who are seeking to simultaneously manage their business units and careers. A common thread throughout this literature is the idea that variation in strategy does not simply emerge from fortuitous timing of problems and opportunities (March & Olsen, 1976) nor does it result exclusively from serendipitous autonomous initiatives (Burgelman, 1984) developed independently of formal processes. Variation in the evolution of firm activities are subject to a variety of forces including ‘‘errors’’ or random variations, learning from experience (Argote, 1999), top-down organizational commitments (Carter, 1971), and attempts by managers to influence the process of variation in response to administrative (Burgelman, 1983, 1984) or cultural (Ouchi, 1980) mechanisms or what they see as forces of selection and retention (Volberda & Baden-Fuller, 2003, p. 5) of initiatives. Building on theory of ambiguity and choice (March, 1978; March & Olsen, 1976), decision making is ultimately guided by the matching of issues and initiatives in channels. Kingdon’s (1984) theory of agenda setting suggests that for a new initiative to be adopted, issues and initiatives must be linked in decision making. Following Kingdon, we posit that for the adoption of strategic initiatives to occur, organizational members must either engage in issue selling (Dutton & Duncan, 1987), or match their strategic proposals to existing organizational issues. Initiatives compete for limited attention in the firm’s decision-making channels. Decisions are made when

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an initiative (or initiatives) meets an issue (or issues), as the combination serves to respond to an organizational problem or opportunity. Consequently, decisions will be guided by which strategic issues and initiatives receive the most attention and by how strategic issues and initiatives come together in time and place (March, 1978; Ocasio, 1997, 2001). While a large number of issue-initiative combinations will be proposed by players within an organization, only a limited number will receive substantial attention and serve to establish the multiple, but limited foci of attention that will guide the variation and selection of activities within the firm. Thus, attention is necessary for both issues and initiatives to persist within an organization’s multiple and interacting channels of decision making. 2. Selective Attention to Organizational Issues and Initiatives is Situated in a Dynamic Network of Operational and Governance Channels. According to the attention perspective, the attention of organizational members is situated in the firm’s network of tightly and loosely coupled decision-making and communication channels defined as ‘‘the formal and informal concrete activities, interactions, and communications set up by the firm to induce organizational decision makers to action on a selected set of issues’’ (Ocasio, 1997, p. 194). These channels exist materially in time and space and may take the form of face-to-face meetings, telephone conversations, e-mail exchanges and other types of decision making and communication conduits linked together through dynamic networks.1 The networks we refer to here are not social networks between individuals but event networks between channels. Each channel is a node in the network and it is coupled to other channels to the extent that it transmits issues and initiatives from one channel to another. The ties hence are common issues and initiatives that flow from one channel to the next over time. Thus channel B has a tie to channel A if the issue and/or initiative attended to in B was also attended to in A. The importance of the dynamic network between channels is exemplified at General Electric (GE). A highly simplified depiction of major channels at GE is depicted in Exhibit 1.2 The nodes in the GE networks of channels include the board of directors, Corporate Executive Office (including the CEO and vice chairmen), Corporate Executive Council meetings (where the top 35 executives meet quarterly), the annual leadership and organizational reviews, Session 1, Session 2, and Session C, the management development institute at Crotonville, and Boca, an annual meeting in Boca Raton, where operating managers meet to plan the coming years activities (Bossidy & Charan, 2002). The links between channels in Exhibit 1 characterizes the

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Exhibit 1. Stylized Model of Network of Governance Channels at General Electric (GE) in 2000. Board of Directors

CEO Corp. Exec. Office Crotonville

GOVERNANCE

Corp. Exec. Council

Boca

OPERATIONAL

Session CA

Session IA

Business A CEO Business coordination with divisions and functions

Session IIA

Session CB

Session IB

Session IIB

Session Cc

Session Ic

Business B CEO

Business C CEO

Business coordination with divisions and functions

Business coordination with divisions and functions

Session IIc

Top-down channels Bottoms-up channels Top-down and bottomts-up channels

information and decision linkages as the output of a particular communication and decision-making channel become inputs into other communication and decision-making channels.3 This process is denoted by directional arrows. Single-headed arrows indicate that output (i.e. issues and/or initiatives) of one channel serves as inputs (i.e. issues and/or initiatives) to another (from A to B). Double-headed arrows indicate that the flows of issues and/or initiatives go both ways (from A to B, and B to A). Note that in the case of two-way flow, the issues and initiatives going from A to B may be different from those going from B to A. The strength of the coupling is

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crucial here as the stronger the overlap between issues and initiatives the greater the strength of the network.

Operational and Governance Channels In this paper, we distinguish between two types of channels: operational channels and governance channels. Operational channels are those in which the technical tasks of the organization are carried out (Thompson, 2003[1967]) – where workers and first-line (or front-line) supervisors deal with production, sales, marketing, research, and other technical issues, occasionally with input from governance channels. Governance channels are those where middle- and senior-level managers attend to the allocation of resources, the formulation, monitoring and control of both business and corporate strategies and policies.4 In the Williamsonian sense, governance refers to those organizational mechanisms, which are integrated in the firm hierarchy to effectively provide information to distribute and reinvest capital and to allocate resources within the firm (Williamson, 1985). Governance channels are characterized by a greater level of abstraction of information which on one hand allows senior-level organizational actors to understand the essence of output from operational channels and make important decisions without knowing unnecessary details (March & Simon, 1958). However, it also restricts their competence of decision making. It is not our intention to defend discrete boundaries between operational and governance channels since this will vary greatly across organizations. Rather we prefer to draw attention to the general interface between channels employed in the day-to-day running of the business at the operational/technical level and channels utilized for managerial processing of issues and initiatives. Although not explicitly discussed, Burgelman (2002) captures the interface between channels in his description of front-line members, at the product/market level of the organization, who conceive of new business opportunities (through local operational channels) and then engage in efforts to champion them among middle managers for their further development. Middle managers then attempt to rationalize new business activity and formulate broader strategies across products or businesses and try to convince top management to support them (through governance channels). Bower (1970) also notes this interface when he describes the facility-oriented manager who, through the course of routine operational activity, may submit capital appropriation requests, which make their way up the chain of command through governance channels. Although in both of these examples, the flow of


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issues and initiatives is from bottom to top, as noted above, the flow of issues and initiatives goes both ways. That is, the issues and initiatives conceived through operational processes may serve as inputs into governance channels and vice versa. At GE, for example, after the CEO introduces key strategic initiatives at the annual meeting in Boca (governance channel), what often follows are a series of local work-out sessions throughout the organization (operational channels) to openly debate opportunities associated with the initiatives. The form and context of the firm’s operating and governance channels are what help us understand how managers process issues and initiatives. The channel form is characterized by spatial, temporal, and procedural dimensions (Stinchcombe, 1968) which are consequential for embedded actors. Meetings, for example, occur in particular locations (e.g., at headquarters or an off-site location), have a particular frequency (e.g., quarterly) and duration (e.g., hours, days) and typically have a purpose, though not always. As a result of these factors, channels affect the substance of the communication. Dialog may come in the form of verbal or written interaction, face-to-face, or via another communication vehicle. Also the nature of the communication may be synchronous or asynchronous (temporally separated) and be formal and highly politicized or informal and candid. An actor’s ability to recognize problems and opportunities and value initiatives is a function of his location within the dynamic network of operational and governance channels of the firm. Channels are themselves embedded in the social and economic structures of the organization, which include structural factors such as organizational policies (rules), human, physical and financial resources, work roles, and people and their relationships. Forms of communicative exchange will reflect the differences in these structural variables and come to shape the perceptions of managers. At any particular meeting, for example, the participants, the size of the group, the nature of the information discussed, the structure of the agenda, and the order of alternatives considered (Hastie, 1985) will all be consequential for decision maker attention. The time of the meeting, its geographic location, what precedes it and what follows it, and the dynamics that unfold during the meeting will additionally have an impact on the focus of attention. The socially structured pattern of attention that emerges ultimately determines the problems and opportunities which are addressed and initiatives which are enacted by organizational members. GE’s Operating System (Slater, 2000) is an exemplar of a dynamic network of channels. According to the GE (1999) Annual Report,

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WILLIAM OCASIO AND JOHN JOSEPH This operating system is based on an informal but intense, regular schedule of reviews designed to create momentum for the initiative. It progresses with a drumbeat regularity throughout our business year – year after year.

Typical initiatives are launched at the annual meeting in Boca, which brings together the firm’s 600 top global leaders. During each quarter, the CEO and executives from the firm’s businesses attend the Corporate Executive Council, where they share what each of them has done to implement initiatives. The primary HR governance channel linking the business units with headquarters, called Session Cs, are full-day personnel reviews at each location, where the people leading and practicing the initiatives present their progress, and assessments are made on the people involved with the initiatives. Classes taught at Crotonville, the firm’s management development institute often provide the tools necessary to role out the initiatives and simultaneously reward high-potential candidates for their success in current and previous initiatives. Note that each of the channels focuses attention on the firm’s primary top-down initiatives yet, provides business units the opportunity to share knowledge. The linkages between channels ensure that decision-making processes are coupled and respond to the demands and needs of localized constituents while simultaneously focusing attention on a subset of corporate-driven initiatives. 3. Formal Channels Guide the Creation of Informal Channels. Observers of organizational decision making have highlighted the importance of informal channels in strategy formulation processes (Allison & Zelikow, 1999; Mintzberg, Raisinghani, & Theoret, 1976; Pascale, 1984). Formal decisionmaking channels often serve to ratify decisions that have been made by political insiders in informal decision-making channels. Off-line meetings are frequently where the action takes place, and informal networks may take precedence over formal strategic decision-making processes. While the importance of informal channels and informal networks is undeniable, one aspect that is often missing from accounts that highlight the criticality of the informal channels is how the establishment of informal channels is itself shaped by formal channels. Organizational participants hold off-line discussions, make phone calls, and send e-mails to problem solve, mobilize political support, brainstorm, and negotiate among participants in formal channels. This process continues until decisions are made and resources are allocated to initiatives in formal channels. After formal strategic decisions are made (or not made) in formal channels, informal channels serve as mechanisms for retrospective rationalizing and sense making. They may also be used to maintain and restore political networks


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that may have been affected by decisions made and to plan for subsequent participation in the organization’s formal decision-making channels. Consequently, when evaluating the impact of informal channels and networks, we must consider how these channels are themselves shaped by the organization’s formal decision-making processes. We should note that sometimes the informal can be just as stable as the formal – sometimes even more so. 4. Tight and Loose Coupling of the Network of Channels Guides’ Strategy Formulation Through the Selective Retention of Strategic Initiatives. Organizational strategy originates from the pattern of initiatives that emerges from a network of tightly and loosely coupled decision-making channels (Ocasio & Joseph, 2004). As we have outlined above, each operational and governance channel serves as a unique context for decision-making processes. Variations in corporate strategy arise from the fact that decision-making processes and the channels through which they flow may be may be tightly coupled, but just as often they have only occasional, negligible and indirect effects on one another (Ocasio & Joseph, 2004; Weick, 1979). More specifically, processes at the individual channel level may be decoupled with one another and from corporate activity and uniquely focus individual and group attention on particular initiatives. Organizations retain only a limited set of initiatives (Lovas & Ghoshal, 2000). Often, directives from top management begin with the exhortation of their benefits but because organizational members are preoccupied with other efforts, they are quickly forgotten throughout the organization. Initiatives subside (i.e. fail to be retained) and everybody goes back to work. Sometimes initiatives generated deep inside the organization bubble up and subsequently become a meaningful and enduring activity of the firm. Just as often, however, great ideas never move out of a nascent stage, despite unambiguous market demand. When silos are prevalent, critical market information that is discovered in one business unit never makes it to another business unit where the information is needed most. Yet existing research on top-down planning does not account for the mechanisms by which particular (although not necessarily the best) initiatives gain altitude. Bottoms-up emergent strategy fails to account for the mechanisms that enable top management to enact key initiatives and get the organization moving in roughly the same direction. Neither view accurately addresses the common problem of silos nor why critical issues and initiatives fail to move laterally across the organization. Our emphasis on the governance channel network bridges the gap in top-down and bottoms-up explanations of strategy formulation and

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reinterprets the problem of ‘‘silos’’ as one of a decoupling of processes. What follows is a review of the treatment of decoupling in the strategy process literature, after which we examine more closely the causes and consequences of the decoupling of processes via channels. The literature is currently split on the degree of decoupling found in organizations vis-a`-vis strategy formulation processes. At the one extreme, Bower (1970) suggests that organizational structure separates those that allocate resources with those that identify issues and opportunities. The resource allocation process is therefore decoupled from explicit strategy formulation since top managers allocating resources have little appropriate knowledge to evaluate initiatives and rely on the credibility of middle managers. Mintzberg and Waters (1985, p. 270) posit that unconnected strategies emerge as a result of loosely coupled actors each within different subunits of the organization. Localized strategic initiatives are fashioned which are ‘‘in absence of, or in direct contradiction to, central or common intentions’’. Burgelman (1991) moves down the continuum of coupling and suggests that different forms of structural context provide more or less tight coupling between the organizational strategy and strategic initiatives of managers at various levels. At the far end, lie proponents of formal strategic planning processes (Andrews, 1971; Ansoff, 1965; Hofer & Schendel, 1978), those that favor control systems (Simons, 1991, 1994) and those that tightly link structural factors to strategy and initiatives (Chandler, 1962), who implicitly assume tight coupling. The source of this confusion and controversy comes from the lack of attention to the factors that are decoupled and the conditions under which loose versus tight coupling occurs. Both theoretical and empirical works in the strategy process domain use the term frequently, but rarely provide a concrete definition and when it is defined, it is inconsistently applied (Orton & Weick, 1990). Here we define the strength of coupling between channels in terms of the flow of issues and initiatives. Specifically, in this paper, tight and loose coupling refers to the responsiveness of individual processes within a channel to issues and initiatives of other channels. For example, in organizations with tightly coupled channels for strategic planning, budgeting, and leadership development, all three processes take each other’s issues into account. In organizations where these channels are loosely coupled, strategic planning, budgeting, and leadership development are independent processes with little direct influence on each other. Driving the degree of coupling between channels are structural elements such as the resources allocated to organizational members, hierarchical reporting arrangements, policy guidelines, and social relations among individuals. When


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channels are bounded by redundant structural elements, it is more likely that the processes carried out through the channels will be tightly coupled. For example, decision-making processes are typically arranged into ‘‘periods’’. Periods might be arbitrary in nature, or more likely correspond to monthly, quarterly, or end-of-year cycles circumscribed by the firm. This arrangement influences the behavior of people and interim information flows consistently across business units and hierarchical levels. At GE, monthly financial reports are required from all business groups. A demarcation of month’s end, the report becomes a variant that, in some way, shapes all actors consistently (i.e. everyone has to ‘‘get their numbers in’’). Tight and loose coupling among channels creates distinctions among them in the degree to which they are central or peripheral to an organization’s attentional field. Since channels are coupled to the extent that they share issues and initiatives with other channels, more tightly coupled channels are likely to be central in the network. Central channels constitute the core of an organization’s attentional field and focus and sustain an actor’s attention on the most commonly attended issues and initiatives in the organization. Loosely coupled channels may be more peripheral to the firm and impose idiosyncratic foci of attention that may be decoupled from the priorities of the senior management. In addition to providing focus, linked channels create and sustain working relationships between individuals, groups, and units. They serve as the context for interaction, shared dialog, and information exchange. The social relationships situated within tightly coupled channels enable individuals to create, retain, and transfer knowledge and provide them with the incentives to do so (Argote, McEvily, & Reagans, 2003). However, tightly coupled channels result in more than simply conversations among organizational members. Tightly coupled channels also provide a greater degree of awareness as to where among other members to find information (Wenger, 1987). As a result, members within tightly coupled channels more capably interrelate their decisions and actions with other members and units within the organization (Weick & Roberts, 1993). Thus, a tightly linked network of channels generates a greater transparency for organizational members as to what is going on (i.e. perceptions), how things are done elsewhere in the organization (i.e. cause and effect relationships), what decisions and actions are possible (i.e. norms and beliefs) (Moorman & Miner, 1998), and how well others are doing their job (i.e. social comparison) (Festinger, 1954). Tightly coupled networks of channels are also more fertile ground for organizational learning. Operational channels are aimed at elaborating and refining existing products and services, and it is within these channels that

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organizational members’ architectural knowledge of linkages between components is created and retained (Henderson & Clark, 1990). Linked tightly to governance channels, the operational channels forward this architectural knowledge up the chain of command and inform senior-level managers as they reconfigure and commit resources to activities. At the middle and senior manager levels, tight coupling in governance channels is thus critical for agenda management, a vehicle for top-down control of the corporate strategic agenda and focusing attention on corporate strategy initiatives. Strategic planning processes will more readily permeate the organization and link to other important processes such as operations, compensation, budgeting, and financial reporting. An additional layer of complexity, which we have not directly addressed, is the consideration of firms with a global footprint. Diversified multinational firms are faced with difficulty in strategy formulation and implementation because of the vast differences in decision contexts of the various geographic subunits (Doz & Prahalad, 1991). Receptivity to ideas varies greatly as a result of different cultural expectations and norms. When governance channels at the corporate level and within geographically dispersed business units differ widely in their focus of attention, idiosyncratic worlds are created. Issues may be independent and contested, and initiatives are more likely to conflict and struggle for funding. Although the addition of cross-cultural heterogeneity presents a challenge to process approaches to strategy, the attention perspective offers some potential insights. Ambiguity derived from greater separation of units from headquarters creates loose coupling between information activities at the geographic unit and decision activities at the corporate center and this loose coupling creates autonomy for information gatherers. In this environment, more discretion is bestowed upon decision makers in disparate geographic locations who perceive or construct idiosyncratic meaning of external stimuli. However, despite the geographic dispersion, behavior is not random. The interpretation of the stimuli by individual decision makers will vary based not only on the distinctive localized issues, but also the shared enterprise-wide initiatives, which essentially serve as an external selection mechanism for country-level managers. Loose coupling ensures that although actions and attitudes of international managers get anchored on the contextual factors within local operational channels, they are adjusted vis-a`vis the attentional field created through corporate governance channels. Thus, although the ensemble of conditions is much greater and centralized control efforts are less efficacious (Doz & Prahalad, 1991) when considering diversified multinational corporations, loosely coupled channels result in


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initiatives which will find common support locally yet at the same time articulate firm strategy. 5. Selective Retention of Initiatives in Channels is a Source of Competitive Advantage. While our analysis of strategy process so far has been primarily descriptive, rather than normative, strategy-formulation processes are themselves a source of competitive advantage. When granted tangible resources, the subset of initiatives, which persists in the network of operational and governance channels, can result in the adoption of new activities, changes in existing activities, expansion (or contraction) of activities, and the abandonment of activities. That is, retained initiatives become enduring and routine activities (Nelson & Winter, 1982) within the firm. Internal business venturing, for example, may lead to new business activity and the establishment of new divisions or new departments in existing divisions (Burgelman, 1983). Rents will flow to those organizations, which can successfully select and retain appropriate strategic initiatives. Identification of the ‘‘right’’ initiatives requires that organizations effectively and efficiently focus managerial attention, through channels, on both internal autonomous behavior and external stimuli in the form of market opportunities. Organizations that are able to capably utilize these channels to optimize attentional processing will be better positioned to take advantage of emerging capabilities inside the organization and address changes in the external environment. The existing literature has typically observed the negative implications of the limited attention of managers as emphasizing the limits of rational decision making (Simon, 1947). Yet this negative bias has obscured the potential advantages that may accrue to organizations that effectively direct managerial attention to key emerging competencies of the organization and existing or future customer needs. Managers may adapt the firm’s activities to the environment if competence-building initiatives are identified and exploited and shifts in the environment are matched by firm moves. The only way for activities to evolve in such a way requires that organizational actors attend to key issues and respond to them by adding, abandoning, or altering strategic activities. Thus, the ability of senior managers to focus the attention of lower-level managers on appropriate issues and activities ensures the accuracy, facilitation, and integration of information processed (Ocasio, 1997), choices made and the concept of strategy realized. The benefits of focused attention are experienced in both operational channels through mechanisms such as learning by doing (Argote, 1999) and in governance channels through the superior capability to adapt to changes in the environment (Teece, Pisano, & Shuen, 1997).

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The network of channels provides the discipline through which critical issues are articulated, added to the management’s agenda and matched to congruent initiatives. While many such issues are important, only a few are generally critical in the sense that they make the difference between success and failure or between superior or mediocre performance. Matching issues and initiatives is important because it is the impetus for the commitment of resources and thus consequential for activities that reconfigure resources (Dutton & Duncan, 1987). It is thus not resource combinations per se that bestow competitive advantage, but the variation, selection, and retention processes (and the channels in which they flow) that result in activities that enable new resource configurations. Tight coupling of the network of channels, especially those pertaining to feedback and knowledge transfer (Zollo & Winter, 2002) increases the probability that the firm will select and retain activities that generate new resource configurations that will lead to competitive advantage. For this adaptation to lead to competitive advantage, part of managerial attention must be directed outward to the external environment. Emerging internal capabilities are only useful if there is a concomitant market opportunity. Much of the work on competitive forces or resource endowments do not directly address the simultaneous mechanisms of internal and external selection of firm capabilities and the role of managers in attending to viable autonomous initiatives, matching them with customer needs and ultimately shifting the pattern of activities within the firm (Burgelman, 1984, 1991). Yet, firms may only achieve competitive advantage if they can successfully identify difficult-to-imitate internal activities most likely to yield valued products and services which is, itself, a major challenge for firms (Teece et al., 1997). For example, channels which enable environmental scanning must be linked to channels that involve product development. The firm must also have sufficient absorptive capacity (Cohen & Levinthal, 1990) to be able to incorporate this information into existing activities.

Attention-Based Model of Strategy Formulation Exhibit 2 explains the relationship between selective organizational attention and the network of operational and governance channels and the implications for organizational strategy formulation. As discussed above, organizational attention is situated in the firm’s network of operational and governance channels. Governance channels are particularly relevant for strategy formulation as they provide opportunities for focusing manager’s

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Exhibit 2. Attentional Processing in Organizational Channels. Performance and Environmental Feedback

Issues Issues

Initiatives

Initiative

Activity Variation and Selection

Initiatives

Network of Channels

Decision Making

Issues

Selective Attention

Issues

Organizational Activities

Initiatives Initiatives Knowledge Generation and Transfer

attention of the firm’s issues (its problems and opportunities), and the set of strategic initiatives available to respond to issues facing the firm. Formal and informal channels filter information and guide decision making (Allison & Zelikow, 1999). Through the process of selective attention the number of issues and variation of initiatives being considered becomes reduced. As the issues and initiatives flow through the firm’s channels, the channels filter and reduce the issues and initiatives considered by managers. Decisions are made through the system as initiatives are linked with relevant issues. The degree of coupling of the channels regulates the initiatives that persist and the new activities selected and retained in the organization.

DISCUSSION AND CONCLUSIONS This paper outlines a set of orienting propositions for linking attentional theories of decision making with theories of guided evolution to explain the formulation of strategy within the firm. A key contribution of the paper is highlighting the importance of governance channels for guiding strategy

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formulation. While attention in operational channels is primarily inward looking and guided by the firms’ operations for manufacturing, marketing, sales, and distribution, governance channels are distinct in that they provide opportunities for organizations to anticipate the opportunities and threats in the market and non-market environments through performance and environmental feedback. Given the complexity of organizational environments, organizations selectively attend to the environment with a limited set of issues. The firm’s governance channels serve to link the available set of strategic initiatives with the available set of strategic issues and guide the evolution of a firm’s strategy. The emphasis on governance channels provides a process counterpoint to more common focus on organizational demography and managerial structures. For example, much work on the top management in strategy focuses on top management teams (Hambrick & Mason, 1984) and their demographic structure. The governance channels perspective emphasizes instead how decision-making processes of the top management team are situated in a network of channels, including the board of directors, corporate executive committees, operational and budgeting reviews, and strategic planning processes. While not denying the influence of demographic composition, an attentional perspective focuses instead on communication and decisionmaking processes. Our emphasis on channels and processes also suggests a contribution to the burgeoning literature on dynamic capabilities. While other streams of strategy research have focused on either market opportunities and constraints or internal efficiency, the notion of dynamic capabilities is consistent with the attention-based theory. Dynamic capabilities are ‘‘the firm’s ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments’’ (Teece et al., 1997, p. 516) and are, themselves, processes (Eisenhardt & Martin, 2000). These processes allow for attention to both internal and external stimuli, which enables the firm to adapt its activities to the requirements of a changing environment. We add to this perspective and posit that decision processes cannot be considered independent of the governance channels through which information flows, managers engage in dialog, and strategic decisions are formulated. It is through these tightly and loosely coupled channels that attention is directed and people come together, consider problems and opportunities, and make critical decisions about initiatives that address organizational change. In our view, dynamic capabilities are derived from the attentional processing of issues and initiatives within governance channels. Through their vigorous


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attention to particular issues and initiatives within governance channels of the firm, decision makers are able to bring about improved understanding of the enterprise and its environment, and to select from and adjust behavior occurring in the firm’s operations and administration. Based on new identifiable patterns of issues and initiatives, they may adjust strategic-decision behavior. Attention to the most critical issues and the most promising initiatives – particularly those having long-range impact on the ability of the enterprise to adapt to the environment – is a primary output of the attentional processing of the firm and provide the seeds of dynamic capabilities. Much empirical research is needed on both the anatomy and operations of governance channels in corporations. While boards of directors have been heavily studied, the emphasis has been primarily from a structural perspective, with limited emphasis on decision-making processes.5 Very little research has been conducted on other governance channels in the corporation, such as Executive Committees, weekly staff meetings, capital budgeting, and for those channels and processes that have been studied such as board of directors and strategic planning, the links between channels and the extent of coupling and decoupling of strategic issues and initiatives remains mostly unexplored. Another important issue for research is the coupling and decoupling of governance channels at different levels of the organization and between different functions. The attentional perspective suggests that in each subunit of the organization, decision makers are shaped and constrained by the forces of social and economic structures, information availability, performance evaluations, and the cues provided as a result of his or her organizational role. Individuals are situated contextually in particular zones of the organization and their attention is guided by the network of channels within which they interact. This distributed attention accounts for the vast number of issues and initiatives considered by the organization at any point in time. Overlapping issues result in stronger ties between channels. Since tightly coupled channels share issues, they provide a coherence of priorities from the top to the bottom and across units of a hierarchical structure. People at different levels and in different parts of the organization will have a focus on common issues. Finally, while governance channels are central for strategy formulation, the issues and initiatives generated within governance channels must be coupled with the firm’s operational channels for strategy implementation to take place. Linkages between operational and governance channels are also critical for feedback from operations to affect the accurate identification of strategic issues and the generation of appropriate strategic initiatives to address these issues.

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NOTES 1. The form of channels inside a large multi-business corporation are too numerous to mention, but include meetings at all levels including a board of directors and their committee meetings, executive committee meetings, capital budgeting meetings, strategic planning sessions, brainstorming meetings, human resource planning, performance reviews, financial performance reviews, budget meetings, sales meetings, operational planning and performance reviews off-site retreats, luncheons, conventions, and other things. They also include written communications such as annual reports, proxy statements, 10-Ks and other SEC filings, capital appropriation requests, business plans, marking plans, public relations plans, press releases, operations manuals, project plans, calendars, policy manuals, surveys, meeting agendas and minutes, speeches, action plans, reports, requests for proposals, contracts, e-mails, spreadsheets, presentations, organizational charts, personnel evaluations/reviews, databases, and budgets. 2. The links between channels in Exhibit 1 are generalized from references to processes within the following sources: Bossidy and Charan (2002), Lowe (2001), Slater (1993, 2000) and Welch and Byrne (2001). This approach allows us to provide a stylized example to illustrate our theoretical rationale, and is meant to be illustrative of the concepts, rather than a detailed description of the actual managerial channels. A more fully developed analysis of GE’s governance channels is contained in Ocasio and Joseph (2004), which also compares channels under four CEO regimes at GE: Cordiner, Borch, Jones, and Welch. 3. It is important to note that organizations have numerous formal and informal channels and it is not our intent to provide an exhaustive list of channels at GE. Rather, our focus is on the channels central to strategy formulation and implementation and the ‘‘strong’’ ties between them. 4. Our conception of governance channels is similar to (Thompson’s (2003[1967]) notion of the administrative process. For Thompson ‘‘the basic function of administration appears to be co-alignment, not merely of people in coalitions but of institutionalized action – of technology and task environment into a viable domain, and of organizational design and structure appropriate to it’’ (2003[1967], p. 147). Interestingly, Thompson draws an explicit link between administrative hierarchy and channels (2003[1967], p. 148). We use the term governance instead of administration because in more recent parlance, administration has taken on a connotation of the support functions of the firm, including human resources, accounting, budgeting, purchasing, etc., which may be more of an operational level, rather than of resource allocation, policy formulation, and control. 5. See Westphal (1999) and Westphal and Fredrickson (2001) for important exceptions.

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TOP MANAGERIAL COGNITIONS, PAST PERFORMANCE, AND STRATEGIC CHANGE: A THEORETICAL FRAMEWORK Jerayr Haleblian and Nandini Rajagopalan Prior empirical work on strategic change and persistence remains both equivocal and incomplete (Rajagopalan & Spreitzer, 1997). It remains equivocal because although it has shown that performance downturns are a major antecedent of strategic change it has not explained why some firms, when faced with performance downturns, respond with strategic changes, while others do not. Moreover, although prior research has shown that strong performance leads to strategic persistence, it has not explained why some firms change their strategy given strong performance. We argue that light may be shed on these questions if the cognitive variables of top managerial performance perceptions, performance attributions, strategic change efficacy, and strategic goals are assessed. In addition, the prior work on strategic change remains incomplete because it has focused on top managers’ reactive, but not proactive, role in the strategic change process. We develop the argument that top managers’ efficacy and goals can proactively motivate strategic change. We draw upon cognitive theory within psychology to more accurately assess the mediating and moderating effects of top managers’ perceptions, attributions, efficacy, and goals on strategic change.

Strategy Process Advances in Strategic Management, Volume 22, 63–91 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22003-X

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JERAYR HALEBLIAN AND NANDINI RAJAGOPALAN

Finally, we present testable research propositions and identify methodological implications and theoretical extensions for future research. The empirical strategic change literature has identified poor performance as a primary antecedent of strategic change (Rajagopalan & Spreitzer, 1997) and strong performance as a crucial incentive for strategic persistence (e.g., Boeker, 1997). Arguably, strong performance indicates a successful strategy that does not need change, while performance downturns signal that current strategies are no longer effective and require change (Ginsberg, 1988). However, in the broader management literature counterintuitive results have been reported in which (1) poor performance leads to persistence rather than change and (2) good performance results in change rather than persistence (e.g., Sitkin & Pablo, 1992). Given the antecedent condition of performance, then, critical questions remain unexplained. First, when faced with declining performance, why do some firms change their strategies, while others do not? That is, if poor performance is a primary driver of strategic change, why do we find variance among firms faced with similar performance levels? Second, if strong performance is the main driver of strategic persistence, why do some firms change their strategy given strong performance? Existing theories within the strategic change literature do not explain how poor performance and strong performance can both lead to either strategic change or persistence. Although we do not present a model describing a complete set of factors that could explain these inconsistencies, we draw upon cognitive theory within psychology to shed some light on this question as we argue for the need to assess the influence of top managerial cognitions to provide better understanding of the effects of past performance on strategic change. In addition, extant empirical research has been grounded solely in a theoretical model that adopts a reactive view of the top manager’s role in the strategic change process. Hence, recent work has assumed that top managers primarily react to past performance, and are more likely to change strategy when performance is poor (e.g., Grimm, Corsi, & Smith, 1993; Fombrun & Ginsberg, 1990). Because of this orientation, the strategy literature has typically not examined how proactive managerial cognitions and actions may influence the strategic change process, such that strategic change may follow from good performance. Anecdotal accounts from the business press and published case studies of successful organizations (e.g., Harvard College, 1999; 2000, cases on General Electric, Medtronics) indicate that top managers do anticipate future environments and initiate strategic changes. However, empirical studies have rarely examined how managers proactively influence and initiate strategic change within their

Top Managerial Cognitions, Past Performance, and Strategic Change

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organizations (Rajagopalan & Spreitzer, 1997). Hence, we contend an underlying model of strategic change that has not recognized the role of proactive managerial cognitions has inhibited empirical work. We draw upon the cognition literature within psychology to identify two proactive antecedents to strategic change – top managers’ efficacy beliefs and their strategic goals. By ‘‘efficacy’’ we mean a managerial belief that the firm is capable of changing strategy, and by ‘‘goals’’ we mean strivings to drive firm performance to a given level. We argue these proactive managerial cognitions shape organizational responses and hence influence strategic change. Although a stream of research has examined the effects of managerial cognitions as antecedents to strategic change (e.g., Barr, Stimpert, & Huff, 1992; Child & Smith, 1987), our approach differs from this work as we provide a more complete explication of the underlying causal cognitive mechanisms through which strategic changes emerge. Prior empirical research has revealed variations in managerial perceptions and attributions across firms facing the same stimuli (e.g., Ginsberg & Abrahamson, 1991) but has generally not explained the underlying causal mechanisms for differing firm responses. Rather than being theory-driven, the approach in prior research has been phenomenon-driven. This has resulted in a somewhat fragmented examination of managerial cognitions, in which different operational definitions have resulted in limited comparability across studies and, at times, in contradictory empirical findings (Walsh, 1995). By adopting a theory-driven approach, we not only specify the domain of managerial cognitions but also provide more precisely defined constructs to facilitate empirical testing and cumulative research. Further, prior work on managerial cognitions in strategic change has primarily focused on those cognitions that represent reactions of top managers to changes in firm performance. Our framework also incorporates proactive cognitions – efficacy and goal setting – into the context of strategic change. We first discuss the theoretical arguments on the direct effects of past performance, and then we argue that these effects may be better understood when top managerial cognitions are considered. Specifically, we postulate that reactive managerial performance perceptions relative to aspirations mediate the effects of past performance on strategic change, while managerial attributions of the causes of performance moderate these perceptions. We then present theoretical arguments on the influence of proactive strategic change efficacy and strategic goals on strategic change. After we present our theoretical framework, we provide key definitions, assumptions, and boundary conditions. We conclude by identifying methodological implications, and directions for future research.

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THEORETICAL FRAMEWORK AND RESEARCH PROPOSITIONS In our framework, we examine the influence of both reactive and proactive cognitive variables on strategic change. Reactive sources that impact strategic change are perceptions and attributions – cognitions that determine the ‘‘what’’ and the ‘‘why’’ of performance. Perceptions are first-order cognitions that assess what is the performance feedback: positive or negative? After performance feedback is perceived, attributions are second-order cognitions that attempt to establish why the performance is positive or negative. Given similar levels of performance among firms in an industry, top managers in one firm may view performance as poor while those in another firm may not, and these differing perceptions can lead to different motivational effects on strategic change. Even in the event that performance is perceived similarly across firms, top managers in various firms may still make differing attributions as to the underlying causes of the current performance level, which may also lead to different motivational effects on strategic change. Hence, perceptions and attributions have distinct effects on strategic change and should be distinguished. We will argue that the exogenous indicators of performance initially influence (first-order) perceptions of performance as positive or negative, and then they affect (secondorder) attributions about the underlying causes of performance, which are made on the dimensions of (1) controllability, (2) permanence, and (3) pervasiveness. Proactive sources of influence – efficacy and goal setting – have rarely been examined within the strategic change literature. In the case of efficacy, top managers are more likely to initiate change when they feel the firm has the capability to successfully change its strategy. In the case of goals, top managers may set standards for future performance that motivate and direct strategic change actions. Specifically, top managers may create a discrepancy between current and future desired performance and then select strategic actions to bridge this gap. In contrast to perceptions and attributions, which represent top managers looking at the past to make sense of prior actions, efficacy and goals represent top managers looking forward as they anticipate future outcomes and strive for given results. Thus, we argue that both reactive and proactive managerial cognitions influence strategic change. Our theoretical framework is presented in Fig. 1.

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Reactive managerial cognitions P1

Firm Past Performance •Intensity •Duration

P2a

TM Perceptions of Past Performance

TM Attributions •Controllability •Permanence •Pervasiveness P3 P2b

Magnitude of Firm Strategic Change

Proactive managerial cognitions P4a

TM Strategic Change Efficacy

P4b

P5 P6b

P6a TM Strategic Goals

Direct effects Moderated effects

Fig. 1.

Theoretical Model.

EXPLAINING ANTECEDENTS TO STRATEGIC CHANGE: DEFINITIONS, ASSUMPTIONS, AND BOUNDARY CONDITIONS We define strategic change as any change in the ‘‘fundamental pattern of present and planned resource deployments and environmental interactions that indicates how the organization will achieve its objectives’’ (Hofer & Schendel, 1978, p. 25). Prior empirical literature has most frequently examined strategic change in terms of changes in patterns of resource allocations at either the business or the corporate level (Rajagopalan & Spreitzer, 1997). Examples of business-level strategic changes include changes in research and development expenditures, marketing expenditures, and product markets (e.g., Fombrun & Ginsberg, 1990; Goodstein & Boeker, 1991). Corporate-level strategic changes

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include changes in the type of diversification and the extent of diversification as reflected in the composition of the corporate portfolio (e.g., Haveman, 1992). Although strategic change is an organization-level phenomenon, we assume that top managers primarily drive these changes (Finkelstein & Hambrick, 1996). Strategic choice theorists (Child, 1972), upper echelon theorists (Hambrick & Mason, 1984), and proponents of managerial discretion (Hambrick & Finkelstein, 1987) have all argued that a significant amount of the variance in firms’ strategic responses could be explained if there was a good understanding of how top managers perceive, respond to, and proactively initiate strategic responses. Our assumption is consistent with both the strategic change literature, which relates variations in top managers’ characteristics to variations in firm-level strategy (Wiersema & Bantel, 1992), and the broader managerial cognition literature, which shows how managerial perceptions shape specific organizational responses (e.g., Gioia & Chittipeddi, 1991; Pettigrew, 1987). Consistent with these two literatures, we argue that the most salient cognitions in understanding organizational responses are those formed at the organization’s strategic apex or within its dominant coalition (e.g., Daft & Weick, 1984). These individuals store and interpret information (e.g., Simon, 1991) that influences managerial actions (e.g., Barr et al., 1992; Lant, Milliken, & Batra, 1992) and leads to strategic change (e.g., Thomas, Clark, & Gioia, 1993). Importantly, while our focus is on the impact of top managerial cognitions on strategic change, we realize that group processes precede these cognitions. Because our focus is on how these shared cognitions affect strategic change, the processes that precede and influence the emergence of shared cognitions are not included within the scope of our model. However, we do want to comment briefly on how group processes often result in shared cognitions, as forming a consensus from the initial preferences of individual members is the first task of decision making in groups (Whyte, 1989). Specifically, each top manager interprets the firm’s performance and its strategic capability, and these cognitions may vary among team members within a firm. However, research has shown that there is a significant commonality of perceptions among managerial elites within a firm (Sutcliffe & Huber, 1998). In addition, cognitions often converge and operate at the group level, resulting in shared interpretations, which have been referred to in the strategy literature as team mental models (Klimoski & Mohammed, 1994), collective cognitive maps (Axelrod, 1976), dominant logic (Prahalad & Bettis, 1986), and strategic consensus (Knight et al., 1999). Although the dispersion of cognitions around the group average varies from small in homogeneous groups to large in heterogeneous groups,


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consensus often results in both types of groups. Research clearly demonstrates that consensus is more likely in homogeneous groups with shared history, accomplishments, and norms (Fischer & Ellis, 1990) or similar demographics (Knight et al., 1999). However, in groups that begin with heterogeneous beliefs consensus may also form in two ways: mediation or domination (Bales & Cohen, 1979). In the case of mediation, differences are resolved as the group process unfolds (Knight et al., 1999; Walsh & Fahey, 1986), which involves the exchanging of multiple views after the team has accumulated and examined information and the integration of individual beliefs into a consensus (Gibson, 2001). In contrast, in the case of domination the cognitions of the powerful stand out and become the consensus view (Bales & Cohen, 1979). Hence, while there may be variations in individual top team member cognitions (Pettigrew, 1987), we assume that in a majority of cases a prevailing set of interpretations will emerge, either by mediation or domination, as the team evaluates the causes of poor performance and the firm’s strategic abilities. In the case in which heterogeneous beliefs within the top management team (TMT) do not become integrated through a process of consensus building or through domination, a lack of consensus may impede team actions because successful implementation requires a top team act on a common set of priorities. This suggests that shared group cognition may be essential for implementation of policies and decisions.

The Influence of Past Performance on Strategic Change We begin our theoretical model with an assessment of the influence of past performance on strategic change. Although the concept has probably been known for centuries (Hobbes, 1651), a substantial amount of psychological research in the first half of the last century acknowledged firmly the important role of past performance, whereby strong performance (i.e., rewards) tend to increase the likelihood of persistence in current behavior and poor performance (i.e., punishment) tends to increase the likelihood of behavioral change (e.g., Mazur, 2001). Research from the management and finance disciplines has shown a similar relationship between performance and change. Strong firm performance has been shown to lead to organizational persistence (e.g., Audia, Locke, & Smith, 2000; Boeker, 1997; Greve, 1998) while poor firm performance has been associated with CEO change (e.g., Puffer & Weintrop, 1991) and divestitures (e.g., Kaplan & Weisbach, 1992).

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Building on the notion that good performance increases persistence while poor performance increases change likelihood, subsequent work in psychology has examined two distinct aspects of past performance – its duration and its intensity. Intensity captures the extent of change in a performance dimension during the immediately preceding time period (such as a year). Duration refers to the number of time periods during which there is a consistent trend in performance, either a decline or an improvement. Research has shown that persistence increases with the duration (i.e., reoccurrence) of good performance (e.g., Neef, Shade, & Miller, 1964), and decreases with the duration of poor performance (e.g., Azrin, Holz, & Hake, 1963). Studies have also shown that as good performance intensity increases, so does the likelihood of increased persistence. Likewise, as poor performance intensity increases, so does the likelihood of diminution in persistence and subsequent behavior change (e.g., Neef et al., 1964). By extension, predicting increased or decreased variance in strategic change should involve the assessment of both the duration and intensity of performance. It is interesting that the effects of poor performance on strategic change remain contradictory. Some studies have found that poor performance increases the likelihood of strategic change (e.g., Lant & Mezias, 1992; Lant et al., 1992), while other studies have found no such relationship (Oster, 1982; Wiersema & Bantel, 1992; Grimm et al., 1993). However, a closer examination of prior studies indicates a plausible reason for this contradiction: duration and intensity are only rarely considered together, resulting in the incomplete measurement of prior performance. For example, studies that examine prior performance in cross-sectional settings may capture prior performance intensity but not its duration. This incomplete conceptualization of past performance may explain why these studies find no consistent evidence of a relationship between poor prior performance and strategic change. In contrast, when studies perform a more complete assessment of past performance, more substantial support is found. For example, Boeker (1989), using a measure of prior performance that assessed both duration and intensity, examined firms’ performance since their founding and discovered that poor performance contributed to changes in strategy. In another study of strategic change that assessed both duration and intensity, Zajac and Kraatz (1993) also found that organizations with a long history of prior poor performance were more likely to undergo significant strategic changes than organizations with fewer periods of poor performance. Their longitudinal research design (16 years of performance data) permitted a more complete definition of the performance construct than studies that


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only measured performance intensity. Thus, it appears that both the duration and intensity of past performance need to be jointly examined in order to predict subsequent change, suggesting the need for a longitudinal, rather than simply a cross-sectional, assessment of past performance. To summarize, empirical evidence suggests that poor consequences do impact strategic change and that prolonged and intense consequences have a greater likelihood of triggering change than infrequent or mild consequences. Thus, the direct effects of past performance are represented in the following proposition: Research Proposition 1. The greater the duration and intensity of poor performance, the greater will be the magnitude of strategic change. Top Managerial Performance Perceptions Although the influence of performance consequences was originally emphasized in psychology (i.e., radical behaviorism), the field gradually shifted and began to acknowledge the role of cognitions as mediating factors that, together with the effects of performance consequences, explain more variance in human behavior than performance consequences alone (Bandura, 1986; Mischel, Cantor, & Feldman, 1996). More recently, empirical strategic change literature has also begun to acknowledge the important role of managerial cognitions in the change process (e.g., Barr et al., 1992; Barr, 1998; Lant et al., 1992). We argue that the causal link from past performance to strategic change needs to recognize the crucial mediating role of top managerial perceptions of performance. That is, while performance influences change, performance levels may be perceived differently among different firms (Greve, 1998). Hence, a similar level of performance may be viewed as poor within one firm but not in another. Variation across firms in the perception of performance is due in part to their aspiration levels (Grinyer & McKiernan, 1990). Top managers set aspiration levels and then judge performance as poor when it does not meet aspirations. This inevitably leads to different thresholds across firms as to what constitutes poor performance. Aspiration levels may be set relative to a firm’s prior performance (Cyert & March, 1963; Greve, 1998), which means that they tend to be raised after strong performance (Bandura, 1997). Research has also shown that aspiration levels are set relative to similar others (Festinger, 1954; Lant et al., 1992), particularly those with high performance levels (Bandura, 1986). Performance is perceived relative to

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aspiration levels because decision makers use aspiration levels to simplify a continuous performance measurement process into a discrete assessment of good or poor performance (March, 1988). If a downturn is perceived as poor performance, it is likely that this perception will act as a cognitive motivator to drive top managers toward strategic change actions to improve performance. At times, performance will be similarly construed across many firms (Mischel, 1973). As the duration and intensity of poor performance indicators increase (e.g., ROA below industry average for 10 consecutive quarters), the greater the likelihood that performance will be perceived as poor, because the performance will significantly under-perform aspirations across firms. However, when the duration and intensity of poor indicators are less severe (e.g., ROA slightly below industry average for one quarter), the perception of performance is open to more interpretation, because top managers are less certain about whether to classify the situation as poor performance. At the extreme, then, poor performance is construed similarly across top managers in different firms and is uniformly perceived as poor performance in every firm. However, in the middle range, where performance indicators are not so clear, the perception of poor performance differs across firms based, in part, on differing levels of aspirations. Those firms that do not perform up to aspirations will tend to perceive performance as poor and will be more likely to undertake strategic actions. Moreover, the greater the gap between aspirations and performance, the greater is the perceived poor performance, the greater will be the resulting magnitude of strategic change. These arguments together lead to the next two research propositions: Research Proposition 2a. The greater the duration and intensity of poor performance, the more likely top managers will perceive the performance as poor. Research Proposition 2b. The poorer the perceived performance, the greater will be the magnitude of strategic change. The Moderating Influence of Top Managers’ Attributions on Strategic Change Psychological research on performance may explain the basic findings that strong performance leads to persistence and poor performance motivates change (Research Proposition 1). Further, by adding the mediating effects of top managerial perceptions, differing perceptions may explain why one


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firm changes its strategy, while another does not, given similar levels of performance (Research Propositions 2a and 2b). Hence, incorporating the role of performance perceptions allows us to account for greater variance between firms on strategic change. Still more variance on strategic change may be accounted for if the effects of managerial attributions are assessed. Specifically, the effect of performance perceptions on strategic change may be moderated by top managerial attributions, which intensify or attenuate the effect. Perceptions are firstorder effects that mediate the influence of poor performance on strategic change. If top managers perceive that their firms have been punished, then second-order effects follow, in which managers make causal attributions – retrospective judgments – as they try to determine the causes of the performance downturns (this idea is further developed below). Based on these attributions, organizations respond differently. Thus, attributions have motivational effects (Bandura, 1997), which moderate the effect of first-order perceptions on strategic change. Managerial attributions are retrospective judgments of causes. Top managers interpret performance and look for underlying causes to determine why an event has occurred. Attributions give the event meaning and help people anticipate future events (Weiner, 1986). Attribution theory assumes that people are motivated to understand and predict their environment (e.g., Kelly, 1955) and that they are concerned with perceived causes of prior events (Weiner, 1986). The meaning, however, is not inherent in a past event, but rather it depends upon how a person construes the event (Kelly, 1967). This argument is not new. Hume (1739) argued that causality is not inherent in environmental events and that people do not observe causes – rather, perceivers of events construct causes in order to make their environments more meaningful. In an organization, as top managers assess firm performance as poor, attributions are made as to the underlying causes. The managers look back and attempt to make sense of prior performance, and their attributions of underlying causes influence the likely repetition of future actions. Largescale empirical studies, however, have tended to ignore attributions as moderating factors impacting strategic change, even though variability in attributions may result in behavioral differences (Weiner, 1986), and failure to assess attributions may result in under-specified models. As we will explain, causal attributions for past performance may vary based upon the following three dimensions: controllability, permanence, and pervasiveness. Controllability is concerned with the source of the cause (i.e., personal or environmental), permanence with its length, and pervasiveness with its breadth.

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Controllability The founder of ‘‘attribution’’ thinking is Fritz Heider (1958), who argued that people ascribe causal factors either to a person or to the environment. An assumption underlying this characterization is that person-related causes are more controllable than environment-related causes. Subsequent research has shown that individuals are more likely to respond to poor performance with behavioral change when the cause is attributed to person-related rather than environment-related factors (Rotter, 1971). Similarly, strategy research has found that when managers attributed poor performance to external factors, they were less likely to change firm strategies (Lant et al., 1992). When performance downturns are attributed to external causes such competitors’ actions, changes in regulatory rules, shifts in technological standards, and changes in consumer preferences they are more likely to be viewed as uncontrollable rather than controllable. In contrast, when causes are attributed to internal factors such as an outdated product line, poor manufacturing facilities, or poor customer service, they are more likely to be viewed as controllable rather than uncontrollable. Attributions of controllability give managers some degree of confidence in their organization’s ability to respond to poor performance, and hence they are positively associated with the likelihood of strategic change (Barr, 1998; Ford, 1985; Ford & Baucus, 1987). We would expect top managerial attributions of poor performance to more uncontrollable factors to be less likely to result in the adoption of new behavior than the attribution to more controllable factors (e.g., Bettman & Weitz, 1983; Fiske & Taylor, 1984; Lant & Mezias, 1992). A classic illustration of the effect of controllability attributions on organizational responses can be found in the differential responses of two major US auto companies to performance decline in the 1970s. Ford Motor Company’s managers interpreted the poor performance during the late 1970s as a problem with the company’s quality standards, and based on this firm-level attribution they closed several plants. In contrast, Chrysler Corporation interpreted its poor performance as a problem with consumer demand, and based on this external attribution it persisted with past behaviors while appealing for government assistance (Dutton & Duncan, 1987). Some recent studies of strategic change have also highlighted the crucial role of managerial interpretations in explaining whether firms respond to declining organizational performance. Although research has shown that managers are more likely to attribute poor performance to uncontrollable factors (Wagner & Gooding, 1997), when managers attribute performance declines to controllable factors (such as poor strategy), they are more likely to initiate strategic changes (Barr et al., 1992; Lant et al., 1992; Meyer, 1982).


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Permanence As work on attributions developed, it became apparent that some causes are more permanent than others (Weiner, 1986). For instance, a more permanent attribution might be a ‘‘lack of firm competencies,’’ whereas a ‘‘lack of company-wide effort’’ could be classified as a more temporary attribution. Similarly, if top managers attribute poor performance to a ‘‘recession,’’ we would classify this cause as ‘‘temporary,’’ while we would classify a ‘‘technological change making our industry irrelevant,’’ as an example of ‘‘permanent’’ attribution. Hence, the permanence dimension is concerned with time, with the underlying causes of poor performance ranging from temporary to permanent. The more permanent the attribution of causes, the more likely top managers will be to change future actions based on these attributions (Ford & Baucus, 1987). Moreover, we would expect the converse to be true: when managers see performance as caused by temporary problems within or outside the organization, they are less likely to change their strategies. Hence, causal attributions of permanence impact the magnitude of strategic change. Pervasiveness After the dimensions of controllability and permanence, a third dimension – pervasiveness – was later offered (Abrahamson, Seligman, & Teasdale, 1978), which dealt with the extent to which the cause of poor performance was limited or generalizable across a wider context. In other words, while permanence is concerned with time, pervasiveness is concerned with space. Some causes are specific to a narrow area, while others affect multiple domains of performance. Thus, top managers may view poor firm performance as being caused by a particular function (e.g., a weak marketing function) or an overarching problem that involves numerous functions (e.g., poor R&D, manufacturing, marketing, and human resources). When the cause of poor performance is seen as pervasive, top managers will be more deterred by it, and therefore they will be more likely to consider strategic change (e.g., Dutton & Duncan, 1987).To sum up, controllability, permanence, and pervasiveness will moderate the impact of perceived poor performance on strategic change. This leads us to the following proposition: Research Proposition 3. Top managerial attributions will significantly moderate the effects of perceived poor performance on strategic change. Specifically, the positive effect of perceived poor performance on the

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magnitude of strategic change will be stronger: a. The higher the attributed level of controllability of the underlying cause(s). b. The higher the attributed level of permanence of the underlying cause(s). c. The higher the attributed level of pervasiveness of the underlying cause(s). Proactive Cognitions and their Influence on Strategic Change In the preceding section, we have argued that assessing performance perceptions and attributions can help to explain why poor performance leads to change. Specifically, the more prior aspirations exceed performance, the greater the perceived level of poor performance, which then increases the subsequent magnitude of strategic change. In addition, when the perceived poor performance is seen as ‘‘controllable,’’ ‘‘permanent,’’ or ‘‘pervasive,’’ the positive relationship between perceived poor performance and strategic change strengthens. Assessing perceptions and attributions also may help explain why poor performance can lead to persistence. In such cases, the underlying causes of perceived poor performance are seen as ‘‘uncontrollable,’’ ‘‘temporary,’’ ‘‘contained,’’ or a combination of the three, which reduces the motivation for change and may in fact result in strategic persistence. Perceptions and attributions can also explain why good performance may lead to strategic persistence. When performance exceeds prior aspirations and is classified as good performance, the more likely strategic persistence will follow. Furthermore, when the perceived good performance is viewed as ‘‘controllable,’’ ‘‘permanent,’’ or ‘‘pervasive,’’ the positive relationship between perceived strong performance and strategic persistence strengthens. In other words, very strong performance gives signals to top managers that current strategies are effective and should be continued. Up to this point, though, we have been arguing that top managers react to performance as they assess its nature and underlying causes; hence, the notion portrayed is that top managers are influenced by past performance outcomes. It is interesting, however, that a history of strong performance (in contrast to recent strong performance) builds top managers’ beliefs regarding their firms’ efficacy or strategic capabilities, which aids managers in exerting influence to control the directions of their firms. Thus, a history of strong performance increases top managers’ confidence in their firms’ strategic capabilities as they plan and execute strategy, which helps


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to explain the conundrum of why good performance may lead to strategic change. A significant amount of work in psychology has been concerned with discovering the principles of how cognitions promote change (Bandura, 1997). Hence, by drawing on the cognition literature within psychology we may be able to understand how proactive managerial cognitions promote strategic change. We will argue that the two critical forms of proactive managerial cognitions are beliefs regarding strategic change efficacy and the setting of strategic goals. Strategic change efficacy consists of top managers’ beliefs in their firms’ capability to change strategy, while strategic goals are anticipatory cognitions translated into performance targets that guide action (Bandura, 1997). It is of interest, however, that the empirical strategic change literature has practically ignored top managers’ proactive influence. We argue that top managers plan for an organization’s future and set goals that motivate and direct organizational actions. So, while past performance acts on top managers and directs their actions, top managers also act to influence future performance (Child, 1972). In other words, a significant proportion of top management effort is directed not just at reacting to performance declines but toward cognitive activities whereby strategic change may be influenced by the self-regulation of actions. Thus, anticipated organizational futures act as cognitive motivators that impact strategic change.

Top Managerial Strategic Change Efficacy Beliefs Albert Bandura is the researcher most associated with work on efficacy, which represent managerial beliefs in the capabilities of firms to exercise control over strategic actions. Efficacy beliefs have been found to be highly predictive of behavior and a powerful source of influence on choice, indicating that perceptions of future states drive present actions (Bandura, 1997). It is also interesting that efficacy beliefs may drive actions different from those that past performance outcomes might dictate, so that good performance, for example, may lead to change rather than persistence. In the context of strategic change, efficacy is the top managerial belief in a firm’s capability to execute a particular strategy. More specifically, top managers assess efficacy based on past performance and then develop probabilistic causal expectations about future outcomes of strategic actions based on assessed capability. These are beliefs about what the firm can do under different sets of conditions, and these beliefs, in turn, guide strategy development.

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Past performance influences the formation of efficacy, as top managers estimate capabilities based on prior experience. For instance, performance success increases efficacy beliefs, with the most resilient forms of efficacy resulting from overcoming obstacles through strong effort. On the other hand, performance failure decreases efficacy beliefs, especially if failures occur early and often and attributions of non-controllability are made for the failures (Bandura, 1997). Organizational decision-making requires the coordination, monitoring, and managing of collective efforts, and experience allows top managers to develop rules for effective management. Under such conditions, efficacy beliefs exert substantial impact on the quality of decision-making (Wood & Bandura, 1989). Thus, efficacy beliefs are influenced by prior experience, but they also influence future experience. Firms will take action when they hold strong strategic change efficacy beliefs and have outcome expectations that make the effort seem worthwhile. It is important, however, to distinguish efficacy from prior work on expectancy theory. Specifically, expectancy theory assumes that the expectation of effort-driving performance impacts choices. In contrast to effort expectations, efficacy is a broader concept concerned with abilities to produce a level of performance, which are based on skills, knowledge, resources, and capabilities, rather than on effort alone (Wood & Bandura, 1989). It is also worth noting that efficacy research has shown that while efficacy expectations contribute to performance, effort expectations do not (Bandura, 1997), which may account for the relatively weak performance of expectancy theory in predicting organizational actions (Locke & Latham, 1990). Therefore, when top managers believe their firms are capable of changing their strategy and believe that this change will be effective, they are more likely to take strategic change actions (Audia et al., 2000). Efficacy beliefs can also be related to an organization’s ‘‘ability to change’’ – a key concept within the strategic change literature (e.g., Dutton & Duncan, 1987). In empirical studies, size and age have been offered as proxies for an organization’s ability to change. These proxies have then been related to strategic change, but with mixed results. Some studies have found a negative relationship either between organization size and strategic change (Fombrun & Ginsberg, 1990), or between organization age and strategic change (Kelly & Amburgey, 1991). In contrast, other studies have found a positive relationship between these two proxies and strategic change (Boeker, 1989; Zajac & Kraatz, 1993). Organizational inertia arguments are offered to explain negative findings, while resource arguments or experience arguments are used to justify positive relationships. However, rather than size and age having a direct effect on strategic change, these variables may influence


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managerial efficacy beliefs, which in turn shape change behaviors. For one thing, top managers may construe size and age variously within different organizations. For example, while managers in one firm may view size or age as a significant constraint on their ability to effect change, managers in another similarly sized or similarly experienced firm may view the larger resource base or increased experience associated with size or age as significant positive influences on their ability to execute change. Thus, by relating organizational attributes like size and age to efficacy rather than directly to change, we may be able to reconcile prior contradictory findings in the empirical change literature. Finally, strong efficacy beliefs promote aspirations, which guide, motivate, and regulate actions (Bandura, 1991). The appraisal of abilities influences goal setting: strong efficacy beliefs result in the setting of challenging goals, contribute to strategic thinking, and help managers to maintain efforts toward the goals, even when setbacks are experienced (Bandura & Wood, 1989; Locke & Latham, 1990; Prussia & Kinicki, 1996). In other words, efficacy beliefs are an important influence through which goals create motivational effects. After a difficult accomplishment, those with strong efficacy beliefs tend to set even higher goals that create new challenges to be mastered. Thus, in direct contrast to the notion that good performance breeds only persistence, strong efficacy beliefs contribute to taking on new challenges, even when company performance has been good. Efficacy beliefs, then, are influenced by past performance, and in turn they influence both strategic change and goal setting. This leads us to the following propositions: Research Proposition 4a. Performance will influence managerial strategic change efficacy. Specifically, the greater the duration and intensity of strong performance, the stronger will be the managerial strategic change efficacy beliefs. Research Proposition 4b. Top managerial strategic change efficacy beliefs will directly influence strategic change. Specifically, the stronger the efficacy beliefs, the greater will be the magnitude of strategic change. Research Proposition 5. Top managerial strategic change efficacy beliefs will impact strategic goal setting. Specifically, the stronger the efficacy beliefs, the more challenging will be the strategic goals. Strategic Goal Setting Goal-setting theory has academic and management precursors, including the work of F. W. Taylor, Peter Drucker, T. A. Ryan, and Kurt Lewin, but

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most modern work is associated with Edwin Locke and his colleagues (e.g., G. Latham, C. Earley, M. Erez, C. Lee). Goals are generally defined as ‘‘desired performance outcomes’’ (Locke & Latham, 1990), and as top managers identify them the intended outcomes have the effect of directing attention, focusing effort, and contributing to persistence (Locke, Shaw, Saari, & Latham, 1981). More specifically, setting a goal is a cognitive comparison process in which a valued standard is set as a challenge that creates a state of disequilibrium. Performance is then assessed relative to the standard, which gives direction to action (Bandura, 1997). The necessary components for goal setting, then, are a standard of performance and feedback that allows the measuring of performance against the standard (Bandura & Cervone, 1983). Based on prior performance and experience with organizational environments, top managers set goals that direct and motivate organizational actions. Thus, goals are often adjusted based on prior performance: if goals are reached, top managers may then ‘‘raise the bar’’ and increase the performance goals for the firm. In other words, the stronger the prior performance, the more challenging the goals that top managers are likely to set. As with efficacy beliefs, then, goals are not formed in isolation but are based on top managers’ reflections on past performance and on their perceptions of the firm’s resources and capabilities. Higher standards for firm performance are typically set relative to prior performance (though they may also be set in comparison with another firm), and they lead to performance goal setting (e.g., Lewin, Dembo, Festinger, & Sears, 1944). The more confidence top managers have in their firms’ competencies, resources, and capabilities based on experience, the more likely they are to set higher goals. After the standard is attained, top managers will generally have an improved sense of their firms’ competencies and are likely to set still-higher standards (e.g., Ryan, 1970). A new standard is then adopted, and this again creates a state of disequilibrium that continues to drive motivation. Therefore, goal setting allows top managers to direct their own motivation, rather than to simply react to events. Modern goal-setting work has shown two primary findings. First, goals that are challenging (assuming they are accepted) lead to greater effort than do easily achieved goals. Challenging goals direct action to relevant behaviors, inspire continued effort over a longer term, and lead to more beneficial outcomes. Second, specific challenging goals lead to greater performance than do vague ‘‘do your best’’ goals (Locke & Latham, 1990). The more elaborated or detailed a goal is, the more effective it is in motivating action (Mischel & Patterson, 1976). Here is an example of a goal


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set at General Electric, as described by former chairman Jack Welch (Harvard College, 2002). The goal is both specific and challenging: We never did more than 5 inventory turns, and we said we’d go to 10. We had no idea how to get to 10. We published in the annual report that we’d do 10. We’ll do 8 this year. We all know what we are shooting for – 200,000 people know what we are shooting for.

When the goals are difficult to meet, increased effort may not be sufficient to achieve targets, and problem solving to discover how targets can be reached may lead to changes in strategy. For example, goal setting at General Electric was sometimes referred to as ‘‘stretch targets,’’ and the following quote from a General Electric executive suggests that problem solving and innovation are needed to meet stretch goals (Harvard College, 2002): People like problem solving. They want to go to that next level. However, stretch goals could degenerate into a justification for forcing people to work a 60-hour week to achieve impossible goals. But, it’s the process you are trying to stimulate. You are trying to get people to think of fundamentally better ways of performing their work.

Importantly, though, goals not only direct attention and mobilize effort but also influence planning in situations in which goals require the development or modification of strategy (Locke & Latham, 1990). This cognitive task involves an attempt to consider the best means to accomplish the goal: complex or difficult goals often require creative problem solving that may result in a more efficacious process than previously used (Locke et al., 1981; Naylor & Ilgen, 1984). Research has shown that goals lead to more planning (e.g., Bandura & Simon, 1977; Earley & Perry, 1987; Latham & Baldes, 1975), and difficult, specific goals stimulate higher-quality planning (e.g., Earley, Wojnaroski, & Prest, 1987) and are associated with the most effective strategies (Chesney & Locke, 1991; Klein, Whitener, & Ilgen, 1990). To achieve a goal, effort must be exerted, and so goals direct attention and action toward goal-relevant activities. However, if the goal is challenging, sheer effort may not be enough – innovation and problem solving may be needed in order to discover suitable strategies for reaching the goal. Less difficult goals activate stored knowledge and skills relevant to meeting the goal, but if goals are difficult their achievement requires more than simply executing learned habits. Therefore, goal setting is relevant to strategy because it often entails a change in strategy to meet the demands of the goal (Locke & Latham, 1990). A strategic change, then, may follow from the setting of goals, particularly if they are difficult and specific. Larry Bossidy, chairman of Allied Signal, Inc., used specific and challenging stretch targets (e.g., increasing earnings per share by 15% annually). Among other things, to reach these

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goals, he encouraged strategic change such as the development of new markets and products (Hill & Jones, 2001). In such ways, top managers proactively influence their environment as they set performance standards to create a state of disequilibrium. Then, in order to reach the strategic goals they have set, they may very well initiate strategic change. To sum up, then, efficacy beliefs may lead to the setting of high goals, and both efficacy beliefs and goals may foster strategic change. This leads to the following two propositions: Research Proposition 6a. Performance will influence managerial strategic goals. Specifically, the greater the duration and intensity of strong performance, the more challenging will be the goals set. Research Proposition 6b. Top managerial strategic goals will directly influence strategic change. Specifically, the more challenging and specific the goal, the greater will be the magnitude of strategic change. To summarize our framework, then, the duration and intensity of poor performance affect strategic change. Importantly, however, top managers interpret performance, which contributes to a differing likelihood of strategic change initiatives across firms, even given similar performance. To better understand how top managers interpret performance, we need to understand both their perceptions and attributions of performance. In the case of perceptions, top managers compare their firms’ current performance to their prior aspiration levels: aspirations exceeding performance are more likely to be seen as poor performance, whereas performance exceeding aspirations is more likely to be viewed as a strong performance. Once performance is perceived as strong or poor, then attributions are made as to its underlying causes – its controllability, permanence, and pervasiveness – and these attributions, in turn, attenuate or amplify the effects of perceived performance on strategic change. Perceptions and attributions are reactive forms of strategic change, but more proactive forms of strategic change are also possible. Sustained strong performance has the effect of boosting top managers’ efficacy beliefs in their firms’ strategic capabilities, which in turn increases the likelihood that more challenging strategic goals will be set. It is interesting, then, that strong performance sets into motion forces for change, as the confidence of top managers in firm capability grows, whereby they are more willing to take on strategic changes. And since they have met prior goals, they are more willing to set more difficult goals, which increases strategic change likelihood. Therefore, both reactive and proactive forces impact on strategic change.


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RESEARCH IMPLICATIONS AND EXTENSIONS A detailed discussion of the methodological implications of our framework is beyond the scope of the current paper. However, in the spirit of demonstrating the testability of our propositions, and in order to encourage empirical work, we offer some specific guidelines for future research that include preferred data sources as well as suggested operationalizations and appropriate levels of analyses of variables within the model. Data Sources and Methodologies for Future Empirical Research Our framework suggests that the direct effects of firm performance (exogenous variable) and the intervening effects of managerial perceptions and cognitions need to be assessed to explain variance in firms’ strategic change behaviors. We suggest that direct effects of past performance and strategic change/persistence can be assessed through archival data sources (such as annual reports) and external experts such as industry analysts, consultants, and academics (Eisenhardt & Bourgeois, 1988; Tushman & Anderson, 1986). However, to assess managerial perceptions and cognitions (endogenous influences), data sources and methods more amenable to a managerial frame of reference will be needed, such as decision strategic decision scenarios or primary field surveys (Hodgkinson, Brown, Maule, Glaister, & Pearman, 1999; Thomas et al., 1993). Thomas et al. (1993), who used decision scenarios to capture top manager’s interpretations and archival data sources to measure actual changes in firm performance and behaviors, demonstrated how different data sources can be combined to obtain information from both managerial and external frames of reference. Our framework can be tested similarly, because exogenous antecedents can also be measured based on annual reports or external experts. Then, the members of the TMT can be surveyed with an instrument that utilizes multi-item scales of cognitions that map onto the exogenous changes identified through archival sources. Ideally, the exogenous variables would be measured at least one time period prior to the measurement of cognitions and cognitions would be assessed at least one time period prior to the evaluation of strategic change.1 Operationalizing Prior Performance, Managerial Perceptions, and Cognitions Many of the constructs developed in our theoretical framework have yet to be operationalized, and prior research offers only limited guidance in this

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regard.2 Hence, we offer preliminary suggestions for empirical measures of our constructs, with the caveat that these measures may need refinement before they can be incorporated into a formal empirical test of our propositions. Intensity and Duration of Past Performance Intensity can be defined as the degree of change in a performance dimension during the immediately preceding time period, usually 1 year. Duration refers to the number of time periods during which past performance is being measured (e.g., for poor performance it may refer to the number of time periods during which past performance on the chosen dimensions has been below the industry median, the firm’s historical median, or has declined). Duration and intensity should be obtained either from archival sources or from non-managerial assessments in order to prevent common methods bias. Since most firms use multiple measures of performance – accounting and financial, qualitative and quantitative – duration and intensity need to be multi-dimensional constructs so that they can be mapped onto the firm’s frame of reference. A preferred method is to ask experts to weight individual performance measures by their level of importance and thus create a weighted index of composite performance.3 Perceived Performance This measure can be based on managerial assessments of the extent to which they perceive the firm’s past performance to be below, at, or above their aspiration levels for (1) the immediately preceding time period corresponding to the intensity measure and (2) for multiple time periods corresponding to the duration measure. The lower (higher) the level of managerial satisfaction, the greater will be the degree of perceived poor (strong) performance. Thus, poor performance and strong performance could be assessed on the same scale, with low scores denoting higher levels of poor performance. Our approach differs from Greve (1998), who assumed homogenous aspiration levels across all firms (either industry performance or historical performance). We believe, in contrast, that aspirations can themselves vary across top managers in different firms. Hence, instead of using an objectively determined aspiration level and applying the same standard to all firms, we recommend a perceptually based measure of satisfaction that allows for variation in managerial aspirations. Thus, we assume that some firms may compare themselves with the highest performers in the industry to set aspiration levels, while others may use industry average performance,


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and still others may aspire to beat the best recent performance of their own firm. By assessing managerial perceptions of satisfaction relative to their subjective aspirations, we can capture greater variance in the first-order perceptions of strong and poor performance.

Attributions of Controllability, Permanence, and Pervasiveness These measures need to be operationalized in relation to managers’ interpretations of the underlying causes of the firm’s past performance. An assessment of controllability would judge the extent to which managers attribute the firm’s past performance to causes that are within the control of the firm. The scale developed by Hodgkinson (1992) to measure senior executive’s attributions of controllability is a noteworthy approach.

Perceived Strategic Change Efficacy Assessing efficacy requires expert knowledge on what it takes to succeed in a given strategy, perhaps supplemented with interviews and questionnaires, in order to identify levels of challenge and impediments to successful strategic performance (Bandura, 1997). Once challenges are understood, top managers can be presented with strategic change scenarios portraying different levels of strategic challenges. In such cases, they rate the strength of their belief in their firm’s ability to implement the strategic change, which is a judgment of capability, not intention. In the only prior strategic change study that assessed efficacy, a two-item scale assessed respondents’ confidence in achieving predetermined levels of market share (Audia et al., 2000). However, this measure did not clearly distinguish efficacy from strategic goals. A preferred measure would rate efficacy in relation to various strategic change options and would separately assess strategic goals.

Strategic Goals Assessing the degree of specificity and challenge of strategic goals can be construed as a three-step process. In the first step, top managers may be asked to specify their relevant performance criteria. Then, when the relevant criteria are ascertained, top managers may be asked to identify the performance levels they are trying to attain for the next year (e.g., Locke, Frederick, Lee, & Bobko, 1984). External experts familiar with the firm’s industry and past performance may then rate performance goals on the dimensions of specificity and challenge.

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Extensions and Directions for Future Research We limited the scope of our framework in order to explicate the underlying causal mechanisms that explain the relationship between firm performance and strategic change and to identify the crucial role of managerial cognitions in determining this relationship. This limited scope, however, offers useful directions for future research. To keep our model focused and to more fully develop the underlying theoretical arguments, we assumed the existence of a dominant set of top managerial cognitions as the starting point for our propositions. However, future research can extend our model and examine the antecedents to managerial cognitions. For instance, attributions can stem from variations in top managers’ prior experiences, functional backgrounds, managerial problem domain familiarity (Sitkin & Pablo, 1992), and organizational control systems (Grinyer & McKiernan, 1990). Similarly, in addition to prior firm experiences, strategic change efficacy beliefs may be shaped by vicarious experience as the performance of other firms is assessed, or from the influence of analysts, industry experts, or respected others who might convince top managers of their firm’s capabilities (Bandura, 1997). Thus, antecedents to top managerial cognitions should be explored. For the sake of simplicity and clarity, we also separately examined the role of reactive (perceived performance and attributions) and proactive (efficacy beliefs and goals) cognitions. However, examining the interactions between the reactive and proactive components could also usefully extend our model. These cognitive forces operate simultaneously, and more work is needed to provide understanding of their relative importance and mutual interactions in explaining strategic change. In addition, although we identified the dominant role of managerial cognitions in the change process, there are several variables that limit managerial discretion stemming from organizational inertia (Hannan & Freeman, 1984) and resource constraints (Pfeffer & Salancik, 1978). While our model accommodates these variables through their effects on managers’ efficacy beliefs and strategic goals, we recognize that these factors can also have direct effects on the magnitude of strategic change. For that reason, empirical tests of our model should incorporate controls for other significant but non-cognitive sources of variations in firm strategies. Including such controls in conjunction with the direct, mediating, and moderating effects identified in our model would contribute to a more completely specified theoretical model of strategic change. To sum up the paper as a whole, we made a distinct theoretical contribution by identifying and elaborating upon the underlying cognitive


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dynamics and their causal effects in the strategic change process. We believe that our theory provides a compelling and logical justification for the influence of top managerial cognitions on strategic change and that it helps fill the ‘‘black box’’ between past performance and strategic change.

NOTES 1. Thus, in a longitudinal research design, exogenous changes would be measured for t n to t; cognitions at time t; and strategic change from t to t+i, in which n and i capture the duration over which change is conceptualized. 2. The exception to this observation is our dependent variable – magnitude of strategic change. Operational measures for both corporate and business-level strategic change can be readily found in extant empirical literature (Rajagopalan & Spreitzer, 1997). Hence, we do not offer a distinct measure for this construct. 3. Performance measures typically depend on the industry and thus need to be assessed in relation to accepted industry norms. Single-industry studies that compare multiple firms using the same performance criteria would offer the simplest and most accurate test of our propositions; however, multi-industry studies that carefully control for industry-level variations can also offer a meaningful test of our framework.

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SEQUENCE OF THINKING AND ACTING IN STRATEGY-MAKING J. Ignacio Canales and Joaquim Vila` ABSTRACT This paper examines the emergent and deliberate views in strategy making through, what we develop as, a sequence of thinking and acting. Combining the features of thinking and acting may enhance the organization’s ability to achieve change, an ability that remains untapped unless it is accompanied by a change in mental models. Both action thinking emergent issues as well as thinking–acting deliberate issues may constitute triggering events, when contrasted with a previously agreed frame of reference. We develop a framework to show how thinking co-evolves with action in a succession of strategic activities, and within an agreed upon frame of reference. Our aim is to shed light on the circumstances under which deliberate or emergent modes take place throughout the strategymaking process. We claim that changes in strategic activities are determined by attention-triggering events, driven by both thinking and acting.

Formulating strategy has been purposively separated from its implementation throughout all areas of the strategy realm. This conceptualization creates limitations as it restricts our ability to study the strategy process as a whole. If implementation is different from previous tasks of goal formulation,

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environmental analysis, and strategy formulation and evaluation, it is because it ‘‘is inherently behavioral in nature’’ (Schendel & Hofer, 1979, p. 17). The suggestion being that behavioral is perceived as opposed to rational and analytic. Nevertheless, this divide artificially separates the ‘thinking’ from the ‘doing’ element (Floyd & Wooldridge, 2000, p. 12). Moreover, it assumes that the summit of the organization undertakes analysis and decides, while the rest of the organization is left to cope with action. Important assumptions of the formulation–implementation divide affect managerial work. Under this divide, the nature of middle managers’ work is not to think but to do (Mintzberg, 1990), and the emphasis on control suggests that middle managers are mainly motivated by opportunism. If there were any thinking on behalf of middle managers, it would be to serve personal interests (Guth & MacMillan, 1986). Therefore, in this view the job of top management is to devise strategy and control its execution, thus acting as guardians of the organizational interests (Christiansen, Andrews, Bower, Hammermesh, & Porter, 1982). Maintaining this separation between formulation and implementation does not facilitate the study of the role of thinking and acting throughout the strategy process. To Schendel and Hofer (1979), formulation and implementation follow a sequence, which is not always deployed as presented. Namely, evaluation and implementation may precede formulation. Schendel and Hofer recognized that ‘‘no manager, except those at the very low operational levels, is without some responsibilities over the strategic management process’’ (1979, p. 14). Therefore, an approach to understand how this sequence progresses, and how its thinking and acting components interact is needed. The present paper offers a conceptual framework to understand this sequence.

EMERGENT AND DELIBERATE VIEWS OF STRATEGY The concepts of emergent strategy (Mintzberg, 1990) and deliberate strategy (Ansoff, 1991) are central to the development of strategy process research and theory. Yet, the bitterness of the controversy between these perspectives and the more extreme statements of their premises might suggest that there is no common ground. Even more recently, advocates of each view keep the disagreement energetic (Ghoshal & Bartlett, 2000; Weick, 2000). However far as apart these two positions may appear to be, it seems plausible to conceive of change as the outcome of both deliberate and emergent components (Pettigrew, 2000).

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While in the deliberate perspective, the sequence resembles formulation followed by the implementation; in the emergent view it is a less tidy sequence, which allows strategy to rise up. In terms of thinking and acting Mintzberg (1994) concluded: y while thinking must certainly precede action, it must follow action, closely behind, or else run the risk of impeding it! Formal planning poses the danger of distancing that connection and therefore discouraging action. That is why, at least under difficult conditions, planning may be better conceived as an interpreter of action than a driver of it, and why action itself may better be driven by thinking of a less formalized and involved nature. (Mintzberg, 1994, p. 293).

Ghoshal and Bartlett (2000) investigate why certain organizations are more successful than others in becoming flexible and responsive. In their findings, successful organizations achieve the desired change because they follow a simple, focused, and purposeful planned sequence, phase by phase. To these authors, there is a ‘‘right’’ sequence for each organization. Once the initial level has been diagnosed, the plan can be designed to advance phase by phase. In their view, any other attempt that does not acknowledge, the right sequence will not be successful. To Weick (2000), there is no right sequence. Change is not a matter of replacing one state with another, but a cumulative ongoing process. He argues that emergent and continuous change is the foundation over which a planned and episodic process can either succeed or fail. To illustrate this, Weick bases his argument on how inertia is conceived. In the initial view that reflects the big picture captured by upper management, inertia is viewed as an inability to change as fast as the environment, and intervention in the form of a plan appears necessary. He goes on to say that if the organization is viewed from a micro-level instead, routine and inertia will suggest ongoing adaptation and continuous adjustment instead of repetitive action. Furthermore, these slight changes and adjustments tend to be a responsive form of adaptation. Added together, these small variations can alter strategy. If there is an underlying program or plan, there is nothing in its content per se that explains success or failure. Weick asserts that it is the sense people make of the plan that matters. While the emergent and deliberate positions seem distant from one another, recent findings suggest that strategy-making practice has not only evolved from what Mintzberg criticized, but also managed to overcome its former deficiencies (Grant, 2003). Moreover, the term ‘planned emergence’ used by Grant denotes how the emergent and deliberate views actually merge in one semi-structured process, with clear corporate guidelines

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coupled with decentralized strategy-making. Theoretically, although the duality of emergent versus planned strategy has helped to develop the field, it now poses a constraint on further development (Pettigrew, 2000). The debate surrounding this duality prevents us from seeing the complementarities between emergent and deliberate. Hence, developing theory that builds bridges between these perspectives might promise a more realistic approach to strategy-making. The two perspectives have arisen from different sources, and this partly explains the distance between them. On the one hand, the planning or deliberate perspective has grown out of a prescriptive approach. Textbooks have provided principles for managers, which have been taught in management schools for more than three decades. Underlying these principles, a rational order of the world is portrayed, showing how meticulous analysis may foster orderly management. Taking a prescriptive approach, rationality is highlighted. On the other , the emergent perspective has been constructed from an empirical standpoint. Its supporters have conducted multi-case studies, which can be traced to Mintzberg (1972), where he first suggests an adaptive mode as opposed to planning. Such an empirical standpoint highlights that real outcomes differ from a-priori plans, even those that were ‘rationally’ developed. While the emergent view aims at answering ex-post, ‘how did this situation arise,’ planning would aim at answering the managers’ question of ‘what should we do now’ (Goold, 1992). Despite their differences, both views seem to agree that the strategy process is a sequence of activities. From the planning viewpoint, it is a sequence guided by the definition of the mission, followed by the internal and external scrutiny, leading to the formulation of a strategy and translated into the implementation of the plans. For the emergent tradition, the sequence of activities, shaped by a ‘‘stream of decisions,’’ is what constitutes strategy (Mintzberg & Waters, 1985). Strategy is not a plan or a design but rather a pattern in a chain of decisions (lately operationalized as actions), which constitute a sequence. In our view, one approach to build a bridge between these two perspectives is via the linkage between thinking and acting that each of them presumes. There are assumptions regarding the sequence of thinking and acting underlying both the synoptic and the emergent perspective. In the synoptic view, thinking precedes action. Plans are to shape actions, and changes in plans come through deliberation. In the emergent view, it is action that produces after-the-fact thinking. Deliberation, if any, would come after changes have taken place. In our view, the challenge to reconcile both perspectives is twofold: first, to allow for intermediate states where both thinking and acting


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play a role in strategic activities, though one may be the dominant mode; and second, to establish a conceptual threshold at which an alert is raised if the ongoing circumstances demand an amendment of the dominant mode. In this paper we make use of the word action as the essence of implementation. Namely, we use it as the movement itself. We conceptually deprive implementation of the purpose component it has, and therefore an action would be associated to the movement per se, with no reference to intentionality. An activity driven by a pure action denotes doing without any reasoning. Conversely, we use thinking as the essence of formulation, depriving it of its action component. An activity driven by a pure thinking denotes total abstraction without any sense of movement. As a result, thinking and acting appear as extremes in a continuum. Within the range established by these extremes, strategic activities will be shaped by a blend of both the effects. Each strategic activity will be followed by another one, thus forming a sequence. Such a sequence is the connection between actions and thoughts (Mintzberg, 1994). The nature of this sequence will determine which approach – emergent or deliberate – best fits the flow of strategic activities. Inasmuch as decisions lead to actions, the sequence will be that thinking produces action, in line with the deliberate approach. Conversely, if actions are not the result of the prior decisions, thinking will be seen as a sense-making process following from an action, and matching the emergent approach. If the sequence of activities includes both the action-guided and thoughtguided segments, then the sequence of strategic activities will be best described by a combination of the planning and emergent descriptions. Along this sequence, thinking-driven episodes can be interwoven with acting-driven episodes. But, under what circumstances does either thinking or acting dominate strategy formation? We attempt to offer an answer to this question by providing a framework that builds bridges between the two perspectives. First, however, we will analyze the two extremes in depth. Next, we will provide a framework that describes how thinking and acting interconnect. Finally, we will try to enrich this framework with other related lines of thought.

THE SEQUENCE OF THINKING AND ACTING IN TWO MODES The first mode draws from the general formulation–implementation sequence. From this synoptic viewpoint the direction of the sequence is that

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thinking leads to action. A plan is the result of intellectual deliberation that is expected to govern activities. Planning approaches range from the prescriptive and fixed type, such as we find in Hax and Majluf (1984), to the less restrictive, as in Friedmann (1967), where ‘‘ y planning is defined as the guidance of change within a social system’’ (1967, p. 225). Regardless of the scope, planning is based on analyzing and evaluating the current information, in order to define a plan which represents a commitment for future decisions.1 The directing role of planning is dependent upon the abstraction from day-to-day duties and mental exercise (Andrews, 1971). The executives in the general office, freed from all but the most essential entrepreneurial duties, can determine, in something of a rational manner, whether the new product uses enough of the firm’s present resources or will help in the development of new ones to warrant its production and sale. (Chandler, 1962, p. 394).

Once drawn up, plans are supposed to be applied to day-to-day operations. This phase identified by Chandler divides the thinking activity of decisionmaking (formulation) from the actual doing (implementation). According to this scheme, actions involve allocating and reallocating resources in accordance with the plan. Since the provision of resources depends on the plan, no initiatives take root without a plan. The division of strategy into formulation and implementation is a methodological approach that helps to contain uncertainty. Deliberately splitting thinking and acting is a powerful reality simplifier and an important tool for developing the strategic process. It simplifies reality by isolating the assessment stage from the activities. For this reason, this type of strategy process has been identified as an example of rational decision-making (Rajagopalan, Rasheed, & Datta, 1993). The practice of thinking ahead and its interface with action are mutually interdependent states. While thinking can be paralyzing if energy is excessively invested in analyzing and contemplating without actually driving strategic activities (Pfeffer & Sutton, 2000), it is also true that a pure action orientation, with no purpose, is by definition aimless. If events are allowed to unfold without any clear direction or sense, scarce resources may be wasted. Hence, we argue that the interaction between thinking ahead and subsequent action will drive the sequence of strategic activities. In the second mode action precedes thinking. The underlying argument is that meaning and sense are produced through action, and that strategy acts merely as a guiding symbol (Weick, 1987). To Weick, plans are one of many pretexts for generating meaning in organizations. Real strategy lies elsewhere


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and action itself is the core, since through action meaning is created. Using the concepts of confidence and improvisation, Weick (1987) explains various ways in which action can precede thinking. Confidence is given by a general sense of order having been imposed; but order is not the result of extensive prior analysis. Order stems from the managers’ effort to impose a sufficient presumption of order where an action is taking place. This presumption of order leads people to act more forcefully. The more confidence in the presumption, the more forceful the action will be. Additionally, improvisation is possible when the range of options is wider, whereas having a plan can limit the scope for experimentation or trial and error. In the Logical Incrementalism approach, thinking interacts with emergent events. Strategic change is rarely brought about by rational means, but rather by monitoring evolution and making adjustments as unforeseen events appear (Quinn, 1980). Quinn’s proposition certainly implies a sequence of thinking and action in a dynamic fashion. Moreover, he adopts the concept of logical incrementalism because there are both cognitive and process limits for long-range planning (Quinn, 1978). Either or both limitations may prevent strategic decisions from becoming actions. Even though his approach is oriented to the emergent, Quinn recognizes the value of planning, resulting in a flexible framework of reference. To Mintzberg, ‘‘Strategic Planning is not strategic thinking. One is analysis and the other is synthesis’’ (1994, p. 107). His critique of strategic planning is based on the inability of traditionally conceived strategic planning to provide better strategies. This inability derives from the emphasis on the quality of programming, which withdraws creativity from strategymaking. In Mintzberg’s view, strategies must be kept open to allow adaptation through emergent strategies.

STRATEGY AS A SHARED FRAMEWORK OF REFERENCE Strategy in the present paper is conceived as a shared framework of reference in the minds of managers. This framework operates as a guide for subsequent strategic activities. Specifically, it provides both a sense of direction and a normative frame2 for strategic activities to evolve. It is achieved through a process of deliberation, in which mutually contrasting ideas across a broad managerial base give birth to an agreed-upon approach. Should this process of deliberation end up as a framework of reference, it will constitute the shell

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by which managers will make decisions in real time, in consonance with their shared agreements (Masifern & Vila`, 1998). A new strategy is not built on previous strategies, but the current information context guides the strategymaking process. The shared framework of reference is built on formal deliberations, decisions, agreements, and dialogues, with a focus on goals and objectives. Strategies differ from plans and predetermined commitments. To explain how such a shared and agreed upon mindset can be formed, we draw on Masifern and Vila` (1998). A possible way to develop the shared framework of reference is by first envisioning an ideal strategy, and then gradually settling down to a possible strategy. Unlike Kiesler and Sproull (1982), to whom strategy stems from a difference between an ideal and a real state, this paper privileges the contrast between a most preferred state (‘‘what we would like to do’’) and a feasible state (‘‘what we can do’’). Both are forward looking. Reaching the situation, in which such a gap is established, provides a future direction that attempts to bridge this gap with strategic activities. To Barr, Stimpert, and Huff (1992), it constitutes a simple mental model through which managers can give sense to the world. The shared mindset becomes a driving force for strategic activities to evolve as combinations of thoughts and actions. As suggested above, strategy as a shared framework also includes a normative frame for strategic activities to evolve. Our stance is that a threshold can be purposively devised to border the sequence of strategic activities. A thinking-intense impulse or an action-intense impetus can spark a change in mental models. Activities within the threshold would not catch managerial attention and develop as normal practice. Whenever the activities step out of the bounds of the threshold, managers may need to refocus the sequence. The sequence of activities can be affected either on the thinking or on the acting side. For instance, Weick (1987) claims that action is the triggering element that is endowed with meaning through thought. Analogously, we argue that thinking can operate as a triggering element and consequently refocus the sequence of strategic activities. Both triggers may cause a change in mental models and consequently the sequence of strategic activities. In order to illustrate how triggering events can happen we will briefly describe the recent case of Kodak.3 After one hundred years of profitable business based on chemical processing photography, the company found that its core business had drastically evaporated in the period from 2001 to 2003. The traditional businesses around film and photo paper were being wiped away by digital imaging. In 2001, Kodak sent their managers off on a retreat, and asked them to ‘think’ and plan ahead. The result was a renewed strategy based on


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assumptions of technology pace similar to that of the 1990s. First, this strategy would enhance the development of products related to digital imaging, mainly to cameras, but only gradually moving away from their core businesses. Second, this strategy would harvest their ‘old’ business, which was forecasted to last a few years yet. However, ‘action’ proved them wrong. By the end of 2003 the digital imaging business had grown three times faster than had been expected in 2001. This forced them to speed up their introduction of digital imaging products, migrating to different businesses. Regardless of how the sequence of strategic activities would move in the future, a thinking-driven triggering event occurred first, and subsequently an action-driven triggering event refocused their sequence. In between these events, the sequence went through a blend of thinking and action. The evolution of digital imaging technology beyond the threshold set by Kodak management sparked attention to consider either staying within the current path of strategic activities or to refocus. The suggested threshold for the normative framework is twofold. On one side, the sequence is bounded by a thinking threshold, and on the other, by an action threshold. The threshold will flank the sequence jointly with the sense of direction provided by the strategy. Thus, both components developed through intentional deliberation, within a broad managerial base, can constitute the context within which strategic activities can evolve. The idea of a shared framework of reference provides a strong base for strategic activities to move as both deliberate and emergent. ‘‘A central idea (call it a ‘mission’ or a ‘company goal’ or ‘basic principles’), embedded in many heads where it is evoked on the occasion of decisions, is more crucial than an elaborate written list of things that are supposed to happen’’(Simon, 1993, p. 141). Similarly, a set of simple rules (Eisenhardt & Sull, 2001) could be evoked at the time of decision as a guiding mechanism in turbulent times. The general guidelines provide a symbolic reference. Rather than picking a position or leveraging a competence, these authors recommend that managers select a few key processes. They believe that the way to respond in a complex world is not with elaborated strategies. On the contrary, their proposal is to ‘‘craft a handful of simple rules’’ (Eisenhardt & Sull, 2001, p. 108). If the turbulence of the environment seriously threatens the source of a company’s competitive advantage, the recommendation would be to seize opportunities (Brown & Eisenhardt, 1998) and encourage entrepreneurial behavior, within a very basic set of guidelines on the edge of chaos. The shared framework of reference starts from a thinking activity. It is in this primary thinking activity where the ideal future is articulated. Building

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a shared frame of reference differs from the concept of dominant logic (Bettis & Prahalad, 1995; Prahalad & Bettis, 1986). While the dominant logic is built on accumulated, shared experiences and learning, the strategic framework of reference in the minds of managers’ builds on the skills of reflection and updates through deliberation. Researchers have viewed the idea of a basic schema as a way to deal with complex, confusing, and ambiguous settings (Allison, 1971; March & Simon, 1958). Frames and schemas have been put forward as mechanisms for simplification and sense-making to allow individuals to reduce the complexity of stimuli-rich environments in order to operate within them. Yet, one crucial issue in developing schemas is that if they are built on the experience of past environments, they will preclude an appropriate reaction for new environments (Kiesler & Sproull, 1982). The reaction to new environments will only be possible if schemas are built on future possible extreme environments. Masifern and Vila` (1998) distinguish the shared framework from culture, identity, and other socially derived cohesion concepts by arguing that the former is driven from insights and deliberation (i.e., forward looking), while the latter from values, beliefs, and habits (from the past). In Gavetti and Levinthal’s (2000) concept of forward-looking, the shared framework stems from the cognitively built most-preferred future, which is not foresight but a cognitive-based choice. The cognitive mechanism used to achieve the framework of reference is individual reflection and group deliberation, as it assesses a broad set of options. The purpose of this mechanism is that the framework settles in the minds of managers. This framework will act as an umbrella under which managers can make decisions on a day-to-day basis. Updating or refocusing the shared framework of reference in the light of changing circumstances is the key to staying attuned. Should new events, either driven by actions or thoughts beyond the threshold, spark management attention; a need to renew the framework may be necessary. A revised mindset can be cast through managerial deliberation. But, while in place, the sense of stability it provides is essential. In the absence of a call to change strategy, both actions and thoughts will drive strategic activities within the shared framework of reference. In the example of Kodak, we can infer that a certain framework was established regarding the pace of growth of the digital imaging business. It materialized through the decision to shift to new businesses, but remain in the traditional business for a few more years. When the velocity of change was higher than expected, the sequence was redirected as a consequence of its mismatch with the shared framework.


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Nevertheless, this framework does not need to exist for the survival of the organization. The frame of reference is a desirable attribute that may not be present in organizations (Barr & Huff, 1997). If present, the common frame will be the marrow, which accounts for coordinated action. But the nonexistence of a frame of reference will leave the sequence of strategic initiatives unrestrained. This state could be fertile soil for exploration (March, 1991), yet at the same time it could allow a waste of resources (Goold, 1992). This exploration could be either driven by thinking, as in the case of the preformation stage of a startup that is being evaluated, or by an action, as new findings are incorporated into a pilot project or an experiment. In summary, from the foregoing examination we have identified three core elements. First, we have presented the flow of strategic activities as a blend of thinking and acting. Second, we have identified strategy as a shared framework of reference in the minds of managers, which circumscribes strategic activities. This framework is constituted by a sense of direction and a normative threshold. Third, we have categorized attention triggers in the action and thought boundaries that stand as the normative threshold. In this manner, unfolding events (either internal or external) may foster further refocusing of the sequence of strategic activities, or even call for a change in the framework of reference. Next, we will address these elements in finegrain, focusing mainly on the sequence of strategic activities.

THINKING AND ACTING AS A SEQUENCE OF CO-EVOLVING ENTITIES We have presented how thinking precedes action according to the deliberate approach, whereas from an emergent perspective action precedes thinking. Consequently, we have labeled the driving element of an emergent event as ‘action’ and the driving element of a deliberate event as ‘thinking.’ While Pfeffer and Sutton (2000), describe the reasons why thinking is not translated into action, our intention is different. We look at how thinking and acting can become windows of awareness or consciousness, respectively. Neither thinking nor acting is an end in itself. Each of them can cast light on the sequence of activities that make up the strategy-making process. They are instruments that can bring about changes in the flow of strategic activities. If the strategy-making process is a sequence of activities, these activities could be characterized by two extremes: either primarily dominated by thinking, or mainly driven by acting. Consequently, we can imagine a continuum


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Thinking

Fig. 1.

Acting

Activities Formed by a Proportion of Thinking and Acting at any Point.

between thinking and acting. Strategic activities may lie at any point along this continuum. Both thought and action produce any point, and the series of points forms the sequence of thinking and acting. A diagram of both thinking and acting as components of the strategic activities is presented in Fig. 1. The sequence of strategic activities, as with any complex system, is characterized by a huge amount of interactions with unknown predictable outcome (Cilliers, 1998). For this reason the sequence cannot be harnessed, and an ex-ante framework is needed to track its evolution. Whenever a higher proportion of action constitutes strategic activities, it can mark crucial points in the development of strategic activities. Similarly, a crucial point can exist when the sequence of strategic activities comprises a higher proportion of thinking. Each crucial point provides insight and direction, and can potentially become a guiding element when they occur. In sum, each one provides reasons for adjustments in the sequence of strategic activities. Based on the concepts of effectuation and causation (Sarasvathy, 2001), we present action-triggering events as effectuation, and thinking-triggering events as causation. ‘‘Causation processes take a particular effect as given by the focus on selecting between means to create an effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means’’ (2001, p. 254). Effectuation processes are present when possible outcomes are not known, as for example in cooking without a recipe where a set of ingredients can result in


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several meals. Causation is the process normally developed to reach an outcome by providing the means to reach it, or like cooking with a recipe. When the sequence of strategic activities tilts from thinking toward acting it resembles the logic of causation. Ends are perceived as known, and subsequent action follows providing the means. However, when the sequence drifts from action it resonates with effectuation, where ends are not perceived as known and action is taken with existing means. Under this logic, retrospective rationalization will eventually and gradually add the thinking component to the sequence. At any point along the sequence of strategic activities, action moves up against thinking, and vice versa, rarely with a perfect balance between the two, and normally one dominating over the other. The sequence itself will follow a pattern which will look more like a random walk rather than a stochastic system (Mantegna & Stanley, 1999). A random walk within the thresholds will neither demand attention focusing nor a need to assess the current course. For instance, if some minor unforeseen events occur while a formal strategic plan is being implemented, then two situations may prevail. First, the sequence of activities may lean toward a predominating acting mode, if an immediate reaction prevails over a reassessment of strategy (leaning to the left in Fig. 1). Alternatively, we could imagine management interpreting the minor external event as a weak signal of a trend with potential major impact. This would suggest a need to call on organizational members to assess the issues and eventually rearrange plans, thus moving the sequence predominantly to thinking (leaning to the right in Fig. 1). In general, a new opportunity could be unattended or, if attended, give rise to three alternative moves: first, a local adaptation, a slight deviation from plan to take advantage of the opportunity; second, a deviation from strategy out of boundaries and subsequently getting back into racks; and third, a call to reconsider the current course of strategic activities. Along this line, unexpected situations may demand action moving away from a plan. This does not mean that strategic planning acts as a mental straightjacket. Mulling over strategic issues, through individual reflection and collective deliberation, will have had the result of developing ‘prepared minds’ in managers. With that capability, they can assess how existing strategy fits new circumstances, update existing plans, or in the extreme, renew strategy. The complementarity of thought and action ensures that the contribution, provided by actions or by the sprouting of new thinking, will be embodied in the flow of strategic activities. In fact, ‘‘ y action and cognition are intertwined, and they evolve in interactive fashion in the strategy-making

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process of new ventures’’ (Burgelman, 1988, p. 78). For the whole strategymaking process, what we have named action- and thinking-driven events, build up into the firm’s concept of strategy. To explain change in these terms, a scheme is needed to illustrate under what circumstances each combination occurs at an organizational level. For this purpose we will adopt the approach of the ‘‘collective mind’’ (Spender, 1996), which allows the unit of analysis to be the organizational level. Within this approach, strategic activities are carried out on a regular basis by social automatic behavior (Spender, 1996). To Spender, the flow of normal activities develops in what he calls an objectified process, where knowledge is embedded in the sequence of activities and requires the support of a social group delimited in space and mind. Spender proposes the concept of the ‘‘activity system’’ to link the individual and the collective mind. It is through activities that the constitution and reconstitution of society evolves in this author’s view. Moreover, this suggests a distinction between social and abstract knowledge. While the latter can be stored in manuals and plans, the former is embedded in practice and contextualized in a particular field of activity. ‘‘In activity systems knowledge cannot be separated from the activity, its quality is only evident in the activity.’’ (Spender, 1998, p. 22). The strategy-making process can be described as an activity system. While in a stable state, the sequence of strategic activities follows a pattern, its components being a blend of thought and action. Occasionally, sparks of awareness produced by intense actions or sparks of consciousness produced by deep thinking will reroute the sequence. Contrasting the actual sequence of strategic activities with the expected pattern (as derived from the previously agreed, shared frame of reference) will cause these sparks. Strategy, as a frame of reference, materializes in a sense of direction coupled with a normative threshold. This translates, in practice, into strategic guidelines and plans. This conceptualization is shown schematically in Fig. 2. The winding arrow stands for the flow of strategic activities, characterized by a co-evolution of thought and action. Strategic activities comprise both thinking and action orientation in different proportions. The sequence will be composed of a higher proportion of action if the activity moves toward the left side, or of a higher proportion of thinking if it leans to the right extreme. Activities are intended to be carried out within a shared and agreed framework of reference, represented by the two-fold threshold as normative boundaries, and by the framing arrow as a forward-looking element. The two-fold threshold is formed by an action boundary we have called the awareness threshold, and a thinking boundary we have called the consciousness threshold.

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Acting

Thinking

Threshold of Awareness

Fig. 2.

Threshold of Consciousness

Thinking Co-Evolving with Acting within a Shared Frame of Reference.

If the sequence of strategic activities lies within an automatic flow, then the strategy-making process includes thinking and acting in an objectified or socially autonomous process (Spender, 1998). Yet, the key issue is the mechanism that allows the achievement of the conditions of awareness or consciousness. Socially autonomous behavior characterizes the sequence of strategic activities, and this sequence remains consistent with the shared framework in the minds of the actors, unless new insights provoke either awareness from an action driver or consciousness from a thinking driver. The new insights can be of two different kinds. On the one hand, strategic activities can be affected by a planning effort. Thorough planning and forward-looking analysis can be leading elements of deliberation to guide strategy implementation. This is the type of consciousness produced by thinking-driven events. On the other hand, emergent action generates episodes, which, once assumed and legitimized, can be leading components of a new redirection. The resulting rationalization is an expost, sense-giving device. This is the type of awareness produced by action. In order to illustrate and contextualize how acting and thinking extremes would be represented, we will exemplify action-intensive as well as thinkingintensive strategic activities. For instance, an overwhelming unforeseen natural event would probably be devastating for the insurance industry. If this were the case, the ex-ante threshold will not be valid anymore, leaving the companies in the industry merely reacting for a period of time. Until a new set of thresholds is established, the sequence of strategic activities would lean to the left of the diagram as shown in Fig. 3. On the other extreme, a pure thinking sequence of strategic activities could be exemplified as the


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Thinking

Fig. 3.

Acting

Diagram of a Pure Action Sequence as an Example of a Response to an Overwhelming External Event.

Thinking Acting

Fig. 4.

Diagram of a Pure Thinking Sequence as the Example of the Efforts Previous to a Startup.

development of new business plan of a startup. The set of thresholds is still under development and the business is either on a pilot mode or not yet started. Mainly thinking, leaning toward the right of the diagram as shown in Fig. 4 would constitute the sequence of strategic activities. It is necessary to differentiate what we have called a thinking-triggering event from any planning exercise. Scheduled strategic planning, which is not triggered by a perceived need to change, but rather just the habit of getting together every year is not a thinking-triggering event. It would be a part of the normal sequence of activities unless it provides fresh insights on how to guide the organization. Thoughts that spark consciousness are to be pursued intentionally, so that possible courses of strategic activities can be identified. Opportunities that give rise to consciousness through thinking will lead to an outpouring of new ideas, making it possible for the organization to increase skills of adaptation (Simon, 1993).


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Barr et al. (1992) found that managers rely on simple mental models to give sense to the world, and more importantly, that renewal requires a change in these mental models. What makes thinking or acting crucial is the extent to which new information fits with existing mental schemes. Each, in a different way, poses new challenges, but both open the way to an enhancement of mental models. In this line of thought, the concept of ‘‘switching cognitive gears’’ calls attention to the fact that cognitive functioning involves a sequence that flows from automatic processing to conscious engagement and back again (Lois & Sutton, 1991). These authors propose that ‘active thinking’ be triggered by unusual situations, by discrepancy between expectations and reality, or by deliberate initiative. These attention-sparking events occur as opposed to ‘habits of mind,’ which are in the automatic mode. The view of strategy presented in this paper provides the ground for active thinking and the frame for habits of mind. The shared framework is meant as a reference to compare it with unusual or discrepant events. Then, if comparison deems it necessary, mental models are updated. In line with Masifern and Vila` (1998), mental models can be updated inasmuch as they redirect strategic activities toward the desired future. However, ‘‘the most crucial part of developing learning as one of the successful outputs of strategy-making is that of eliciting managers’ ‘taken-for-granted’ mental models in their world’’ (van der Heijden & Eden, 1998, p. 66). For learning to occur, a certain awakening device must be present; otherwise the mental model will remain unchanged (Senge, 1992). The mental model, then, ought to be flexible enough to give room for change, but at the same time rooted firmly enough to confer direction. These two characteristics, though seemingly opposed, are compatible within the conceptual framework presented here. The two mechanisms we propose for updating mental models are thought-driven or action-driven insofar as they generate consciousness and awareness. The thresholds provide the ex-ante boundaries that permit updating mental models, while the forward-looking element provides a sense of direction. Deliberate and frequent triggering exercises of this kind will prevent the mental models from becoming a straightjacket and explicitly make it possible to deal with uncertainty. The exercise of deliberately eliciting new ideas and comparing them with the strategy in use makes it possible to inspect it, in order to either redirect it or carry on in the same direction. Similarly, action can also foster change, using it deliberately as an awareness-creating mechanism to test new opportunities. The use of these two mechanisms to test the validity of the existing strategy leaves organizations better prepared to deal with the unexpected (Kiesler & Sproull, 1982).

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DISCUSSION The exercise of provoking awareness or consciousness is a managerial activity in our view. We argue that an intentional effort to trigger awareness will be the differentiating element for better preparation and skill development, regardless of the environment. This deduction is supported by empirical findings (Brews & Hunt, 1999). To these authors purposeful planning is positively related to performance in both stable and unstable environments, and to the intentional flexibility to adjust a constituent part of the strategic activity. Deliberate strategy-making is not seen as restrictive, but rather as an exercise to develop a shared approach. Neither acting nor thinking will occur just on a random basis. On the contrary, their character will be seeking opportunity if managers pursue them within a scheme. The force that propels strategy, as seen from an ex-ante viewpoint, cannot be merely a sequence that will evolve through thinking and acting events. The intention to guide the progression of strategic activities is a third party in this dyadic sequence. Butler, in Butler, Mintzberg, Pettigrew, and Waters (1990), stresses that ‘‘ y by definition strategy must surely involve a degree of intention to act, a kind of plan which is to be put into effect’’ (1990, p. 15). However, intention is revealed in two forms in the framework presented in this paper. First, it takes the form of stability, represented by the shared framework of reference in the minds of managers, which is aimed at the central idea (mission, company goal, basic principles, or objective function). Second, it turns to the form of flexibility, represented by the corrections built into the shared framework. While the first can be considered as cognitive search, the latter can be considered as experiential search (Gavetti & Levinthal, 2000). These authors have shown that cognitive and experiential search are complementary forms of intelligence, and that each of them contributes to learning and adaptation. Without stability, the sequence of strategic activities can flow in any pattern. By itself, the existence of a sequence does not indicate the existence of a strategy (Inkpen & Choudhury, 1995). Absence of strategy is perfectly possible if the sequence of strategic activities reveals no consistent interconnectedness. Yet, the presence of the shared framework of reference shows the presence of strategy. On the other hand, stability will not preclude the flexibility to adapt to the unknown. There can also be an absence of strategy if stability prevents adaptation. Adaptation, according to Burgelman (1988) is originated in autonomous, fortuitously emerging initiatives. Burgelman focuses on venture-level strategy, and states that at this level the stage is set for its integration with corporate-level strategy. This serendipitous view leaves


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the role of top-level managers as incorporating successful ventures into corporate strategy. In our model we recognize the value of autonomous initiatives, as action is brought into thinking, yet we also add the opposite direction since we regard the flow of strategic initiatives as a combination of thought and action. In this line, serendipitous initiatives are blended with thinking and thus are partially purposive. All in all, we recognize that managers at all levels of the hierarchy may play a role in strategic renewal, and that their behavior may be both purposeful and inadvertent (Mintzberg, 1978). In summary, we have identified thinking and acting as two prominent ways to create consciousness and awareness. Both are integral parts of the strategymaking process at an organizational level. This process has been identified as the sequences of activities, partly thinking and partly acting, which are carried out through socially autonomous behavior. This behavior is framed by a shared understanding in the minds of managers. Either thinking or acting may interrupt the autonomous behavior. Then, if necessary, the sequence is refocused. Furthermore, even the shared framework can be revised, subject to formal and collective deliberation, to build a new agreement. The artificial separation of emergent and deliberate processes of strategymaking does not contribute to the analysis and development of theory. In contrast, a more realistic perspective is gained by integrating views (Goold, 1992). The main bridging element presented here is that thinking and acting can be the means to discover reality. Either can trigger attention. We have identified the driver through which strategy-making may provoke attention triggering – action or thought – as the contrast with the previously agreed threshold. Embodied in strategy this normative threshold allows triggering events to happen as the strategic activities are contrasted with it. Strategy as a shared framework of reference provides stability and is embedded in the minds of managers, but it also fosters creativity and imagination through purposeful thinking or acting. Strategy is both continuity and adaptability. Huff, Huff, and Thomas (1992) describe renewal as the outcome of the interaction between cumulative stress and inertia. They define both terms as summarizing concepts. Inertia is defined as the commitment to the current strategy and anything that supports the current way of doing things. Stress, on the other hand, is defined as the dissatisfaction with the current strategy and imperfections in the fit between the organization and its environment. These two opposing forces will account for the occurrence of self-renewal. When a strategy is first put into place, it entails a certain level of commitment. Then, as routines and procedures are developed, the process of institutionalization causes commitment to grow. Huff et al. (1992) use the term ‘cumulative

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inertia’ to refer to this sequence of escalating commitment. Stress, too, may be cumulative. Since no strategy can perfectly foresee all eventualities, stress is generated as unexpected events unfold. Inconsistencies with experience become apparent, and this process is accelerated by the dynamism of the environment. The tendency of a system to maintain stability will be guided by inertia. Thus stress, even though accumulated over time, will rather be associated with specific events that directly capture attention. The stability mode of the system suits our framework inasmuch as it parallels the socially autonomous sequence of strategic activities. Nevertheless, stress, as it is reflected in specific events, describes the backbone of how actions or thoughts may spark awareness or consciousness. These two conditions make the system capable of renewing itself and to feedback strategic activities.

CONCLUDING REMARKS The focus of this paper has been the sequence of thinking and acting in the strategy-making process. This sequence is not unidirectional; on the contrary, thinking coevolves with action in a succession of strategic activities. For this reason, the framework proposed provides a more realistic approach to strategy-making. It describes change as the interaction of emergent and deliberate components. With respect to the development of the strategy field, Mintzberg and Lampel (1999) point out that instead of looking at the whole animal strategy has been obsessed, first with planning, then with position, and currently with learning. They suggest an effort to go beyond the fragmented analysis from one point of view. Though the task of accurately combining different approaches is difficult and may result in incoherence (Van de Ven, 1992), an attempt toward this end has been made in the present paper. We have presented a framework that describes the strategy-making process as a sequence of actions and thoughts. In doing so, we have chosen the organizational level as unit of analysis. Due to this, the way in which organizational members drive the sequence of thinking and acting has not been explored. Future theory and research could aim at addressing how managers translate both thinking and acting into the sequence of strategic activities across the organization. If strategic management is to guide the sequence of strategic activities, how is this done? The role of managers in this approach is to guide the sequence of strategic activities, to generate the two types of triggering elements, and to develop the initial forward-looking


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choice. In order to play this role, managerial interaction will be the essential situation for deliberation and agreement to occur (Hart, 1992) and the capacity to adapt will be rooted in broad managerial participation (Floyd & Wooldridge, 1992). In our view, a participative strategy-making process will tend to enhance the effectiveness of the evolution of strategic activities. The occasional awareness or consciousness conditions will not be left to occur at random if an ample base of managers intentionally pursues them. Under this ample involvement, change in mental models will be more likely. If new ideas or insights are not incorporated into managers’ mental models, then no change will take place.

NOTES 1. To Mintzberg (1990) foresight is the cornerstone for the validity of planning. 2. Normative frame is used in the sense that it is developed exante to the development of strategic activities rather than in its prescriptive connotation. 3. Taken from Reuters October 22, 2003; www.Kodak.com press releases, The Buffalo News, September 29, 2003 and Financial Times, June 5, 2003.

ACKNOWLEDGEMENT We thank Fabrizio Ferraro, Rob Gray, Quintus Jett, John Joseph, Bill McKelvey, Joe Porac, Kristin Price, Lori Rockett, Carlos Sańchez-Runde, Gabriel Szulanski, Andrew Van de Ven and Maurizio Zollo for helpful comments and enriching discussion. We are also grateful for detailed comments and suggestions from two anonymous reviewers. Finally, we appreciate the financial support from the Center ‘Anselmo Rubiralta’ for Globalization and Strategy at IESE. All mistakes remain our own.

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INTERORGANIZATIONAL MONITORING: PROCESS, CHOICES, AND OUTCOMES Giuseppe Labianca and James F. Fairbank ABSTRACT Researchers have traditionally investigated aspects of the interorganizational monitoring process in piecemeal fashion. This conceptual piece argues that juxtaposing the categorization process with interorganizational emulation, imitation, and competition, brings focus to organizations’ attempts to acquire information from other organizations, signal internal and external constituencies, and ultimately change. We argue that the depth or intensity with which the monitoring process is pursued as well as the breadth or degree of overlap in the sets of organizations chosen to monitor, determines the volume and diversity of information acquired, the strength of the signal sent to constituent groups, and the amount and type of change likely to emerge from the process. All of these factors will ultimately affect the firm’s future performance.

As organizations compete in ever more complex and uncertain environments, managers increasingly confront the need to change their organizations in response to competitive pressures and to exploit emergent opportunities.


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This stretches the ability of organizations to gather relevant information, learn quickly, and initiate changes. One important source of learning is from other organizations in one’s environment, so keeping track of other organizations and what they are doing has become increasingly important. We call this process of tracking other organizations interorganizational monitoring. Specifically, interorganizational monitoring involves the systematic comparison of a focal organization to other organizations with the goal of collecting information in order to affect organizational change. It is a continual process through which organizational members scan their environment, identify other relevant organizations, collect information about and from those organizations, compare their organizations to others, interpret what they learn, and ultimately use that information to make changes. Interorganizational monitoring presents a great number of choices as to which organizations to attend to and learn from, and also which to ignore. Previous research has examined some aspects of the choices that managers make in interorganizational monitoring; for example, which organizations they categorize themselves as similar to (e.g., Baum & Lant, 2003; Reger & Huff, 1993), which organizations are recognized as direct competitors (e.g., Porac & Thomas, 1990), which organizations they aspire to be like (e.g., Gioia & Thomas, 1996), and which organizations’ processes they will imitate (e.g., Haunschild & Miner, 1997). The cognitive perspective employed in studying interorganizational monitoring recognizes that all of the above choices involve categorization, filtering, and selective attention to a smaller subset of organizations that are deemed relevant in some way to the focal organization. In this conceptual piece, we explore the potential difference between organizations whose top managers view the organizations that they choose to monitor for each of these purposes (categorization, competition, emulation, and imitation) as an undifferentiated, overlapping set, versus organizations whose managers select different organizations for these different purposes. That is, some organizations’ managers make choices that reflect a high degree of overlap between organizations against whom they compete, emulate, and imitate. Other organizations’ managers make more disparate choices in the organizations against whom they compete, emulate, and imitate – they might imitate the processes of one organization, while competing against a second, and striving to be like a third. While some might consider these processes to be virtually identical, there are subtle but meaningful differences between the constructs, and we show that these differences will have consequences for the interorganizational

Interorganizational Monitoring: Process, Choices, and Outcomes

Table 1. Construct

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Constructs Subsumed under the Interorganizational Monitoring Meta-Construct. Definition

Similarities and Differences with other Monitoring Constructs

Categorization

The process through which sets of objects are associated and viewed as similar on certain dimensions (e.g., Dutton & Jackson, 1987)

Competition

The rivalry between organizations striving for the same set of scarce resources (e.g., Porter, 1980)

Emulation

The striving to equal or surpass a comparison organization or organizations on a set of strategic qualities or features (e.g., Labianca et al., 2001) The process of copying certain practices or features of another organization (e.g., DiMaggio & Powell, 1983)

Two organizations can be categorized as similar or become associated in insiders’ and outsiders’ minds, even if they are not in competition (are not striving for the same set of scarce resources) Threatening to the organization, specific to identifiable organizations, can be strategic or tactical. An organization might or might not emulate or imitate direct competitors Emulation is strategic, broad, and aspirational. Organizations might emulate organizations in a different category entirely

Imitation

Imitation is tactical or operational, and specific. While imitation is action-oriented (active copying), emulation is aspiration-oriented. An organization might seek to imitate organizations in categories that are very dissimilar

Interorganizational monitoring is the systematic comparison of a focal organization to other organizations with the goal of collecting information in order to affect organizational change. It is a continual process through which organizational members scan their environment, identify other relevant organizations, collect information about and from those organizations, compare their organizations to others, interpret what they learn, and ultimately use that information to affect changes.

monitoring process, and for subsequent organizational change. Table 1 provides definitions as well as some similarities and differences between these four constructs. Briefly, categorization is the process through which sets of objects are associated and viewed as similar on certain dimensions (e.g., Dutton & Jackson, 1987). Competition is the rivalry between organizations striving for the same set of scarce resources (e.g., Porter, 1980). Emulation is the striving to equal or surpass a comparison organization or

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organizations on a set of strategic qualities or features (Labianca, Fairbank, Thomas, Gioia, & Umphress, 2001). Imitation is the process of copying certain practices or features of another organization (DiMaggio & Powell, 1983). While emulation is striving in a general sense, imitation is the act of changing to be like another organization in terms of a specific feature – imitation is more action-oriented than emulation, and it is more specific (Labianca et al., 2001). Because previous research efforts have not examined categorization, competition, emulation, and imitation processes in concert, they have not been able to reveal how managers’ perceptions of the coupling between these processes can affect monitoring choices and subsequent changes to their organizations. Previous research has also focused on categories of organizations being monitored, rather than the specific choices of organizations to monitor. Thus, our main contribution is to explain the differences between these aspects of interorganizational monitoring and to argue that the degree of overlap in specific organizations to monitor has implications for the diversity of the information acquired through the monitoring process, thereby shaping the changes that managers ultimately make.

THE INTERORGANIZATIONAL MONITORING PROCESS We begin by describing the interorganizational monitoring process illustrated in Fig. 1, which involves discussing the similarities and differences between the related sub-constructs of categorization, competition, emulation, and imitation. Categorization Categorization is the process through which sets of objects are associated and viewed as similar on certain dimensions (Dutton & Jackson, 1987). As organizations seek to define their essential identity (‘‘who are we?’’) as well as the basis of their competitive advantage (‘‘how are we unique?’’), they scan their environment and identify other organizations as somehow similar or dissimilar. As the members of an organization compare their organization against others, they classify it as similar to some referent organizations and recognizably different from others on a variety of factors (Albert & Whetten, 1985). Managers categorize other organizations in their

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Categorization

Aspiration Discrepancy

Constraints • Resource • Political • Cognitive

Low overlap

Emulated orgs High Intensity

Imitated orgs

Competitors

Intensity With Which Monitoring is Pursued (Depth)

High overlap

Choices of Organizations to Monitor (Breadth)

Emulated orgs

1 3

Imitated orgs

Competitors

4 2

Low Intensity

Monitoring Profiles

Information Acquisition • Amount • Diversity

Internal Signaling Strength

External Signaling Strength

Change • Extent • Type

Performance Outcome

Fig. 1.

A Model of Interorganizational Monitoring.

environment relative to their own organization based on similarities and differences in both structural and organizational identity factors (Dutton & Jackson, 1987; Labianca et al., 2001; Porac & Thomas, 1990; Reger & Huff, 1993; Reger & Palmer, 1996). The structural factors represent major

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resource-based constraints, such as organizational size and geographic location (Baum & Mezias, 1992; Haveman, 1993; Ingram & Roberts, 2000), while the identity-related factors involve differences around the core values of the organization’s members (Labianca et al., 2001). At the same time, other organizations are scanning them and attempting to make the same judgments. This provides organizations with a looking-glass self (Cooley, 1902) – not only can the members of an organization categorize their organization in a certain way, but they can also view how the members of other organizations view and categorize them. These outsider judgments also become part of the input into an ongoing categorization process. That is, the members of the organization come to view their organization as outsiders view it (Dutton & Dukerich, 1991). Over time, and across the many organizations competing for the same resource set, these referent classification schemes become a means to describe organizational variation within an industry or a field (Porac, Thomas, & Baden-Fuller, 1989; Porac, Thomas, Wilson, Paton, & Kanfer, 1995). Essentially, members of many organizations are scanning each other and deciding that they are similar to some, different from others, and this categorization process forms the basis of cognitively constructing the strategic groups in an industry (Reger & Huff, 1993; Reger & Palmer, 1996; Porac & Thomas, 1990).

Aspiration Discrepancy The process of categorization is dynamic. While members of an organization and its environment might view the organization as being associated with a certain category, there might be a desire of organizational leaders to have their organization viewed by its members and outsiders as part of another category. When that happens, the organization’s top managers sense an aspiration discrepancy, or a difference between their aspirations for the organization and how outsiders view them. For example, Gioia and Thomas (1996) conducted a qualitative analysis of a large public university whose top managers intentionally initiated an aspiration discrepancy in order to motivate strategic change. At the time, the university was a wellregarded, major public research university with a solid reputation, but it was not considered to be among the elite public universities nationwide. The top managers of the university they studied chose becoming ‘‘a top 10 public university’’ as their guiding aspiration. The perceived discrepancy between that aspiration and the organization’s current categorization


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created pressure for action to change. Subsequent to the university’s top managers communicating that new vision throughout the university, its members began to ask what should be done to achieve it. This led to a decision to increase interorganizational monitoring of universities considered as part of that desired category (‘‘top 10 public universities’’). In contrast to the Gioia and Thomas study where top management intentionally caused the aspiration discrepancy, Elsbach and Kramer’s (1996) qualitative study of elite business schools focused on external threats to an organization’s self-categorization. They found that top administrators of elite business schools were forced to react to threats to their schools’ reputational status arising from business school ranking publications such as BusinessWeek. The aspiration discrepancy created the need for them to alter the schools they categorized themselves as being similar to so that they could reaffirm their organizational identity and blunt negative news about their perceived reputation. For example, one business school that had previously claimed to be among the top ten but that was now ranked well below the top ten began to categorize itself as a top small business school, thus comparing itself to a narrower range of other business schools among which it could maintain its relative standing.

Desired Outcomes Gioia and Thomas (1996) found that the choices of what universities to monitor led top managers to copy key features that were idiosyncratic to those universities, which in turn resulted in major, multi-million dollar changes in the university, including the launching of a new professional school for information technology. Those changes were directly attributable to the amount and type of information the university acquired through the interorganizational monitoring process. That process occurred within a ‘‘fishbowl’’ in that the choice of whom to monitor sent a strong signal to both internal and external stakeholders about the extent and type of change they were seeking to make to the organization. Thus, we would expect top managers to attempt to anticipate the consequences of their monitoring choices on the changes that they envision (to the extent to which that is possible). We would also expect them to choose to obtain an amount and diversity of information that is dependent on the extent and type of change they desire, and their choices to send a signal to internal and external stakeholders concerning the magnitude of the desired changes (Gioia, Schultz, & Corley, 2000). We now turn our attention to describing the

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different possible outcomes that top managers might seek through the interorganizational monitoring process.

OUTCOMES DERIVED THROUGH THE INTERORGANIZATIONAL MONITORING PROCESS Information Acquisition As top managers sense a greater aspiration discrepancy, they face a greater amount of uncertainty (Gioia et al., 2000). One way to reduce uncertainty is to increase the amount and/or type of information on which to base decisions (Galbraith, 1977). Top managers will seek advice from their counterparts in other organizations (McDonald & Westphal, 2003) as well as observe the actions of other organizations to learn from them (Argyris & Schon, 1978; Nonaka & Takeuchi, 1995). As they attempt to learn from others, top managers make choices concerning the resources they will allocate to the monitoring process, which will affect the amount of information they acquire. They also make choices about which organizations they will monitor, which will affect the diversity of information they acquire. If they choose organizations that they categorize as different from their own, it is less likely that these organizations will obtain their ideas and information from the same redundant sources. This greater non-redundancy will increase the diversity of information they obtain (Burt, 1992, 2000; Rindfleisch & Moorman, 2001). Internal Signaling The choices managers make concerning their interorganizational monitoring process affect their organizations’ members. As members gain experience in their respective organizations, they categorize their organization relative to others in the environment. That categorization serves as one basis for organizational identity (Dutton & Dukerich, 1991). Organizational identity constitutes the central and enduring qualities unique to every organization (Albert & Whetten, 1985). Organizational identity defines ‘‘who we are’’ for organizational members, and ‘‘how we are unique’’ relative to others. While fundamental organizational change often requires changing an organization’s identity, it is resistant to change (Dutton & Dukerich, 1991). Thus, it is important that organizational members first understand


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and accept changes to their organization’s identity. One way to facilitate such a change is for top managers to overtly change the organizations that are monitored. For example, Gioia and Thomas (1996) found that by changing the universities that were being monitored to a more elite set of universities (‘‘top 10 public universities’’), a greater pressure for changes began to occur within various areas of the university. This illustrates the importance of the mere choices of who to monitor, independent of any effort being expended on monitoring, as a signal to organizational members of the desire for change.

External Signaling The signaling effect of monitoring choices is not limited to internal stakeholders, but also extends to external stakeholders and the broader market (Lee, 2001). The status-based model of market competition (e.g., Podolny, 1993) suggests that the perceived quality of an organization’s products and services is enhanced through its affiliations with higher-status organizations. Accordingly, top managers’ monitoring choices serve as an indicator of an organization’s desire to be affiliated and categorized with higher-status organizations, which in turn affects the perceptions of people outside the organization and the way they will categorize it. At other times, top managers might choose to monitor organizations that are of equal or lower status in an effort to defend their identity against a threat (Labianca et al., 2001; Porac, Wade, & Pollock, 1999). In those instances, outsiders’ perceptions will result in a different categorization – one that affiliates the organization with a less prestigious set, but one in which the organization outshines the other members of the category. These choices amount to making decisions about whether to be a small fish in a big pond, or a big fish in a small pond.

Change The amount and diversity of information acquired through the interorganizational monitoring process, and the strength of the internal signal that is sent by the choices made, will affect the extent and type of organizational change. By extent of change, we mean the number of aspects of the organization – input, process, and/or output activities – affected by the change. By type of change, we are referring to first- versus second-order change

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(Bartunek & Moch, 1987). First-order changes are incremental modifications of established ways of doing things, while second-order changes challenge existing models and assumptions about the way things are currently done.

Performance Outcomes After a change or changes have been implemented, internal and external constituencies must recognize the organization as belonging to the intended category in order for the change to be considered successful by top managers. Regardless of whether the performance outcomes are deemed to be successful from the standpoint of the focal organization, however, the process begins anew with a comparison of its existing and aspiration categorization.

Interorganizational Monitoring Profiles We argue that interorganizational monitoring can be characterized by its depth and breadth. By depth, we mean the richness and intensity with which monitoring is pursued – issues of how much of an organization’s resources (e.g., money, people, time) is committed to monitoring and for how long, how often the organization engages in monitoring, and the extent to which information is being sought from the environment to help solve complex, illdefined, and difficult to quantify internal organizational issues. Organizations can range from low-intensity monitors that idly observe the organizations in their environment, but are mainly internally focused, to high-intensity monitors that actively track and integrate information acquired from interorganizational sources. At this end of the spectrum, these organizations may form learning partnerships with other organizations. An example of low-intensity monitoring behavior is for an organization to only access publicly available information on other organizations in its environment on easily quantifiable topics (e.g., annual reports, salary surveys, trade publication articles). An example of high-intensity monitoring behavior is for an organization to engage in reciprocal site visits and information exchanges with other organizations in order to encourage process improvements. In addition to affecting the volume of information acquired, the intensity of monitoring efforts will also have a signaling effect on both internal and


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external constituents concerning the extent of change that is coming, and top management’s commitment to that change. When organizations decide to pursue high-intensity monitoring, the extensive resource commitments are more likely to make the monitoring effort visible to both internal and external constituents because costly signals are more noticeable, and these costly signals relate a desire to focus on increased quality (Milgrom & Roberts, 1986). This signals that the organization is actively seeking information that might be used to initiate change. The interorganizational monitoring process’s breadth is the extent to which the sets of organizations chosen to compete against, emulate, and imitate intersect. Where there is high intersection (or overlap) between the three constructs – that is, where the focal organization monitors only its direct competitors, only aspires to be like the members of its competitive set, and subsequently imitates only its competitors – the breadth of interorganizational monitoring is low. It is much more likely that the information sources that these other organizations have access to will be redundant, the variety of information acquired will be constrained, and the potential opportunity for diverse ideas and information to enter the organization will be limited (Burt, 1992, 2000; Uzzi, 1999). Conversely, when there is little overlap in the sets of organizations being monitored, the diversity of information that might be considered when considering changes will be greater because of less redundancy, more variety, and greater exposure to different ideas.

The Interaction between Interorganizational Monitoring’s Depth and Breadth The effort with which interorganizational monitoring is pursued (i.e., its depth) and the degree of overlap between the sets of organizations chosen to monitor (i.e., its breadth) will have not only direct effects on information acquisition and signaling, but will interact as shown in the two-by-two diagram presented in Fig. 1 to determine subsequent change and performance outcomes. These are two separate continua, and organizations can be high, low, or moderate on both the depth and breadth of their monitoring process. For the purposes of describing the effects of these choices, we have created four interorganizational profiles by considering depth and breadth together. We believe that differences in organizations’ placement on these two continua will lead to differences in information acquisition and signaling, and ultimately affect the type and amount of organizational change as

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well as the organization’s future performance. At any point in time, we can categorize organizations as fitting into one of these four profiles. Profile 1: High Intensity/Low Overlap This interorganizational monitoring profile represents one extreme in that the organization is placing a great deal of effort into monitoring other organizations, but the organization implicitly or explicitly views the various constructs as being different processes, and thus selects different organizations for each purpose. Thus, while an organization’s members emulate one organization and imitate another, they do not view either to be a direct competitor. Interorganizational emulation, imitation, and competition are distinct activities in the minds of the top managers. The consequences of this high intensity/low overlap interorganizational monitoring profile will be high information acquisition, strong signaling of the importance of the change, and second-order organizational change. Information acquisition will be high because there is a great deal of resources being expended on collecting information from other organizations. The information acquired will be more diverse because it is coming from a greater variety of non-redundant sources than would be the case if there was high overlap among the sets of organizations that are emulated, imitated, and against which they compete (Burt, 1992, 2000). Having greater information diversity is more likely to lead to second-order change (Bartunek & Moch, 1987). By exposing themselves to a wider variety of processes, procedures, and values, it encourages organizational members to reexamine their own processes, procedures, and values in a deep way that can lead to second-order change – challenging existing models and assumptions about the way things are currently done. There will be strong signaling to internal and external groups because the organizational members are being very deliberate in their choice of organizations to monitor. They are intentionally creating some discrepancy between the different monitoring constructs. For example, while the organization might compete against one set of organizations, by emulating an entirely different set, it might send a signal to internal and external groups that there is a desire for a greater amount of second-order change to break the current categorization pattern in the industry. Ultimately, by collecting a great deal of information generated by a broad and different set of organizations, the proposed changes are likely to be extensive and of the second-order variety. The organization’s internal and external groups will have been prepared by the signaling throughout the process that this type of extensive, second-order change was being sought and will now take place.


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Proposition 1. High intensity and low overlap interorganizational monitoring will be related to strong signaling to internal and external constituents, high diversity of information acquisition, and extensive, second-order change. Profile 2: Low Intensity/High Overlap This interorganizational monitoring profile represents the opposite extreme in that the organization is both placing little effort into monitoring other organizations, and the organization views the various constructs as being essentially the same process. Thus, they emulate, imitate, and compete with the same organization or set of organizations, and these activities are not distinct in the minds of the top managers. The consequences of this type of low intensity/high overlap interorganizational monitoring profile will be low information acquisition, weak signaling of the commitment to change, and ultimately the reinforcement of the status quo through the pursuit of, at best, limited first-order change (Bartunek & Moch, 1987). Information acquisition will be low because they are not devoting attention to collecting information from other organizations. The information acquired will be homogeneous because it is coming from a narrow, limited set of fairly redundant sources (Burt, 1992, 2000). Further, limiting the organization’s search for information to, for example, the same set of organizations against which it competes, constrains the organization’s ability to learn from the best (Jennings & Westfall, 1992). There will be weak signaling to internal and external groups of the need and commitment to change in organizations in this quadrant. The low intensity of the monitoring will send the message to internal and external groups that there is not a strong need to learn from other organizations. Also, because the same organizations are always viewed as monitoring choices to satisfy all of the diverse needs of an organization’s monitoring efforts, there will be a signal that there is very little deliberation in their choice of organizations to monitor. Further, it sends a signal that the current categorization of the industry or field will not be challenged in any way by the organization’s future actions. Ultimately, by collecting a little external information from a narrow, homogenous set of organizations, any proposed changes are likely to be minimal and, at best, incremental, first-order changes – incremental modifications of established ways of doing things (Fox-Wolfgramm, Boal, & Hunt, 1998). Proposition 2. Low intensity and high overlap interorganizational monitoring will be related to weak signaling to internal and external

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constituents, low-diversity information acquisition, and minimal, firstorder change. Profile 3: High Intensity/High Overlap This interorganizational monitoring profile implies that the organization is placing extensive effort into monitoring other organizations, but the organization views the various constructs as being essentially the same process. Thus, they emulate, imitate, and compete with the same organization or set of organizations, and these activities are not distinct in the minds of the top managers. The consequences of this type of high intensity/high overlap interorganizational monitoring profile will be high information acquisition, moderate signaling of the commitment to the change, and ultimately firstorder changes focused on continuous improvement of existing ways of doing things (Fox-Wolfgramm et al., 1998). Information acquisition will be high because there is a great deal of resources being expended on collecting information from other organizations. However, the information will be homogeneous because it is coming from a narrow, limited set of redundant sources (e.g., Burt, 1992, 2000). The high intensity of the monitoring will send the signal to internal and external groups that there is a need to learn from other organizations. However, because the same organizations are always being discussed as monitoring choices, it sends a signal that the current categorization of the industry or field will not be challenged in any way by the organization’s future actions. Ultimately, by collecting a lot of external information from a narrow, homogenous set of organizations, any proposed changes might be numerous, yet operational or incremental in focus. Rather than being second-order changes, as in the high intensity/low overlap quadrant, this profile is more appropriate for organizations desiring to enhance performance incrementally through firstorder changes (Fox-Wolfgramm et al., 1998). Proposition 3. High intensity and high overlap interorganizational monitoring will be related to moderate signaling to internal and external constituents, low-diversity information acquisition, and extensive, first-order change. Profile 4: Low Intensity/Low Overlap This interorganizational monitoring profile implies that emulation, imitation, and competition are distinct activities in the minds of the top managers, but that the organization is not placing extensive effort into monitoring other organizations. The consequences of this type of low intensity/low overlap interorganizational monitoring profile will be low


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volume and high-diversity information acquisition, weak signaling of the importance of change, and ultimately little change, with the hope or desire to pursue second-order change at some point in the future. This is indicative of an organization that is floating trial balloons – there is some signaling that they are aspiring to be in a different category than they are currently in, and they are exploring the possibility of second-order change, but they are not able or willing to commit resources to move ahead with information acquisition. Information acquisition will be low in volume because there are few resources being expended on collecting information from other organizations. But the high diversity in information acquisition suggests a desire to categorize the organization differently within the industry or field. Because resources are not yet being committed, it might indicate that the organization is still in a preparatory stage for future change. The lack of resource commitment to the monitoring effort acts as a signal to internal and external groups that the organization is not yet serious about change (cf., Lee, 2001; Milgrom & Roberts, 1996). Proposition 4. Low intensity and low overlap interorganizational monitoring will be related to weak signaling to internal and external constituents, high-diversity information acquisition, and little organizational change. Monitoring Profile Dynamics We have described interorganizational monitoring profiles in a fairly static manner. But these profiles can be considered a snapshot during a particular moment in the organization’s evolution in monitoring, and we expect that organizations will alter these profiles over time. For example, when organizations identify a large discrepancy between their performance and their aspirations, they are more likely to pursue more radical, second-order change (Argyris & Schon, 1978), and this will likely precipitate moving from an interorganizational monitoring profile emphasizing lower intensity and higher overlap toward one that is higher in intensity and lower in overlap. Once the discrepancy between performance and aspiration is somehow reduced, we would expect those organizations to stabilize during a period of incremental, first-order change (Tushman & Anderson, 1986), which is more likely to result in higher overlap in the sets of organizations chosen to monitor or perhaps in a reduction in the intensity of the monitoring process.

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Constraints on the Interorganizational Monitoring Process To this point, we have discussed the interorganizational monitoring process as if managers have the freedom to choose their monitoring profile at will. However, there are numerous resource, political, and cognitive constraints that hamper a top manager’s ability to dedicate resources to monitoring, or to alter the overlap between the different monitoring processes (Kraatz, 1998; Reger & Palmer, 1996). Resource constraints, including money, people, and time, will obviously come into play as an organization decides the intensity and overlap of its interorganizational monitoring efforts. Perhaps the only reason that an organization employs Profile 4 (low intensity, low overlap) rather than Profile 1 (high intensity, low overlap) is that, despite the desire for extensive, second-order change, there are insufficient resources available to commit to the effort at that particular point in time. Time constraints also challenge an organization’s ability to comprehensively monitor the environment. Given sufficient time to affect changes, administrators might choose to monitor other organizations more broadly and deeply, having the luxury to exercise care in the process of collecting, evaluating, and acting on that information. On the other hand, in the face of time pressures, administrators might limit the breadth and/or depth of information sought (March & Simon, 1958). Political constraints often come into play as the organization decides on the intensity of the monitoring process and the degree of overlap in the sets of organizations it monitors. The values and beliefs of important constituents concerning their organization’s central, distinctive, and enduring qualities can serve as the basis of some constraints (Dutton & Jackson, 1987; Dutton & Dukerich, 1991; Elsbach & Kramer, 1996; Labianca et al., 2001). For example, a business school that is highly ranked might realize that a low-ranked business school, or a different type of school altogether, such as a for-profit business school, has created an interesting innovation that might improve its performance (e.g., a new technology-based program delivery format). The administrators might want to implement that innovation in their school, but internal groups, such as faculty, and external groups, such as alumni, might view imitating a school that is ‘‘behind’’ them or too ‘‘different’’ from them as illegitimate (Labianca et al., 2001). This creates pressure on the management to keep its monitoring choices more tightly overlapped, with the subsequent consequence that learning and signaling are constrained, and the type of change that is pursued is less second-order and more first-order in nature. Political constraints would also occur where some constituencies feel that resources should not be ‘‘wasted’’ on monitoring


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other organizations, because the information and changes necessary can be generated internally. This might be particularly true where the focal organization is high in status and constituencies feel that external comparisons are irrelevant or illegitimate. Political constraints might also force managers who are under pressure to change their organization to act quickly in an expedient manner when making monitoring choices. Although that pressure might stimulate the process of interorganizational monitoring, it might also act to limit the choices made, which would enable managers to point out progress quickly in order to ease the pressure under which they are operating. In such a situation, the objective of appearing to be changing would have more importance than actual changes that might better serve the organization over time (DiMaggio & Powell, 1983). Cognitive constraints can also affect the degree of overlap in the monitoring process if organizational members have difficulty envisioning how information collected from one set of organizations can be transferred into their organization. While the ability to acquire diverse information is important, the perceived ability to utilize the information collected is also important (Rindfleisch & Moorman, 2001). This would lead organizational members to argue for higher overlap in the monitoring process because it would allow them to filter out information that might seem to be irrelevant. For example, cognitive constraints might keep organizations from monitoring organizations in other industries. Business schools might be able to learn a great deal about service delivery from monitoring luxury hotels, but cognitive constraints on how to transfer information collected from the hotel industry to academia might lead them to never consider luxury hotels as possible monitoring choices. Further, cognitive constraints can affect the amount and/or type of information being sought. If an organization’s attention is focused predominantly inward, it could create a situation whereby administrators would fail to recognize the benefit of outside information to assist with the change process or to improve performance. Constraints affect not only the choice of monitoring profiles, but also any desired subsequent shift from one monitoring profile to another. For example, an organization with a low intensity and high overlap profile (Profile 2) would have a very difficult time in making the leap to being a high intensity and low overlap monitoring organization (Profile 1) because of the resource, political, and cognitive constraints mentioned above. It is much more likely that an organization that has always emulated and imitated only its direct competitors, and then only in an arms-length manner that did not require a lot of resources, will decide to either increase its devotion of resources to monitoring, but not change the overlap in its monitoring choices,

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or change the overlap in its monitoring choices, but not alter the devotion of resources to monitoring. That is, it is more likely to move from Profile 2 to Profile 3 or 4 than directly to Profile 1. There is also a learning process that is embedded in the interorganizational monitoring process itself (e.g., ‘‘who should we monitor?’’ ‘‘how should we do it?’’ ‘‘what do we want to get out of the process?’’), and attempting to increase both the depth and breadth of the monitoring process simultaneously might be too much for the organization to digest all at once. Learning about how to conduct interorganizational monitoring, and being able to consciously question the organization’s monitoring profile, is an example of third-order change (Bartunek & Moch, 1987), where the process itself becomes a topic for thought, discussion, and debate among the members. As the organization increasingly monitors other organizations that are very different from it, being able to transfer what is learned back into the organization becomes increasingly difficult, and requires increasing understanding of the monitoring process itself.

GOIZUETA BUSINESS SCHOOL CASE EXAMPLE We use the example of Emory University’s Goizueta Business School’s (GBS) recent introduction of a major, multi-million dollar change – the launching of a doctoral program – to assist the reader in grounding the abstract concepts involved in interorganizational monitoring. We offer this example not as a rigorous, in-depth case study, but rather as a platform for illustrating these concepts in a more concrete fashion. The first author, who joined GBS as a tenure-track assistant professor in 2001, created the example by engaging in informal interviews with faculty and administrators involved in the change, through observation of discussions in faculty meetings, and by reviewing the archival documents from the benchmarking committee formed for this change. The first author was not involved in any way with launching the doctoral program, and remained an unobtrusive, impartial observer of the monitoring process at GBS.

Monitoring Choices for the New Doctoral Program GBS in 1998 The top administrators at GBS are faced with the issue of bringing in necessary resources for the continual functioning and improvement of the


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organization. These resources include funds, students, staff, and faculty. A major component of GBS’s 5-year strategic plan developed in 1998 was to increase the number of faculty, with particular emphasis on those with greater research productivity and potential. The administrators knew that in order to attract and retain the best research faculty, potential faculty members must view GBS as a viable employment option. At the time, GBS felt that it was competing most closely with Vanderbilt and Washington University for faculty. It was also aspiring to compete successfully with Duke, but was often failing when it came to luring prospective faculty that had the choice between GBS and Duke as well as other prestigious schools like Duke. As Emory transitioned from a teaching-focused school to a major research university in the 1980s and early 1990s, new research-oriented faculty members were hired into GBS with the promise that a doctoral program would follow. Administrators wanted to keep that promise in order to retain these faculty members. Administrators also were concerned that GBS be viewed by other academic units at Emory as being actively engaged in knowledge creation through high-quality research. The introduction of a doctoral program would generate greater research productivity in GBS and serve as a signal to the rest of the university about the seriousness of the commitment to becoming an elite research business school. As administrators and influential faculty members pushed for the introduction of a doctoral program, they encountered some resistance at the university level because of the significant resource commitment necessary to achieve that goal. They also encountered some resistance within GBS itself from faculty members who felt that GBS increased prominence was due mainly to its investments in the MBA program (e.g., more intensive marketing, improving the career management center, hiring dedicated administrators), which had been steadily climbing in external rankings by business publications, and was viewed as a ‘‘top 30’’ program by the late 1990s. For example, GBS’s MBA program ranking at BusinessWeek went from a ‘‘second tier’’ program in 1996 to a ranking of 28 in 2000. More importantly, the business school’s ranking in U.S. News and World Report, which was heavily reliant on other business school deans’ ratings of the school’s quality, also improved dramatically. These faculty members felt that resources should continue to be funneled into enhancing the quality of the MBA program, as reflected in those external rankings, rather than diverted into an expensive doctoral program. GBS administrators and faculty members wanting to create the doctoral program pointed out that GBS had a publicly stated goal of being a ‘‘top

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20’’ business school. Yet, every one of the ‘‘top 20’’ business schools (with the exception of Dartmouth’s Tuck School) had a doctoral program in business. They used this as a political tool to convince internal faculty members that only focusing on the MBA program was no longer an option if GBS wanted to continue to climb in reputational status. They also pointed out to the university as a whole that when faculty members were going up for promotion and tenure, they were being compared to colleagues at other ‘‘top 20’’ schools, and yet they did not have similar research resources in the form of a doctoral program. Further, they continued to note that it was becoming increasingly difficult to attract faculty from other top schools and doctoral programs to GBS because of those potential faculty members’ expectations that a top business school would have a doctoral program. GBS in 2000 Ultimately, the decision was made to create a doctoral program, thus making GBS resemble more closely the ‘‘top 20’’ business schools. At this point, GBS had to decide how the doctoral program would be set up and how it would actually operate. The focus turned to monitoring other business schools’ doctoral programs to determine how to best implement the new doctoral program, and to imitation of their best practices. Fig. 2 summarizes the monitoring choices made. The doctoral studies committee chose other business schools to monitor through a process that was both deliberate and opportunistic. Deliberate choices included the University of Central Florida, which had most recently introduced a doctoral program, and Notre Dame, whose recent written proposal for a doctoral program would be useful for creating their own proposal to the university. INSEAD was also chosen to monitor because it had created a successful doctoral program in business only a decade earlier. The University of Rochester was selected because the finance-oriented members of the administration and senior faculty saw that business school’s doctoral program, which was only three decades old, as being very successful, and thus worthy of serving as a good model. The doctoral program in finance at Vanderbilt was also examined because the finance faculty there was considered ‘‘better’’ than GBS’s, and recent potential hires had chosen Vanderbilt over Emory. The marketing-oriented members of the administration and senior faculty felt that a faculty member at Harvard Business School was particularly successful at creating and maintaining a doctoral program, so he was contacted. Finally, there were some opportunistic choices. Some faculty members from the management area gave talks at Northwestern and Columbia and also used the opportunity to explore the

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Interorganizational Monitoring: Process, Choices, and Outcomes Monitored Organizations

Emulated Organizations

Imitated Organizations Harvard Columbia INSEAD Northwestern Notre Dame U. Of Central Fla. U. Of Rochester

“Top 20” Business Schools

Vanderbilt

Duke

Washington U.

Competitors

Not Monitored Tulane Wake Forest Other Southern private, Ph.D. granting business schools

Fig. 2.

Goizueta Business School’s Monitoring Choices during Introduction of Ph.D. Program.

doctoral programs in their business schools, which were regarded as being very successful, and this information was included in the benchmarking effort. It is interesting at this point to note several business schools that might have been expected to be imitated, but were not. Duke, Tulane, and Washington University were not included as monitored schools for GBS’s doctoral program, despite the fact that business schools at these universities all had doctoral programs and were very similar to GBS on many dimensions, including size, resource availability, private ownership, and values toward research and teaching.

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Description of the Underlying Monitoring Constructs The above example illustrates the monitoring process and the similarities and differences among the different constructs that make up the metaconstruct of interorganizational monitoring (categorization, emulation, competition, and imitation). Continuing with the GBS case example, we can see how subtle differences between these processes led to the choices of which schools to monitor. Categorization The administrators and members of GBS categorized their school relative to other business schools. In the process, they recognized some schools as being very similar to GBS, including Vanderbilt and Washington University. Those schools are similar on many structural and identity-related factors. For example, from a structural perspective, they are private, medium-sized, resource-rich schools. From an identity-related perspective, they have similar values in terms of the relative emphasis they place on research, teaching, and service. They all value high-caliber basic research and outstanding teaching in their MBA programs, commensurate with their national reputations and high rankings in popular business publications. However, GBS differed from these schools by not having a Ph.D. program. This difference was minimized in the minds of internal stakeholders for years because of the overwhelming similarities, which drew attention away from the exception. The flip side of the categorization process is the dissimilarity judgment. GBS does not view itself as being very similar to Wake Forest or Tulane, although they are very similar structurally and on most identity-related factors. The only major factor on which those schools differ is external reputation with popular business publications (e.g., BusinessWeek ranked Tulane’s MBA program in the third tier, and Wake Forest’s in the second tier consistently through that timeframe). That dissimilarity is exaggerated in the minds of GBS administrators and faculty, and consequently very little attention is paid to these schools for monitoring purposes. Aspiration Discrepancy, Competition, and Emulation Categorizing is being done not only by internal stakeholders (i.e., deans and current faculty), but also external groups (i.e., prospective faculty and students, other units of the university, and other business schools), and the interplay between internal and external groups’ perceptions motivated GBS’s change to incorporate a doctoral program (e.g., Dutton & Dukerich, 1991). As GBS’s reputation with external rankings improved and GBS


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flirted with entering the ‘‘top 20,’’ external stakeholders, such as prospective faculty, began to question why GBS did not have a Ph.D. program like nearly all of the other ‘‘top 20’’ business schools. This was an often-cited reason for a job offer that was declined. Internal groups began pointing out the inconsistency of trying to be a ‘‘top 20’’ business school without a doctoral program, even though they realized that the doctoral program would be an enormous resource drain, and that it might divert attention and resources from the successful and continually improving MBA program that had led to the higher rankings. But as internal groups decided that achieving their next aspiration level – to be a ‘‘top 15 business school’’ – required an improvement in research faculty, they decided they needed to introduce a doctoral program to improve their ability to attract those faculty members. This move also eliminated a competitive disadvantage relative to GBS’s key competitor and the school they most sought to emulate: Duke. This illustrates that emulation – the striving to equal or surpass a comparison organization or organizations on a set of strategic qualities or features – is simultaneously done against both aggregates of organizations (e.g., ‘‘top 20’’ business schools) as well as against specific organizations (e.g., Duke). The emulation process is often anchored against a specific organization that is ultimately almost the mirror image of the organization in terms of structural and identity-related factors (Labianca et al., 2001). Duke is the school that is most similar to Goizueta in most structural and identity-related factors, except that Duke has a higher ranking and more prestige. Imitation The example also illustrates bandwagon effects on imitation (e.g., Abrahamson & Rosenkopf, 1993; Haunschild & Miner, 1997), and how external groups pressure organizations to copy practices or features (DiMaggio & Powell, 1983). In the highly institutionalized realm of business schools, doctoral programs are taken-for-granted features among most of the top business schools (Meyer & Rowan, 1977). Particularly salient to potential new entrants to the ‘‘top 20’’ are legitimacy concerns, and this leads faculty and administrators to ask, ‘‘can we be a legitimate top 20 school if we don’t have a doctoral program?’’. This type of imitation is being done at the aggregate level – the focus is on the ‘‘top 20’’ business schools, and not on any one particular school. While emulation is striving in a general sense, imitation is the act of changing to be like another organization in terms of a specific feature – imitation is more action-oriented than emulation, and is more specific (Labianca et al., 2001). We do not mean to imply here that the imitation GBS is employing is ‘‘blind’’ imitation. That is,

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the introduction of a doctoral program is extremely important and considerable thought has gone into the decision to introduce the doctoral program. However, GBS’s own aspirations to be viewed as an elite generator of business school knowledge is increasing pressure on the school to imitate by adopting a program in order to resemble other elite business schools. Specific Monitoring Choices: Intensity and Breadth Once the decision was made to move forward with a doctoral program, however, more specific information was needed to actually design and implement such a complex and resource-intensive change. The doctoral studies committee monitored business schools that had most recently introduced or proposed doctoral programs (University of Central Florida and Notre Dame) because they could obtain documents and information that would assist with the administrative side of proposing and introducing a new doctoral program. On the intellectual side (including program content and delivery), information could not be obtained solely from publicly available sources. At that point, a number of exemplar business schools were selected for monitoring (INSEAD, Northwestern, Columbia, Rochester, Harvard, and Vanderbilt – see Fig. 2). These schools were in the ‘‘top 20,’’ but with the exception of Vanderbilt, were not generally regarded as direct competitors, nor did GBS actively seek to emulate them. Rather, they were viewed as having successful doctoral programs that were worthy of scrutiny. Administrators at those schools willingly participated in the monitoring effort, allowing GBS access to information regarding their doctoral programs through site visits and conference calls. One example of something that was learned through monitoring this group was the concept of ‘‘DocEd.’’ Modeled after ‘‘ExecEd’’ programs where faculty members from other schools were contracted to deliver executive education courses at a school, INSEAD had contracted with faculty members from other universities to teach doctoral seminars at INSEAD. INSEAD administrators felt that DocEd had allowed their doctoral program to quickly become well-respected, and had helped increase the number of prestigious placements for their doctoral students by introducing them to faculty at other elite business schools. GBS viewed this as an important innovation that they were interested in adopting. Interestingly, all of the schools chosen for monitoring on intellectual content outside of Vanderbilt were different in terms of structure and identity when compared to GBS’s closest competitors. They are much larger business schools and have better academic reputations. Not only are they dissimilar from GBS, but they are somewhat dissimilar from one another in


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their external reputations (e.g., in the academic programs they emphasize and the instructional methods they employ). GBS did not choose to monitor Washington University’s or Tulane’s doctoral programs, despite the fact that Washington University and Tulane are both very similar to GBS in terms of structural and identity-related features, and would appear to share many of the same constraints that GBS would likely be facing with its new doctoral program. The doctoral programs were not considered relevant referents because of the relatively lower external reputations of those schools (e.g., BusinessWeek ranked Washington University’s MBA program 17 in 1998 and 23 in 2004, and Tulane’s was ranked in the third tier consistently throughout this period). Another interesting point is that Tulane was also involved in a doctoral innovation similar to INSEAD’s DocEd program where Tulane faculty were contracted to go to various prominent South American business schools to teach doctoral seminars for faculty and students. However, GBS did not have access to this innovation because it never even considered Tulane as a possible organization to monitor. Signaling To some extent, not monitoring Washington University’s programs was, intentionally or unintentionally, a signal intended for both internal and external groups that Washington University was an increasingly irrelevant competitor. By the year 2000, GBS administrators were using their monitoring efforts as a signal to their faculty that their aspirations were to emulate ‘‘top 15’’ business schools, not to outcompete the schools ‘‘behind’’ them in terms of status. Although GBS was still in direct competition with Washington University in the minds of the best prospective faculty and students – both of which are important scare resources on which Washington University and GBS clearly compete directly – GBS was either intentionally or unintentionally signaling a desire to redefine the categories of these external groups, in part by choosing to monitor outside of those competitors. Once the doctoral program began to be implemented in 2002, GBS began preparing for its new 5-year strategic plan. GBS’s MBA program had risen in the BusinessWeek rankings from a second tier program in 1996 to a ranking of 22 in 2002. By 2004, GBS had a ranking of 20 among U.S. business schools in the BusinessWeek rankings and in U.S. News and World Report’s business school rankings, and GBS administrators began talking about becoming a ‘‘top 15’’ business school. Although GBS had previously emulated Vanderbilt, recent rankings by external business publications had consistently placed GBS ahead of Vanderbilt in the 5 years since the last

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strategic plan was created (Vanderbilt’s MBA program was ranked 30 by BusinessWeek in 2004, down from 24 in 1998, and Vanderbilt’s business school was ranked 39 by U.S. News and World Report in 2004), and Vanderbilt was no longer considered a school to emulate. Indeed, GBS was considering dropping Vanderbilt as a monitoring target for other issues (e.g., the amount of scholarship money being given to MBA applicants). While GBS administrators were increasingly eager to no longer view Vanderbilt as a direct competitor, they knew that external constituencies (e.g., prospective faculty and students) categorized them together. Duke, meanwhile, continued to be emulated, and remained an organization to closely monitor for other issues. It was expected to remain a major emulation and monitoring target, particularly as GBS’s aspirations increasingly targeted becoming more like Duke, which was consistently ranked in the top 10 by major business publications (and was ranked 11 in 2004 by BusinessWeek). Therefore, it was not surprising that Duke’s dean participated in an external review of GBS as its administrators looked to formulate their next 5-year strategic plan in 2003. GBS Monitoring Profile When the decision was made to introduce the doctoral program, significant resources were committed to monitor other schools, including conducting site visits. This indicates a relatively high intensity monitoring effort. GBS’s emulated Duke specifically and the ‘‘top 20’’ business schools more generally, competed directly against Duke, Vanderbilt, and Washington University, and imitated aspects of doctoral programs at Harvard, Columbia, INSEAD, Northwestern, Notre Dame, University of Central Florida, University of Rochester, and Vanderbilt when it created its doctoral program. This reflects a relatively low degree of overlap. GBS’s monitoring profile, thus, would be representative of schools in profile one – organizations pursuing extensive second-order change. Outcomes: Information Acquisition, Signaling, Change, and Performance The interorganizational monitoring process in which GBS was engaged pursued multiple outcomes simultaneously. There was a desire to increase the organization’s perceived performance (e.g., its reputational status) by improving its faculty. Over time, this had the effect of successfully recategorizing GBS from a ‘‘second tier’’ school to a ‘‘top 20’’ school. This necessitated a major and resource-intensive change to the organization – the introduction of a doctoral program. This represented an extensive secondorder change for the school because it necessitated changes in what the vast


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majority of faculty members do at GBS, while altering their roles as professors in fundamental ways (Bartunek & Moch, 1987). The introduction of the doctoral program led to the need to offer Ph.D. seminars, which increased the number of courses offered dramatically, leading to more hiring; the new hires have been more research focused than previous hires. These new hires have brought with them a norm against relying on a large number of adjunct faculties to teach in GBS programs. The relatively small size of the program meant that Ph.D. students from various areas of GBS (e.g., management, accounting) take courses together, and this has promoted greater interdisciplinary research as the students’ advisors learn of research projects occurring elsewhere in GBS. Faculty members have now taken on the roles of mentors in addition to their previous roles. The need for change necessitated information acquisition about what was required to operate a successful doctoral program. But throughout the process, administrators were keen to make certain that the monitoring process itself sent the right signals to internal and external groups about the organization’s aspirations for its future status and performance (Spence, 1973, 1974a, b). Although signaling might not always be a conscious, stated outcome of the process, it is an important secondary outcome of monitoring. The organization’s ability to acquire information and effectively signal important constituent groups will, in part, determine its future performance. The interorganizational monitoring cycle then began anew as GBS looked at its new ‘‘top 20’’ categorization and as its members’ aspirations began to evolve to being seen as a ‘‘top 15’’ school.

GBS Monitoring Profile Dynamics GBS created a new aspiration to become a ‘‘top 15’’ business school, which broadened the gap between its current performance and its aspirations. This led organizational members to cast a wider net in their interorganizational monitoring in order to affect changes to propel them toward that level. If GBS attains that level, a number of possibilities could occur. One possibility is that GBS will increase the overlap in their monitoring to reinforce the practices and actions that got them to that level. That choice will make GBS vulnerable to other schools that are pursuing radically different approaches to business education because they are in GBS’s ‘‘blind spot.’’ Alternatively, GBS administrators might simply reduce the amount of interorganizational monitoring with the assumption that they have learned what they needed to learn from the other organizations in their environment. This option also

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leaves the possibility of being overtaken by a competitor. Here, however, it is not because the competitor is unnoticed, but rather that not enough effort has gone into understanding how the changes that competitor has implemented are affecting performance. The final option is that GBS sets a new aspiration level and alters its monitoring profile again. This might actually entail increasing the monitoring effort to an even greater extent than has been done in the past.

DISCUSSION We have shown that viewing categorization, interorganizational emulation, imitation, and competition as part of the larger interorganizational monitoring process brings focus to organizations’ attempts to acquire information from other organizations, signal internal and external constituencies, and ultimately change. We argued that the depth or intensity with which the monitoring process is pursued as well as the breadth or degree of overlap in the sets of organizations chosen to monitor, determines the volume and diversity of information acquired, the strength of the signal sent to constituent groups, and the amount and type of change likely to emerge from the process. Previous researchers in the arena of organizational identity management have focused, as we do, on how internal changes to important elements of an organization, such as its identity, interact with signals sent to internal and external constituents via projected images that ultimately affect reputation (e.g., Gioia et al., 2000). The process they describe is one whereby perceived discrepancies between an organization’s current and desired future identity, and its current and future image, creates pressure for action to change both the organization’s image and identity. However, their model’s black box is in the action phase, where organizational members ask, ‘‘should we do anything?’’ and ‘‘what should we do?’’ (Gioia et al., 2000, p. 69). Our model contributes to this literature by showing that as an organization seeks information from other organizations in its environment to answer these questions, the choices it makes during the interorganizational monitoring process will affect both the substance and degree of the changes attempted, as well as the signals projected to internal and external constituents. Organizations that devote a great deal of intensity to their interorganizational monitoring process and that have little overlap in their choices of organizations to monitor are more likely to acquire a higher volume and diversity of information to answer the questions ‘‘should we do anything?’’ and


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‘‘what should we do?’’ and will be more likely to pursue more change, particularly of the second-order type. Throughout the monitoring process, they will be sending strong signals that significant change is coming (cf., Lee, 2001). In contrast, organizations devoting little intensity to their monitoring process, and having significant overlap in their monitoring choices, are more likely to answer the ‘‘should we do anything?’’ question with a ‘‘no,’’ and ‘‘what should we do?’’ with a ‘‘not much’’ response. There will be very little change, what little change occurs will be more incremental or first order, and a status quo acceptance will be signaled to constituents by the monitoring process itself. While previous research on aspects of interorganizational monitoring (e.g., Elsbach & Kramer, 1996; Gioia & Thomas, 1996) has examined how organizations categorize themselves into general categories such as ‘‘top public universities’’ and ‘‘elite business schools,’’ the emphasis has not been on exploring specific monitoring choices. We contribute to the literature in interorganizational monitoring by pointing out that while organizations might aspire to be a member of a broad category (e.g., being viewed as a ‘‘top 10’’ school), understanding the particular choices of which organizations to monitor or not to monitor will provide a better understanding of the process by which interoganizational monitoring affects subsequent outcomes such as change and performance. This viewpoint emphasizes that while two organizations might both aspire to be viewed in a category such as a ‘‘top 10 school,’’ the choices of organizations to monitor and the intensity with which to monitor them can lead to very different outcomes. Our model also contributes to the broader strategy process literature. The concept of strategic intent – deciding on what your position relative to other organizations in your industry is to be – is rooted in cognitive and symbolic processes (Hamel & Prahalad, 1989). That aspiration process is often manifest in language such as ‘‘we will become a top 10 business school,’’ as well as the symbolism of establishing often aggressive goals that require organizational members to stretch their capabilities, which will require long-term commitment from the organization. Conversely, other organizations might decide to pursue more modest objectives that are more easily achieved and more short term in nature. Strategic intent requires managers to choose between these long-term and short-term approaches to competitive positioning. Our model suggests that organizations with a high intensity and low overlap interorganizational profile are more focused on long-term positioning, whereas organizations with a low intensity and high overlap profile are devoting their managerial attention to short-term objectives. The monitoring process reflects the strategic intent of top managers. If they wish to

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pursue a great deal of second-order change over the long term, this is likely to be reflected in a high intensity and low overlap profile. However, if political, resource, or cognitive constraints do not allow free choice of the monitoring profile, the choice of a different profile (e.g., high intensity and high overlap) might alter the amount of change and the organization’s strategic intent. This model also contributes to the literature on cognitive strategic groups (Fiegenbaum & Thomas, 1995; Porac & Thomas, 1990; Reger & Huff, 1993; Reger & Palmer, 1996) by providing insight as to how organizations might move from one competitive category to another in the minds of organizational members and outsiders. By understanding the interorganizational monitoring process and how it results in both perceptual and actual changes, we can continue to move management thinking about strategic groups away from static clusters of organizations constrained in their mobility by the rigidities imposed by an interorganizational economic perspective (Porter, 1980), and toward strategic groups as dynamic, cognitive categories that can evolve continuously within an industry (Reger & Huff, 1993; Reger & Palmer, 1996) and that can serve as reference groups for strategic action (Fiegenbaum & Thomas, 1995). The interorganizational monitoring process can be one component of organizations’ attempts to change their strategic group membership through both substantive changes to the organization as well as symbolic changes to how they are viewed within their industry. As organizations announce their aspiration goals through whom they are emulating, for example, they are setting in motion the strategic changes that might ultimately lead them from their current standing in one strategic group in the industry to another. GBS’s experience illustrates an organization that is in the process of changing its membership to a more elite strategic group within its industry, thereby enhancing its ability to attract necessary resources to improve its future performance.

Methodological Considerations Studying the interorganizational monitoring process requires researchers to undertake analyses of an entire industry or field. We would suggest contacting top managers in all organizations within an industry and asking them to reveal how many resources are committed to the monitoring process, and to identify their choices for emulation, imitation, and competition. These choices can be entered in matrix format to create three industry networks (one each for the different choices). The degree of overlap for a


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particular organization would be the correlation between the choices for each of the three constructs, ranging from 0 to 1. This can be accomplished in UCINET, a network analysis program (Borgatti, Everett, & Freeman, 2003). Researchers will also need to capture the extent and diversity of information acquisition as well as survey internal groups about signaling by capturing their views on image and identity, and reputational rankings to assess external groups’ views of the organization (see Labianca et al., 2001, for an example of the methods to employ in researching interorganizational monitoring constructs). We would suggest the use of longitudinal studies to better understand how monitoring is related to organizational change and subsequent performance outcomes.

Boundary Condition Our theory is broadly generalizable. We believe that all organizations are engaged in interorganizational monitoring to some extent. Clearly, however, the acquisition of information from other organizations, and the signaling to internal and external constituents, is more critical in certain industries than in others. Meyer and Scott (1983) describe two major types of environments – institutional environments, where outcomes are ambiguous, rules are prevalent, and legitimacy is a critical resource for organizational survival, and technical environments, where outcomes are more unambiguous, and markets are the primary determinants of performance and survival. We believe that interorganizational monitoring is particularly crucial in highly institutional environments, such as academia, where organizations are rewarded for using correct structures and processes, but where it is difficult to unambiguously determine the ultimate performance of the organization. However, we argue that interorganizational monitoring is a basic process in any organization, regardless of whether the environment is institutional or technical.

CONCLUSION A more comprehensive examination of the different aspects of the interorganizational monitoring process can yield insights into the management of change. Rather than focusing on any particular aspect of monitoring, we argue that taking a more integrative approach and understanding how the process affects information acquisition and signaling will better inform

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practitioners and researchers seeking to understand how organizations learn from other organizations to enhance their change process and ultimately improve their performance.

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PART II: INSTITUTIONAL AND RESOURCE FOUNDATIONS OF STRATEGY MAKING

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THE DEVELOPMENT OF THE RESOURCE-BASED FIRM BETWEEN VALUE APPROPRIATION AND VALUE CREATION Arabella Mocciaro Li Destri and Giovanni Battista Dagnino ABSTRACT Various authors have brought forth the idea that the increase in context turbulence and the relentless change in today’s economic and competitive environments have rendered it essential for an effective firm strategy to combine both value appropriation and value creation (Porter, 1996; Moran & Ghoshal, 1999; Venkataraman & Sarasvathy, 2001; Hitt, Ireland, Camp, & Sexton, 2001b). Nonetheless, the methodological bases and the assumptions that characterize contributions concerning value appropriation and value creation are notably different and in many respects opposite to one another. These profound methodological differences hinder the possibility of a combined consideration of value appropriation and value creation issues within a coherent interpretative framework. By reinterpreting more conventional strategy studies in the light of the Austrian process view, this article builds a process framework which is able to consider and render mutually compatible both value appropriation and Strategy Process Advances in Strategic Management, Volume 22, 153–188 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22006-5

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value creation within the unitary process of firm development. In addition, the use of the Austrian approach as an interpretative lens enables an evolution and extension of the resource-based theory that consents it, not only to grasp the mechanisms behind value appropriation, but also to suggest new ways of viewing post-industrial firm behavior that help to interpret its dynamic and proactive role in the value creation process.

INTRODUCTION In the analysis of competitive advantages, strategy investigation has traditionally focused its attention on the mechanisms that consent firms to take advantage of systematic rent flows. Although the nature and the origin of the rents considered within the dominant or emergent frameworks in strategic management (i.e., Knowledge-Based Theory-KBT, Resource-Based TheoryRBT, and Structure-Conduct-Performance paradigm-SCP), are significantly different from one another, the main issue remains essentially the same: firm strategy is prevalently concerned with the behaviors and the characteristics that permit firms to appropriate as much value as possible from their productive activity, rather than facing the issue of value creation (i.e., the creation of new wealth for themselves and for the system they belong to). The origin of firm heterogeneity on which the possibility of obtaining rents rests is generally attributed to unexpected changes in the environment (Rumelt, 1984), to luck (Barney, 1986; Cohen & Levinthal, 1994), or to entrepreneurial or managerial foresight (Barney, 1986). Probably due to the continuous tension toward normative implications that distinguish strategy studies, for a long time the latter have failed to further their knowledge regarding the process of value creation. The basic reasoning behind this attitude being that, even if there were the possibility of formulating normative indications about value creation, these would be of little or no use to firms as, once they have been identified and implemented, imitation and expropriation phenomena would quickly erode any benefits firms were able to achieve thanks to them. Consequently, according to the prevailing opinion (Barney, 1986, 1989; Dierickx & Cool, 1989; Schoemaker, 1990) there can be no systematic theory of value creation by firms. Although this opinion has virtually dominated strategy enquiry for a long time, there is an increasing number of contributions (Amit & Schoemaker, 1993; Teece, Pisano, & Shuen, 1997; Barney, 1997; Moran & Ghoshal, 1999; Nonaka, Toyama, & Nagata, 2000), broadly within the RBT and the KBT,

The Development of the Resource-Based Firm

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that begin to address the issue of value creation. In addition, other authors have pioneered the idea that the increasing environmental turbulence and the constant nature of change in today’s economic and competitive scenarios make it crucial for a successful firm strategy to foster both value appropriation and value creation (Porter, 1996; Moran & Ghoshal, 1999; Venkataraman & Sarasvathy, 2001; Hitt et al., 2001b; Nonaka & Toyama, 2002). Nonetheless, both the methodological approaches and the assumptions underlying the studies which analyze issues relative to value appropriation, on the one hand, and value creation, on the other, are different and in some important respects at stark opposites to one another. The methodological distance between these two streams of thought hinders the possibility of formulating a coherent framework within which to conduct a combined analysis of both value appropriation and value creation (Schulze, 1994). However, to view these perspectives as fundamentally incompatible, one has to believe that each of these approaches of study sees its own theory as fully deterministic; i.e., as outlining necessary and sufficient conditions for explaining firm development in all its phases (Baum & Dutton, 1996). This condition is not present in any of the two approaches we analyze herein; therefore it is possible to see these perspectives as potentially complementary. This paper aims to develop an interpretative lens and a methodological approach which are able to render the phases of value appropriation and value creation mutually compatible in order to permit their combined analysis within the unitary process of firm development. This means to forsake the dichotomic and polarized vision of firm activity based on the incommensurability between the two basic conditions of firm evolution (i.e., stability and change) and to hunt for the nexuses of integration between value creation and value appropriation. In this study, the firm and the mechanisms at the basis of its success are based on conceptual categories elaborated: (a) within the RBT and the KBT of the firm; (b) integrated with the Schumpeterian analysis of economic development (Schumpeter, 1934, 1942); and (c) with the concepts and the methodological approach that characterize the neoAustrian process and subjective view (Hayek, 1948, 1978; Kirzner, 1979, 1997; Langlois, 1984, 1986; O’Driscoll & Rizzo, 1985). More precisely, the Austrian process view is regarded as a general epistemic perspective that lays the ground to integrate value appropriation and creation, and that can be used as a methodological basis in modeling and

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theorizing about the strategy process. Though it may appear counterintuitive, the Austrian approach bears a number of intriguing links with the traditional strategy process literature that we have tried to point out disseminating them throughout the paper.

Why a Process View is Much Required? The adoption of a process view to economic phenomena allows for the assertion that value appropriation and value creation are not incompatible within the theory of the firm, and there is no need (as has often been the case in the past) to counterpoise them. Conversely, there are two conditions that equally characterize the process of firm development. At the firm level, a process approach is able to explain how the firm can appropriate value from its existing activities (or from new ones), and how the firm can create value by performing new activities (or by conducting its existing activities in a different way). The strategic theory of the firm genuinely needs value creation as much as it needs value appropriation because, absent value creation, the possibility to create and renew the bases of sustainable competitive advantage and the same logics of firms’ operational processes are hindered. The use of the aforementioned dynamic and subjectivist approach also renders it possible to single out and appreciate the contribution, both joint and separate, that value appropriation and value creation offer to firms in order for them to adopt and develop new productive pathways (Mocciaro Li Destri & Dagnino, 2003). Avoiding to engage in the methodological dispute between those who support (Barney, 2001) and those who oppose (Priem & Butler, 2001; Bromiley & Fleming, 2000) the theoretical strength of the RBT of the firm, in the present analysis we sustain that: (1) there is not a single vision of the firm based on resources, competences and knowledge; rather there are several views of the resource-based (Schulze, 1994) and knowledge-based (Grant, 1996; Nonaka et al., 2000) firms. Some of these views are essentially static (Barney, 1991; Peteraf, 1993; Porter-Liebeskind, 1996), whereas others are more dynamic (Amit & Schoemaker, 1993; Teece et al., 1997; Nonaka et al., 2000), and others focalize their attention on the issue of resource exchange (Moran & Ghoshal, 1999; Coleman, 1990);1 (2) the visions of the resource- and knowledge-based firm described above are correspondingly referable to ‘structural’ or ‘content’ approaches in


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the first case, and ‘process’ approaches in the second and third case. In order to appreciate the differences between static/structural and dynamic/process views of firm resources and knowledge and to create a bridge between these two views, it is vital to return to the original Penrosian perspective (Penrose, 1959) and integrate it with a more open, dynamic and subjectivist approach like the Austrian one; (3) in order to be able to move from the concept of value appropriation to the concept of value creation and create an original synthesis between the two, it is necessary to eradicate the low level of voluntarism accorded to the firm in the RBT and the KBT. This aim may be accomplished thanks to the introduction in strategy research of both the Schumpeterian integration between resources and competences (Langlois, 1995), and the active role accorded to entrepreneurs by Austrian economists (Kirzner, 1973, 1997); (4) finally, the reconduction of value appropriation and value creation within a coherent analytical framework requires: (i) the capacity to transcend the dichotomy between the static/dynamic conditions of a system and of the phenomena connected to it (Schulze, 1994); (ii) the capacity to move toward a multidimensional interpretation that encompasses both the stable and the dynamic conditions of systems (O’Driscoll & Rizzo, 1985; Langlois, 1995), on one hand, and that allows for ‘time’ to play an effective and autonomous causative role both in the stable and the dynamic phases of the system (Hayek, 1948, 1978; O’Driscoll & Rizzo, 1985), on the other. It is this last condition, due to which it becomes possible to accommodate learning phenomena into all the phases of firm development, which provides a fundamental link (heretofore absent) between value appropriation and value creation. In order to illustrate the process of firm development between value appropriation and value creation, this paper is structured in five sections. In particular, in the second section, stemming respectively from the Penrosian and the Nonakian conceptions, the firm comes to be defined as an integrator of resources and competences whose efficient coordination produces new knowledge. In the third section, the different logics that underlie value appropriation and value creation in strategy enquiry are defined and juxtaposed. In the fourth section, on the basis of the analysis of the fundamental assumptions that characterize ‘content’ and ‘process’ studies in strategy, the stark dichotomy existing between these two approaches is emphasized and discussed, and the methodological premises on which to build in order to overcome this duality are illustrated. The following subsections introduce

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the typical Austrian process and subjectivist perspective within the strategy field and, on the basis of this renewed approach, are aimed to analyze the role and combination of value appropriation and value creation in the unitary process of firm development. The fifth and concluding section outlines the main methodological and theoretical implications derived from the present study and suggests new itineraries for further research in strategy.

THE FIRM AS A SYSTEM OF RESOURCES AND COMPETENCES FOR KNOWLEDGE CREATION The elaboration of a ‘theory of the firm’ within strategy studies is fairly recent; before the development of the resource-based view (RBV) of the firm (Barney, 1991; Peteraf, 1993) in the 1990s, and later on the knowledge-based view (KBV) of the firm (Grant, 1996, Porter-Liebeskind, 1996), the consideration of endogenous firm characteristics and the mechanisms underlying its activities were generally absent from the strategy agenda. Classical strategy studies developed in the 1960s and 1970s (Ansoff, 1965; Andrews, 1971; Hofer & Schendel, 1978) focused their analysis of the determinants of firm success on the interaction of factors both endogenous and exogenous to the latter. According to this approach, strategic analysis consists in the examination of both the strengths and weaknesses internal to the firm and the opportunities and threats present in the external environment (i.e., the overworked 1960s SWOT analysis); the aim being that of deploying the internal strengths to capture the opportunities present in the external environment while neutralizing the external threats. Although this branch of research considers the internal characteristics of the firm, it cannot be said to have elaborated a theory of the firm as the mechanisms and logics governing firm existence, behavior and success are not considered. Whereas, there has always been a widespread general agreement as regards the framework elaborated within the classical strategy studies, during the 1980s a significant part of strategy research was conducted within the SCP paradigm, initially elaborated by Michael Porter (1980, 1981) on the basis of Mason’s (1939) and Bain’s (1956) studies in Industrial Organization Economics (IOE). According to this perspective, it is the structural characteristics of the industry which determine the conduct and the performance of the firms that operate within it (Scherer & Ross, 1990). The implicit hypotheses on which these studies rest, exclude the possibility for firm heterogeneity and reduced resource mobility to be considered as sources of


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competitive advantages for the firm: the identification and acquisition or development of the resources necessary to compete within a specific industry are not problematic. Coherently, for approximately a decade strategy studies have de facto overlooked the endogenous characteristics of firms and concentrated their attention on the exogenous competitive environment. The formulation and development of the RBT was at least partially a reaction to the dominant SCP framework, and identifies the determinants of firm competitive advantages in the endogenous characteristics of the latter (see Hitt, Freeman, & Harrison, 2001a; Pettigrew, Thomas, & Whittington, 2002; Faulkner & Campbell, 2003, for fairly comprehensive reviews on this critical passage). In this perspective, rooted on the original Penrosian vision of the firm, the capacity of firms to obtain rents from their activities does not depend on the product/market chosen, rather it depends on the system of resources that firms possess or control, and on the way these are combined together to carry out the productive process that enable it to offer particular products or services on the market. The RBT firm is therefore identified as the stocks of productive factors (i.e., resources) that are possessed or controlled by the firm and the capabilities the latter develops to deploy these productive factors – combining them through organizational processes and routines – in order to reach the firms’ goals (Barney, 2001, p. 54). In this perspective, the firm is a set of resources2 and competences3 (Prahalad & Hamel, 1990; Hamel, 1994) and can return to be considered as a more or less efficient producer of goods and services. Extending early strategic factor studies on the sources of competitive heterogeneity, a burgeoning dynamic approach to the RBT has recently emerged that explicitly focuses on the dynamic capabilities (i.e., the firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments – Teece et al., 1997). This perspective stimulates firms to achieve superior performance by continuously creating and nourishing a sequence of temporary strategic advantages (Eisenhardt & Martin, 2000), which requires the capacity to learn quickly in order to alter the resource configuration in adaptation to market changes.

Two Different Approaches Within the KBT of the Firm During to its particular emphasis on learning processes, and to its connection to the concepts of abilities and intangible assets (i.e., know-how and know-what; see Itami, 1987), the debate on the notion of competences in the

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1990s paved the way to the study of knowledge and the elaboration of the KBT (Eisenhardt & Santos, 2002; Grant, 2003). Initially, the KBT was an extension of the RBT, fundamentally tied to the perspective of value appropriation, and considered the firm as an agent that develops superior capacities to protect knowledge (Porter-Liebeskind, 1996) and/or to integrate and deploy the knowledge possessed by single individuals (Grant, 1996). More recently, the KBT has evolved toward a dynamic perspective, starting to assume a theoretical configuration more fit to the conceptualization of the firm according to value creation (see the juxtaposition of KBT1 and KBT2 in Table 1). Nonaka et al. (2000) and Nonaka and Toyama (2002), in particular, describe the firm as a cognitive system or, more precisely, as an entity which creates (new) knowledge. The possession of knowledge and the capacity to generate and deploy this knowledge are considered as the most important factors determining firm sustainable competitive advantages, as through them the firm acquires the ability to innovate, producing new goods/services/processes or manages to improve the existing ones. In this second KBT perspective, pioneering studies, such as the ones of Kogut and Zander (1992, 1993, 1996) and Zander and Kogut (1995), had already contributed to the view of the firm by considering it as an entity for knowledge creation and transfer and suggesting that the challenge, both in theory and in practice, was to grasp the firm ‘knowledge base’ that brings about a set or a system of capabilities. The capability system, together with some organizing principles, was considered

Table 1.

Resource- and Knowledge-Based Approaches in the Strategic Theory of the Firm.

Strategic Perspectives

Basic Framework

Competitive Advantage

Market

Rents

RBT Dynamic RBT

Static Dynamic

Resource Heterogeneity How can you sustain it?

Factors

Ricardian Schumpeterian

KBT1

Static

Knowledge

Ricardian

KBT2

Dynamic

Protection, application and integration of knowledge How can you protect it? Creation of new knowledge How can you create it?

Schumpeterian Austrian

Dynamic Process

Information Knowledge How can you give origin to it?

Intangibles

Schumpeterian Schumpeterian Kirznerian


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in turn as the primary source of competitive advantage. Rooted in this latter stance, the Nonakian firm, conceived as a knowledge generator and incubator, is thus a second base particularly appropriate for our definition of the firm. Combining the contributions stemming from RBT and KBT2 (i.e., Penrosian and Nonakian conceptions), we see the firm as a dynamic system of resources and competences whose raison d’eˆtre is the creation of knowledge. Firm Coherence and Historical Significance For the firm to acquire importance as an entity historically significant, the activities that characterize it, must present a high level of coherence (Teece, Rumelt, Dosi, & Winter, 1994; Langlois, 1995) both in a synchronic and a diachronic dimension. In order to guarantee its survival and success, the firm must possess a strategy, while leaving sufficient liberty and flexibility (Mintzberg & Waters, 1985; Quinn, 1980), defines and legitimates the way it is organized and governed and that, contemporarily, is able to foster the coherence between the resources, competences and knowledge that are at the basis of the firm’s organization and management. This kind of coherence allows, in the short-term, to identify gaps and anomalies – with respect to the strategic trajectory undertaken – in the management and the organization of the firm and prepares the ground for a coherent development of the latter in time. From a diachronic point of view, firm coherence helps the manager and/ or entrepreneur to identify, among the various opportunities that arise, those that are most appealing and promising for the specific firm considered. Furthermore, firm coherence helps to guide the development and the maintenance of (at least a part of) the resources, competences and knowledge which is necessary to possess or control in order to implement strategies aimed to grasp the opportunities of development that the environment presents (Nelson, 1994). Therefore, in this perspective, the firm is viewed as an autonomous administrative planning entity essentially aimed toward the production of knowledge, whose activities are coordinated via strategic projects defined on the basis of their effect on the firm as a whole (see Penrose, 1959).

VALUE APPROPRIATION AND VALUE CREATION IN THE RESOURCE-BASED FIRM As stated earlier, various authors (Porter, 1996; Moran & Ghoshal, 1999; Venkataraman & Sarasvathy, 2001; Hitt et al., 2001b; Nonaka & Toyama,

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2002) have recently underlined the necessity for an effective firm strategy to foster both value appropriation and value creation. In order to allow the definition and the resolution of the issues that derive from a combined consideration of these two faces of firm strategies, it is necessary in the first place to verify the mutual compatibility between the approaches that characterize studies conducted on value appropriation, on the one hand, and value creation, on the other. Consequently, in the following sections we analyze the methodological bases and render explicit the implicit hypotheses that underlie studies regarding value appropriation and value creation. Finally these are juxtaposed in order to verify their mutual compatibility.

Value Appropriation and Competitive Advantages in the Resource-Based Firm Content strategy studies consider firm activities and their relative productivity (or the contribution of firm activities to the wealth of the system they belong to) as given, and analyze the way in which market forces determine the scope (and the very existence) of firm rents. If firm activities and their relative productivity are given, then the possibility for the firm to obtain rents depends on the transfer of wealth between the different agents with whom it engages in market exchanges.4 Consequently, strategy analyses that are focused on the generation of firm rents, given the wealth that the firm contributes to the system in which it operates, are basically studying the way to appropriate higher or increasing shares of wealth from the agents with whom the firm engages in transactions and the forces which have an influence on the amount of the aforementioned transfer. In the light of what we have stated, it becomes evident that studies regarding the sources and the protection of firm competitive advantages in fact analyze the issue of value appropriation. If for those who adhere to an efficiency view of the market (in a neoclassical sense) the firms operating within an economic system may appropriate wealth from the agents with whom they participate in market exchanges only when (and if) the system is in a phase of temporary disequilibrium, in the SCP, RBT and KBT1 frameworks, firms have the possibility to gain rents especially when the system reaches equilibrium (Donzelli, 1986). These three perspectives differ with regard to the way in which they identify the conditions that allow the appropriation of value on behalf of the firm or, more precisely, with regard to the level of analysis taken into consideration, while the logical mechanisms at the basis of value


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appropriation remain to a large extent unchanged. In fact, studies conducted in the RBT and KBT1 frameworks focus their attention at the firm level, whereas the SCP framework considers entire industries, or strategic groups of firms within an industry. In the latter, strategic analysis concerns the forces operating at the industry (or intra-industry) level that exercise a significant influence on the capacity of the firms who belong to the economic space considered to obtain higher prices for the products and/or services they offer to the market, with respect to the opportunity costs that such products and/or services entail, and/or to avoid that the suppliers of an industry may appropriate a part of the value of the firms operating within the industry itself.5 The emphasis assigned to monopolistic and Chamberlinian rents (Peteraf, 1993; Dagnino, 1996), which are based on a deliberate prevention of the competitive forces and the restriction of the quantities offered by firms in order to artificially raise market prices, shows clearly how the main purpose in the SCP framework is the issue of value appropriation. In the former two approaches, the fact that the resource- or knowledgebased firm identifies the source of its competitive advantages in Ricardian or in quasi-rents (Peteraf, 1993), seems, at a first glance, to show that firm rents depend on an ineliminable scarcity of the resources, competences and knowledge present in the economic system which determines a natural and inevitable heterogeneity between firms. However, if considered more closely, competition between firms is present in this framework too, but it occurs at the factor market level – i.e., firms deliberately restrict the availability (to other firms with whom they compete) of resource, competences and knowledge on which their competitive advantages rest. In other terms, in the RBT and KBT1 firm competition no longer occurs and the product/market level is shifted respectively to the level of resources and competences (Prahalad & Hamel, 1990; Hamel & Prahalad, 1994) and/or to the level of knowledge (Porter-Liebeskind, 1996; Grant, 1996). It is therefore possible to see how the logic underlying the analysis of competitive advantages in the SCP, RBT and KBT1 is substantially the same: firm strategic conduct is largely focused on the appropriation of value during exchange processes and on preventing other actors to acquire part of its rents, whereas there is barely any attention paid to the creation of new sources of competitive advantages. Implicit Hypotheses Underlying Value Appropriation Studies conducted within the content/structural stream broadly focus on identifying resources and competences that are able to generate Ricardian

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rents (Peteraf, 1993; Dagnino, 1996) and on how to obtain sustainable competitive advantages from these resources. In this perspective, the RBT offers normative advice to managers seeking to understand, preserve or extend competitive advantages, but says little about the creation of new competitive advantages. Economic activity occurs in efficient markets whose parameters of behavior are presumed to be known or knowable; i.e., firms operate in closed economic systems in which the general framework tying means and ends present in the system (or the efficiency criteria that characterizes the system) are given and established exogenously from the firm. Correspondingly, significant sources of change are exogenous to the system, as what is endogenous is known or knowable and thus is reflected in the current conduct preventing the rise of new phenomena or that there be ‘real’ learning (Hahn, 1973) within the system. The portrait given is of a stable economic system, in which competitive advantages may be gained or eroded, thanks to changes in the relative positioning of the firms competing against one another with respect to the efficiency criteria present in the system, and in which previous conduct is a valuable guide for future conduct. This stream of thought does not indicate how firms may create new rent sources,6 but provides a set of tools that can be used to identify, acquire or control, and protect factors of production that are currently capable of generating rents. The emphasis posed on sustainable competitive advantages is commensurate with the assumption of equilibrium conditions, as is the strong concern for preventing appropriation and/or imitation of valuable resources or competences. Given the representation of the economic system in which firms operate, in this perspective agents face parametric uncertainty (Langlois, 1984) – i.e., agents or firms are able to gain knowledge regarding the various actions which they may take (or the alternative ‘possible states of the world’) but, as seen they are unable to know which of these will effectively occur, they are forced to reason in probabilistic terms. As a consequence of the fact that the past represents a good guide for future behavior, and of the relative parametric uncertainty faced by individual agents, the idea of agent rationality that underlies this kind of study is strong though imperfect:7 in practice it is a Cartesian idea of rationality compatible with Simon’s procedural and/or bounded rationality (Simon, 1949/1957, 1976, 1982). Entrepreneurial behavior in this framework is reduced to the ability to perform logicaldeductions regards market imperfections, with the aim of putting in action arbitrage processes between the cost of the resources and competences that must be acquired or developed by the firm and the market prices of the goods and services that may be obtained by their deployment.


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Value Creation and Rent Dynamics in the Resource-Based Firm The process/dynamic angle, on the other hand, has aims and presents characteristics that are at odds with the structural/content approach. Recently, number of authors (Amit & Schoemaker, 1993; Nonaka, 1994; Porter, 1996; Teece et al., 1997; Moran & Ghoshal, 1999; Nonaka et al., 2000; Hitt et al., 2001b) have called attention and (some of them) tried to trace the founding blocks for the systematic analysis of value creation. These studies underline how strategy needs to focus on value creation as well as value appropriation, as it is due to the value creating strategies that firms may create and renovate the sources of their competitive advantages. On the basis of the process, aspects of the RBT and the contributions of the KBT2, along with the Schumpeterian analysis of economic development, in this section we define value creation processes, the type of rents, which may be gained through these processes and the view of the firm this perspective entails. Finally, the macro and micro logics behind value creation are discussed. In this study, the notion of value creation is referred to the role the firm plays with respect to the economic system in which it operates,8 and entails the latter’s capacity to perceive and implement new combinations between resources (Schumpeter, 1934), to develop new competences and new knowledge that are able to increase the efficiency reached in the use of the resources present in the economic system.9 For it is able to grip the two critical levels of the economic system and the firm in the value creation perspective, the latter point is a good complement to the arguments advanced in a few dynamic resource-based and evolutionary models in strategy literature (Montgomery, 1995; Teece et al., 1997; Eisenhardt & Martin, 2000; Winter, 2000). In the process/dynamic perspective the focus becomes the generation of new rent flows and, thus, the creation of new competitive advantages (and not merely their protection). The creation of new rent flows entails: (a) learning new ways of managing existing sets of resources or competences; (b) developing new sets of resources and capabilities (DeGregori, 1987); (c) achieving a match between changing environmental conditions and distinctive organizational resources and competences. The driving force behind value creation remains, as in the case of value appropriation, the firms’ search for rents. However, the origin and the nature of these Schumpeterian rents (Dagnino, 1996)10 are different from Ricardian or quasi-rents. The innovative activity of the firm – when successful – changes the relationship between means and ends that define the

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efficiency criteria of an economic system and, thus, redefine resources, competences and knowledge that are strategically relevant. At least in the short-term, the innovative firm will present a higher level of heterogeneity with respect to the other firms with whom it competes and, at least initially, will be the only one between them to conform to the new efficiency criteria it contributed to set. Thus, if on the one hand, Schumpeterian rents are the result of firm heterogeneity and of the higher efficiency of firm resources, competences and knowledge relative to those of the other firms in the system considered (as is also the case with Ricardian rents), on the other, they differ from Ricardian and quasi-rents, as the process behind their rise and flow contributes to create wealth also for other individuals that belong to the economic system in which the firm operates. Entrepreneurial Intuition and Knowledge Vision In this view, the firm is seen as a cognitive system, which systematically aims to develop new knowledge and new distinctive capabilities. Although the KBT2 considers the entire organization (or significant parts of it) in the knowledge creation process, it also underlines the crucial role played by entrepreneurial intuition in the creation of value. It is the entrepreneurial intuition that, through the definition of the ‘knowledge vision’ (Nonaka et al., 2000; Fransman, 1994), gives the knowledge production process an orientation that the market is unable to.11 Therefore, in this dynamic framework, entrepreneurship does not intervene on a static organization which replicates standard logics while carrying out its operational processes; rather it is embedded in a continually changing reality from which it absorbs stimuli and information that significantly contribute to the definition of the specific contents of its creative intuitions. However, value creation does not occur in the absence of entrepreneurial behavior; i.e., without the discontinuous alteration in the logic at the base of the firms’ productive activities. Implicit Hypotheses Underlying Value Creation The framework within which the studies about value creation are conducted considers the economic system as open and dynamic; the set of means and ends that define the efficiency criteria within it are not given, but changeable and expandable to either (or both) exogenous factors or to forces endogenous to the system — namely firm innovations. The economic system is, therefore, not stable, but rather cycles in and out of equilibrium and is constantly changing. This stream of thought allows for a strong voluntaristic vein; firms are able to act on the forces in the economic system and are able,


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when their actions are successful, to change the efficiency criteria on which competition between firms is based. In this context, the past is an uncertain guide for future conduct and there is an irreducible ex ante uncertainty associated with entrepreneurial behavior. The nature of uncertainty facing individual agents is no longer parametric but structural (Langlois, 1986) or genuine (O’Driscoll & Rizzo, 1985). Structural or genuine uncertainty is relative to situations in which there is no possibility to identify all the alternative ‘possible states of the world’ as – given the open nature of the system in which agents operate – these have yet to be created. Firms are able to predict a certain number of aspects of future events; however these are largely determined and indeterminable as they depend on the specific circumstances of time and place that occur as the system evolves. Entrepreneurial Behavior in Value Creation Entrepreneurial behavior does not reside in the ability to predict future events (as this is not possible given the characteristics of the system in which firms operate), but rather in the ability to foresee future events. In other terms, firms try to anticipate the possible future evolutions of the system in which they operate that are not logically deducible from the conditions and the circumstances present at the moment in which they formulate their views. Entrepreneurs try to anticipate the characteristics of events that still have to be created with the aim of being prepared for them when (and if) they occur. In other terms, the undetermined nature of future events implies that firm behavior, rather than heading for the search of knowable productive combinations, proceeds toward the discovery and/or the invention of new productive combinations (Littlechild, 1986; Kirzner, 1979, 1997). Summing up, firm entrepreneurs and managers continuously try to develop, nurture and apply strategic foresight.12 Given the former considerations, it becomes apparent that individual rationality in this perspective must be conceived as a weaker notion than the logical deduction from a set of pre-established explicit assumptions (or Cartesian rationality). Entrepreneurial behavior is in fact guided by the anticipation of future events based on an incomplete and largely tacit set of assumptions. The rationality that leads to the discovery or the invention of new productive combinations and their implementation implies the capacity to learn and to adapt constantly to the specific space–time context in which agents operate (Loasby, 1986). In this perspective, the ability of individuals to make sense of novel events through the interplay of memory of the past and anticipation of the future become paramount, as it is due to this interplay

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that individuals make new sense of the knowledge they already possess and of the new fragments of knowledge and information they acquire from the changeable environment surrounding them giving way to intuitions. The latter contention displays significant connections with the study of entrepreneurship as it has been carried out in strategy process research. The examination of entrepreneurial initiatives and ventures has been the focus of the renowned Bower-Burgelman framework and has stimulated additional process investigation. In fact, much of the strategy process tradition includes the scrutiny of strategic initiatives and ventures (both as individual start-ups and as spin-offs of large multinational firms), their motives (i.e., knowledge spillovers, creativity and vision) and evolutionary paths (Burgelman & Sayles, 1985; Mintzberg & McHugh, 1985; Mintzberg & Waters, 1985; Pettigrew, 1979, 1985).

AUSTRIAN PROCESS VIEW AND FIRM DEVELOPMENT BETWEEN VALUE APPROPRIATION AND VALUE CREATION As the environment in which firms operate has become increasingly turbulent and hypercompetitive (D’Aveni, 1994), there has been an increase in attention and consensus with regard to the necessity for effective firm strategies to foster both value appropriation and value creation. In order to allow the contemporary consideration of these two aspects of firm strategy, there is the need to abandon the dichotomic view of firm activities that has typically characterized strategy studies by highlighting the nexuses between value appropriation and creation, showing the contribution of these two phases to the definition of the diachronic paths of firm development. There is, therefore, in the first place the need to render mutually compatible opposite views on which content and process studies originally rest. The following sections address the reasons behind the incommensurability between the studies conducted on these two aspects of firm strategy until today, proposing the Austrian process view as an interpretative lens capable of (re) conducing value appropriation and value creation into a unitary framework for the analysis of firm development. The Content vs. Process Duality in the Strategic Theory of the Firm Our analysis above has shown that the (implicit) hypotheses on which the content/structural and the process/dynamic view of the firm are based at


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stark odds with one another. If they are systematically compared, they seem, at least in first approximation, incommensurable and difficult to reconcile within a single framework of analysis. The content/structural view of the firm implies strong agent rationality, views the economic system as closed, is based on an allocative idea of efficiency (North, 1990, 1994) and affirms the durability of system equilibria. The process/dynamic view, on the other hand, is non deterministic and gives firms a strong voluntaristic power, implies weak agent rationality which cannot be based on logical-deductive reasoning, views the economic system as open and changeable, is based on a dynamic idea of efficiency and assumes system equilibria to be transitory (see Table 2). In order to allow an appropriate comprehension of the firm’s development process, it is necessary to ascend to the fundamental hypotheses at the basis of the study of the firm and introduce an analytical framework, which is able to integrate the two dichotomic perspectives considered earlier. In this analysis, we introduce the Austrian process approach within strategy studies (Jacobson, 1992; Langlois & Robertson, 1995; Barca, 2003; Roberts & Eisenhardt, 2003) as a means to obtain such integration. In this regard, we underscore that – though it is in our opinion of vast interest for the refinement of some compelling strategy notions (such as the one of the entrepreneur and that of entrepreneurial discovery of new profit opportunities) and consistently beneficial for its theoretical advancement – strategy inquiry, if we exclude a limited number of rather episodical studies, has largely overlooked the potentiality of the Austrian perspective. From a methodological angle, the aforementioned approach presents the particular epistemic characteristic of being sufficiently open, flexible and encompassing to consent the integration and comprehension of conceptions that, at first approximation, seem opposite to one another. This perspective may, thus, be used as a methodological surface or interface for the investigation of multiple levels of analysis and is able to lay the ground for the integration of approaches which are based on different and prima facie opposite assumptions. More accurately, the Austrian approach is viewed as a general perspective that may consent the combination of value appropriation and creation in the firm evolutionary process.

Selected Contributions of the Austrian Process View to Strategic Analysis In this section, we illustrate concisely the basic building blocks that characterize the Austrian process approach. Among the main representatives of

Juxtaposition and Integration of the Approaches to Value Appropriation and Value Creation in the Strategic Theory of the Resource-Based Firm. VALUE APPROPRIATION

VALUE CREATION

INTEGRATED VIEW

Deterministic

Voluntaristic Subjectivist

Austrian subjectivist and process approach

(I) Macro-level - The Economic System Nature of Economic system

Closed Static

Open Dynamic

Equilibrium of the system

Neoclassical Equilibrium

Disequilibrium

Efficiency criterion of the system

Allocative efficiency

Dynamic efficiency

Origins of change in the efficiency criteria

System data and information given Modifications only due to factors exogenous to the system Parametric

Modifications due to factors both exogenous and endogenous to the system

Cyclic: closed/open, but always dynamic Coordination between agent predictions regards typical aspects of future events Both: Allocative and Dynamic efficiency – even contemporarily Modifications due to factors both exogenous and endogenous to the system

Entrepreneurial Rationality

Strong and given by logicaldeductive reasoning (Cartesian Rationality)

Structural (or Genuine)

Weak (subjective) Capacity to learn from, and adapt to, potentially all types of situations

Both: Parametric and Structural (depends on the economic phase) Situational approach: Cartesian if the situation is sufficiently structured; if not, weak (subjective) – capacity to learn from, and adapt to, potentially all types of situations


Methodological Approach

Nature of the environmental uncertainty faced by agents

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Table 2.

Durable Consolidated/ or possibility to consolidate them Monopolistic Chamberlinian Ricardian Quasi Rents

Non durable Transitional

Objective of entreprenerial behavior

Predict future events Intertemporal arbitrage between the value of resources, competences and knowledge and the value of the products and services obtainable by deploying them. Medium/long term Planning

Foresee future events that are not yet determinable Perceive and create new combinations of resources, competences and knowledge that modify the efficiency criteria of the system Adaptive changeable guide of the firm

Results of entrepreneurial activity

Arbitrage Increase in the allocative efficiency of both the firm and the economic system

Innovation Increase in the productivity of the resources present in the economic system

Significant contributions in strategy literature

Barney, 1991; Rumelt, 1991; Peteraf, 1993

Rumelt, 1987; Teece et al., 1997; Moran and Ghoshal, 1999; Nonaka et al. 2000; Nonaka and Toyama, 2002

Competitive Rents accessible to firms

Schumpeterian

Non durable in the long run, but neither necessarily transitory in the short run Schumpeterian Kirznerian Monopolistic Chamberlinian Ricardian Quasi Rents Manage contradictions: Foster both the protection of competitive advantages already possessed (i.e., incrementing allocative efficiency) and learning aimed towards the creation of new sources of competitive advantages (i.e., incrementing dynamic efficiency) Contemperation of arbitrage and innovation issues, reaping rents from existing sources of competitive advantages whilest creating new sources of rents Wernerfelt, 1984; Dierickx and Cool, 1989


(II) Micro-level - The Firm Competitive positions of firms

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the Austrian school we find authors like Menger, Mises, Kirzner, Hayek, O’Driscoll and Rizzo. In very general terms, the Austrian subjectivist approach to economic analysis may be distinguished from the objectivist approach (typical for example of neoclassical economic studies) on the basis of the former’s assumption that the contents of the human mind, and therefore individual decisional processes and outcomes, are not rigidly determined by variables and events present in the exogenous environment. Consequently, emphasis is given to the creative possibilities of the mind and to the autonomy of individual choices. ‘Economic facts’ are considered to be the unintended consequences of the choices and actions taken liberally and voluntarily by all the actors that operate within the system analyzed. Therefore, in this view, economic facts are neither the result of higher order ‘economic forces’, nor the result of specific agent actions aimed to their explicit attainment. Typical and Unique Aspects of Economic Processes Although there have been extreme positions like that of Lachmann within the Austrian school, most of the contributions to the latter can be distinguished from the more radical subjectivist approaches (like the radical constructivists and the historicists) as they assume the possibility to identify typifications in human behaviors and interactions. Accordingly, the Austrian approach is not limited to the comprehension and the description of specific human actions or interactions (and the economic events that derive from them) that are destined not to be repeated, but rather it focuses its studies on the analysis of recurring types of human interaction and aims to render these intelligible; i.e., it aims to find adequate causality relations between events and human actions. It is the assumption of the possibility to single out typical and unique aspects in human and economic phenomena that distinguish Austrian analyses from the more radical subjectivist approaches. In fact, if all future aspects were time dependent (i.e., their realization depended on the specific positioning within a continuous flow of events) they would all be unpredictable, and single agents would not be able to plan and act intentionally. The condition that allows agents to act intentionally resides in the relative stability of their mental frames. The reconciliation of the need for stability of the mental frames guiding individual action and the uncertainty that derives from the flow of time, is based on the recognition that processes possess both unique and typical aspects – i.e., there are aspects that are time dependent and others that are relatively time independent. Typical aspects of phenomena can be identified as the regular or repetitive characteristics of events,13 which may be identified by agents probabilistically or with certainty, but the nature of their prediction remains deterministic


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either way. Typical aspects of phenomena have, therefore, a static nature. This is true from at least two points of view: (i) the set of alternatives is closed; and (ii) the revision of the distribution of probability between alternative typical aspects possible is, given the presence of a specific event, determined or determinable. Unique aspects of events are identified as those aspects that are time dependent and are therefore not subject to repetition (i.e., the property of irreversibility). Owing to these aspects that individual agents learn from the experiences they live and progressively change their mental frames and the way they interpret new events. Accordingly, it is the consideration of the unique aspects of events that determine the open nature of the predictions of future events and that render uncertainty endogenous within a continuously changing system. Individual agents, in fact, are able to predict the typical aspects of future events, but are not able to predict the ‘details’ or the unique aspects of the latter. A Notion of Equilibrium Compatible with Dynamic Processes Parallel to the adoption of a process and subjectivist view, there is the necessity to revise the notion of system equilibrium and formulate a notion of equilibrium that is compatible with the idea of time and endogenous change. In fact, the possibility that in a process view the typical aspects of phenomena may change renders inadequate to the conception of equilibrium as the perfect and punctual coordination between all the participants to the system or as the logical consistency of the functions that tie together the economic variables of the system. Furthermore, the neoclassical idea of equilibrium implies the absence of endogenous mutations in the system: the only source of change are exogenous to the system considered. The key to the formulation of a notion of equilibrium compatible with the process view described herein, and with the idea of endogenous change, lies in the distinction between typical and unique aspects of phenomena. O’Driscoll and Rizzo (1985) elaborate a new notion of equilibrium compatible with the Austrian approach. The initial building block is given by Hayek’s (1937) idea of equilibrium as the perfect coordination of the subjective plans of the single actor present in the system. In other terms, for Hayek the system reaches equilibrium when the subjective plans of individual agents coincide, and not when objective quantities offered and demanded equal each other due to intervention of the price mechanism. Although this formulation renders the notion of equilibrium compatible with the subjectivist view, it is still unable to account for the adoption of the idea of the endogenous nature of change. O’Driscoll and Rizzo (1985) introduce a

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notion of equilibrium as the coordination of the part of subjective plans that regard exclusively the typical aspects of phenomena; i.e., there is equilibrium when there is an agent coordination of the part that regard the typical aspects of phenomena even if their expectation concerning unique aspects of events does not coincide. This second notion of equilibrium is, therefore, compatible with the open nature of the system and with the ideas of spontaneity and of novelty. The fact that a system has reached equilibrium does not imply the absence of endogenous sources of change, rather more simply the relative stability of the typical aspects of phenomena that enable the coordination of classes of agent behavior. The possibility, given by this renewed notion, of changes in the knowledge agents’ posses and of the mental frames that guide their action even in equilibrium, implies that there is space for endogenous processes of change within stable systems. Subjective Agent Rationality and the Situational Approach Finally, it is necessary to consider how to intend agent rationality within the Austrian process view. At the base of the Austrian perspective lies a fundamental criticism to the Cartesian idea of subjective rationality; be this perfect, limited of procedural (Simon, 1949/1957, 1976, 1982). However, the Cartesian idea of rationality is not abandoned all together, rather the Austrians pass from the exclusive idea of Cartesian rationality to the situational approach14 in the analysis of individual reasoning. The situational approach adopts a flexible notion of rationality, which is reconducible to the idea of ‘reasonable behavior’ given the specific situation faced by the individual agent. It is, therefore, the characteristics of the specific situation lived by the agent that determines whether or not it is possible to consider agent rationality as Cartesian. The rationality dilemma must, consequently, be resolved through the analysis of the situation faced (Popper, 1966): the more the problem the individual is called to resolve is fluid, variable and difficult to structure, the more it becomes necessary to abandon the Cartesian idea of logical deductive reasoning and analyze the internal psychology, the knowledge and the reasoning procedures possessed by the agent. This approach maintains the fundamental liberty and voluntary nature of human action; however contemporarily it admits that the full exercise of subjective liberty does not imply the complete indetermination of human behavior – rather, depending on the nature of the problem faced, subjective liberty leads to different degrees of determination and predictability of human behavior. There is not the possibility to identify a single type of behavior, which is rational in all situations; individual rationality is, instead, the capacity to learn from past experience and


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to adapt to different situations adopting changeable behavioral patterns according to the different types of problems, which are progressively faced. The Austrian approach, therefore, does not counterpoise static and dynamic systems, rather it considers the economic system (and the activities of the agents who operate within it) in an authentically process view. Systems may be stable or dynamic and changeable, but stability does not mean that the system dies down to a static and unchangeable state; they more realistically are two different phases that the system may assume in different moments of a unitary evolutionary process. In fact, during the phases of equilibrium, where the typical aspects of events are sufficiently extended to consent agent coordination, the unique aspects of phenomena are considered to be constantly changing fostering individual learning processes and, thus, allowing for endogenous sources of change in the system and not solely for exogenous ones.

The Firm Development between Value Appropriation and Value Creation in the Light of the Austrian Process View The description of the Austrian approach to economic analyses offered above is sufficient to show how it is able to embrace both stability and change within a unitary analytical framework and, therefore, that it allows the adoption of an interpretative lens which fosters the creation of a bridge between studies conducted in the content approach, on the one hand, and in the process approach, on the other, without losing each one’s contribution to the knowledge of firm survival and success. In the Austrian view, the economic system circles in and out of equilibrium passing from more stable phases to more dynamic ones and vice versa. In the more stable phases, the system becomes temporarily closed and the typical aspects of phenomena become sufficient to consent agent coordination and the adoption of the arbitrage behaviors considered in content strategy studies. The sole consideration of the typical aspects of phenomena render the analysis static, seeing that in this case there is no place for learning processes by agents and, thus, for endogenous change. On the contrary, in unstable systems that are not in equilibrium the relevance of the typical aspects of phenomena is reduced and, correspondingly, the unique aspects of phenomena augment in significance. This condition hinders agent coordination and contributes to individual and interactive learning between agents, fostering the further opening of the system and the entrepreneurial perception of new productive possibilities.

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As it is intuitive, the dichotomic consideration of these two states of the system does not imply a substantial break away from the traditional strategic approaches to the analysis of the firm and may be seen as fully compatible with the studies conducted in the content perspective, on the one hand, and in the process perspective, on the other: there is thus the possibility to maintain the concepts, criteria and teachings that the content/ structural approach and the process/dynamic approach have contributed to the knowledge of firm survival and success. The Stable-and-Dynamic Systems Nexus The possibility to bridge these two perspectives and pave the way to the analysis of the nexuses between value appropriation and value creation resides in the emphasis of the fundamental linkages between stable and dynamic systems. Essentially, the nexus between stable and dynamic systems is given by the consideration of the unique aspects of phenomena present in stable systems. The inclusion of the unique aspects of phenomena in economic analyses consents that stable systems, although maintaining the characteristics shown in the content/structural approach, do not acquire a static nature. In fact, the mutability of the unique aspects of events and the constant search for increases in firm competitiveness even in stable systems leads agents to expand the information and knowledge they possess and to learn from each new event posing the pre-conditions for the intuition and the creation of new combinations of the resources and competences already (or not yet) present in the system. These in turn reinforce the satisfaction of new (or old) desires of the agents within the system considered or in other systems. Change may thus be endogenous to stable systems, due to the possibility that agents adopt entrepreneurial behaviors even in presence of stability.15 The adoption of entrepreneurial behaviors in stable systems is fostered by the learning processes that agents progressively bring forth by paying attention to the unique aspects of phenomena in their continuous attempt to interpret these in order to win competitive advantages vis-a`-vis their competitors.16 In this view, systems are not seen as static and unchangeable, nor as continuously changing and dynamic and, correspondingly, the firm is not considered to be exclusively aimed toward either value appropriation or value creation. It shows that, in order to guarantee firm survival and success, the latter cannot innovate and change (dis) continuously, there must be a period of time in which the firm may pursue value appropriation in order to grasp the fruits of its innovations through an increase in its allocative efficiency. At the same time, value appropriation cannot alone stand the test


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of time in a hypercompetitive environment: there is the need to anticipate and pro-actively contribute to the creation of the future ‘rules of the competitive game’ in order not to succumb to rival firm actions (see Table 2). Cyclic Processes of Firms and Economic Systems The view proposed shows that economic systems and firms have cyclic processes that move together and that are intimately linked. It is during the phases of stability that firms, while generating rents by increasing their allocative efficiency, more or less consciously, pose the basis for the future adoption of value creating behaviors and foster the construction of new competitive advantages (i.e., phases of inner change). During the phases of stability in the firm’s evolutionary process, it should actively nurture the increase of knowledge acquired and produced within the firm by emphasising the importance of taking into account novel and unexpected aspects of the events lived by the individual agents at all levels of the firm and creating the pre-conditions to encourage the condivision and interaction of individual agents in order to enhance organizational learning processes (Nonaka, 1994). The adoption of entrepreneurial value creating behaviors, on the other, must be followed by phases of stability in order to be able to increase the efficiency of the productive processes and consolidate stable rents from the innovations it has led to. It may be useful to observe the dynamics of value appropriation and value creation behaviors in the firm developmental phases as long as these concepts are applied to a historical case study. Value Appropriation and Value Creation at Philips NV Since it is customarily beneficial (and yet not resolutive) to try to exemplify theoretical constructions, we examine concisely the cyclic strategic behavior of a widely recognized Dutch firm, Philips NV of Eindhoven, in relation to the introduction and management of one of its core products: the CD. We notice that, in relation to this item, the company has traveled straightforwardly through time and space across both the two phases. Notably, Philips has positioned itself decidedly on change and value creation when, at the beginning of the 1980s, thanks to accurate R&D investment and strategic intuition, it has internally conceived, engineered, and marketed worldwide the CD. In this way, Philips was able to capture innovation rents or value creation rents for its subsequent development. Alternatively, the same firm has positioned itself on stability and value appropriation the moment it has decided to sell out the rights of the patents concerning the reproduction of the same product (the CD), and to cash in the royalties coming from this

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trade (i.e., value appropriation rents). This value appropriation activity lays the ground to propel an ensuing phase of firm change and value creation.

DISCUSSION AND CONCLUSIONS In this paper our intention was to define and discuss the fundamental elements of a process vision of the resource-based firm, which may encompass in a unifying interpretive framework both value appropriation and value creation. Accordingly, we have introduced a multidimensional vision of the firm that may allow to overcome the dichotomy between content and process studies within the RBT and the KBT, and to advance an original interpretation of the firm’s development in the light of the Austrian process view.

Implications for Strategy Theory We emphasize basically five tentative implications for strategy investigation which stem out from this analysis and which may allow additional and momentous avenues for future research. First, for its comprehensive methodological breadth and rationality assumptions we maintain that the Austrian-based interpretation of the basic principles of RBT and KBT proffers a more dynamic representation of firm development that accommodates and integrates both the phases of stability and change of the firm and the economic system in which it is embedded. In particular, it pushes for more reflection as concerns the multifaceted dynamics of firm behavior, this understanding provides some insights at two conceptual levels which may reveal fruitful also for more practice-oriented purposes. On a first theoretical level, the use of the Austrian approach as an interpretative lens enables an evolution, extension and consolidation of the RBT and KBT that in turn consent them, not only to grasp the mechanisms behind value appropriation and value creation, but to outline the rudiments of a new process view of firm evolutionary paths that help to understand its constructive role in value creation and appropriation activities. On a second and ensuing conceptual level, those who embrace this angle may realize both the necessity and possibility for managers and entrepreneurs to tackle contradictions in time-space context; i.e., managers and entrepreneurs are asked to both foster the protection of competitive advantages already possessed (incrementing allocative efficiency) and to learn new capabilities and knowledge aimed toward the creation of new sources of competitive advantages


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(incrementing dynamic efficiency). This may be done by reaping both Ricardian and Chamberlinian rents from the existing sources of competitive advantages while creating new sources of Schumpeterian rents. Successful experiences in this direction may be nothing else than the clear manifestation of a sheer situational approach; i.e., a fruitful combination of individual and organizational capabilities to learn from and adapt to potentially all types of situations by means of the contemperation of both arbitrage and innovation issues. Second, as concerns the passage or intersection between the phases of value appropriation and value creation, we consider it valuable to focus on the nature and the evolutionary role of the entrepreneur which is a central blueprint in the view: (a) of designing a possible integrative path of entrepreneurial and strategic thinking (Hitt et al., 2001b; McGrath & MacMillan, 2000; Venkataraman & Sarasvathy, 2001), and (b) in the evolution of the dynamic capability-based literature (Teece et al., 1997; Eisenhardt & Martin, 2000). Entrepreneurial intuition intervenes within the ongoing productive cycles from which the entrepreneur draws experience and contributes to develop a ‘repertoire of specific and experiential knowledge’, which plays a relevant role in the development of his/her interpretive frames. Additionally, the repetition of the firm’s productive cycles allows, not only an expansion in the productive potential of a part of its resources and of most of its competences, but also the incremental development of some of the firm’s capabilities (in this dynamic RBT vein, Helfat & Peteraf, 2003, advanced the idea of the capability lifecycle). Thus, in this perspective, the phases of relative stability in the productive activities of the firm acquire a significant role on the widened view of the latter’s development process: these phases are, in fact, characterized by a progressive development of individual and organizational knowledge which supplies the basic elements on which entrepreneurial intuition rests. Third and consequently, at the very intersection of the phases of value appropriation and value creation we underscore the strategic importance of processes of knowledge enhancement and organizational learning. Distant from being solely related to the value creation stage, the processes of knowledge modification and enrichment, even if in a fine-tuning or marginal fashion, openly occur during the crucial value creation-value appropriation interfaces as in these periods the straight replication of the firm’s productive cycles consent the accumulation of learning and a moderate growth of firm knowledge. Therefore, learning cycles may come about at the firm level assuming the form of error discovery, miscalculation detection and routine refinement or renewal; the ensuing result is quite frequently epitomized by

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laying the ground for the foundation and establishment of new routines and new processes. We remark that the foregoing argument may be associated straightforwardly to the stream of thought in strategy process research that Mintzberg (1990) has formerly labeled ‘learning school’, validating de facto the circumstance that organizational learning, based on situated action (Brown & Duguid, 1991; Lave & Wenger, 1991), is actually what separates the long-lasting strategy design/planning tradition from the strategy process one. Fourth, in the short run the innovative firm may capture Schumpeterian rents because they match the new efficiency criteria, which they have contributed to establish better than the other firms in the system. Yet, in this case we may actually speak of ‘modified Schumpeterian rents’, so to say ‘less temporary’ and ‘more durational’, or also of ‘Kirznerian rents’. According to the Austrian perspective and differently from the feˆted Schumpeterian idea that innovation rents are transitory due to the imitation of other firms, Kirznerian rents may be more durable also after the initial disequilibrating effect, which the innovation produces on the system. The fact that the innovating firm is the first in the system to operate in accordance to the new efficiency criteria brings to light that it may generate ‘sustainable first mover advantages’ (which stretch the notion timely proposed by Lieberman & Montgomery, 1988), that in turn may consent it to sustain and maintain its competitive advantage also in extensive post-innovation time periods. Fifth and lastly, an open question that stems from this study and may be a cornerstone for future inquiry is apparent: the controversy about the (in) compatibility between static and dynamic efficiency (see Ghemawat & Ricart i Costa, 1993, for a formal representation and appraisal). The theoretical dispute is generally reconducted to the fact that there are different logics underlying value appropriation and value creation (i.e., static efficiency vs. dynamic efficiency) (Klein, 1977). The logic of static efficiency is in essence a Paretian logic according to which the efficiency criterion is one and unique. This criterion refers to the fact that the advancement toward perfect competition, and hence firm similarity, is a crucial step for economic efficiency. According to this argument, firm heterogeneity, which is at the basis of research in both RBT and KBT, is nothing else than an ‘occasion of inefficiency’. Dynamic efficiency, conversely, is a process efficiency notion inherent to a system continuously changing and evolving toward equilibrium, which advocates variety and diversity in business firms and production methods in order to increase the system’s possibilities to create innovation. The latter is understandably at odds vis-a`-vis static efficiency, which is instead contrary to experimentation, invention and innovation.


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Although some authors (Ghoshal & Moran, 1999), have already started to create bridges between the two logics by arguing that they are compatible at the economic system level, and this work supports the latter argument as it refers to the theory of the firm, a certain path remains yet to be traveled to integrate fully the two kinds of efficiencies.

ACKNOWLEDGMENTS The authors wish to thank the participants of the INSEAD-AiSM Conference, held in Fontainebleau in August 2003, for their valuable discussions and kind support, Jim Fairbank, Alvaro Cuervo Cazurra and two anonymous reviewers for their helpful suggestions.

NOTES 1. The discussion of the static and dynamic approaches has been investigated by Ghemawat and Ricart i Costa (1993). Such analysis can be traced back to the study of exploration vs. exploitation in the organizational learning literature examined by March (1991). 2. As far as the identification of which elements are classifiable as resources is concerned, the RBT has extended the original set of resources considered by Edith Penrose (1959, pp. 39–40) (which were basically physical and human resources) to include mainly a wide set of intangible resources, such as firm reputation, technical knowledge, information, brands, patents, and so on. 3. The notion of competence (Prahalad & Hamel, 1990) refers to more or less complex mechanisms that firms develop in order to be able to combine and assemble the resources they posses or control. It is therefore due to the development of competences that the firm manages to obtain coordinated systems of resources that connect single individuals and groups within the organization and which permit the firm to carry out specific productive activities (Grant, 1998). Among all the competences the firm develops, there are typically some that can be defined as ‘core’ competences and that define the specific activities that distinguish the firm from the others with whom it competes and on which the firm should base its competitive advantage. 4. Exchanges do not entail the transfer of wealth between participants when the price paid (in money, goods or services) is sufficient to cover only the opportunity cost of the resources deployed for the production of the goods or services exchanged. Conversely, wealth is transferred between agents via the exchange process when the price paid for the goods or services exchanged is higher (or lower) than the aforementioned opportunity cost. The amount of wealth transferred between agents via the exchange process is defined by the difference between the price paid and the opportunity cost of the specific good or service exchanged. In other terms, the

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amount of wealth appropriated by an agent measures the rent (s)he gains from the exchange process. 5. Porter’s (1980) five competitive forces framework is a particularly well-known and clear example indicative of the SCP logic. 6. The creation of new rent sources has, in this perspective, been ascribed to unexpected changes in the environment (Rumelt, 1984), good luck (Barney, 1986; Cohen and Levinthal, 1994), or to the superior predictive capabilities of managers (Barney, 1986). These factors have not only found no further theoretical attention or study, but additionally do not analyze the determinant factors underlying firm creation of new rent sources. 7. Agent rationality is not perfect as two main conditions underlying perfect rationality are absent: there is no hypothesis of agents’ complete knowledge, nor is there complete transparency of markets. 8. Value creation, in this sense, must not be confused with the notion of value creation for the stockholders of the firm. This consideration is significant in as much as the creation of new wealth for the owners of the firm’s capital that may equally derive from its capacity to appropriate value during exchange processes or from its capacity to create value for the economic system in which it operates. Therefore, the analysis of the results obtained by the firm in terms of stock value is not able to distinguish between value appropriation and value creation as intended in this study. 9. The increase in the efficiency with which resources are combined creates value for the economic system as a whole seeing as: (a) it renders resources available for other uses, in cases where the new combinations imply a reduction in the opportunity costs that must be sustained in order to obtain given products or services, or when they consent – given a fixed level of opportunity costs – to obtain products or services with higher performance levels; (b) it allows the satisfaction of desires or needs that were precedently unexpressed or that it was not possible to satisfy, in case where the new combinations lead to the production of new goods or services. 10. The rents that derive from the innovative coordination and integration of resources and competences (be these old or new) have found various denominations; e.g., ‘entrepreneurial rents’ or ‘innovating rents’ (Rumelt, 1987), or ‘efficiency rents’ (Schulze, 1994). 11. Nonaka’s knowledge vision defines the firm’s mission and field of activity and, in the operational sense, determines what knowledge is to be developed and what criteria will be chosen to assess the quality and the value of knowledge produced within the firm. It thus establishes the direction of the firm productive activity of new knowledge and determines the specific content to develop, to exploit or to eliminate (Nonaka et al., 2000). 12. As concerns entrepreneurial success (and thus foresight), Schumpeter (1934, p. 85) says that it depends on ‘‘the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment’’. 13. These indicate both the characteristics of events that have in reality been repeated and the characteristics of events that in principle may be repeated, as they do not depend on the specific circumstances of time and space in which they occurred. The possibility of identifying typical aspects in events is given by two conditions: (a) the relative stability of natural and physical aspects of the environment; and (b) the stabilizing effect of ‘rule following’ behavior adopted by individual agents.


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14. The situational approach, by taking rational problems to which there is no solution into consideration (Elster, 1979, It. trans., 1983, p. 75), underline the arbitrarity of the maximization criterion as the only base of rational behavior. In fact, if rational behavior consists in the optimal adaptation of means to ends of a system, then it presumes the existence of a framework that defines the relationships between means and ends within which the optimization problem is posed. The problem, therefore, must be shifted to a different level and become the consideration of where this framework comes from. This, by logic, cannot be the result of rational choice, as this would create a problem of infinite regression without the possibility of finding a solution. 15. The adoption of the Austrian approach consents a significantly different interpretation of the origins of entrepreneurial behavior respects to that given by Schumpeter in his renowned studies of economic development. Schumpeter introduced the crucial role of entrepreneurs, their contribution to economic development and their destructive effects on system equilibria. Also, according to Schumpeter, the economic system is considered to cycle in and out of equilibrium (i.e., the so-called circular flow). Nonetheless, the acceptance of the Walrasian idea of system equilibrium as the logical consistency of a set of initial variables that characterize the system analyzed does not consent his analysis to consider entrepreneurial behavior originating within the system. Entrepreneurial behavior in Schumpeter’s framework originates from outside the system as learning phenomena are not present in the static Walrasian equilibria (O’Driscoll & Rizzo, 1985). 16. The stability which derives from system equilibrium in this perspective does not imply that there is perfect coordination in transparent markets, but more simply that there are sufficient number of aspects on which to base agent interactions. Thus, even within systems at equilibrium there may be changes in relative competitive positions of firms that enable these to gain rents from their strategic manoeuvres and from the adoption of arbitrage behaviors. Yet, as the general framework of means and ends that guides their actions remain unchanged, these modifications in firm competitive positioning do not create disequilibrating forces for the system they operate in. It is only due to entrepreneurial intuitions that the system moves toward disequilibrium and mutability as, on the basis of the pre-existent framework of means and ends which agents had until then based their actions, the new behavior results incomprehensible and reduces the possibility of interactive coordination until a new order is established.

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ADAPTIVE AND CREATIVE STRATEGY LOGICS IN STRATEGY PROCESSES Patrick Regne´r INTRODUCTION Strategic management theory has failed to explain the underlying principles of strategy processes and the relationships between strategy process and strategy content. There seems to be no theory of strategy logic, i. e. the general process and management characteristics generating a certain strategy outcome. Strategy content research has presented a systematic analysis on the basis of competitive advantage, and strategy process research has provided careful in-depth descriptions and examinations of strategy making. However, the basic strategy logic, including the underlying procedures, activities and reasoning that generate a particular type of strategy, has been less commonly evaluated. In particular, principles and details of strategy making in complex situations seem less clear. The two most influential lines of research in strategic management in the last two decades, of the industrial-organization (IO) perspective on strategy (e.g. Porter, 1980, 1981) and the resource-based view (RBV) (e.g. Barney, 1986, 1991) have compellingly established that strategy grows out of exploiting industry and resource structures, respectively. However, these strategy content views do not appear to consider how industry and resource configurations are actually developed in terms of underlying logic. The Strategy Process Advances in Strategic Management, Volume 22, 189–211 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22007-7

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process by which market imperfections in the form of entry barriers (Porter, 1980, 1981) and isolating mechanisms (Rumelt, 1984) in fact arise has not been determined. Implicitly, centrally located managers seem to play an important role in analyzing and planning competitive and resource positions, but the principles and mechanisms that form these strategic positions essentially remain unclear (Cockburn, Henderson, & Stern, 2000). The fundamental logic that generates a certain strategic outcome and, in the end, competitive advantage is not identified. Strategy-process views, in contrast, (e.g. Bower & Doz, 1979; Burgelman, 1983; Doz & Prahalad, 1987; Mintzberg, 1978; Johnson, 1987; Pettigrew, 1977; Quinn, 1980) have provided rich and systematic descriptions showing that strategy making involves a variety of contextual influences and actors in addition to analytical exercises and leadership by managers at the center. However, our understanding of the particulars of these alternative strategy processes still appears to be imperfect. A whole range of contextual influences (political, cognitive, cultural, symbolic, etc.) have been identified (e.g. Johnson, 1987; Pettigrew, 1985; Porac & Thomas, 1990), but it is not entirely clear how they influence and shape strategy outcome. In brief, it is unclear how different procedures, activities and reasoning generate certain strategy content. Hence, the fundamental strategy logic is likewise rather indeterminate in strategy process views as well as in strategy content approaches. While characteristics regarding strategy (planning) procedures have been described for rather well-defined strategic issues, the basic logic in strategy is particularly unclear in situations that are complex – i. e. where resources and industries are less defined, and markets and products are unclear. In fact, it seems as if one common way of avoiding an examination of a basis or logic in strategy is to assume the existence of a strategy and its central artifacts and contexts from the start. The role for research then becomes one of explaining the characteristics of competitive advantage (strategy content) or describing the general process of its development and/or implementation (strategy process) ex post. However, the procedures, activities and reasoning generating and creating competitive advantage and strategy are rarely addressed (Regne´r, 1999). Another approach that avoids the question of strategy logic is to present strategy as an art; this approach is common both in more planning-oriented writings (Christensen, Andrews, Bower, Hamermesh, & Porter, 1982) and in more process-oriented literature (Mintzberg, 1975). This approach run the risk of precluding critical examinations of the actual mechanisms and procedures involved by placing reliance on intuition and feelings, which are highly difficult to examine. Perhaps not surprisingly, research has often responded with this tactic since

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managers themselves often refer to ‘‘gut feelings’’ and undefined circumstantial events in explaining why a particular strategy outcome finally presented itself. Art is certainly an important part of the answer, especially in situations of uncertainty (Szulanski & Amin, 2000), but by reducing strategy under more complicated circumstances exclusively to artistic talent or questions of chance, we risk overlooking important aspects of strategy making and, furthermore, denying managers relevant and systematic knowledge that might be useful in practice. It might be argued that strategy is in fact most relevant precisely in complex circumstances, where research evaluations of strategy logic seem most vague (Schoemaker, 1990; Regne´r, 2001). When optimization is possible the strategic complexity is low, the question of strategy is actually of little interest, at least for generating long run aboveaverage returns. Finally, the revelation of the strategy logic or principles that underlie different strategy processes, would seem crucial for understanding not only how strategy outcome and content are actually generated, but also what type of capabilities that are important in developing competitive advantage (Teece, Pisano, & Shuen, 1997). This paper seeks to identify fundamental principles in strategy – the general process and management characteristics involved in diverse types of strategy making, including the underlying procedures, activities and reasoning – and how they generate different strategy outcomes. It distinguishes between two types of strategy process or strategy logics and addresses the question how they influence strategy. Based on the prior work in economics, cybernetics and organizational change and learning, it proposes a dynamic view of strategy processes as involving two fundamentally different types of strategy logic depending on external context and internal location. Besides discussing the relationship to the prior strategy process research, the paper suggests possible links to new theoretical developments in strategic management such as the dynamic capabilities view (Teece et al., 1997) and related evolutionary and learning views (Winter, 2000; Zollo & Winter, 2002), and the activity-based view (Johnson, Melin, & Whittington, 2003). It ends with a discussion of interactions between the two logics.

STRATEGY LOGIC IN STRATEGY CONTENT AND PROCESS RESEARCH Strategy content research has not been explicitly concerned with how managers create and develop strategy. However, even though not spelled out, the general spirit in at least some quarters seems to be that senior executives play a central role in strategy development by making insightful strategic

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choices that build competitive advantage. This is of course the way in which these schools of strategy often have been interpreted, used and taught. The suggestion appears to be that centrally located and insightful managers in consensus choose or design a particular industry structure, resource factor or organizational capability (Cockburn et al., 2000). Both strategy content (RBV and IO–based) rest on economic theory, including assumptions regarding equilibrium, rationality and flexibility. This, in turn, has implications for assumptions about strategy logic and process. Concepts like process, learning and uncertainty are either assumed away or subsumed under economics assumptions (Bromiley, 2005; Hirsch, Friedman, & Mitchell, 1990; Rumelt, 1995). Hence, the fundamental strategy logic – including procedures, activities and reasoning – often seems to be vaguely defined. Strategies in regard to entry barriers and isolating mechanisms can be observed ex post, but the logic determining how to get there is unclear. In contrast to strategy content research, there is a strong emphasis on the feedback between strategy formulation and implementation in strategy process research. Strategy is viewed as a collective and adaptive process in an emergent pattern over time influenced by various contextual influences. The research provides a large quantity of rich and comprehensive descriptions challenging the traditional rationalist and analytical views of strategy formation explicitly or implicitly expressed in parts of strategy (content) research. However, the fact that strategy develops from a number of contextual areas and actors according to these views results in rather vague answers concerning the particular logic and actual basis of strategy. It is not specified what and how different procedures, activities and reasoning explore and exploit resource and market positions. The primary focus is frequently on descriptions of (macro) strategy processes per se and obstacles to strategy implementation, rather than on what foundation strategies are developed. Consequently, there is also less emphasis on considerations of strategy outcome and performance. The relationship to strategy outcome seems particularly unclear under complex circumstances, such as in the creation and development of new strategies. In this sense, the situation with strategy process approaches is essentially the inverse of the situation with strategy content under complex circumstances; they tend to be vague about strategy content, while the strategy content is particularly vague regarding the process in such situations. Summing up the brief overview above, there seems to be little theory in strategy content research on what logic in terms of procedures, activities and reasoning generates market imperfections like entry barriers and isolating mechanisms (Cockburn et al., 2000). Similarly, in strategy process research,


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there seem to be few theoretical structures of strategy logic, or the basis on which strategic positions are created through, political, cultural, cognitive and other contextual influences. The theoretical uncertainties seem particularly apparent under more complex circumstances, such as in strategy creation and development. One major reason why the details of strategy making and strategy logic have not been laid out is the lack of connection between the two major research streams. Strategy content research has been less concerned with issues regarding process, and strategy process research has focused less on the question of content. The relatively minor emphasis on process in strategy content research has clearly not provided a basis for revealing details of strategy making and logic, but it must be emphasized that this has not been its primary aim. In parallel, the relatively small effort in strategy process research to determine the relationship to strategy content might have ruled out identification of more detailed strategy mechanisms and, in particular, the logic involved. Another reason for the limited understanding about details of strategy making and logic could be the lack of focus on the more complex embryonic stages of strategy (Regne´r, 2005) and entrepreneurial discovery (Jacobson, 1992). Although it might be an unfair interpretation, both principal currents of strategic management research appear essentially to have taken an ex post view of strategy. This dilemma has attracted attention both for strategy process (Schendel, 1992) and strategy content research (Hamel & Prahalad, 1994). Strategy content research has been more concerned with strategic configurations and competitive advantages once established. Likewise, strategy process research has often focused on describing patterns of strategy and obstacles to strategy implementation once identifiable. Both currents have put relatively less emphasis on how strategy is explored, created and developed in the first place. It might be unreasonable to expect strategic management research to provide a complete explanation and clarification of strategy making and logic. But showing and explaining the actual development and fundamental logic of strategy would seem to be significant, even core elements of strategic management.

AN INTEGRATED FRAMEWORK FOR STRATEGY PROCESSES: ADAPTIVE AND CREATIVE STRATEGY LOGICS Even if there are limits to what strategic management literature has to offer when it comes to the underlying logic of strategy, literature on change,

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adaptive processes and learning might provide some answers. A careful examination of this literature reveals two basic models of managerial influence and organization. One is oriented primarily toward experimentation and exploration, the other places more emphasis on exploitation. Essentially, they represent two archetypical categories of organizational development and growth. This division between two fundamentally different types of processes and organizational development has been recognized in some of the literature on economics, cybernetics, organizational change and learning. Table 1 summarizes these diverse views. While the literature on change, adaptive processes and learning has portrayed diverse mechanisms that might be useful for determining the underlying principles of strategy making, the detailed consequences of these mechanisms for strategic management have not been investigated and described. In particular, the specific procedures, activities and reasoning applicable to strategy remain unclear, and so does the connection to strategy outcome and strategy content. Some empirical research in strategy can be interpreted as at least suggesting diverse principles of strategy. One example is the Bower–Burgelman framework (Bower, 1970; Bower & Doz, 1979; Burgelman, 1983), which is Table 1.

Overview of Literature on Diverse Forms of Change, Processes, Learning and Organizing.

Literature Adaptive systems Economics Contingency theory

Organizational learning

Adaptive processes

Technological innovation

Studies Ashby, 1956; Buckley, 1968; Weick, 1979 Carlsson, 1989; Klein, 1984; Marschak & Nelson, 1962 Burns & Stalker, 1961; Lawrence & Lorsch, 1967; Galbraith, 1974; Hedberg, Nystrom & Starbuck, 1976 Argyris & Scho¨n 1978, Bateson, 1972; Fiol & Lyles, 1985 Holland 1975; March 1991, 1994; Penrose 1959; Schumpeter, 1942; Wernerfelt, 1984 Daft & Becker, 1978; Ettlie et al. 1984; Tushman & Anderson, 1986

Concepts Requisite Variety Static and Dynamic efficiency Organic vs. Mechanistic Organizations, Adaptive vs. Manipulative Processes Single- and Double-Loop Learning Exploitation and Exploration

Radical vs. Incremental Innovation

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focused on internal corporate venturing. It emphasizes induced strategic behavior, which refers to strategic initiatives within the scope of the company’s current strategy and autonomous behavior, which develops outside the prevailing strategy and functions as a variation enhancer. Another example is research on strategy creation in multinationals that emphasizes diverse and conflicting learning dynamics with adaptive dynamics in the center and creative dynamics in the periphery (Regne´r, 1999). Based on the division and discussion of the prior research above, which indicates two fundamentally different categories of strategy, a classification of strategy logic is presented in this section. In this classification, strategy logics are either adaptive or creative. The division essentially builds on Schumpeter’s (1947) adaptive and creative responses to economic change. An adaptive response entails changing within the confines of existing tradition and practice, while a creative response involves seeking solutions outside of existing practice. Table 2 outlines the basic environmental conditions and general characteristics related to each strategy logic. The adaptive logic is applicable in a

Table 2. Adaptive and Creative Strategy Logics: Environmental Conditions and General Characteristics.

Environment Future Form Focus

Industry factors

Resource factors Technology resources Human resources

Adaptive Logic

Creative Logic

Relatively ordered, static, continuous and independent Relatively certain Efficiency Continuity in products/services, customers/clients, service or distribution channels, partners, organization, etc. Existing industry positions and incremental development of them

Complex, dynamic, turbulent and ecological Truly uncertain and ambiguous Innovation and flexibility Change in products/services, customers/clients, service or distribution channels, partners, organization, etc. Entirely new industry positions and completely new industries

Incremental product, service and process improvements Implementation focus and compliance with existing strategy Incremental development and training

Entirely new products, services, processes, distribution forms, etc. Development focus and investigation of new strategies Development of entirely new competences

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relatively ordered, static and independent environment, while the context of a creative logic is typically complex, dynamic and ecological. The future in the former state is relatively certain, but in the latter it is a question of genuine and true uncertainty involving ambiguity. Under conditions of uncertainty, there are complications in guessing future consequences, but it might be possible to identify certain states of the world, or to discover information over time that might reduce the uncertainty. When there is ambiguity, however, the problem is in guessing future preferences; there are no specific desired states of the world, or if there are, they are vague, inconsistent or unstable (March, 1978, 1994).1 Hence, actors in such situations have little or no idea what decisions or actions to take; moreover, they do not know with any certainty what they want to achieve with those actions and decisions. In general, strategy under the adaptive logic is primarily a question of efficiency, focusing on improvements in existing products/services, customers/clients, organization, etc. In contrast, the creative logic is oriented toward innovation and flexibility, including changes and more fundamental development of products, customers, etc. When it comes to industry and resource positions, the emphasis differs essentially in which the adaptive logic is relatively more concerned with prevailing industry and resource positions, while the creative logic includes mechanisms to develop entirely new positions. Likewise, the policy in regard to human resources will tend to focus more on implementation and incremental development in the former logic, and more on entirely new competences and strategies in the latter. Table 3 describes the organizational characteristics of the two strategy logics. The brief overview in Table 1 shows that there is a fairly large body of literature regarding organizational characteristics. Basically, this literature follows the traditional division between more organic and more mechanistic organizations (Burns & Stalker, 1961; Lawrence & Lorsch, 1967; Galbraith, 1974). In the adaptive logic, the primary concern in regard to organization is to ensure efficiency and homogeneity through careful control and coordination mechanisms. In the creative logic, by contrast, the emphasis is more on allowing informal processes to function, including a flat configuration and horizontal communication to encourage originality and heterogeneity. When it comes to the procedures, activities and reasoning involved in strategy making, there is less to build on in terms of prior research and theories, but some characteristics can be established. Table 4 provides an overview of the diverse features of strategy making within each logic. First, regarding assumptions about the environment and ways to cope with the

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Table 3. Adaptive and Creative Strategy Logics: Organizational Characteristics. Adaptive Logic Structure Formality Communication Coordination and control

Values and norms Career tracks

Centralized Formal Vertical Bureaucratic: Tight, detailed plans and budgets Number-focused: costs, quality, delivery, etc. Efficiency, homogeneity, precision and improvement Clear and vertical, through traditional means Promotion from within

Creative Logic Decentralized Informal Horizontal Casual: Rather loose, based on objectives Activity-focused: actions in order to reach objectives Originality, heterogeneity, novel ideas and growth Based on new resources, competences and skills Promotion via networking (partners, consultants, etc.)

future, there is a fundamental difference between efforts to predict in the adaptive logic and efforts to enact and create in the creative logic. Instead of just trying to predict future states of the environment, organizations and managers might as well create and enact them (Weick, 1979). This difference relates to the distinction in theories on entrepreneurship between causation, based on a logic of prediction and effectuation, based on a logic of control (Sarasvarthy, 2001; Venkataraman & Sarasvarthy, 2001). Consequently, the actions taken toward the environment in the two logics are quite different; one concerns buffering and isolation, the other involves taking advantage of contingencies. In regard to strategy making, the primary concern of the adaptive logic is the management and development of existing potentials in terms of industry and resource structures. Hence, the emphasis is on refinement and perfection of the prevailing strategy. In the creative logic, on the other hand, the focus is less clear and involves a heuristic search for possible new competitive advantages. These may be found in new combinations of old and new resource and industry factors that produce entirely new industries and industry positions, and new resources and competences or combinations thereof. In the two models of strategy logic, the development of strategy (see the second section, Table 4) involves diverse sources and actors as well as fundamentally diverse methods. Top and upper management play essential roles in the adaptive logic, which includes strategy–related activities where adaptive and formalized practices prevail. More peripheral actors take

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Table 4.

Adaptive and Creative Strategy Logics: Basic Characteristics. Adaptive Logic

Strategy making Environment Assumptions Coping with future Actions Strategy Industry focus

Strategy Development Source Key actors Activities

To be created Ambiguous, but controllable

Building and incremental development of existing resources and core competences

Creating, enacting and controlling an unpredictable and ambiguous future Take advantage of contingencies in industry and resources. Heuristic search for possible new competitive advantage Any industry and market: finding entirely new industries and new combinations of industry positions New resources and competences, and new combinations of resources and competences

Center: corporate and divisional management, board of directors Top management Adaptive and formalized

Periphery: subsidiaries, projects, business and technology units Teams Creative and informal

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Resource focus

Specified limitations Relatively certain and uncertain segments relatively predictable Analyzing, forecasting and planning for an uncertain future Buffer and isolate industry and resource positions from contingencies. Management and development of current potential Specific industry and market: finding specific positions and niches within industry

Creative Logic

Actions Knowledge-assimilation activities Sensemaking Knowledge structure Top management role

Strategy outcome and content

Exploitation of prevailing resources and industry Position- and improvement-focused: use and capitalize on existing industry and resource structures Industry-focused: Planning, analysis, use of expertise Formal reports, documents, intelligence Industry experience and routines. Deductive: Established strategy interpretation patterns and structures. Emphasizing current knowledge structure

Externally focused: Trial and error, probing environment, use of heuristics Informal contacts and encounters Technology and market experiments. Inductive: Trying out, adjusting and generating new strategy interpretations Establishing new knowledge structure

Supervisor Establishing vision Setting direction Managing structure- strategy alignment Manage and control strategy implementation Information and knowledge control Allocating resources Refinement of existing resource and industry positions: perfection of prevailing strategy

Sponsor/coach Co-creating vision Asking for direction Managing general strategy context Encourage and empower new strategists Dispersing information and knowledge Catalyst for resources and competences New combinations of old and new resource and industry positions: strategy creation

Exploration of new resources and industries. Idea- and growth-focused: investigate and probe into new resources, skills, actors, and any factors relevant to objectives


Basic action mechanism

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center stage in the creative logic, where more creative and informal actions are involved. This reflects that strategy–related activities and learning (Regne´r, 2003), as activities more generally (Brown & Duguid, 1991, 2001; Lave & Wenger, 1991), are highly influenced by the settings where they take place. The two logics include two fundamentally different drivers of strategy development. The fundamental driver in the adaptive logic is exploitation, while in the creative logic it is exploration (March, 1991). The categorization in Table 4 illustrates that different actions and activities for knowledge assimilation and ‘‘sensemaking’’ (Weick, 1995) are employed in the two logics, with divergent implications for strategic change and content. Moreover, the related two strategy logics include different mental models (e.g. Barr, Stimpert, & Huff, 1992; Porac & Thomas, 1990) or knowledge structures (e.g. Huff, 1983; Walsh, 1995), which go through mutual enactment processes within their specific location and embeddedness (Porac, Thomas, & Baden–Fuller, 1989; Porac, Thomas, Wilson, Paton, & Kanfer, 1995). The adaptive logic builds on and grows from the current and historically established knowledge structure, or core knowledge structure (Lyles & Schwenk, 1992), central in the current industry or in a certain niche within it. In contrast, the creative logic involves a looser or a peripheral knowledge structure, partly embedded outside the current-focal industry, and allows more diverse interpretations of strategy in an effort to establish a new knowledge structure. These collective cognitive structures, or knowledge structures, can co-exist in a single organization (Hodgkinson & Johnson, 1994), with a more structured one in the center and a looser one at the periphery (Regne´r, 2003). The differences between the two logics in terms of knowledge structure are also related to diverse barriers to strategy development. The adaptive logic may include forms of bias linked to the existing values, beliefs and knowledge structure. The strategy based on this logic is efficient, but entails a risk of automatic or unreflective diagnosis of the new strategic issues (Dutton, 1983); given the limits of attentional resources, other relevant issues might be ignored (Porac, Thomas, & Emme, 1987). This logic is dominated by cognitive simplicity, which promotes strategic simplicity (Miller, 1993; Miller & Chen, 1996). The creative logic is more remote from the existing values and beliefs. Essentially, it is forming a new knowledge structure or strategic views on the basis of individual mental models which co-adapt (Porac et al., 1989; Arthur, 1994). However, it must be emphasized that the creative logic also includes biases such as ‘‘wishful thinking’’ (Hogarth & Makridakis, 1981) and it needs to be acknowledged that it seems as if most new ideas are actually bad ideas (March, 1994).


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Naturally, in line with the differences in strategy logics reported above, the role of top management will differ as well (see third section, Table 4). In accordance with the basic principles of the adaptive logic, top management will have a more traditional role in regard to strategy as a resource allocator, supervisor and controller of strategy planning and implementation. In the creative logic, the top management role is quite different and is more about ‘‘coaching,’’ encouraging strategic initiatives, managing the general context and acting as a catalyst in the coordination and transformation of the resources and skills. Finally, and perhaps most importantly, the two strategy logics are likely to promote different strategy outcomes or content (see the final section, Table 4). They have the potential to produce diverse types of knowledge and insights and, accordingly, different results in regard to strategy. The adaptive logic tends to promote the refinement of existing resource and industry positions and to perfect the prevailing strategy. The creative logic, on the other hand, tends to provide new combinations of old and new resource and industry positions and to generate new value and the creation of new strategy. Consequently, there would seem to be a crucial and important link between strategy content and the type of logic prevailing. Regarding the location (center vs. periphery) and environmental conditions (ordered vs. complex) of the two strategy logics, the proposed division suggests that these are the more likely internal and external contexts associated with each logic. However, this does not exclude the possibility that the procedures, activities and reasoning typical of each category can in fact be found in the other context. The characteristics of each indicates that on average they are more likely to be found within one particular category, but in reality there will of course be more of a mix, with presence to varying degrees in both categories. Hence, the division can be thought of as different locations along a continuum rather than as a dichotomy.

DISCUSSION The identification of two separate types or logics of strategy process can be related to prior strategic management work, for example, early work in the RBV (Dierickx & Cool, 1989; Wernerfelt, 1984), research on different forms of strategy (Heskett, 1987), research on static and dynamic efficiency (Ghemawat & Ricart I Costa, 1993) and research in international management (Doz, 1980; Hedlund & Rolander, 1990). More recently, Szulanski and Amin (2000) have presented two elements of strategy in the concept

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of ‘‘disciplined imagination.’’ Discipline involves the consistent application of rules to evaluate alternatives, and imagination entails a deliberate effort to generate and evaluate many diverse options. Also recently, strategic decision-making has been separated into developmental strategic decisions, which alter the core businesses of an organization or its key businesses, and non-developmental decisions, which builds on current strategic positions (Nutt, 2001). In addition, the conceptualization of the two fundamental principles in strategy making is related to a recently proposed ‘‘activity– based view’’ of strategy (Johnson et al., 2003) since it puts the focus on detailed processes, practices and activities in strategic management and how they relate to strategy development and outcome. Besides developing research on strategy process, the conceptualization of the two strategy logics is also comparable to sections of the RBV that emphasize the development of resources and capabilities, and may provide an addition to it (Eisenhardt & Martin, 2000; Teece et al., 1997; Winter, 2000, 2003; Zollo & Winter, 2002). When incremental building of knowledge, capabilities and competitive positions is to be examined, behavioral–and process–based approaches must be considered as well as approaches based on economics (Rumelt, Schendel, & Tecce, 1991), since managerial processes and activities rather than resources and capabilities per se become important for competitive advantage (Moran & Ghoshal, 1999; Teece et al., 1997). Managerial activities and processes can be conceived of as capabilities as indicated above, or more specifically, ‘‘dynamic managerial capabilities,’’ with which managers build, integrate and reconfigure organizational resources and competences (Adner & Helfat, 2003). The two strategy logics presented here comprise two separate sets of processes and routines or capabilities in the firm. In fact, the adaptive strategy logic can be related to ordinary capabilities (‘‘zero level,’’ or operational capabilities), those that permit a firm to make a living in the short-term. The creative logic can be related to dynamic capabilities, those that serve to extend, modify or create ordinary capabilities (Winter, 2000, 2003). However, as presented here, the creative logic also includes what Winter (2003, pp. 992–993) categorizes as ‘‘ad hoc problem solving,’’ experimental behaviors that are non-routine and non-repetitive, but still intentionally rational. Recent studies of technological change (e.g. Dosi, 1982; Nelson & Winter, 1982; Levinthal, 1998) and strategic management (Cockburn et al., 2000) have suggested that initial conditions might be significant for technological and strategy development and, in the end, for firm performance. This would put a premium on early discoveries of haphazard initial conditions and market opportunities. Related to this it has been proposed that serendipity might play a


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critical role for discovery of strategic opportunities (Denrell, Fang, & Winter, 2003). It involves the fortuitous, unsought discovery or development of new value, but it requires determination, effort, attentiveness and experimentation. These process requirements appear to be included in the creative logic and arguably it might be able to capture events of chance and serendipity. It is apparent that there are important and fundamental trade-offs between the two forms of strategy logic. The adaptive logic provides readymade and efficient standard operating procedures, but risks to be inert, whereas the creative one shows more flexibility, including new and original solutions, but risks being too costly. Extensive use of the adaptive logic to the exclusion of creative logic in a context dominated by complexity may lock the firm even further into the prevailing strategy. By the same token, using the creative logic at the expense of the adaptive one in a context dominated by order may only generate further costs rather than new strategies (March, 1991, 1994). With the adaptive logic, there thus appears to be a danger of lock-in effects in terms of industry or market myopia (Levitt, 1960) and resource or core-competence rigidities (Leonard Barton, 1992), and of being held captive by customers (Christensen, 1997). With the creative logic exploration might lead to failure that tends to induce further exploration, and so on, possibly creating an exploration trap. Since the logics tend to crowd out each other, a common argument in previous studies has been based on the notion that organizations ideally require a balance between exploration and exploitation for their survival and prosperity (Levinthal & March, 1993; March, 1991). Maintaining a balance and avoiding costly conflicts between the two logics might provide the ultimate solution. However, while there are important differences and trade-offs between them, they also seem capable of complementing each other in any individual firm and in any strategy process over time. Although the balance argument basically seems to apply to the long–term survival of organizations, arguably the question is one of relative balance according to the particular complexity of the environment and the complexity within a given strategy process over time. Hence, the balance would depend on the characteristics of the environment at a certain point in time and the particular stage in the strategy process. In turbulent times and in complex parts of the strategy process, the creative logic would be appropriate, and vice versa. Moreover, to be useful, the creative logic must be followed by an adaptive one in order to avoid exploration traps, and for the adaptive logic not to be caught in an exploitation trap, it needs to be followed by a creative one. In brief, the adaptive and creative logics would essentially and ideally complement each other within and across strategy processes over time.

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This is more of a dynamic-cycle solution to the exploration/exploitation trade-off compared to the more common static–balance solution. The adaptive logic provides resources in terms of capital and capabilities (initial conditions) for the creative logic, while this creative logic develops entirely new growth areas, which in turn are exploited by the adaptive logic and so on. In this sense the two logics can be considered complementary within and across strategy processes, with the relative balance between the two depending on the strategic-foresight horizon. Although an ideal, this complementarity represents a more dynamic view of trade-offs between exploration and exploitation (cp. Garud, Nayyar, & Shapira, 1997; Winter & Szulanski, 2001) than the traditional focus on a more permanent static steady balanced state. In this respect it can also be compared to a possible recursive and co-evolutionary relationship between exploration and exploitation as discussed in relation to knowledge evolution by Zollo and Winter (2002).

CONCLUSIONS From the viewpoint of both the theory and practice of strategy, it seems essential to make explicit in strategy studies the underlying logic in the development of competitive advantage. The description of two fundamental strategy logics provides an initial step in such an endeavor, presenting various procedures, activities and reasoning involved in strategy making. In addition, it is demonstrated that the strategy logics are embedded in various outer and inner contexts that they include diverse barriers to strategy development, and that they produce different strategy outcomes and content. The strategy logics have diverse merits for different purposes and situations. In a strategy context characterized by complexity, a creative logic is likely to be more applicable than an adaptive one, and vice versa. This reasoning is based on the traditional requisite-variety argument and in line with basic tenets of modern organization theory, but here it is suggested that this holds only generally and in the long-term. In the short-term, the two logics could essentially complement each other within and across strategy processes. Ideally, this complementarity would involve a continuous and dynamic cycle between adaptive and creative strategy logics, with the relative balance between the two depending on the complexity of the current strategic-foresight horizon. The distinction between the two underlying principles of strategy making indicates a possible specification of the relationship between strategy process and content. The inherent process and management characteristics and their


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strategy-related procedures, activities and reasoning in the two logics, it is suggested, have the potential to produce different types of strategic knowledge and, consequently, different ends regarding strategy content. The adaptive logic can potentially perfect existing strategic positions, while the creative logic potentially can develop new ones. It is widely acknowledged that the character of the outcome, be it innovation or any form of strategy content, cannot be totally separated from the process through which it is developed; thus, knowledge of how decisions are arrived at may indicate what decisions will be reached (Nelson & Winter, 1982). The differences between the two forms of strategy logic might also have implications for their intrinsic value. In accordance with the resource-based and dynamic-capabilities views, strategy activities and processes in order to be valuable appear to require characteristics regarding idiosyncrasy, rarity and inimitability similar to the capabilities and resources, which they are to create. It seems clear that the more formal and deductive processes involved in the adaptive logic do not necessarily fulfill these criteria. Formal strategic planning systems are widespread and have been thoroughly described (e.g. Lorange, 1980). The creative logic, in contrast, is much more complex and distant from commonly found planning systems and seems to involve various procedures, activities and reasoning that fulfill the criteria of being rare, imitable and idiosyncratic. In addition, this paper indicates a possible reconciliation between more deterministic views of strategy development, including chance and initial conditions (Cockburn, et al., 2000; Holbrook, Cohen, Hounshell, & Klepper, 2000), and more common voluntaristic ones involving managerial choice and design. The intentional creative and inductive managerial activities in the creative logic might involve valuable (although sometimes serendipitous) interaction with less controllable and deterministic aspects, such as initial conditions and pure chance, and provide for possible creation of new value and new competitive advantage. The separation between the logics provides a possible description of two categories of capabilities in the firm as discussed in the dynamic-capabilities view. The overview of the adaptive logic describes and explains procedures, activities and reasoning related to ordinary or operational capabilities, while the creative one does the same for dynamic capabilities (including ‘‘ad hoc problem solving’’). Hence, the conceptualization of the two strategy logics may constitute a potential step, albeit minor, toward the development of a more dynamic theory of strategy. It shows how new value is built up over time (creative logic), and how prevailing strategy positions might be developed further (adaptive logic).

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The difference in the character of the two logics has important implications for traditional concepts in strategic management. While the established distinctions between strategy and tactics, planning and implementation, corporate and business strategy and, finally, strategy content and process appear to work quite well under the adaptive logic, they appear to break down under the creative one. By this logic, creative tactical considerations might well result in important strategic developments, implementation of strategy might precede planning, business strategy might generate corporate strategic change and strategy content, and process clearly mixes. Some of the confusion in the literature on strategy seems to be due to the fact that the two forms of strategy logics have not been made explicit. An obvious managerial recommendation, given the findings, is to avoid a single-minded concentration on an adaptive logic and include more of a creative one if new strategies and growth areas are to be found, and if traps of certain path-dependent strategies are to be avoided. However, it seems important to emphasize not only a balance between the two, but also their interactive and complementary potential. If there are essential differences in strategy logic, they need to be further scrutinized; in particular, the managerial demands and any interactions between the logics need to be investigated. Interesting research questions are raised by the fundamentally diverse characteristics of the two logics – can they be chosen, designed and managed and if so, how? The question of a static trade-off balance vs. a dynamic complementary relationship between the two logics also deserves attention. In addition, diverse combinations of the two should be studied, identifying possible multiple categories of strategy process and their various relationships to strategy outcome. Strategy-process research, together with more process- and learningfocused strategy content research such as the dynamic-capabilities view, would appear to provide fertile ground for future research on the underlying procedures, activities and reasoning that generate a particular type of strategy. Despite the achievements so far in strategy research, the fundamental task of identifying the relationship between the strategy process and the quality and outcome in terms of strategy content remains to be accomplished. There is thus a need in the field of strategy for more work that integrates the two, linking strategy process and strategy content.

NOTES 1. Knight (1921) makes a similar distinction between risk and uncertainty. Risk refers to situations, which have many precedents and where decision rules can be


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applied and the consequences can be calculated. Situations without precedents, on the other hand, create uncertainty, where only subjective probabilities rather than objective frequencies can be applied.

ACKNOWLEDGMENT The author would like to thank two anonymous reviewers and the participants at the AiSM–INSEAD conference on Expanding Perspectives on the Strategy Process for their helpful and constructive comments on earlier versions of this paper. Thanks also for the help, advice and encouragement provided by the editors of this volume. All errors remain with the author.

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MANAGING THE MNC AND EXPLOITATION/EXPLORATION DILEMMA: FROM STATIC BALANCE TO DYNAMIC OSCILLATION Catherine Thomas, Renata Kaminska-Labbe´ and Bill McKelvey ABSTRACT Research on multinational corporations (MNCs) shows that they have tried various structural solutions to solve the dilemma of trying to ‘‘balance’’ global control and efficiency with local country-specific sensitivity, autonomy, and innovation, with the Transnational form preferred. Failings of the strategy-structure sequence lend credence to the emerging strategy-process perspective. To date, the best lesson for MNC strategyprocess concerns pertaining to the global vs. country dilemma comes from March’s classic paper on ‘‘balancing’’ exploitation vs. exploration. 21st century MNCs exist in a more rapidly changing world, however, where static ‘‘balance’’ solutions may be insufficient. The tradition of ‘‘circular organizing’’ is one alternative to the failing ‘‘balance’’ solution; it offers a dynamic strategy-process approach to MNC management. Another is Strategy Process Advances in Strategic Management, Volume 22, 213–247 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22008-9

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Dupuy’s concept of ‘‘tangled hierarchies’’ where top-down and bottom-up influence forces are interwoven such that global exploitation or countryspecific exploration dominates in timely fashion. It calls for clearly defined control and autonomy regimes, with space given for emergent rules governing the rotation rate. Key questions are: What is the optimal rate at which they should rotate supremacy, and how to get this to happen and persist? Since normal quantitative methods can’t track complex, nonlinear, emergent phenomena, an in-depth longitudinal case analysis was conducted of a global MNC in the cosmetics industry, as it progressed through its early years of formation. Our case covers twelve years, during which the MNC goes through several kinds of tangled hierarchies. The dynamics in our case are rich enough to illustrate many aspects of the ‘‘tangled hierarchy’’ approach, while also offering new clues about oscillation rates. A number of implications for managers are discussed. Principal among these is the ‘‘edge of chaos’’ idea, in which managers have to avoid too-fast or too-slow oscillation rates. Very fast rates can degenerate into chaos and then collapse into the exploitation or exploration ‘‘traps.’’ Firms also fall into the traps simply because managers don’t understand or can’t tolerate the idea of oscillation dynamics.

For some 50 years, experts on multinational corporations (MNCs) have struggled with a fundamental managerial dilemma: How to gain the efficiency advantages of global integration while at the same time remaining sensitive to exploration and innovation advantages stemming from countryspecific marketing and production? The favored solution to date is Bartlett’s (1986) Transnational form, purportedly offering a solution to the dilemma via internal network structures. ‘‘Strategy/structure’’ research shows mixed results (Johansson & Yip, 1994). Harzing’s (2000) research partially supports the Transnational approach, but the details of how managers are to solve the dilemma remain obscure. Strategy-process theory and research may offer a way out. One of the quickest ways for strategy-process theorists and researchers to get ahead of the dilemma is to build from March’s already classic paper of 1991, and a decade’s worth of subsequent research. March, too, focuses on essentially the same dilemma: How to gain the advantages of exploitation and exploration simultaneously. But, like the MNC studies, he also takes a static balance solution (p. 71). Contrary to March’s findings, Kogut (2000) argues that social networks offer firms the advantages of both exploration and exploitation. Miles,

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Snow, Matthews, and Miles (1999) also focus on the benefits of ‘‘cellular networks,’’ which are made up of autonomous cells operating alone or by interacting with other cells, and which can produce continuous innovation. This may be true, but what keeps them from spinning out of control? Thus: Who has the authority to make strategic decisions relevant to autonomous, interconnected systems? How to control, orient, or regulate a cellular network of autonomous units, supposing the network innovates in random directions at shareholder expense without ramping any products up to market? What happens if there is no top-down control to set it straight, or control is so strong that the cellular network, lower-level autonomy, and innovation stop? March (1999, p. 5) calls for an optimum mix of exploration and exploitation. But what does the word ‘‘mix’’ mean? It could stand for a static optimal design or some kind of dynamic cycling between the two. Most of March’s readers appear to take the ‘‘static balance’’ approach (e.g., Tushman & O’Reilly, 1996; Bradach, 1997; Brown & Eisenhardt, 1997; Tushman & Smith, 2002; Warglien, 2002). Christensen and Foss (1997) talk in terms of balance and equilibrium, but also focus on synergistic dynamics. Instead of viewing organizations as consisting of static structural designs – like the Transnational form – we treat organizational performance at the internal process level. In this view, performance is a consequence of finding appropriate rates of alternation between exploitation and exploration. Unlike March, however, who worries about what upsets appropriate balance, we propose a dynamic-cycling approach. We go back to the French social theorists, Dumont (1966) and Dupuy (1992), to suggest a shift from static balancing of organizational influences toward dynamic shifts in the dominance of one or the other opposing forces – what the French imply by hie´rarchie encheveˆtreé and we translate as tangled hierarchy. That organizational effectiveness is a function of the rate at which tangled forces such as exploitation and exploration forces rotate, is further advanced by Dupuy (1992). Reynaud (1987) and Reynaud (1993) develop the dynamics of how control and autonomy ‘‘rules’’ form and come to regulate the entanglement dynamics. First, we analyze the exploitation–exploration trade-off via tangled hierarchy theory. Then we ground our theory with a 12-year long case study of a large cosmetics MNC. It goes through several dynamic phases: (1) five years of exploration dominance showing marginal profits; (2) a period of rapid

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oscillation between exploration and exploitation with profits, which subsequently collapses into the exploitation trap; (3) a brief control/exploitation attempt; and (4) it eventually finds a timely oscillation between exploration and exploitation – and profits.

BALANCING CONTROL AND AUTONOMY IN MNCS: A PROBLEM There is a long history of managers and academics trying to solve a truly endemic problem: How to balance between control and autonomy (Roethlisberger & Dixon, 1939), mechanistic and organic designs (Burns & Stalker, 1961), global control and local sensitivity (Doz & Prahalad, 1986), efficiency and learning (Bartlett & Ghoshal, 1987), exploitation and exploration (March, 1991), and so on. Invariably the solution is one of emphasizing ‘‘balance.’’ This tendency shows up in both the competitive strategy and organizational process literatures. This means it could also slip into strategy-process thinking as well. The balance approach is problematic in a changing world. Before we turn to a more dynamic solution to the problem, however, we track balance solutions in both the MNC and organization design literature.

The MNC Dilemma: Solved by Balancing Global Efficiency and Local Innovation As the world’s economies came back to life after the WW II and the Korean Conflict, the MNC form of organizing emerged as companies attempted to cash in on economies of scale and scope. By 1980, problems in managing across countries had emerged (Doz, 1980). By the mid-1980s, the simple idea of a ‘‘global’’ firm selling products made in one country world-wide, with little, if any, change in product designs or marketing approaches had evaporated. More and more, MNC executives discovered that local country and culture-sensitive adjustments had to be made. The dilemma is: How to best manage the trade-off between global control and efficiency vs. local innovation and variety. By 1986, Doz and Prahalad had zeroed in on how best to manage the trade-off between global efficiency and local sensitivities, introducing their Global Integration–Local Responsiveness framework. Their solution was to


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create ‘‘balanced’’ managers by rotating them from country to headquarters and back, and so on (Doz & Prahalad, 1986). Alternatively, Bartlett (1986) introduced his Transnational form, later elaborated in Bartlett and Ghoshal (1987, 1998), as a method of ‘‘balancing’’ between the conflicting structural designs of the Global and Multidomestic forms. They defined Transnationals as balancing between the conflicting control and efficiency demands of Globals vs. the novel product and marketing innovations arising from local sensitivities dominating the Multidomestics. How? Bartlett and Ghoshal’s (1998) solution is ‘‘integrated network configurations’’ coupled with ‘‘flexible coordination’’; they say, this is what facilitates global learning and efficient performance. For them, however, networks are top-down creations. Flexible coordination, for them, means drawing on a variety of coordinating processes, practices, and tools. Empirical research on the MNC dilemma is ‘‘sparse and impressionistic,’’ stemming from studies of a few ‘‘classic’’ MNCs (Hedlund & Ridderstra˚le, 1997, p. 334). Ghoshal (1997) also points to the absence of empirically verified conceptualizations. Though there are also weaknesses in her study,1 one of the best investigations on MNCs to date is that by Harzing (2000). She found that the Transnational form offered MNCs the best global–local balance. This form is characterized by decentralized network structure, subsidiaries as centers of excellence and product modification. Summing up, she says, ‘‘a Transnational company combines characteristics of both Global and Multidomestic companies; it tries to respond simultaneously to the sometimes-conflicting strategic needs of global efficiency and national responsiveness’’ (p. 115). The solution, however, still consists of balancing between global control and autonomy (Bartlett & Ghoshal, 1998). Empirical research focuses on MNC structure. Prahalad and Doz (1987) downplay the role of organizational structure in global strategy, emphasizing instead other integrative management processes, such as global information systems, teams, task forces, coordination committees, and other cross-country coordination devices, as do Hedlund (1980) and Edstro¨m and Lorange (1984). The strategy-process concerns of MNC scholars in the 1980s – about managing Transnationals – got an analytical push by March’s (1991) modeling of how to balance exploitation vs. exploration dynamics – another dilemma. We now connect the MNC global–local dilemma to the parallel problem inside firms by discussing March’s dilemma, which is now a major focus of attention by many other researchers (Powell, Koput, & Smith-Doerr, 1996; Henderson, 1999; Lewin & Volberda, 1999; Marcus & Nichols, 1999; Luo, 2002; Siggelkow & Levinthal, 2003; Beckman, Haunschild, & Phillips, 2004; Holmqvist, 2004). The parallel is:

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MNC: Global Integration, Control, & Efficiency vs. Country-specific Sensitivity, Autonomy, & Innovation MARCH: Exploitation and Efficiency vs. Autonomy and Exploration

March’s Dilemma: Solved by Balancing Exploitation and Exploration March (1991) draws on Schumpeter (1934) and Holland (1975) to consider how organizations develop and use knowledge to explore new possibilities (searching new development opportunities) or exploit certainties (improving their existing technology). The existence of these two strategies is essential, but the fact that organizations have scarce resources implies an implicit or explicit choice between the two objectives. Exploration includes ‘‘y search, variation, risk taking, experimentation, play, flexibility, discovery, innovation,’’ all of which depend on social networks, interaction, and member heterogeneity. Exploitation includes ‘‘y refinement, choice, production, efficiency selection, implementation, execution,’’ things that call for more specialization, managerial focus, and control. Most of March’s computational simulations focus on ways in which mutual socialization in social networks may dissipate the heterogeneity of organizational members, which is a significant basis of knowledge creation. These dynamics upset the balance between exploration and exploitation. Investment returns from exploring new knowledge are uncertain and long term in nature, whereas organizations evolving in turbulent environments try to maximize their short-term value. Therefore, the perspective of an immediate income is sometimes more attractive: ‘‘The search for new ideas, markets, or relations has less certain outcomes, longer time horizons, and more diffuse effects than does further development of existing ones’’ (March, 1991, p. 73). Consequently, adaptive processes are designed to improve exploitation rather than exploration and can lead to suboptimal equilibria. Thus, ‘‘maintaining an appropriate balance between exploration and exploitation is a primary factor in system survival and prosperity’’ (March, 1991, p. 71). Innovation depends on the combination and the exchange of diverse knowledge retained by different organizational members or subunits (Holland, 1995; Nahapiet & Ghoshal, 1998). This requires heterogeneity of member knowledge and the existence of shared codes. Organizations learn from their members or subunits and accumulate knowledge through rules, procedures, and norms (Argote, 1999). Shared codes and beliefs are affected by intra-organizational interactions enhancing the socialization of members or subunits (Whyte, 1957).


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Socialization has both positive and negative input on innovation. On the one hand, it improves the capacity of exchange and combination (March, 1991) but on the other, it reduces diversity (Janis, 1972). March emphasizes that efforts to maintain appropriate exploration–exploitation balance in organizational learning imply conflicts between long- and short-term conceptions as well as individual and collective knowledge gains. Balance is continually eroded by too much top-down managerial control or bottom-up anarchy, loss of employee heterogeneity, effects of short- and long-run perspectives about costs and profits, changing emphases on reliability vs. novelty, turnover effects, and various ecological forces. March (1991) does not really define just exactly what balance means. More recently, he calls for ‘‘y an optimum mix of exploration and exploitation’’ (1999, p. 5). To us, his use of the word ‘‘optimum’’ means that managers can study the conditions at hand and then ‘‘design’’ a stable or static optimum.

Balance and Optimum Design vs. A Changing World: Still a Problem While American professors were elaborating their inventory optimizing models and fine-tuning their job shop scheduling algorithms, the Japanese invented ‘‘just-in-time’’ supply and computer-aided flexible production methods, thus illustrating the difference between fine-tuning in a static environment vs. thinking dynamically in a changing world. Static thinking and inattention to dynamics are still widespread problems in management research and practice (Eisenhardt, 1989; McKelvey, 1997). Going from industry drivers (1980) to the efficiency curve (1985), Porter (1996) says economic rents go to firms staying at the front edge of industry evolution. Prahalad and Hamel (1994) agree. As we move into the knowledge era (Prusak, 1996), and 21st Century economics (Halal & Taylor, 1999), competitive advantage comes from making moves faster than the competition (Fine, 1998; Jennings & Haughton, 2000). The idea of aiming for static balance seems ill suited to a fast-paced world. At some point, the time it takes to arrive at an optimal design is slower than the rate at which competitive conditions change (Scho¨n, 1971). Optimum designs slow firms down as they become more global, more dispersed, more integrated into multiple local cultures that change at varying rates, more hooked into leading-edge technologies, more dependent on rapidly changing consumer taste (Sanchez & Mahoney, 1996), or as products change from things that clank to things that change at the whim of a

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software programmer (Prusak, 1996; Jennings & Haughton, 2000). In lieu of the prevailing static-balance approaches dominating strategy process to date, we propose a more dynamic approach.

DYNAMIC METHODS OF GLOBAL CONTROL AND LOCAL INNOVATION Circular Organizing Romme (1999) notes that scholars have been struggling with the problem of balancing power and control for over 50 years (Weber, 1947; McGregor, 1960; Likert, 1961). Dynamic circling between top-down and bottom-up control appears in business firms in the US (Ackoff, 1981, 1989), Holland (Endenburg, 1988), and Japan (Nonaka, 1988), now referred to as circular organizing (Romme, 1996, 1999). Based on his research in the Dutch company Endenburg Elektrotechniek, Romme shows that the trade-off between teams and hierarchy can be solved by a circular organizational design involving ‘‘the ability of the organization to switch between teams and hierarchy processes’’ (Romme, 1999, p. 806). Circularity is based on the principle of double linking which implies ‘‘that a team is linked to the next higher team in the hierarchy by means of its functional leader appointed by the next higher team, and a democratically elected representative or spokesman’’ (Romme, 1996, p. 415). In the decision-making process, functional leaders and spokespersons play completely different roles. The double link favors open discussion inside teams at each level until the consensus emerges. This model proposes a new perspective on the control and autonomy dilemma in which these two modes of coordination are not seen as in dichotomous stasis, but rather in dynamic oscillation. Managing the Rate of Exploitation–Exploration Reversals Tangled Hierarchy Studying Hindu society, a well-known French anthropologist, Louis Dumont (1966), proposed a new concept of social order comprising an entanglement of individualism and holism. He indicates how the relationship of hierarchical opposition between the englobing level (the whole) and the enclosed level (the element) called enclosing of the contrary constitutes a formal model of social structure. Dumont shows that in holistic systems,

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such as Hindu society, a hierarchy inside a hierarchy exists. For example, Hindu society is characterized by a continuing conjunction between religious and political power. The Brahman represents the sacred (most of the time the englobing hierarchy), that is, the religious sector dominates the political one. However, on the occasion of an economic or social disturbance, the hierarchy of Hindu society is inverted, with the Rajah (representing the political), dominating the Brahman. Eventually, the hierarchy reverts to its original form. In fact, social systems are always composed of entangled components that vary in their relative dominance. The epistemologist, Jean Pierre Dupuy (1992), sees in the Dumontian model an illustration of a logical form that he terms as tangled hierarchy.2 Applying it to Hindu society, he proposes the schematization presented in Fig. 1. He shows, in Fig. 2, that the undoing (deconstruction) of a tangled hierarchy is always a tangled hierarchy but oriented differently. The englobing level of the initial hierarchy becomes the englobed level of the new hierarchy. In Fig. 1, the H1 form, sacred is the englobing level and dominates political. Fig. 2 shows the deconstruction of the H1 form into the H2 form in which political becomes the englobing level and dominates sacred. Dupuy also discusses the rate of oscillation between the englobing and the enclosed levels by differentiating between oriented and symmetric tangled hierarchies. Oriented means that the oscillation rate is slow enough for an observer to easily distinguish between the englobing and the enclosed levels.

In Hindu Society the sacred (I) dominates the political (II). In the domain of the sacred (I), the Brahman (1) dominates the Rajah (2). But, in the domain of the political (II), which is always subordinate in relation to the sacred, the Rajah dominates the Brahman. This, results in a tangled hierarchy, termed the H1 form.

I _____ 1 _____ 2 II _____ 2 _____ 1

Fig. 1.

Tangled Hierarchy Applied to the Hindu Society (Dupuy, 1992).

I _____ 1 _____ 2

Fig. 2.

H1

H2

II _____ 2 _____ 1

II _____ 2

I _____ 1

_____ 1

_____ 2

Deconstruction of an Oriented Tangled Hierarchy (H1–H2).

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I _____ 1 _____ 2

II _____ 2 _____ 1 i.e., this:

II _____ 2

I _____ 1

_____ 1

_____ 2

H1 Fig. 3.

H2

From Oriented to Symmetric Tangled Hierarchies.

As the inversion–reversion cycle speeds up, the dominance of one level over the other recedes. Symmetric means the rate of oscillation between englobing and enclosed levels is so high that their separate effects cannot be identified. This leads to a permanent deconstruction of the tangled hierarchy. We graphically depict this oscillation between H1 and H2 in Fig. 3. According to Dupuy, only the symmetric tangled hierarchy model corresponds to a real deconstruction of hierarchical effects in systems. However, this form is fragile and can lead to chaos. Tangled Hierarchy in Firms Building on Dumont and Dupuy, the French economist, Benedicte Reynaud (1987), defines three formal conditions for the existence of a tangled hierarchy. They are (1) recognition of distinct levels of social organization; (2) asymmetry in relations between those levels; and (3) their inversion. For application to firms we draw from Jean-Daniel Reynaud (1993), a French sociologist. According to him, in a firm there exist many different sources and domains of regulation. Two principal sources of regulation are: management and organizational groups. Managers define ‘‘official’’ rules, which constitute control regulation. At each organizational level, these rules fix or orient the activity, organization, objectives, etc., of groups at lower levels. At the same time, these groups define for themselves rules concerning the same subjects. Thus, an autonomous regulation reinforces or inhibits the control regulation. These regulation processes exist between different organizational levels (corporate–divisions, supervisor–operators, etc.) and/or different functions and services. Also, a firm’s regulation rules may focus on various objects, such as work methods, promotion and access to managerial positions, remuneration, or the adoption of new production techniques. If


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many sources and levels of legitimate regulation exist in a firm, the main problem is to understand the way they are created, combined, or interact. When the interests of two parties are in opposition, a compromise may result; what Reynaud and Reynaud (1994) call joint regulation. Different types of compromise may be observed in everyday practices between opposing autonomy and control regulations. Effective and efficient joint regulation happens when there is a conjunction of regulation processes, that is, when they reinforce one another mutually. Also, a firm’s regulation rules may focus on various elements of organizing, such as work methods, promotion and access to managerial positions, remuneration, or the adoption of new production techniques. Autonomous regulation in the knowledge era becomes an organizational means of flexibility and innovation (McKelvey, 2001). We emphasize two kinds of regulation: 1. Control-dominated exploitation regulation: rules (official) defined by management (or group supervisor). 2. Autonomy-dominated exploration regulation: rules (informal) defined by some group. Managers and/or group members have an option to define exploitation and exploration regulations jointly. These regulations could also be jointly defined between a division and a production site, or between functional vs. project units in a matrix organization. For firms, the applicability of the concept of ‘‘tangled hierarchies’’ may be summarized as follows (Thomas, 1999) (see Table 1 for a glossary of key French terms): 1. Two opposing regulatory forces structure a firm: exploitation/control regulation and exploration/autonomous regulation. This results in hierarchical opposition. Because these forces are not separated, their constant interaction is a source of continuous tension. 2. In the foregoing configuration, a firm may be defined as a space of articulation between these two forces. Reynaud and Reynaud (1994) call this meeting place the space of joint regulation. The effectiveness of the joint regulation process comes from its capacity to maintain a clear separation between these two types of ‘‘regulations.’’ Regulation separation may be achieved by giving priority to either exploitation/control or exploration/autonomy regulations, and by delimiting the conditions under which this priority may be inverted or, in other words, by introducing a tangled hierarchy.

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Table 1.

Glossary of Key Terms.

Tanglement Glossary (Dumont, 1966; Dupuy, 1992) Englobing of the contrary, or Hierarchical A hierarchy containing two opposing opposition, or Tangled hierarchy forces or social regulation processes – such as control and autonomy – which exhibit an inversion of the hierarchy, inside the hierarchy Englobing level The hierarchical level at which the englobing social regulation process/ force holds dominance most of the time Enclosed level The hierarchical level at which a regulation process/force remains subordinate to the englobing force most of the time Inversion or Reversion Inversion of the hierarchy inside a hierarchy; a situation in which the englobing level inverts to become the enclosed level, and vice versa Oriented tangled hierarchy A tangled hierarchy that has a clearly observable englobing level Symmetric entangled hierarchy A tangled hierarchy in which the rate of inversion/reversion is so high that it becomes impossible to make a distinction between englobing and enclosed levels Regulation Glossary (Reynaud, 1993, 1999) Rules

Regulation process Top-down control regulation

Autonomous regulation Sources of regulation Joint regulation

General term that includes formal rules, conventions, norms, and routines. Rules set in motion by up- or downward forces that may become entangled Process of creation and maintenance of the rules Rules created by a high-level authority – top management – and imposed in a top-down manner Rules created by a group that are imposed on all group members Any entity in an organization that creates rules and asserts their legitimacy Compromises among different sources and levels of regulation (entangled regulations) that emerge from daily interactions in the joint regulation space where the two processes/forces entangle


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3. Hierarchical opposition, such as exploitation-oriented vs. explorationoriented regulation may occur within the same organizational level, such as when a problem of competence sharing arises between different services (i.e., engineering, production, or sales), or between functions and projects (such as when a firm adopts a matrix form where horizontal and vertical coordination hierarchies interact – seen in Phase 3 of our case analysis). Effective joint regulation appears in Japanese firms (Aoki, 1994; Nonaka & Takeuchi, 1995). Aoki shows how Japanese firms use ‘‘conventions’’ distinguishing between responsibilities of operational units (including their degree of autonomy in the decision-making process) and higher-level managers. They describe conventions determining conditions under which the hierarchy between control and autonomous regulations may be inverted. Aoki notes further that new conventions structuring the exchange of information between different services appear. They may concern, for example, the nature of events that need to be communicated or the media that should be used. Conventions facilitate the relationships between different functions and services. Similarly, Nonaka and Takeuchi note that in a ‘‘hypertext’’ form, in contrast to a matrix structure, an organizational member is involved in only one regulation process (vertical or horizontal) depending on the context and the type of a decision. In a hypertext form there is no equality of structural forces and their regulation processes – the inversion–reversion of one opposing structure over another depends on the task and its context. In circular organizing, Romme (1999) describes the use of ‘‘double linking’’ as the Dutch way of governing by circling between the forces of administrative control and bottom-up consensus.

THE CASE STUDY After describing our method of analysis we will present the case. Initially, the latter was the cosmetics division of an international corporation. Beginning from 1996, it was restructured into a holding company, now composed of three divisions (one prestige and two mass market).

Empirical Method The dynamic nature of the research questions clearly suggests the use of qualitative methodology. Our data come from a case study – a commonly

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recognized way to uncover complex forces showing multiple, nonlinear, and emergent dynamics. The choice of this empirical approach is also motivated by the three criteria proposed by Yin (1989): research questions defined in terms of ‘‘how,’’ the novelty of the investigated field, and the exploratory nature of the research which makes control of actors’ behavior unnecessary. The research perspective is longitudinal, narrative, and process-oriented. The empirical observation is nonparticipative and covers 12 years in the life of a firm. Data are collected via three of the six sources of evidence identified by Yin (1989): interviews, documents, and direct observation. These several sources of information improve the level of ‘‘completeness’’ and ‘‘saturation,’’ which are two key internal-validity criteria proposed by Mucchielli (1991). Information obtained from interviews was complemented by data gathered from direct observation and official documentation. It is important to note, however, that in this study interviews constitute the most important source of data because they are ‘‘y pertinent when one wishes to analyze the meaning that actors want to attribute to their practices, or to events of which they could be active witnesses; when one wishes to discover value systems and normative frames of reference on the basis of which individuals orient and determine themselves’’ (Blanchet & Gotman, 1992). Interviews were mainly conducted within one production unit of the prestige market division in three phases (1994, 1998, & 2001). The data collection and analysis was an iterative process and it proceeded in several stages. The first set of exploratory interviews allowed the construction of an interview guide. The second stage consisted of interviewing employees occupying positions at the corporate and the divisional levels. The objective of the final stage was to present the initial results to selected participants and to enrich these results with another series of interviews. In total, three people interviewed held positions at the corporate level and six at the divisional level. Based on the process-analysis model proposed by Desreumaux (1986), the research was designed to gather and analyze data concerning: the actors, conscious or not of the processes and their partial understanding of the sense of the context; the driving forces of organizational dynamics; and time, the stages and rhythms of the evolution of organizational design. Data analysis was conducted according to the methodology proposed by Huberman and Miles (1991). It involved data condensation, its presentation in figures, and finally, formulating conclusions.


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The Firm In 1990, an international corporation, which we call Omega Group, decided to diversify into cosmetics via an acquisition strategy. Our analysis covers the 12 years from 1990 to 2001 during which the firm underwent three distinct development phases. Phase 1, from 1990 to 1996, was marked by sequential acquisitions of various small entrepreneurial cosmetic firms. In 1990, Omega acquired the production and research unit where our data collection took place, as well as one ‘‘mass-market’’ brand. At this time, it owned four production plants in Europe, three of which were aimed at prestige markets and one at the mass market. In 1992, Omega extended its mass-market business by acquiring a leader in the American market, two more European brands, and one Chinese production company. During this period it became a true MNC in the cosmetics sector. Up until 1996, Omega’s cosmetics division was divided between two relatively independent subdivisions, specialized by type of market: prestige or mass. This period was marked by the first attempt to rationalize the activities of each division by making production activities more efficient, especially where surplus capacity existed. As a result, the production plant we analyzed, which specialized in production for the prestige markets, was put into direct competition against three other plants. During this period, local entities were highly autonomous. In 1996, the company realized it had produced a strong record of innovation but was barely profitable. Phase 2, from 1996 to 1998, focused on restructuring the cosmetics division. Omega’s strategy was to become Europe’s third major cosmetics corporation. Consequently, it regrouped all of its cosmetic business into one financial holding company, to be listed on the New York Stock Exchange. Then, the newly constituted managerial team of Cosmetics Holding Company initiated a restructuring aimed at realigning its different units into three Divisions (see Fig. 4): Prestige and Mass Market – each being composed of Sales, Marketing, and R&D units; and Operations – comprising eight production plants situated in Europe, US, and China. Operations developed activities in both types of markets (prestige and mass) simultaneously. Moreover, management tried to implement a balance between global integration and local responsiveness by introducing horizontal coordination among the three Divisions; they were looking for synergies (mainly in Operations) by better coordinating the international purchase committees,

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Cosmetic Holding Administration, Finance, IS

Human Resources

S.S.C Operations Division

Selective Market Division

Purchase Logistics Production Quality

Commercial Units

Mass Market Division

Commercial Units

Marketing

Marketing

Research and Development

8 production sites group's units

Research and Development

Legend : Classical hierarchicallink

Functional Management

Functional Coordination Groupe/unit link Centralized Services, participation asa Share Service

Fig. 4.

Division Profit Center International Committees (transversal links)

Organizational Structure of the Cosmetics Division (1997).

logistics, production, and quality control. Finally, management developed centralized, vertical coordination of certain key functions (Human Resources, Finance, and Information Systems) by introducing Shared Service Centers. These service centers offered their resources to all three Divisions (Fig. 4). The horizontal coordination across production, sales, marketing,

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and R&D units proved difficult. This resulted in the postponement of the introduction of Cosmetics Holding onto the NYSE and in turnover on its Executive Committee. Phase 3 began in 1999 with a restructuring of Cosmetics Holding. The new managerial team introduced a matrix MNC design, imposing specialization by market type. Three business units (profit centers) were created: Prestige, Mass Market Europe, and Mass Market – Rest of the World – Fig. 5. Each of these units – headed up by a ‘‘Division President’’ – included the following functions: Finance, Human Resources, R&D, Marketing, Sales, and ORGANIZATION OF THE COSMETIC HOLDING 1999 EXECUTIVE BOARD:

Chief Executive Officer Executive vice Presidents (E.V.P.)

Division Presidents

President Functional coordination

Finance

Prestige Market Division Financial Manager

Human Resources

H. R. Manager

Operations

Operation Manager

Senior V. P. Operations

Plant Director Distribution Centre Director

S.V.P. Development S.V.P. Purchasing S.V.P. Planning S.V.P. Quality

V.P. Development V.P. Purchasing V.P. Planning V.P. Quality

Mass Market Division (Europe)

Mass Market Division (Remaining world)

Financial Mgr.

Financial Manager

H. R. Manager

H. R. Manager

Operations Mgr.

Operations Manager

R&D Manager

R&D Manager

R&D Manager Marketing

Marketing Manager

Marketing Mgr.

Marketing Manager

Sales Manager

Sales Manager

Sales Manager

E.V.P.: Executive vice President S.V.P.: Senior vice President V.P.: Vice President

Fig. 5.

Organization Chart of the Cosmetic Holding Company (1999).

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Operations (vertical axis on the matrix). At the same time, the cross-unit coordination of some of these functions was strengthened by creating positions of ‘‘Executive Vice President’’ for Finance, Human Resources, Marketing and Operations (horizontal axis on the matrix). The Division Presidents and Executive Vice Presidents made up the Executive Committee. The objective of this design was to reinforce global control and efficiency, while preserving local sensitivity and adjustment. When our analysis ended in 2001, Cosmetics Holding was profitable, had 8,000 employees, and showed $1.8 billion in sales. The Prestige business unit employed 3,000 people and recorded $620 million in sales. It owned two production plants, sold 5,000 different products, and introduced 400–500 new products per year.

RESULTS Analysis of Omega’s Cosmetics Division reveals the links between tangled hierarchies and exploration–exploitation strategies as it evolved through the three time periods. This section primarily focuses on the interactions between one production plant and higher-level management – the Executive Committee. Several distinct forms of tangled hierarchy may be observed during the three phases.

Phase 1: Innovation, with Autonomous Regulation Englobing (H2) Oriented Tangled Hierarchy – H2 Form Phase 1 (1990–1996) began when Omega adopted a strategy of rapid growth by acquiring entrepreneurial firms, but leaving them autonomous. The two subdivisions of the Cosmetics Division also remained very independent. Priority clearly was given to fostering differentiated lower-level autonomy: when new products were created, for example, a person responsible for a particular brand could simply submit his/her project to the production plant of his/her choice in each of the Prestige or Mass Market subdivisions. That the Cosmetics Division faced a production surplus eventually led to a strategy of forcing interplant competition. Plants took up this challenge and began competing with each other. Which plant a particular brand chose was dictated by production costs, speed by which a new product could be produced, production flexibility, and quality of service. Each production plant was forced to innovate/explore both to satisfy its Divisional clients and to guarantee its survival within the Cosmetics Division. However, two broad decisions


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remained centralized at the Division-level Executive Committee: investments and worldwide strategic choices. The latter mainly concerned the acquisition of new brands or new production plants. We characterize this specific decision-making process as an oriented tangled hierarchy of an H2 type (Fig. 1). During this period everyone bought into the strategic vision to innovate, with strong priority given to local autonomous regulation – exploration dominance. This led to the reinforcement of informal, horizontal links between marketing, R&D, sales, and production. The emergent internal subunit competition forced each production plant to anticipate and innovate to satisfy the needs of the other subunits and innovate. The production plant we studied, autonomously developed a number of organizational and process innovations differentiating itself from competing plants. Beginning in 1992, inspired by pharmaceutical innovations, this plant created specific zones where ‘‘sterile’’ and ‘‘clean’’ products could be produced. Completely new in the cosmetics industry, these advances allowed production of cosmetics with almost no preservatives, reducing allergy risks for users. This particular innovation came about at the same time as important broader market changes – sterile and clean products were in keeping with increasingly important ecological preoccupations by customers and the growing prevalence of allergies. These methods also better supported new formulas in which the benefits of the active agents were not diminished by the use of preservatives. The plant also completely computerized its production processes in order to increase reliability and flexibility. Finally, it strengthened its supply chain management and, as a result of all these efforts, it was the first plant of the group to obtain ISO 9002 certification in 1994. The tangled hierarchy of the H2 type fostered a climate of exploration that produced many, many innovations – but little profit.

Phase 2: A Symmetric Tangled Hierarchy, Efficient but Fragile Oscillating H1#H2 Hierarchies In 1996, a stagnation of the prestige market and rapid growth of the mass market caused major restructuring of the industry and led to concentration of product lines dominated by a few international leaders. In addition, because of overproduction and in order to improve profitability, Omega’s top management reorganized the Cosmetics Division, resulting in Cosmetics Holding Company. During Phase 2, the Company attempted to manage the balance between global efficiency and local sensitivity affecting its Operations Division by creating four top-management International Committees

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(Purchasing, Scheduling, Production, and Quality), making it an H1 form (control englobing). The committees were to improve coordination across its two ‘‘Marketing Divisions’’ and the eight production plants in Europe, US, and China comprising the ‘‘Operations Division.’’ At this point, top-management’s strategy became one of launching a ‘‘globalization program’’ to find synergies aimed at cost reductions, while simultaneously keeping flexibility at the local level. Indeed, management of certain functions, requiring a subtle mix of control and autonomy (i.e., rapid inversion–reversion between attention to one or the other tangled opposing regulations) was accomplished company-wide by the creation of International Committees. These also fostered the company-wide spread of best practices – a clear shift to an exploitation approach. To further illustrate the symmetric tangled hierarchy, we focus on purchasing, representing 70% of a typical plant’s costs. Our analysis of the supply coordination activities of the International Purchasing Committee (IPC) showed that, as organized, it was extremely difficult to identify the englobing regulation level. The priorities alternated rapidly, depending on the particular time impact of the decision (short term–long term), as well as on the involvement of purchase managers at different production plants. It seemed that there was a constant deconstruction of the tangled hierarchy depending on the particular stage of the decision-making process. Thus, over time, IPC evolved from the oriented tangled hierarchy of H1 type into a more flexible, efficient form giving balanced importance to autonomous regulation. These dynamics resulted in a symmetric tangled hierarchy, which oscillated very rapidly between H1 and H2 – as we depict in Fig. 3. We now describe the parallel opposing hierarchies during this phase: Detailing the H1 Half of the Cycle: Control Regulation Dominant. The IPC Officers formed a hierarchy where control regulation corresponded to the englobing level of the H1 form – the exploitation half. The Prestige Division’s President and the two (mass and prestige) Division-level International Purchasing Officers met every 15 days. They negotiated next year’s prices with core suppliers, announced bidding for new products (60% new products annually), and resolved temporary problems (quality, delays, price increases, etc.). For the latter, representatives from the concerned production plant often joined the meetings. Generally, the President listened to his subordinates, which secured them a very important position in the entire process. The job of plant-level Purchasing Officers included: organizing operational purchases (follow-up of orders, deliveries, prices, quality, etc.);


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evaluating suppliers (prices, quality, and delays), for example, over 30 suppliers were eliminated by the initiative of the Purchasing Officer of the plant we analyzed; and participating in different types of professional events in order to meet new suppliers, discover new techniques. Each plant was free to establish contracts with new suppliers for an amount not exceeding h150,000. Local plant managers had some leeway to sidestep strict application of IPC Officers’ proposed rules. They had considerable autonomy to innovate in their elaboration and implementation of purchasing strategies. So, even though control regulation was the englobing level, regular inversions to autonomy influence inside the englobing control hierarchy were possible. These inversions occurred because the local actors had their say (they actively participated in the evaluation of suppliers), held a certain amount of power (mainly in contracting with suppliers), and enjoyed considerable legitimacy. In fact, the value system of the plant-level Purchasing Committee, similarly to the IPC, recognized local initiatives. Consequently, over the progression of the inversion–reversion cycles, the exploration tradition – the enclosed level – regained its strength, becoming equal in influence and brought about the rapid oscillation between H1 and H2. Detailing the H2 Half of the Cycle: Autonomous Regulation Dominant. Due to the inversions discussed above, and as the experience of the plantmanagers increased, the englobing level changed from H1 back to H2 – see Fig. 3. Even so, to reduce purchasing costs, the IPC Officers decided to proceed with a ‘‘value analysis,’’ thus again imposing control dominance. At the company level, focus turned to high-volume production stocks where even a 1% saving in volume resulted in high-cost savings. For example, a reduction of the perfume content in scent products yielded savings of roughly h1,000,000. At the plant level the value analysis included reviews and changes of suppliers, as well as product and production innovations. The value-analysis exercise brought to light the importance of plant-level inputs. It was only at the plant level, and by involving employees in different aspects of business processes (suppliers, purchasing services, production, and marketing), that value-creating innovations emerged. This sequence is illustrated by the following example. A supplier new to the packaging business signed a contract with one of the production plants. Initially, the local buyer limited himself to a few contracts, but later engaged in significant cooperation with this supplier in order to find ways to reduce production costs and thus the overall price of packaging. High costs were detected in two areas:

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(1) a high percentage of waste during a stamping/cutting operation where package shapes were cut out of large sheets of aluminum and cardboard; and (2) the manual assembly of a cosmetics ‘‘celebrity collection’’ because one of the bottles was too large for a machine to handle. The partnership between the plant-level buyer and the supplier gave rise to the following solution: the packaging designs were changed in order to minimize the stamping waste and the shape of the bottle was changed so the machine could do a final automated placing of bottles in the shipping boxes. The supplier made a prototype and proposed a price that ultimately saved h 720,000. The supplier and the local buyer, supported by the IPC, proposed these modifications to the Division’s Marketing Department, which accepted them promptly because they considered that the change in the packaging would not diminish customer satisfaction. In this example, exploration regulation clearly became the dominant influence.

This example shows that the role of the IPC officers evolved from that of managers exercising control to that of support. In short, the H1 tangled hierarchy evolved into an H2 tangled hierarchy. Then, what began as an inversion to autonomy within the H1 control form, over time resulted in a rebalancing of autonomy and control. Both H1 and H2 forms achieved equality, that is, the whole became a symmetric tangled hierarchy. What started as inversion–reversion within the newly established H1 form in Phase 2, progressed into a rapid oscillation of H1#H2 – seemingly both control and autonomy dominating at the same time. We detailed each half in ‘‘slow motion,’’ but in reality they were alternating so rapidly that one could not say, at any given time, that either control or autonomous regulations really englobed the other. This, according to Dupuy (1992) is the only form that corresponds to a true deconstruction of hierarchy. Thus, the IPC appears to have adopted a true cellular network form as described by Miles et al. (1999),3 because its functioning tended toward becoming a symmetric tangled hierarchy. It is important to note, however, that this type of an organization – H1#H2 rapidly oscillating between up- and downward forces – is very fragile. The retirement of the IPC President (Company VP) at the end of 1997 marked the end of this regulation process. The new Company VP also became President of the IPC. However, not having participated in the emergent regulation of the symmetric form and in the progressive balancing of down- and upward influence, he adopted a very centralizing approach by creating a top-level ‘‘global buyers’’ function for different purchase categories. This gave a clear priority to standardization at the expense of flexibility – exploitation dominating. The organization adopted an H1 type tangled hierarchy and tried as much as possible to limit the traditional opportunities for inversion. This return to centralization, compounded by a decreasing understanding by key actors of a context they no longer shared,


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destroyed the existing joint regulation. Autonomous regulation emerged ‘‘undercover’’ in opposition to control regulation, as typically is the case within Taylorist-style organizations (Roethlisberger & Dixon, 1939). This caused a very conflictual and chaotic situation. Isolated decisions were taken in plants; for example, a contract equivalent to h600,000 was negotiated without involving the IPC.

Phase 3: Exploitation Englobing, but with Interacting Opposed Regulations H1 Oriented Form A revised approach with control regulation dominating (englobing) became necessary because of the fragility of the previous form, the bad experience with the control-oriented new IPC President (who was fired), the difficulty of getting the symmetric form to spread to other committees, divisions, and plants in the Company, and the necessity of reinforcing coordination across different levels. Phase 3 began in 1999 when a matrix structure was introduced, with the three Divisions as Strategic Business Units forming the vertical axis, and Functions forming the horizontal axis (Fig. 5). Strong horizontal Functional coordination across-Divisions, especially at the Operations level, matched vertical Function-based control in each Division. The englobing level remained one of top-down control regulation (exploitation) – H1. However, the various plant-level managers regained their autonomy: the inversion of the hierarchy within the H1 form was, therefore, also happening (exploration) – illustrated in the H1 half of Fig. 2. The inversion allowed for the emergence of truly interactive opposed regulations, as described by Dumont and Dupuy. Simons (1991, 1994) also argues that influence systems, when they are used interactively, can be a proactive and dynamic tool to gather information and stimulate discussion in decentralized businesses. Interactive control [influence] systems are ‘‘a powerful tool in guiding and energizing the competitive evolution of the firm’’ (Simons, 1991, p. 61). The matrix form fostered the emergence of multiple tangled hierarchies. Concerning the Operations activities, there were three sets of tangled hierarchies (indicated by the large arrows in Fig. 5): (1) inter-level ones running up and down between the Prestige Market Division’s President and the Operations Managers (vertical arrow); (2) inter-level ones, running left and right between the Operations Executive Vice President (higher-level), VPs, and the lower-level Operations Managers (envision this as a horizontal hierarchy in the matrix) (horizontal arrow); and (3) the intra-level ones

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running between a Division’s President and the Operations Executive Vice President (diagonal arrow). Thus, there were two H1 hierarchies (one vertical and one horizontal) in which control regulation (exploitation) represented the englobing level. The intra-level tangled hierarchy recognized the regulation necessity between the vertical and horizontal regulating processes. In this case, concerning the Operations activities of the Prestige Division, the englobing level was the Operations Executive Vice President. However, in each inter-level tangled hierarchy, plant-level managers kept their exploration autonomy, hence timely inversions to exploration occurred. In the same way, in the intra-level tangled hierarchy, inversion is also possible. The oriented tangled hierarchy depended on the horizontal functional coordination axis of the matrix structure having very strong involvement by the Executive Vice President Operations and his team, composed of four Senior Vice Presidents (SVPs) and four corresponding Vice Presidents (VPs) in the Prestige Division (see Fig. 5). This structure resulted from the decision to enhance synergies inside the operations activities, between the corporate level and the local level (production plants) and between the key operational functions: development, purchasing, planning, and quality. In periodic meetings, the SVPs/VPs articulated different types of regulation pertaining to control, coordination, and local sensitivity, that is, they managed the inversion–reversion between exploration and exploitation. Two meetings were organized each month at both plant and corporate levels. The objective of the first meeting was to monitor results. The objective of the second one was to strengthen coordination between Marketing and Operations, especially as it pertained to launching of new products, which occurred frequently in the Prestige Division. Some managers were present for meetings at both levels, thus assuring inter-level coordination. This was especially the case for the managers responsible for Operations and Product Development and for the Purchasing and Planning VPs. The budgetary process developed to support the matrix structure illustrates how joint regulation inside tangled hierarchies emerged. Indeed, the modified budgetary process improved the Company’s capacity to identify different decision arenas and to better manage the performance outcomes separating them. Moreover, the budgetary process favored the elaboration of an efficient compromise between different regulation processes by providing an alternative means for promulgating various kinds of initiatives and sanctions (Thomas, 2003). Specific regulation processes emerged to govern how the tangled hierarchies dealt with control and autonomy.


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The budgetary process brought about a distribution of initiatives among managers by creating domains of decisional competencies and their interaction modes, that is, the ability to understand opposing regulation processes and coordination links among all parties. In transactive memory terms (Argote, 1999), this is equivalent to finding out ‘‘who knows what about what’’ and, thus, who is best qualified to make specific budgetary decision inputs. The elaboration of budgets was no longer based solely on a vertical distribution of centralized and nonshared knowledge, but rather led to the distribution of different kinds of knowledge throughout the Company. All of the interconnected, budget-related activities delineated during the budgetary process, in reality an organizational learning process, generated a true ‘‘cognitive flexibility’’ (Amintas, 1995). Frequent, but not too rapid, cycling between exploration and exploitation was legitimated. The budget-development process embodied a network of decisions producing various informal rules indicating the interaction between the different regulation processes. These emerged thanks to a shared understanding of interactions leading to decisions concerning different businesses and managerial hierarchical levels. Budgetary processes defined areas of responsibility delimitating solutions acceptable at each level. These areas were not defined a priori, but evolved based on constant interaction. Discussions at each of two meetings allow progressive elaboration of rules (more or less formal) determining at which level decisions should be made, and which services were concerned. Regular attendance in both meetings at the two levels of those responsible for Operations, along with the matrix-related Functional VPs, facilitated the development of inter-level regulation conventions. These two meetings allowed the top managers to regularly involve themselves in the decisions of subordinates as per Simons’s ‘‘interactive control system.’’ The following example from the case illustrates Simons’s (1991) strategic flexibility. Because of a recent price war in the components market, margins on purchases by one of the production plants had rapidly diminished. A new Purchasing VP initially had the typical reaction: he increased quantities purchased in order to take advantage of the price war, a decision well within his responsibility. However, this decision was quickly overturned at the next monthly meeting, because it would affect overall plant performance in a negative way, leading to increased inventory carrying costs for a product that would soon be obsolete. One part of the problem was transferred to a superior level by involving the purchasing SVP, so that he could negotiate with the suppliers (vertical interactive control and group activation of control regulation – exploitation). Solutions were also developed at the local level (exploration) to compensate for the loss and to maintain results (interactive intra-level control across plant and

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activation of autonomous regulation). For example, a value chain analysis was conducted between plant-level purchasing and development managers in order to simplify and standardize packaging. Their proposed solutions were validated (or rejected) by the Division’s Marketing Department. In addition, the decision to standardize productdescription leaflets was retained. This fostered more effective renegotiation of prices with suppliers.

Discussions of both local and overall costs and performance results led to quick appreciation of strategic decision implications (timing and success of new products, competitors’ actions, changing consumer needs), and to collective corrective actions (interactive inter- and intra-level regulation processes). ‘‘Thus, by using a control system interactively, top managers can guide organizational learning and thereby unobtrusively influence the process of strategy-making y.’’ (Simons, 1991, p. 50). The interactive profit planning systems used by the Cosmetic Division were particularly well adapted to high-speed environments where competitive advantage was based on fast-paced product or market innovations. The Phase 3 oriented tangled hierarchy, H1 form, favored exploitation while simultaneously providing room to adapt to the changing external environment.

CONCLUSION AND MANAGERIAL IMPLICATIONS Research on MNCs shows various structural design approaches to solve the dilemma of trying simultaneously to retain global control and efficiency, while maximizing local country-specific sensitivity, autonomy, and innovation (Harzing, 2000). The Transnational design has emerged as the preferred structural solution. Its failings, however, have led to a ‘‘strategy-process’’ perspective, wherein internal managerial processes take precedence. To date, the best lesson for strategy-process concerns about the efficiency vs. innovation dilemma comes from March’s (1991) paper about balancing exploitation vs. exploration approach – with much follow-on research (Tushman & O’Reilly, 1996; Bradach, 1997; Luo, 2002; Tushman & Smith, 2002; Warglien, 2002; Beckman, Haunschild, & Phillips, 2004; Holmqvist, 2004). Twenty-first century MNCs live in a more rapidly changing world (Halal & Taylor, 1999), suggesting that static ‘‘balance’’ solutions are insufficient. We draw on the tradition of circular organizing (Romme, 1999) and several French theorists to bring a dynamic perspective to the failing balance solutions heretofore tried on MNCs and in strategy-process approaches. The French view sees MNC organizations consisting of entangled regulation processes resulting in tangled hierarchies (Dupuy, 1992). One


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regulation process exerts downward control influence; another exerts upward autonomy influence. Depending on environmental constraints, one or the other should dominate (oriented tangled hierarchy). However, inside both the H1 (control and efficiency dominating) and the H2 form (autonomy and innovation dominating) an inversion of the hierarchy between autonomy and control is possible. Dupuy (1992) also sees that the rate of oscillation between the two H forms varies. This oscillation rate view is quite opposite to the traditional MNC or exploitation–exploration balance approach. Furthermore, even though adapting to a constraining environment calls for one H form to dominate for a lengthy period of time, say H1, Dupuy says there should be ‘‘timely’’ inversion to the opposite englobing level (H2), with a reversion back to control after autonomy issues are cleared up. Since longitudinal quantitative methods cannot capture the kinds of dynamics predicted by the French theory, we conducted an in-depth document-and-interview study of a cosmetics MNC as it progressed through its early years of formation. Our case analysis covers 12 years and divides into three phases, during which the MNC goes through three different forms of tangled hierarchy: 1. A tangled hierarchy of the H2 form – where exploration and autonomy dominate (the englobing level), with very infrequent inversions to control. In this phase, innovation clearly prevails, but there is little profit. The H2 form dominates for five years. 2. A symmetric tangled hierarchy that oscillates rapidly between the H1 and H2 forms. Here exploration and exploitation regulation processes oscillate rapidly (the frequency measured approximately in days), and profits are forthcoming. The theory predicts that this form is unstable and, indeed, the organization falls apart upon the retirement of a key individual. Thence, exploitation and exploration influences compete against each other or ignore each other, and unprofitability reappears. No englobing form is apparent. 3. A tangled oriented hierarchy of the H1 form with timely inversion to autonomy and then reversion back to control – exploitation dominates but legitimacy also prevails for frequent exploratory emphases; profits improve along with incremental innovation. Inversion–reversion changes measured more or less in weeks. Each tangled form is unique, creating different oscillation rates between exploitation and exploration. We found three main forms – one at each phase of development.

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Managing the Inversion–Reversion rate inside an H1 or H2 Tangled Hierarchy Lesson One Tangled hierarchy theory holds that managers have to maintain separation between opposing regulation processes and forces – clear-but-separate regulations assuring efficiency and clear-but-separate regulations assuring autonomy and innovation – but not to the point where dominance is frozen in one regulation force over the other. In other words, it is necessary to continuously define each hierarchy’s span of decision responsibilities and modes of interaction – each must respond to the other – with top-down and bottom-up forces ‘‘separate-but-interacting.’’ The existence of both clear priorities and shared meanings established via these interactions facilitates the emergence of negotiation flexibilities. Lesson Two Managers have to find the right inversion–reversion rhythm within one or the other oriented tangled hierarchies. a. The more solidly stable are the regulations defining decision objectives and responsibilities corresponding to the englobing and enclosed levels (oriented tangled hierarchy), the rhythm of inversion–reversion can be faster because it would not disrupt (deconstruct) the oriented H1 or H2 form. b. Our case results also suggest that the dynamic rhythm can be faster inside an oriented tangled hierarchy of H1 type (control regulation englobing) than in an oriented tangled hierarchy of H2 type (autonomous regulation englobing). Decades of theory and practice in Organization Development demonstrate that it is much harder to start up autonomous structures and keep them going than is true for control-dominated ones (French, Bell, & Zawacki, 1989; Mirvis & Berg, 1997). c. A word of caution, however. If the limits and the nature of the span of decisional responsibilities corresponding to the englobing and enclosed levels change quickly and if the rhythm of inversion–reversion is too rapid, the tangled hierarchy is permanently deconstructed. The result is a symmetric tangled hierarchy in which rapid oscillation between the H1 and H2 forms occurs – cycles measured in days – as opposed to inversion– reversion within one or the other oriented tangled hierarchy forms. As the case demonstrates, the symmetric dynamic is the most effective, but also the most fragile. Points a, b, and c are illustrated in Fig. 6.

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Fragility from the symmetric form

High

Inversion–Reversion Rate

Symmetric tangled hierarchy H1 region

Exploitation Trap Order

H2 region

Exploration Trap Chaos

Low

Exploitation

Fig. 6.

Exploration

Relation of Inversion/Reversion and Exploitation/Exploration.

d. Bottom line is that managers must take charge of two kinds of dynamics: (1) manage the stability of the oriented tangled hierarchy of the H1 or H2 kind; and (2) manage an optimal inversion–reversion rate within one or the other H1 or H2 form. Inversion–reversion cycles in the ‘‘weeks-to-a-month’’ range appear optimal in our case. The essential requirement is to keep an oriented tangled hierarchy from collapsing into a symmetric one. While the latter may be more effective, it is also more fragile. It tends to fly apart and freeze into stasis, with no inversion–reversion dynamic occurring. In referring to symmetry, Dupuy (1992) says it leads to ‘‘chaos and violence’’ (interpret ‘‘violence’’ as meaning tension, conflict, turnover, and instability). Lesson Three Applying the foregoing rate-timing lessons to the MNC and exploitation– exploration dilemmas suggests that: a. an oriented tangled hierarchy of the H1 type favors global control, efficiency, and exploitation but pursuing timely inversions within the hierarchy fosters the introduction of country sensitivity, autonomy, exploration, and variety. If there is no inversion, as is the case for rigid, Taylorist firms, falling into the Exploitation Trap is likely. In addition, in the H1 form the rate of inversion–reversion needs to be fairly high (see the placement of H1 on the curve) because this produces shared codes

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improving coordination and the firm’s capacity to exchange and combine new knowledge with exploitation as its priority. b. A symmetric tangled hierarchy – no observable englobing level – seems to be the most effective organizational form for simultaneously fostering explorative country sensitivity and exploitative efficiency. This form is the closest to Miles et al.’s entrepreneurial cellular networks. It is capable of combining independence and interdependence. This form appears to be the most fragile and can deteriorate rapidly to chaos and then to either Trap. c. An oriented tangled hierarchy of the H2 type favors exploration. The existence of inversions inside this englobing hierarchy allows the introduction of control regulation to focus and coordinate innovation. Note that the rate of inversion–reversion needs to be moderate so as to limit over-control and efficiency effects while also maintaining a high degree of exploration-relevant diversity. Managing the Oscillation Rate between H1 and H2 Over Time Lesson Four Considering the fact that the symmetric tangled hierarchy is fragile, managers should aim for oriented tangled hierarchies of H1 or H2 form, depending on their strategic objectives for the given period (global efficiency/ exploitation englobing vs. country sensitivity/local exploration/innovation englobing, with timely inversion–reversion rhythms within either englobing form). One can suppose that in the evolution of a firm, it is necessary to alternate between H1 and H2. Seemingly, H1 should dominate longer to allow the firm to be more profitable – as illustrated in the case. Lesson Five We note that, as shown in Fig. 6, managers have to hold their oriented H forms in a somewhat narrow space on the curve. Positioning in the center, at the symmetry position is the best, but it is unstable – there is the risk of quick collapse (down the arrow) and thence into one or the other Traps. Positioning on the slope on either side as an oriented H1 or H2 is optimal. But even here there is also the danger of the ‘‘slippery slope’’ – either oriented H form can easily slide down toward the Exploitation or Exploration Traps. These are mostly one-way slides, usually changed only by CEO firings. This finding parallels Brown and Eisenhardt’s (1997) conclusions about competing at the edge of chaos. In the absence of the strong culture-based legitimacy of an englobing hierarchy and an appropriate inversion–reversion rhythm,


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the tendency will be entrapment in either control or autonomy dominance. This parallels the Bureaucracy vs. Chaos arches in the Brown and Eisenhardt (1998) perspective and the dysfunctional bouncing from one to the other extreme as is evident in the recent case analysis by Cardinal, Sitkin, and Long (2004). Lesson Six The record shows that in many firms the oriented hierarchy changes only with CEO change – think Jack Welch at GE, Lou Gerstner at IBM, Percy Barnevik at ABB, and John Reed at Citibank. Thus, for some period of time – usually years – the dominant perspective has to be one of solving the driving environmental constraints; either efficiency or innovation is called for. This view fits with Porter’s (1985) focus on the efficiency curve. Economic rents come only when firms establish competitive reputations at the low cost or product differentiation ends of the curve. Note, however, that we add the oscillation rhythm idea – even at, say, the low-cost end of the curve one has to keep exploring for continual improvements in production efficiency. For continued success with either of Porter’s strategies, attention to the opposite can never be far away. Lesson Seven Periodically Boards can expect to change the fundamental H1 or H2 competitive orientation, usually with a CEO change. CEOs good at driving toward efficiency usually are not very good at attracting and encouraging the kinds of innovative, entrepreneurial cellular networks that Miles et al. (1999) talk about. The opposite is also true. Eventually, shareholder value is best achieved by re-establishing the dominance of the opposing orientation. The cosmetics firm in our case went five years before making the switch, along with considerable turnover at the top. Over what turns out to be a seven-year span, Cosmetics Holding struggled with what the oscillation rate should be. Beginning around 2003, they have begun to show conflict over the idea of shifting to an oriented H1 form as englobing, wherein Marketing would become dominant over Production. We can only wonder if the timely inversion–reversion rate will continue.

NOTES 1. Her results are based on 287 returned questionnaires from a sample of 1,650 firms; 104 represented out of 122 MNCs in US, Japan, and seven European countries

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(22 countries total); response rate by individuals surveyed was 20%; dependent on ‘‘single informants’’ and ‘‘only perceptual measures’’ as she puts it. 2. The English definition of the French word, ‘‘encheveˆtreé,’’ is ‘‘y tangled, entangled y’’ in this order, with no further distinction made. Dumont talks about opposing hierarchies (plural). Dupuy seems to refer to a tangled hierarchy (singular). In French the two terms are used interchangeably. We will begin with Dupuy’s tangled hierarchy, but then talk about entangled control and autonomy forces as we progress. 3. Plants were autonomous cells; innovation, competition, and need to cut costs forced the development of network links; the IPC generated vertical links between plants, Divisions, and supra-Division management.

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COMMUNICATION DISSONANCE AND PRAGMATIC FAILURES IN STRATEGIC PROCESSES: THE CASE OF CROSS-BORDER ACQUISITIONS Olivier Irrmann ABSTRACT Individual interactions between partners are recognized today as playing a central role in the evolution of cooperative interorganizational relationships. Most theoretical treatments of interactions have been made at a macro-level, with reference to constructs such as trust, outcome expectations, process and outcome discrepancies, and communication. Relationships are analyzed at the level of organizations seen as collective actors, and their international aspects are reduced to the comparative analysis of macro-level dimensions of culture. In the past two decades, research in social science has progressively revealed the complex and multiple natures of culture and identity in organizations. Surprisingly, the monolithic vision of organizational and national cultures is still dominant in the strategy field and has tended to use organization-wide or nationwide classifications (one organization – one culture/one country – one culture) and seeing top managers as the most reliable source of information on the topic. The paper suggests substantial modifications in our approach to culture and argues that the mapping and codifying of different Strategy Process Advances in Strategic Management, Volume 22, 251–266 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22009-0

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management styles and cultural dimensions may not be enough to understand the dynamics of international business encounters. The main issue is not the existence of differences per se, but rather the way behavioral differences are perceived and interpreted by members of other managerial/organizational/national cultures, and particularly how the interactions – the ‘‘contact’’ across these cultures – are socially constructed and managed. We propose a research agenda putting perceptions and communication processes at center stage and introduce the concepts of Communication and Cultural Dissonance – rooted in the field of cross-cultural management and intercultural communication – as an important factor in the development of cooperative processes. Perceptions of cultural differences and problematic behaviors are grounded in the different cultural interpretations of a proper way to communicate intent, relations and business strategies to be implemented. These respective and often divergent interpretations will be fundamental in the way individuals assess the quality of the cooperation process, the reliability of their partners and of the knowledge they want to transfer and the trustworthiness of the partner. We use data from a longitudinal study of several post-merger integration processes to illustrate some of our theoretical conjectures.

ACCOUNTING FOR THE INTERNATIONAL DIMENSION: FROM CULTURAL DIFFERENCES TO THE STUDY OF CULTURAL INTERACTION In their foundational article on interorganizational relationships, Ring and Van de Ven (1994) concluded their discussion with the following cautionary note: ‘‘Cooperative interorganizational relationships are increasingly occurring between parties from different nation states, cultures, and languages, representing a more complex set of conditions than have been examined in this paper.’’ (p. 113). However, despite the strong development of research on processes and this early call for further research, theoretical issues surrounding the role and influence of culture and language on strategic process have largely remained in the shadow. The traditional approach to the topic has either been to leave it completely unaddressed (culture and language as irrelevant factors), or to assume that the existence of macrolevel differences in values (e.g. Hofstede, 1980) would automatically be dysfunctional (differences in cultural dimensions generate conflicts). The construct of cultural distance – and its operationalization as a composite

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index (Kogut & Singh, 1988) has been widely used in strategy and international business with the tacit assumption that the greater the distance, the more difficult interactions would be. However, recent advances in the study of cultural, social and organizational identity suggest the need for substantial modifications in our approach to the topic. During the past two decades a great deal of effort has been dedicated to the description and codification of nationally determined business systems, cultures, and management styles. The shift from ethnocentric to polycentric comparative studies has opened up new perspectives to researchers and practitioners in the fields of human resources, marketing and organizational behavior. However, these rich descriptions of culturally relative management systems and models tend to consistently overlook an important factor, namely interaction between individuals. The really important issue may not be the existence of differences per se, but rather the way these behavioral differences are perceived and interpreted by members of other managerial/ organizational/national cultures, and particularly how the interactions – the ‘‘contact’’ across these cultures – are socially constructed and managed. Assessing cultural values, mapping and codifying management styles, business contexts or organizational cultures is definitely a necessary starting point to better understand the dynamics of international business encounters, but it should be considered only as a starting point. When shifting to the study of cultures in interaction, two major problems arise. First of all, knowledge derived from intra-cultural studies (comparative/cross-cultural) is difficult to apply to the study of intercultural settings (cultures in contact) because people tend to adapt their behavior to the new situation and behave only partially as predicted by observations made in more familiar settings (Adler & Graham, 1989). The second major problem comes from the fundamental ambiguity of communication and the constant need to draw inferences from ambiguous information. Problems stem from situations where participants in a conversation hold different assumptions and misinterpret each others’ actions or messages due to lack of common language or concepts, or due to differing world images, or because of membership in different groups. What matters is not only what is said, but also how it is said. This ‘‘how’’ often obeys rules that are culturally relative and people at the workplace will enact or express their cultural expectations about what is an appropriate communicative or negotiation behavior. In other words, cultural differences do not exist per se; they are only a result of perceptions occurring during interaction – literally co-constructed by the Actors. Helping organizational members to solve functional problems in interaction across cultures requires an analysis of cultural dynamics that

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goes far beyond the predictions that may be made by comparing national indicators of cultural value orientations. What is needed is to help people understand how they form cultural categories (they are very bureaucratic, we are very egalitarian) and the type of discourse they use to communicate their own values. We argue that there is no predetermined influence of culture on any kind of strategic processes, be it a post-acquisition integration phase or the evolution of an alliance. It is rather the way culture is enacted and made sense of during interaction between organizations’ members that leads to successful or unsuccessful processes. Our paper focuses on the application of a communicative and interactionist approach in the analysis of the integration process of cross-border acquisitions, with the objective of using knowledge stemming from the fields of negotiation and communication and show their usefulness in the analysis of interorganizational relationships and strategy processes. First, we briefly review prior research on the role of cultural and organizational issues in the post-acquisition phase and show the limitations of the traditional static approach of culture to interpret the dynamics of interorganizational combination. In the following section we show how the concepts of pragmatic failure and communication dissonance can be used in the analysis of international business encounters and firms combination. We then show how these concepts were used in two longitudinal studies we conducted, exploring the intercultural dimension of communicative events occurring during the integration phase of cross-border acquisition. Finally in the concluding section of the paper we discuss how this new approach could help broaden our approach of interorganizational relationships, alliance evolution, crossborder acquisitions and knowledge transfer.

THE ROLE OF CULTURE IN THE INTEGRATION PROCESS OF CROSS-BORDER ACQUISITIONS: AN UNSOLVED PUZZLE IN INTERNATIONAL BUSINESS The exponential increase of cross-border mergers and acquisition during the last decade was paradoxically accompanied by a growing volume of empirical studies conducted by academics and practitioners reporting a high failure rate of Mergers and Acquisitions (M&As), generally estimated as high as 50–60%. Despite the fact that the main motives behind a merger or acquisition are usually related to the creation of value, focusing on strategic and financial factors proved insufficient to explain such high failure rates. For Morosini (1998), it is rather cultural and organizational issues that play


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a major role in the success or the failure of an acquisition, particularly during the implementation phase when people, organization and operations need to be coordinated and progressively combined. The inability to manage properly the integration process can lead to demoralized staff and employee defection, an outcome that may be disastrous particularly for technologybased industries where people are the main asset (Inkpen, Sundaran, & Rockwood, 2000). However, the role and influence of culture in the success or failure of cross-border acquisitions is by no means clear. It has been hypothesized that culture, both at the national and corporate level, has an important effect on post-acquisition performance (measured in terms of stock price, return on investments, cash flow, productivity) but research in the field has yielded contrasting and sometimes contradictory results. For instance Morosini and Singh (1994) found that some post-acquisition strategies were more national culture-compatible than others. However, in a subsequent larger scale study reinterpreting the original data, the same research team found that post-acquisition performance was not affected by the post-acquisition strategy chosen for target integration (Morosini, Shane, & Singh, 1998). As regards acculturative stress (Berry, 1980, 1983; Nahavandi & Malekzadeh, 1988), research on European mergers (Very, Lubatkin, & Calori, 1996) showed that national cultures sometimes influence acculturative stress but not always in the expected direction, with some differences eliciting perceptions of attraction rather than stress. As a matter of fact, qualitative interviews led by Morosini et al (1998) with executives of firms undertaking cross-border acquisitions revealed that a greater national cultural distance (as defined by Kogut & Singh, 1988) between the acquirer and the target seemed to enhance performance. One reason why the influence of culture on acquisitions might be difficult to assess is that most studies of cross-border M&As paradigmatically use Hofstede’s (1980) dimensions to define national culture. While replication studies have globally confirmed the validity of Hofstede’s dimensions (Sondergaard, 1994), we should not forget that these dimensions reflect work-related values, collected between 1967 and 1973, using an attitudesurvey questionnaire. Any use of the results outside their original setting should be undertaken with caution. Using the country scores as an ultimate truth and a proxy for culture is a widespread but dangerous trend in crosscultural and intercultural studies (Usunier, 1998). In an in-depth study of foreign acquisitions in Denmark, Gertsen and Søderberg (1998) compared the actual implementation of the acquired firm’s integration with the predictions based on Hofstede’s (1980) cultural dimensions and Cartwright and Cooper’s (1992) models of organizational fit. In most of the cases

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predictions made were very partially or not at all validated by the observations conducted over a period of 2 years after the acquisition, mainly because the employees gave very different interpretations of the cultural differences they noticed and to which they attributed importance. In order to shed light on the complex collaboration and integration processes involved in mergers, acquisition or multicultural teamwork, we need to adopt a more social constructionist and process-oriented approach to interpret the role of culture in intercultural communication and crosscultural management (Holden & Søderberg, 1999). We can posit that there is no predetermined influence of culture on post-acquisition performance. The influence can be positive, negative or neutral. It is rather the way culture is enacted during interaction between the people within the acquirer and acquired companies that leads to successful or unsuccessful integration. As we stated earlier, conducting processual research on that topic forces us to be more sensitive to the unfolding of the integration process and the symbolic and communicative interactions between people within the merging organizations. We propose to analyze the integration process of an acquisition as an intercultural communication and negotiation process. When there is a relative balance of power between the acquirer and the acquired or between subgroups within the organizations, control mechanisms and procedures as well as access to knowledge and know-how are negotiated between the two firms’ managers and staff. Viewing the integration process of an acquisition as a negotiation has the advantage of restoring interpersonal dynamics and communication into the analysis. The field of negotiation has addressed in quite a detailed fashion the issue of communicative strategies and the interpretation of others behavior and language in use. In the next section we present the notions of pragmatic failure and communicative dissonance, two concepts extensively used in communication and applied linguistics, that shall help us interpret some of the complex issues encountered in post-acquisition integration processes and cooperative relationships between individuals and groups.

PRAGMATIC FAILURE AND COMMUNICATION DISSONANCE IN INTERNATIONAL BUSINESS ENCOUNTERS In international business interactions, the cultural relativity of rules about the ‘‘how’’ of communication leads to interpretations of the ‘‘what’’ of the


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message that can diverge considerably from the original intentions of the sender. In their in-depth study of seven cross-border acquisitions involving Danish firms, Gertsen and Søderberg (1998) found that communication processes were at the heart of the successes and failures during the integration phase. Perceptions of cultural differences by the staff of the companies were grounded in the different cultural interpretations of a proper way to communicate content and relations. Although the application of this type of analysis to M&As is rather new, it has been a classical field of inquiry for researchers in Negotiations (see Putnam & Roloff, 1992). A recurring theme in studies of international negotiations in a business context is that cultural differences in styles of negotiating and handling conflicts generate problematic misunderstandings (Graham, 1996; Mariott, 1995; O¨berg, 1995). As parties enact or express their respective cultural expectations about what is an appropriate negotiation behavior, miscommunications can substantially modify the final outcome of the negotiation process (Holmes, 1992). The most serious type of miscommunication is caused by the deep features of the cultural and business background of the people in contact. Interactants may evaluate the behavior of other participants according to their own cultural and communicative norms (Mariott, 1995). This is true in both monocultural and multicultural contact situations. However, in intercultural situations, misunderstandings and miscommunications are more frequent (cf Gumperz, 1982) because the behavior of participants reflects more divergent underlying communicative and socio-cultural norms. Yet negotiators are for the most part not fully aware that their evaluation of other’s behavior is rooted in culturally based ‘‘ways of talking’’, and they generally conclude that their interlocutors are ‘‘difficult’’, ‘‘awkward’’, or the like. This phenomenon is labeled ‘‘dissonance’’ or ‘‘socio-cultural miscommunication’’ (Mariott, 1995; O¨berg, 1995). It often results in failure to reach common understanding, particularly when misunderstandings are linked to the affective or relational dimension of interaction. Lack of knowledge about the prerequisites of the meeting, about facts and conversational norms related to social, cultural and business backgrounds lead to pragmatic failures, i.e. an inability to understand ‘‘what is meant by what is said’’ (Thomas, 1983). Every competent native speaker knows that there are times when what is said cannot be taken at face value but must be interpreted according to different ground rules that differ cross-culturally. Pragmatic failures affect not only the outcome of the negotiation but also the mutual evaluations of the participants. The first source of pragmatic failures is in cross-culturally different patterns of communication and ways

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to express a convincing discourse. The second source can be found in culturally based ways of doing business, in the non-linguistic aspects of coordinating interactions of co-workers, managers, customers and suppliers across borders, an activity often referred to as cross-cultural management. But management is very much conversational in essence, and miscommunications can also occur because the professional contexts in which the partners evolve are different, creating ambiguities about the intention of the other party. We show next how these concepts were central in interpreting data collected from two qualitative studies of cross-border acquisitions.

COMMUNICATION AND CULTURAL DISSONANCE IN CROSS-BORDER ACQUISITIONS: RESULTS FROM TWO QUALITATIVE LONGITUDINAL STUDIES In two qualitative studies conducted in Finland and France, we explored the intercultural dimension of communicative events at play during the integration phase of a cross-border acquisition. Data was collected between 1997 and 2002 within two French–Finnish industrial and engineering groups. Field notes, meeting notes and tape-recorded interviews were collected, trying to capture the perceptions of actors and analyze the unfolding of communicative and managerial events, both from the Finnish and the French point of view. During this extended period of time, ‘‘stories’’ of the organization progressively emerged, recollection of significant events interpreted successively by Finnish and French staff. We also had sessions where part of the management staff reflected and commented on the researcher’s interpretation of the intercultural communication processes at play during the acquisition process. From the transcripts we could observe that both sides perceived a certain degree of communication dissonance (as defined by Mariott, 1995). This was rationalized as ‘‘attitudes’’, ‘‘lack of trust’’, ‘‘absence of cooperation’’ but the issue was about the inability to generate smooth exchange of information, to successfully influence on strategic decisions and to persuade the other party of the validity of one’s point of view. In other words, we could define the general atmosphere as the result of unsuccessful negotiations about exchange of knowledge and control over business operations. As a consequence, executives from Finnish units deliberately limited the amount


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of market and industrial knowledge they transmitted to their headquarters. The resistance could take several forms, from refusal to comply with orders perceived as harmful for the Finnish unit, to ‘‘express’’ visits of the factory, which did not allow the foreign visitor to get a real idea of the production technology used in the plant. In its simplest form it consisted of a strong reluctance to communicate anything but the strict minimum, the whole unit entering in a sort of ‘‘organizational silence’’. Interestingly, we found that many conflicts rationalized as organizational problems between the two units were actually due to different patterns of communication. Conversely, purely business related problems led to and were labeled as communication difficulties.

Pragmatic Failures Originating in the Linguistic and Communication Patterns We identified three main sources of communication dissonance originating in linguistic pragmatic failures and leading to misunderstandings and noncooperative behaviors. The first one concerns the form of the discourse (how do I say things and to whom), the second one is in terms of content (what do I say or not say), and the last one is related to the medium of communication. Actors involved in intra-organizational negotiations are rarely aware of these causal elements. What was diagnosed as an organizational problem (steep hierarchy with distant deciders) had its roots in the communicative behavior (adopting the right discourse at the right time in order to convince). In an acquisition, staff and managers of both acquired and acquirer companies will try to discover the new channels and patterns of communication and influence within the extended organization. From the acquirer standpoint, the legitimacy of ownership does not guarantee full access to the knowledge embedded in the acquired organization, and getting access necessitates identifying new ways of gaining cooperation and compliance. It is during this identification process that communication dissonances may generate misunderstandings, conflicts (open or latent) or lack of cooperation. Differences in ‘‘corporate cultures’’ are rooted in, and may be no more than, differing rules of internal communication (Gilsdorf, 1998). This type of problem is generally analyzed in terms of hierarchical structure and decision-making styles, and indeed the inability to influence decision at the headquarters was interpreted by the Finnish unit as a problem of hierarchy and power distance. A recurring interpretation also expressed by the Finnish

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staff was that ‘‘they do not trust us’’! However, the respective interpretations from both sides about this question of influence pointed to an alternative explanation. Part of the problem was due to cross-culturally differing patterns of argumentation – the way in which arguments and evidence are presented, interpreted and accepted.

Pragmatic Failures Originating in the Professional and Strategic Context We identified two main sources of communication dissonance originating in the business pragmatic failures and leading to misunderstandings and noncooperative behaviors. The first one comes from divergent visions of the appropriate business strategy to adopt and of the economic role of the acquired unit. The second one is more about the interpretation of decisionmaking processes and the social construction of management styles. We also saw that in some instances what was identified as cultural traits and communication problems (a secretive and non cooperative culture) was originating in more prosaic business and strategic elements (divergent visions of marketing and of the role of the subsidiary). The data collected revealed a very interesting mirror effect in the perception of management style. Each side described itself as well as the other using the same words. ‘‘We are very direct and informal – They are very hierarchical and formal’’. It is often stated in popular management literature that French organizations are very hierarchical and Finnish ones very flat and informal. This dichotomy was absolutely not confirmed by the informants as every of them unanimously considered their own organization as very democratic, egalitarian and informal and the ‘‘other’’ organization as very bureaucratic and hierarchical.

Communication and Cultural Dissonance as the Outcome of Pragmatic Failures The perception of frictions in knowledge exchange, complaints about the quality of interpersonal communication between units and interpersonal conflicts across units are often good symptoms of an emerging or existing problem. In the absence of a precise attributional cause (such as tensions created by layoffs plans or uncertainty about one’s future position in the new organization), such frictions are caused by what we define broadly here as ‘‘cultural dissonance’’. Cultural dissonance could be defined as the


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general feeling that something in the interaction between individuals does not quite correspond with one’s expectations, creating ambiguity and stress. Ambiguous interpretations of new procedures, perception of a breach in the logic behind integration initiatives, feelings of frustration while trying to convince the other party, are all constitutive of cultural dissonance. Such dissonance can stem from any kind of difference on any identified dimension: organizational or national culture, communication styles, work-related values, social background, occupational culture, age, gender, and discourse system. The following analysis underlines that these differences are ‘‘perceived’’ and constructed in the successive interactions between individuals. As such they are a partial outcome of communication dissonance, dissonance that itself originates in the pragmatic failures between interacting individuals. Fig. 1 offers a tentative schema describing the antecedents and outcomes of Communication and cultural dissonance.

DISCUSSION What we offer here is an alternative tool for gaining a better understanding of the complex influence of culture in intercultural business encounters. This is primarily a classification of the sources of miscommunications in intercultural communication and negotiations, integrating concepts and findings stemming from the different fields of management, communication and linguistics. We focused deliberately on the deeper levels of miscommunication and left aside the surface features of language and communication, such as lexical, presentational or non-verbal aspects. The sources of communication dissonance could be traced to two types of pragmatic failures (a concept developed originally by Thomas, 1983): one we could label as linguistic pragmatic failure and the other one as business pragmatic failure. The first one is grounded in differences in accepted cultural forms of discourse, message content and medium of communication. The second one is grounded in different interpretations of the appropriate decision-making process, the right kind of compliance-gaining strategy and the divergent visions of the economic role of the acquired unit. When informants typically talk about ‘‘lack of trust, lack of competence, unwillingness to cooperate, unacceptable behavior, bureaucratic system, secretive culture’’, their labels should not necessarily be taken at face value. In many cases such attributions can be traced back to the partners’ inability to properly and convincingly get the message through and in the divergent interpretations of negotiation processes. Comparing and contrasting views from both sides about the same

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Consequences of Dissonance

Sources of Dissonance

Behavior: (observed) Non-cooperation Information retention Organizational silence

Linguistic pragmatic failures Communication Dissonance

Cultural Dissonance Sense-making: (expressed)

Business pragmatic failure

Perception of Cultural differences Mistrust Perception of Bureaucracy

Macro Level Differences Work-related values (national or regional level)

Professional identities

Fig. 1.

Intercultural Communication Dissonance/Cultural Dissonance.

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Organizational Cultures


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events is critical to overcome the attribution bias contained in the interpretations given by one side of the organization. Far from being exclusively restricted to the study of international corporate acquisitions, this could be a useful typology for the interpretation of all sorts of cultural interaction in business contexts, such as the ones occurring in intercultural team’s processes, buyer–seller interaction and the management of international alliances. The excessive reliance on static cultural dimensions in explaining the dynamics of international business encounters has often led to unsatisfactory results. Our approach is based on a more interpretative and interactional paradigm, but still offers a typology that could be used in both qualitative and quantitative tests of the influence of culture in intercultural encounters. For practice, our results suggest that investing in the development of intercultural communication skills and cultural intelligence could be a more fruitful approach for managers than the quest for cultural fit between transacting and merging organizations. We see three theoretical insights for process research coming from this interdisciplinary perspective on culture and interactions: 1) Shifting from the study of cultural differences to the study of cultural perceptions. The first consequence is that focusing on the causes of ‘‘communication dissonances’’ or ‘‘cultural dissonances’’ could possibly be more fruitful to process research than the notion of ‘‘cultural differences’’. This approach is congruent with recent theoretical contributions made in the field of alliance research showing that the perception of the partner’s credibility and trustworthiness are central in the evolution of alliances, perception largely rooted in the interpretation of the repeated interactions between partners (Doz, 1996; Ring & Van de Ven, 1994) and the comparative assessment of both processes and outcomes (Arino & Doz, 2000; Kumar & Nti, 1998). Language and culture are deemed to influence these interpretations and our typology may help understand the shaping and unfolding of mutual trust and mistrust. The perceptual agenda seems to have been overlooked in much of recent work on alliance processes. It is generally assessed, generally tacitly, that the perceptions of others’ behaviors are fully informed and accurate. We see no reason why the interpretation of others intentions and communicative actions could not be misinterpreted across organizations or units, especially when partners come from different cultural and professional environments, and often speak a non-native language on both sides. An illustration can be found in some of the dysfunctional aspects of the Ciba-Geigy–Alza alliance described by Doz (1996, p. 73) and analyzed

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further by Kumar and Nti (1998, p. 360). Alza personnel began to bypass Ciba’s hierarchy and alienated a large part of the middle management in the process, as they were viewed as making ‘‘constant criticism and attacks on people who were their best friends’’. It is somehow unlikely that Alza personnel had intentionally wanted to create a conflict, and therefore the outcome of their behavioral change was unintentional. Alza people wanted to find a more effective way to proceed, but could not find the appropriate behavioral script. What was intended as a more effective process was interpreted as an inadmissible trespassing of rules. The issues here revolve around intercultural competence and illustrate perfectly the consequences of a business pragmatic failure in the context of the evolution of an alliance. 2) Communicative process and knowledge transfer. A focus on communicative process and cultural interpretations of behaviors could shed light on individuals’ assessment of partners’ credibility and how this, in turn, can influence the stickiness of knowledge transfer across borders. In-depth studies of knowledge transfer across and within firms show that in the early stages, the perception of the counterpart trustworthiness, competence, and even professional status are determinant factors in the decision to transfer knowledge or not (Empson, 2001; Szulanski, 2000). The reasons why individuals perceive their own knowledge or status to be superior are hard to justify by any objective criteria, and as a consequence a focus on how interpretations and images are shaped could be useful when trying to understand the roots of knowledge transfer stickiness. 3) Learning to manage identification in cross-border acquisitions. A third perspective arises from a social identity approach. One could hypothesize that a critical cause of the high level of failures in cross-border mergers and acquisitions is poor management of post-merger identification. Rather than focusing solely on the form and speed of integration, scholars could also fruitfully study post-merger internal and external communication and the way they influenced perceptions of status and dominance that resulted in cooperative or non-cooperative behaviors. It is undeniable that the large media battle prior to some mergers would have profound influences in the subsequent integration processes. Measures reflecting the level and tone of media coverage of an alliance or an acquisition could be of great interest in models testing the antecedents of firms’ performance. In conclusion, although past research on the cultural dimension of international business has provided us with many useful insights, it also shows


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that many aspects of the intercultural dynamics and the perception of credibility and trustworthiness across borders still remain in the shadow. This may not necessarily be an issue for research looking only at discrete interactions within homogeneous groups – such as top-management negotiations in joint-venture formation – but the perceptual and cultural interaction dimension becomes particularly important when the aim is to understand complex processes at company-wide levels, such as integration processes in M&As or knowledge transfer between or within organizations. The concepts of communicative dissonance, cultural dissonance and pragmatic failures could help us enrich our understanding of strategy implementation and processes, by taking into account the micro-level of individual intercultural interactions in our analysis of the dynamics of cooperation or resistance observed at the firm-level.

REFERENCES Adler, N. J., & Graham, J. L. (1989). Cross-cultural interaction: The international comparison fallacy. Journal of International Business Studies, 20, 515–537. Arino, A., & Doz, Y. (2000). Rescuing troubled alliances...before it’s too late. European Management Journal, 18(2), 173. Berry, J. (1983). Acculturation: A comparative analysis of alternative forms. In: R. J. Samuda & S. L. Wood (Eds), Perspectives in immigrant and minority education (pp. 66–77). Lanham, MD: University Press of America. Berry, J. W. (1980). Acculturation as varieties of adaptation. In: A. M. Padilla (Ed.), Acculturation. Theory, models and some new findings. Boulder, CO: Westview Press. Cartwright, S., & Cooper, C. L. (1992). Mergers and acquisitions: The human factor. Oxford: Butterworth-Heinemann Ltd. Doz, Y. L. (1996). The evolution of cooperation in strategic alliances: Initial conditions or learning processes? Strategic Management Journal, 17(7), 55. Empson, L. (2001). Fear of exploitation and fear of contamination: Impediments to knowledge transfer in mergers between professional service firms. Human Relations, 54(7), 839–862. Gertsen, M. C., & Søderberg, A.-M. (1998). Foreign acquisitions in Denmark: Cultural and communicative dimensions. In: M. C. Gertsen, A.-M. Søderberg & J. E. Torp (Eds), Cultural dimensions of international mergers and acquisitions. Berlin-NewYork: Walter de Gruyter. Gilsdorf, J. W. (1998). Organizational rules on communicating: How employees are – and are not – learning the ropes. The Journal of Business Communication, 35(April), 173–201. Graham, J. L. (1996). Vis-a`-vis international business negotiations. In: G. Pervez & J.-C. Usunier (Eds), International business negotiations. New York: Pergamon. Gumperz, J. J. (1982). Discourse strategies. Cambridge: Cambridge University Press. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills: Sage.

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STRATEGY-MAKING AS A COMPLEX, DOUBLE-LOOP PROCESS OF KNOWLEDGE CREATION: FOUR CASES OF ESTABLISHED BANKS REINVENTING THE INDUSTRY BY MEANS OF THE INTERNET Marı´ a P. Salmador and Eduardo Bueno ABSTRACT We blend knowledge creation and complexity perspectives in a model of strategy-making that explains how top managers in organizations that are reinventing their industries in high-velocity environments conceptualize the strategy-formation process. The model is grounded in four in-depth case studies of Internet banks that are part of different established financial groups in Spain. The main findings suggest that strategy-making seems to emerge out of the interplay of the following interrelated constructs: action, reflection-on-action, imagination, and simple guiding principles. The study of such constructs from the perspectives of knowledge creation and complexity theory suggests interesting implications. Strategy Process Advances in Strategic Management, Volume 22, 267–318 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22010-7

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Action and reflection-on-action seem to form a first SECI (Socialization– Externalization–Combination–Internalization) spiral of knowledge creation. Out of the interaction of action and reflection-on-action, imagination may emerge when the system has reached a ‘‘critical state’’. Imagination forms a second SECI spiral of knowledge creation. The interaction between imagination and action on a higher level results from the emergence and application of simple guiding principles, which provide the organization with coherence between what is imagined and what is done, and guide the actions taken throughout the organization with flexible planning. We conclude by proposing that strategy-making may be understood as a complex, double-loop process of knowledge creation.

INTRODUCTION Major catalysts such as deregulation, global competition, technological breakthroughs, changing customer expectations, structural changes, excess capacity, environmental concerns, and less protectionism, among others, are reshaping the landscape of corporations worldwide (e.g., D’Aveni, 1994; Prahalad & Hamel, 1994a). In most industries, firms are not only undergoing rapid change, but they are also experiencing a fundamental shift in the rules of competition and the way the game of competition is played (e.g., Illinitch, D’Aveni, & Lewin, 1996; Eisenhardt & Sull, 2001). Hamel (1998a) has therefore suggested that the primary problem is one of industry transformation. As Baden-Fuller and Stopford (1994) and Markides (1998) point out, if established companies are to thrive, they must adopt new strategies in response to changing environments. Strategy innovation seems the only way for established firms to renew their lease on success and the key to the reconception of the existing industry model in ways that create new value for customers, trip up competitors, and produce new wealth for all stakeholders (Hamel, 1998b). Managers are therefore interested in how they can help an industry evolve in ways that are advantageous to them (Prahalad & Hamel, 1994b). Strategy-making becomes crucial because, as the latter authors highlight, in facing this challenge, there is a great need for imagining (and anticipating) the future and developing a transition path toward it in an industry undergoing complex changes. Part of the answer may be found in an increased focus on process and dynamics (e.g., Pettigrew, Thomas, & Whittington, 2002). In line with the concerns mentioned, the purpose of this research was to explore the ways in which managers in organizations that were reinventing

Strategy-Making as a Process of Knowledge Creation

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their industries in high-velocity environments conceptualized the process of strategy formation. Our focus was on social actions and interactions. As Johnson, Melin, and Whittington (2003) propose, ‘‘strategy’’ is not only an attribute of firms, but also an activity undertaken by people. From this perspective, strategy can be seen as a social practice (Whittington, 2004). In particular, and in line with the increasing agreement with the idea that new approaches to the study of the field would be welcomed (Caldart & Ricart, 2004), our exploration of such social actions and interactions was carried out mainly through two theoretical lenses, in recognition of their potential explanatory power (e.g., Prahalad & Hamel, 1994b; Løwendahl & Revang, 2004). These lenses are knowledge and complexity theory. They were chosen in an attempt to shed new light on the different knowledge flows and the dynamics of such flows in strategic processes. We used the inductive approach of case-study theory building, the main justification being that a grounded, theory-building approach would be more likely to generate novel and accurate insights into a phenomenon about which little research exists (Glaser & Strauss, 1967). The research setting was Internet banking. Banking is one of the industries that Bourgeois and Eisenhardt (1988) identify as a high-velocity environment, while the challenge of the Internet exacerbates the rapid movement characteristic of all areas of the New Economy (Eisenhardt & Sull, 2001). In particular, we selected Internet banks that were part of established banks and that were intent on reinventing the banking industry. The reason for our selection was that, as noted in a report for Merrill Lynch (2000), the biggest competitive pressure in e-banking would come from the evolved, established banks that were the quickest to transform themselves. With deep pockets, large customer bases and economies of scale, evolved incumbents were likely to become the agents of change. They were also under pressure to do so, for if they did not, others would usurp their position. The few barriers to entering the industry would make for increased competition from pure e-banks, established banks from different markets, and new entrants (such as retailers, telecom companies and utilities) from other sectors with access to a large pool of clients. Drawing from our field investigation of four Internet banks in Spain, we induced several propositions on how managers conceptualized strategymaking. In our research, we found that one of the basic sources in the strategic process was action (Proposition 1). Nevertheless, action was not a sufficient condition for strategy-making. Action was closely linked to reflection-on-action (Proposition 2). Managers promoted the accumulation of actions, and interactions of action and reflection-on-action

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(Proposition 3), in an attempt to provoke the emergence of imagination as a crucial source of strategy creation (Proposition 4). Then, what had been imagined seemed to be implemented in the light of a set of simple principles that guided the actions of the different agents involved, all the while helping them cope with the unexpected events that happened continuously (Proposition 5). Following Van de Ven’s (1992) suggestion, we coupled the set of statements presented, our goal being to promote a better understanding of how strategic processes unfolded over time, with special emphasis on why the propositions mentioned were such by building on previous research. In particular, when studying these propositions through the theoretical lenses of knowledge creation and complexity theory, we found that strategy-making could be understood as a complex, doubleloop process of knowledge creation. According to the logic of induction and following the structure of inductive works such as Bourgeois and Eisenhardt’s (1988) and Eisenhardt’s (1989a), we organize the paper as follows. We begin by presenting the background and continue by discussing the method. We then describe the data and the insights drawn from them. Finally, we tie these insights to the broader agenda of the matter of study and depict the main contributions and limitations of our study, as well as suggestions for future research.

BACKGROUND Research on strategy-making has been conducted in various settings. Few field studies, however, have explored how decision-makers in established firms in high-velocity environments face the challenge of reinventing their industries. For example, many scholars of strategic processes have focused their efforts on large corporations in stable environments (e.g., Quinn, 1980; Mintzberg & Waters, 1982) or non-profit organizations (e.g., Pfeffer & Salancik, 1974; March & Olsen, 1976; Mintzberg & McHugh, 1985). As Bourgeois and Eisenhardt (1988) make clear, these approaches to strategy development have been conducted in settings in which market data were plentiful. As a result, it was possible to rely on the processing of industry information as part of the strategy-development process (Hofer & Schendel, 1978; Porter, 1980). Other research (e.g., Bourgeois & Eisenhardt, 1988; Eisenhardt & Bourgeois, 1988; Eisenhardt, 1989a; Burgelman, 1994; Grant, 2003) has contributed significantly to the theory and practice of strategymaking in rapidly changing environments. Why is strategic decision-making problematic in this kind of environment? Not only because change is so


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dramatic, but also because it is difficult to predict the significance of a change as it is occurring (Sutton, Eisenhardt, & Jucker, 1986). These dilemmas are aggravated in the case of incumbents facing the challenge of reinventing their industries (Hamel, 1998b). The strategy field stands to benefit from further research in this direction, and in particular from new theoretical lenses, such as knowledge and complexity (e.g., Prahalad & Hamel, 1994b); knowledge being a critical resource in the new competitive landscape and complexity theory representing a major opportunity in the strategy field.

Strategy-Making and the Theoretical Lens of Knowledge Over the last decade, the primary theories regarding the strategy-formation process have been organized into two categories: the design school and the learning school (Mintzberg, 1990, 1991; Ansoff, 1991). From a knowledge perspective, the former focuses on the role of formal analysis, planning and formal, strategic choice as essential activities that provide strategy-makers with the data essential for their task; highlighting the role of explicit knowledge. The latter emphasizes the role of the gathering of experience. This school has long since adopted an implicit-knowledge and learning perspective in describing how strategies are formed (e.g., Burgelman, 1988; Mintzberg & McHugh, 1985; Noda & Bower, 1996; Quinn, 1980), stressing the importance of tacit knowledge. The research of Grant (2003) in the oil industry informs the long-running debate between the ‘‘design’’ and ‘‘process’’ schools of strategic management and suggests a possible reconciliation of the two. However, the design and the learning schools mentioned, corresponding primarily to the classical and modern strategy perspectives (Volberda, 2004), are silent as to how these analyses and actions are ultimately converted into an original strategy that can help reinvent an industry. Along these lines, there is an emerging research effort to further the development of the science and practice of imagination as a source of strategy creation (e.g., Roos & Victor, 1999; Scharmer, 2000), in which Scharmer (2000) points out the importance of organizing around not-yet-embodied knowledge. Moreover, the postmodern strategy perspective is concerned with ‘‘how to develop adequate strategic schemas that enable the firm to create or adapt to change’’ (Volberda, 2004). The study of Szulanski, Doz, and Ovetzky (2004) deals, for example, with the cognitive frames of three established companies responding to the Internet. This perspective is more focused on cognitive,

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tacit knowledge (Polanyi, 1966), centering in what Johnson-Laird (1983) calls ‘‘mental models’’. How do the different schools and research efforts presented, with their different approaches to knowledge, and which are on occasions competitive, on occasions complementary, help us to understand the process of strategymaking in organizations attempting to reinvent their industries?

Strategy-Making and the Theoretical Lens of Complexity Models of complexity theory developed mainly for analyzing biological evolution have also found an application in the evolution of organizations (Anderson, 1999). As Prahalad and Hamel (1994b) suggest, the strategy field, if nothing else, is characterized by complexity. For example, the understanding of organizations as complex, adaptive associations of individuals with different interests and different perceptions (Bower, 1970; Burgelman, 1983), whose interactions when making strategy give rise to an emergent process (e.g., Mintzberg, 1991, 1994), has received conceptual reinforcement from complexity theory. In a similar vein, Pascale’s (1984, 1999) arguments in favor of strategy-making as an organic, unsystematic, informal process may find theoretical basis on a complexity perspective, and offer interesting implications for organizational strategy. Burgelman’s (2002) research on Intel’s strategy-making process as vector and the inertia of co-evolutionary lock-in is also very representative. Brown’s and Eisenhardt’s (1997) and Eisenhardt’s and Sull’s (2001) studies link complexity theory and time-paced evolution in relentlessly shifting organizations, highlighting the use of simple guiding principles in strategy formulation. Grant’s (2003) study of eight leading oil and gas-oil majors highlights the process of ‘‘planned emergence’’ evident in the companies’ strategic planning and is consistent with management principles derived from complexity theory. However, can complexity theory shed new light on the dynamics of the strategic process in the reinvention of an industry? If so, how? The inductive, case-study approach described next was carried out for two main reasons: First, it was carried out in recognition of the importance of furthering the research of the strategy-formation process from the perspectives of knowledge and complexity theory in incumbent firms that are reinventing their industries in high-velocity environments; and second, because of the lack of existing field studies.


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METHODS We used case studies, particularly suitable for answering ‘‘how’’ and ‘‘why’’ questions and well-suited to generating and building theory in an area where little data or theory exist (Yin, 1984). It also enables researchers to use ‘‘controlled opportunism’’ to respond flexibly to new discoveries made while collecting new data (Eisenhardt, 1989b). By making this choice, we addressed the major challenge of ensuring that data collection and analysis met tests of construct validity, reliability, and internal and external validity by carefully considering Yin’s (1984) tactics.1

Research Design We undertook a real-time study of different strategic processes in their natural field setting (Van de Ven, 1992) by investigating four Internet banks in Spain. All firms are publicly owned, multibusiness banking firms. The sample was not random, but reflected a selection of Internet banks, namely parts of established banks that were intent on reinventing the banking industry through the Internet. Using terms proposed by Hamel (1996), they were ‘‘rule makers’’ that were becoming ‘‘rule breakers’’ in the banking industry; that is, they were established market leaders that were endeavoring to break the mold and become rule breakers. The intention to reinvent the industry came about after considering Internet banks related to established banks. At the time of the study, the Internet banks not only had intentions, but were taking innovative actions that would not have been possible without the Internet. Considering not only intentions, but also actions, we judged they were not following what Bourgeois and Eisenhardt (1988) refer to as a ‘‘wait and see’’ strategy. Considering that the actions were innovations, we judged they were not following what Bourgeois and Eisenhardt (1988) refer to as a ‘‘me too’’ strategy. Although space prevents our providing ‘‘thick descriptions’’ of each case (McClintock, Brannon, & Maynard-Moody, 1979), we include next an overview of the firms studied at the time of our analysis, and examples of why we argue that they were intent on reinventing the banking industry. Firm 1 is an established bank that was founded in the mid-1960s. The history of the firm has been characterized by growth and the ability to capitalize on regulatory changes, special situations, and new market niches. Thus the bank, which was ranked 107th when it was founded, is currently

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among the top six Spanish banks. The 1990s saw the emergence of various alternative channels to the traditional branches, which at the time of the study formed an essential part of the firm’s multichannel network. Among the alternative channels were telephone banking, virtual banking, the agent network, and the Internet, the latter intended to become the main one. In consequence, the way of approaching the Internet was through the transformation of the whole bank. As they state, the bank’s staff are young, highly trained, dynamic, flexible, and capable of adapting rapidly to technological and market changes. Also, almost all employees are shareholders of the bank, ensuring staff commitment to the bank’s strategy. We argue that Firm 1 was intent on reinventing the banking industry through the Internet because they had taken some original steps – for instance, launching auctions on the Internet allowing customers to transfer mortgages from other financial entities to the firm. They also facilitate simulators on-line that allow customers themselves to evaluate the different alternatives. Firm 2 is one of the largest financial groups, a holder of a solid position in the Spanish market and a leading franchise in Latin America. It was formed from various financial institutions that have been created since the mid-19th century and that have, over time, united to increase their business potential. Its way of approaching the Internet has been to create an independent Internet bank, in which a major telecommunications company also takes part. In this case, the intent of reinventing the industry can be illustrated. The bank was, for example, the first to offer support online for persons seeking a house for different purposes (to buy, to rent, for living, for holidays, etc.). The support included photos and a virtual tour, information on the services of the area (hospitals, schools, transportation), arrangement of details for visiting it, and more. Firm 3 is one of the leading financial institutions of Spain that models its identity, its present and its future on the history of four Spanish banks that have played a major role in the country’s financial and economic history (banks that themselves were built over time by absorbing and acquiring many other smaller institutions). Its strategy is to be an international benchmark bank, specializing in commercial banking. Its presence in Europe and Latin America is strong. Firm 3 combines geographical diversification with a thorough knowledge of the markets in which it works. This involvement in the markets where the firm operates makes it a multilocal group. The approach toward the Internet has been through the creation of an independent bank in the group. This independent bank is, for example, a pioneer in the creation of the concept of the mini-office with access to Internet in underground stations, shopping centers, etc., open from 10 a.m.


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to 10 p.m. Also, they give customers the possibility of receiving alerts and real-time information on the stock market via their mobile telephones. Founded at the beginning of the 20th century, Firm 4 is the third-largest banking group in Spain, comprising a national bank, five regional banks, and a mortgage bank. It also has a presence in neighboring countries through a bank in France and one in Portugal. It approached the Internet by creating a separate Internet bank that provided, inter alia, a personalized Web for enterprises with real-time data on marketing research, suppliers and customers, evolution and new tendencies, etc. Table 1 provides an overview of the information presented and descriptive statistics on the cases. To determine our number of cases, we used theoretical saturation – that is, we stopped adding cases when our incremental learning diminished (Glaser & Strauss, 1967; Sutton & Callahan, 1987). Our decision was also guided by the range of minimum and maximum cases recommended (Eisenhardt, 1989b). The comparison of case studies within the same industrial context enabled ‘‘analytic generalization’’ through the replication of results, either literally (when similar responses emerged) or theoretically (when contrary results emerged for predictable reasons) (Yin, 1984), thus ensuring that the evidence in one well-described setting was not wholly idiosyncratic (Miles & Huberman, 1984).

Research Site As identified by Bourgeois and Eisenhardt (1988), banking is a high-velocity environment. In high-velocity environments there is continuous ‘‘dynamism’’ (Dess & Beard, 1984), or ‘‘volatility’’ (Bourgeois, 1985), but these are overlaid by sharp and discontinuous change (Meyer, 1982; Sutton et al., 1986). Deregulation, mergers, new products, and new forms of competition have created both continuous and sharp, discontinuous change in the banking industry (Wooldridge & Floyd, 1990). At the time of our study (1999–2000) and in the foregoing years, the banking industry in Spain was facing the impact of the Internet. This fact accentuated the feature of fast movement, a characteristic of the New Economy (Eisenhardt & Sull, 2001). The situation of electronic banking in Spain in relation to Europe was as follows, according to Merrill Lynch (2000). Bottom-up, best-placed countries in terms of margin situation and cost structure were the Nordic area and Spain, while the biggest risks were in Portugal, Ireland, and to some extent the United Kingdom and Italy. In terms of speed of conversion,

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Table 1. Firm

Characterization

Description of the Four Cases Studied. Way of Approaching Internet

Number of Employees in Internet Bank

Number of Informants

Examples of why we Propose they were intent on Reinventing the Banking Industry. They were Pioneers iny

- Launching auctions in Internet to change mortgage - Simulators online - Offering support online for customers seeking a house

1

Established bank

2,539

Transformation of the whole bank

2,539

6

2

Established bank

32,447

129

4

3

Established bank

28,009

Creation of an independent Internet bank in the Group Creation of an independent Internet bank in the Group

321

5

4

Established bank

7,615

Creation of an independent Internet bank in the Group

49

4

- Creating the concept of the mini-office - Sending alerts and real-time information on the stock market to the mobile telephone - Creating a personalized Web for enterprises with realtime data on marketing research, suppliers and customers, evolution and new tendencies, etc


Number of Employees of the Established Financial Group


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Germany, France, and the Nordic area were ahead, while France and Spain were doing well relative to their underlying Internet penetration. Although the business model was not clear, by looking to the experience in the United States, Merrill Lynch (2000) highlighted that pure e-banks needed to evolve to make an impact on the mass market, as they offered good pricing but poor customer service.

Data Sources As is typical in case studies (Eisenhardt, 1989b), we combined different data-collection methods. We collected data through interviews, questionnaires, observations, and secondary sources. The rationale is the same as in hypothesis-testing research. That is, the ‘‘triangulation’’ (Webb, Campbell, Schwartz, & Sechrest, 1966) made possible by multiple data sources provides stronger substantiation of constructs and hypotheses. Of special note is the combining of qualitative and quantitative evidence. As Yin (1984) points out, case-study research can involve qualitative data only, quantitative data only, or a combination of both, as in our research in an attempt to get synergistic effects. The data-collection process took place in 2000. Interviews The primary sources were semi-structured interviews with individual respondents (see Table 1). At each site, we conducted two to three sessions of two hours each on average per case with the CEO or the person or persons assigned by them (19 persons in total). A case-study protocol was developed pursuing reliability in the findings, and a pilot study was carried out in order to refine our data-collection plan with respect to both the content of the data and the procedures followed. We began the interviews by asking the respondents to describe the competitive strategy of their firm and its position within the industry. We then asked them to describe the distinctive competencies of their Internet banking and key success factors. Finally, we asked them about the social actions and interactions when formulating and implementing their strategies. Following Van de Ven’s (1992) suggestion, we defined the strategic process in one of the three ways that are often used in the literature: a category of concepts (thinking, analysis, formulation, planning, implementation, and control) that refer to actions of individuals or organizations. As Chakravarthy and Doz (1992) state, the strategic process subfield is concerned with

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how effective strategies are shaped within the firm and then validated and implemented. According to Schendel (1992), ‘‘shaped’’ can mean the manner in which an organization develops or, in terms of extant literature, formulates, strategy. Good strategy must be created or imagined. Validation has to do with the issue of goodness: what is expected to work ex ante, in what circumstances is it expected to work, and with what can the organization reasonably expect it to work. Implementation means using strategy, operating with the strategy, and executing the strategy, and thus it is related to action. Implementation has to do with activities that concern the whole organization and its work. We were concerned with both formulation and implementation. The questions in the interviews concentrated on facts and events, rather than on respondents’ interpretations, using standard courtroom interrogation (What did you do? When? Who said what to whom?). In the first stages of the research, the interviews helped us develop an understanding of the strategic process in the different cases. In the latter stages, little new information was obtained, and the interviews gradually became a way of increasing the construct validity of the conclusions we were developing. Following Eisenhardt’s (1989b) recommendation, the interviews were conducted in tandem by two researchers. All interviews were recorded and were transcribed immediately afterward. In the transcriptions, we included all data, regardless of its apparent importance in the interview. We then cross-checked facts and ended the transcription notes with our lingering impressions, trying to sharpen them by asking ourselves questions (e.g., What did I learn? How does this interview compare to prior interviews?). We completed the interview notes and impressions within a day of the interview (Yin, 1984). Questionnaires We also obtained quantitative data on strategy-formation process patterns from questionnaires. After an initial interview analysis, informants were asked to give numerically scaled responses to rate different variables that emerged from the interviews. This was done because the qualitative data may directly suggest theory, which can then be strengthened by quantitative support (Jick, 1979). According to Eisenhardt (1989b), the frequent overlap of data analysis with data collection is a striking feature of research leading to the building of theory from case studies. The overlap may lead to legitimate adjustments, such as the addition of data sources in selected cases (e.g., Sutton & Callahan, 1987; Burgelman, 1983; Leonard-Barton, 1988). This flexibility is not a license to be unsystematic, but a way of avoiding


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potential information-processing bias, such as that suggested by Kahneman and Tversky (1973) of leaping with limited data to conclusions, or Nisbett’s and Ross’s (1980) warning against being overly influenced by vividness. As Eisenhardt (1989b,p. 538) suggests, ‘‘quantitative evidence can keep researchers from being carried away by vivid, but false, impressions in qualitative data, and it can bolster findings when it corroborates those findings from qualitative evidence’’. Among the variables rated using a 10-point Likert scale were participation in joint projects with customers, with companies in the same industry, and with companies in different industries; communication within project, cross-projects, and external; level of analysis and systematization of the lessons learned from experience in real-time; importance of the creation of contexts that promoted the quantity, quality, and variety of actions and reflections; level of existence of a few simple rules that defined direction without confining it, and level of existence of a developed and detailed plan that guided action (see tables in section ‘‘How is the strategy-formation process in the Internet part of established banks trying to reinvent their industries?’’). We then averaged these scores. Observations and Secondary Sources During the site visits, we kept a daily record of impressions and recorded informal observations we made as we participated in activities such as lunches and coffee breaks. In addition, whenever possible, we attended meetings as passive note-takers. These observations provided real-time data. We also used secondary sources to collect background information about the cases. Such sources included annual reports; internal documents provided by the interviewees, such as notices of meetings; agendas for meetings; minutes of past meetings; internal newsletters and intranets; and various articles in specialty magazines and newspapers about the situation and evolution of the Internet banks in general and of the different cases in particular.

Data Analysis For data analysis, we used a highly iterative approach (Glaser & Strauss, 1967) and included the following steps (Eisenhardt, 1989b): (1) analysis within case data; (2) search for cross-case patterns; (3) shape of propositions; and (4) comparison of the emergent hypothesis with the extant literature.

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Analysis within-Case Data Within-case analysis involved detailed, case-study write-ups for each site, central to the generation of insights (Gersick, 1988; Pettigrew, 1988). The objective was to become intimately familiar with each case as a stand-alone entity (Eisenhardt, 1989b).

Search for Cross-Case Patterns Coupled with within-case analysis, we pursued cross-case searches for patterns. In an attempt to improve the likelihood of accurate and reliable theory, this search was assisted by the following tactics suggested by Eisenhardt (1989b): (a) Comparison of pairs of firms. We then induced tentative relationships between each pair; (b) Division of the data by data source with the aim of exploiting the unique insights possible from different types of data collection. One researcher was in charge of the analysis of the qualitative data, another of the quantitative. We then shifted tasks.

Shape of Propositions From both the within-case and cross-case analysis, tentative impressions, concepts, and relationships began to emerge. First, we compared systematically the emergent frame with the evidence from each case in order to assess how it fitted with case data. This constant comparison between constructs and data allowed us to sharpen the constructs of our study by means of a two-part process: (a) refinements of the definition of the constructs, and (b) building the evidence that measures the construct in each case. We eventually developed definitions and measures for several constructs, such as action, reflection-on-action, critical state, imagination, and simple guiding principles. Second, we verified that the emergent relationships between constructs fitted with the evidence in each case. At that point, we focused on discovering the underlying theoretical reasons for the existence of the relationships.

Comparison of the Emergent Propositions with the Extant Literature We then tied the emergent theory to the extant literature. The aim was to establish ‘‘stronger internal validity, wider generalizability, and higher conceptual level’’ (Eisenhardt, 1989b, p. 544) of the findings. These are particularly relevant aspects in this kind of research, because the findings rest on a limited number of cases.


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HOW IS THE STRATEGY-FORMATION PROCESS ON THE INTERNET PART OF ESTABLISHED BANKS TRYING TO REINVENT THEIR INDUSTRY? Insights emerged from our data that linked the reinvention of an industry2 with a set of social processes related to the strategic process. In attempting to understand strategy-making in banks that were evolving from rule-makers to rule-breakers, we found that managers that were helping the banking industry to evolve in ways advantageous to them combined the following social processes: action, reflection-on-action, accumulation of actions and reflections-on-action; imagination; and the use of simple guiding principles. In the following sections, we elaborate on these insights and describe their grounding in the data. We mainly focus, as Van de Ven (1992) suggests to researchers attempting to contribute to a theory of process, on statements that explain how the strategic process unfolds over time and why; in particular from the perspectives of knowledge and complexity. We present five general propositions, each of which summarizes a set of inferences as a theme.

Action What is the role of action in the strategy process? The original definition of strategy included only decisions (Mintzberg, 1973). For a number of reasons, not the last being that decisions, too, represent intentions and that we necessarily ended up studying actions, the definition was modified to include actions (Mintzberg & McHugh, 1985). The evidence from our data suggests that actions seemed to be a major source of strategy creation. In formal terms, Proposition 1. In high-velocity environments, rule-breaker incumbents use action as one of the basic sources in the strategy-formation process. How did managers of established firms that are reinventing their industries use action as a source of strategy creation? Table 2 describes two specific tactics – experimental products and participation in joint projects – that emerged from the data that managers used to explore the future by engaging in actions. Consistent with the methods of Brown and Eisenhardt (1997), we qualitatively assessed the use of experimental products by means of the interviews. The first column in Table 2 summarizes this evidence.

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Table 2. Case

Experimental Products

Participation in Joint Projects With customers

1

‘‘We created a first prototype of software and distributed it for free to our customers’’ ‘‘We designed a small platform and gave access to our clients’’ ‘‘With the aim of promoting transactions, we adapted our telephone banking model to the Internet to see what happened y’’

‘‘We launch products to the market, and then we are very attentive to the feedback we may get’’

a

With companies in the same industryb

With companies in different industriesc

Average: 8

Average: 8.3

Average: 9

‘‘Partnerships commenced a new stage which focuses much more strongly on business with individuals (Individuals, Private Banking and Personal Finance). It is aided by Customer Relationship Management (CRM) tools to obtain a deeper knowledge of customers’ financial needs and supported by the new structures created by the Bank to serve individual customers, based mainly on advice and more personalized service We also create partnerships with them’’ Average: 8.25 ‘‘We establish joint projects with current customers. Potential customers are also very interesting to us because of the great potential and emerging market’’

‘‘Together with other financial entities, we designed and launched an application for the income tax return, the accounting and the implementation of payroll’’

‘‘We have created a new area called New Technology Research, whose mission is to find firms in the network that will help us to create value in this relationship driven context we have created (through Internet)’’

Average: 8.25 ‘‘Interacting with other financial entities is really valuable to us. We have some joint projects in this respect’’

Average: 9 ‘‘We have established a major partnership with (a leading telecommunication firm)’’


2

Action.

‘‘We invite our customers to play with our products. We try to get them involved, for example, by means of contests where we learn together and they may win a nice prize’’

Average: 8.2 ‘‘We don’t just finance different projects. We also get involved and manage some of those new projects to be in close touch with our customers and get firsthand learning’’

4

‘‘We are exploring new possibilities, new ways of doing things, better ways of satisfying our current and potential customers. In facing this challenge, we propose products to them and see how they like them’’

Average: 8.25 ‘‘We learn from and with our customers. Working in projects with them is very satisfying and fruitful’’

a

Average: 7.8 ‘‘We have agreements with (a leading European bank) for the distribution and support of their products here in Spain and vice versa. It is a good way of getting in touch with markets other than the national’’ Average: 8 ‘‘We establish different kinds of collaboration with other entities’’

Average: 8 ‘‘We have recently signed an agreement of collaboration with (an insurance company), that allows our bank to widen the products of third parties’’

Average: 8.5 ‘‘Indeed, we are interested in learning from other industries, and that is why we get involved in different projects with companies from such different backgrounds’’

The averages in this column are the average levels of participation in joint projects with customers, on a 0–10 point scale. The averages in this column are the average levels of participation in joint projects with companies within the same industry, on a 0–10 point scale. c The averages in this column are the average levels of participation in joint projects with companies in different industries, on a 0–10 point scale. b


3

283

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For instance, Case 1 provides a good example of how managers engaged in action by routinely creating experimental products to probe the emerging market. They usually designed product prototypes and distributed them to their customers. As one of the interviewees stated, ‘‘Do and improve is our motto. Launching products and delivering them to customers to learn with them and meet better their requirements is a valuable source of learning’’. Another example was Case 3. This firm launched a broker contest in which participants could invest 6,000 virtual euros and win prizes every week and month, and a final prize. Participants had to become customers, free of any charge or commission, so that they could use all the broker tools available for clients. Among the tools: real-time market prices; expert reports on companies; tracking of securities and bonds; graphics and analysis; information and training in the financial university of the bank; and free telephone advice from bank experts. As in cases 1 and 3, evidence shown in Table 2 related to the other two cases also supports the use of experimental products as a major source of action. Another source of action that emerged from the cases was the participation in joint projects. Consistent with our respondents, we considered three major categories of participation in projects: with customers, with companies in the same industry, and with companies in different industries. We qualitatively assessed this participation based on the analysis of the data gathered from the interviews. We quantitatively measured these categories using a questionnaire item on the level of participation in joint projects on a 0–10 point Likert scale. The results shown in the last three columns in Table 2 indicate that all of the four firms studied engaged in action by participating in joint projects. Take, for example, the description of an interviewee in Case 3: ‘‘Virtual partnerships are set up when an association agreement is reached between the bank and a partner – which can be a company, government agency or professional association – to govern the distribution of financial products and services to employees, suppliers and customers of the partner. The earnings from this business – which are not only tangible but, most importantly, intangible – are shared by the partner and our firm. More than 400 partners who have virtual partnership agreements with our firm include the major Spanish and international companies, as well as official agencies. They represent diverse industries, such as consultancy and advisory services, construction, pharmaceuticals, technology, electricity, and tourism, in addition to professional associations.’’ One reason experimental products and participation in joint projects were coupled with action as a source of strategy creation, may be that managers explore the future by experimenting with a wide variety of low-cost probes


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(Brown & Eisenhardt, 1997). As these authors suggest, they enhance learning about possible future states. Learning is critical because, while the future is uncertain, it is usually possible to learn something about it, making it easier for managers to anticipate and potentially even create it. Experimenting creates ‘‘learning by doing’’, which is a particularly good way to learn, especially compared with vicarious or second-hand learning (Brown, Collins, & Duguid, 1989). This argument is consonant with Hamel’s (1998a). This author also suggests launching a series of small, risk-avoiding experiments in the market, which serves to maximize a company’s rate of learning about which new strategies will work and which will not. The insights that come from a broad-based strategy dialogue will never be perfect. While much traditional analysis can be done to refine those insights into viable strategies, there is much that can be learned only in the marketplace. Another reason may be found when analyzing the results through the theoretical lens of knowledge creation. Theory suggests that, through socialization, experiences are shared and thereby tacit knowledge (such as shared mental models and technical skills) is created (Nonaka & Takeuchi, 1995). Socialization, which seemed to happen in action as a source of strategy-making in the firms studied, is a subprocess in the knowledge-creation process. And as Eisenhardt and Martin (2000) highlight, knowledge-creation processes are a crucial dynamic capability, especially in high-velocity firms. Dynamic capabilities strikingly involve the creation of new, situation-specific knowledge. This occurs by engaging in actions in order to learn quickly and thereby compensate for the lack of relevant existing knowledge by rapidly creating new knowledge about the current situation. Dynamic capabilities, therefore, often use prototyping and early testing to generate new knowledge quickly. Also, when engaging in joint projects, tacit knowledge from customers, and from other companies within or from different industries, may become tacit knowledge of the persons in the company.

Reflection-on-Action Argote (1999) and Sitkin (1992) propose that actions create rapid learning through small losses and immediate feedback. The question then becomes whether there are subprocesses within the strategy-formation process that articulate such feedback, and what those subprocesses are. The evidence from our data shows that action is closely linked to reflection-on-action. In formal terms,

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Proposition 2. For rule-breaker incumbents in high-velocity environments, action is not a sufficient condition in the strategic process. Action is closely linked to reflection-on-action. Table 3 describes the subprocesses that the four firms used for achieving an effective assimilation of such feedback from the different actions that were developed. The subprocesses were: (1) conceptualization of experiences, (2) systematization of concepts, and (3) assimilation of common experiences. First, according to our evidence, conceptualization of experiences referred to the process of articulating the knowledge gained from the experience into concepts, hypotheses, models, metaphors, and analogies, by means of communication. We qualitatively assessed the role of communication in sharing the different experiences, using data mainly from the interviews and secondary sources. We quantitatively measured conceptualization of experiences on a 0–10 scale rating the level of communication in three dimensions: within-project, cross-project, and external, consistent with our respondents and previous research (Brown & Eisenhardt, 1997). The data suggest the importance of communication within-project, cross-project, and outwardly as a way of externalizing the knowledge gained from experience. In fact, the four firms studied literally replicated (Yin, 1984) these results, as shown in the first three columns in Table 3. As stated by one of the interviewees in Case 1: ‘‘The cornerstones of the firm’s internal and external communications are transparency in information on the matters affecting our operations and the environment and the clarity of its messages. This is crucial if we want to make the best out of our experiences’’. In the same case, the annual report states, ‘‘With a view to incorporating the perception and insights of the customer experiences into the development of our entity as a guarantee of the success of the Internet services, 22 studies were conducted this year with both customers and non-customers. The studies were aimed at ascertaining how the services being designed for our firm are perceived and measuring the user-friendliness of the various Web pages. More than 200 customers took part in the studies, contributing and suggesting numerous improvements. Among the services analyzed were e-mortgages, funds, new broker services, the WAP service, mortgage and deposit comparators, e-cards, etc.’’ Second, consistent with our evidence, systematization of concepts referred to the subprocess of emptying the different concepts, hypotheses, models, metaphors, or analogies gained from experience into a knowledge system, which involves combining different bodies of explicit knowledge. We qualitatively assessed this systematization by means of the data gathered from

Case

Conceptualization of Experiences

Systematization of Concepts

Assimilation of Common Experiences

Communication

Real-time analysis and systematization of the lessons learned from experiencea

Level of involvement

Within-projectb

1

Reflection-on-Action.

Cross-projectc

Externald

Newsletter, Shared databases

Meetings

‘‘The participation and involvement of the people in the debate sessions of the firm are very important’’ Information on Intellectual Capital from the Annual Report of the company: ‘‘Employees participating in debate sessions: 74.87%’’

Average: 8.33

Average: 8.16

Average: 9.66

‘‘Our involvement, the involvement of the people in our company, is very high’’

‘‘Internal communication is crucial for swift and clear transmission not only of changes in an organization but also of employees’ knowledge and experience’’

‘‘The channels of communication with the Bank’s departments and people, who play an active part in the process, are managed by the Internal Communication Department and include the use of e-mail, forums, video-chats, videoconferences and, of course, the Intranet, which lies at the heart of the Bank’’

‘‘We have what we denominate the ‘‘Call me back’’ system. It is very important, because the customer tell us: ‘‘Call me, and call me at this time for this purpose’’. We establish an active relationship in which the bank contacts the customer because he/she has required so. It is a very important step in communication between the bank and our customers’’

‘‘Incidents received by the services specialized in Customer Service are an invaluable source of information for detecting and improving problematic systems and services. Last year saw advancements in the creation of tools for collecting and analyzing all this information in real time’’

Information on Intellectual Capital from the Annual Report of the company: ‘‘100% of the employees have access to the Intranet, and the number of connections is very high’’; ‘‘80% of the employees participate in shared databases’’; ‘‘80% of the management information is available to all employees’’

287

Average: 9


Table 3.

Case




Communication



Within-projectb

Average: 8.5 ‘‘We do not just look for the right answers but also for the convenient questions. Reflecting together on the different projects we have is key when pursuing both aims’’

Cross-projectc

Average: 8 ‘‘We have periodical meetings, organized around workshops. People exchange experiences and get to know each other better by working elbow to elbow’’

Externald

Average: 9 ‘‘We are very interested in getting to know other experiences. In particular, we are more interested in knowing how Coke is managed than how (name of an important bank) is’’

‘‘All knowledge resources which are of interest, arising within the Bank or from external sources, are capable of being identified, categorized, valued and made available to any user through the appropriate computer tool’’ Average: 8.25 ‘‘Trying to learn from the different projects we are developing would be a vain exercise if the lessons learned were not systematized as we get them so that they can be shared with the rest of the organization’’


Meetings

‘‘We are promoting information technologies tools, which are very well accepted in the company’’

‘‘We celebrate periodical meetings, organized around workshops’’


2

288

Table 3. (Continued )

Average: 8 ‘‘In our firm, communication among team members is very fluent’’

Average: 9 ‘‘We have a department that is in charge of channeling, analyzing and systematizing the different experiences that are being continuously transferred’’

‘‘Every morning, when we connect online we have a summary and description of the main news on the operations of our entity and the environment. We have the habit of going though them, just as we read the newspaper or check our emails’’

‘‘We have also established formal and informal groups that are proposing and exchanging ideas’’

289

Average: 8 ‘‘Many people in the company have the role of monitoring. They act as radars or as tentacles that capture knowledge and experiences. That is then transferred internally. For example, we have a very important project going on in New York. They are exploring what we need to deliver products in Latin America. In Madrid we learn from their experiences’’


3

‘‘We have meetings where we invite external people related with the world of Internet and the New Economy, such as people that are managing important Web sites, to come and share their points of view and challenges with us’’ Average: 8.8 ‘‘Relations with our customers are crucial. We have open communication with them’’

Case




Communication



Within-projectb

4

Average: 7 ‘‘There are constant flows of information exchange among team members’’

Cross-projectc

Externald

Average: 8.5 ‘‘Communication is one of the valuable aspects that are part of our culture’’

Average: 8 ‘‘Listening carefully and talking to customers is one of our main tasks as a company. Their satisfaction is our reason for existing’’

Average: 8 ‘‘Relevant information, which is collected via different channels, is systematically refreshed into our intranet’’


Meetings

‘‘Databases are a valuable source of information. We consult them often so that we get updated info on any change’’

‘‘We have discussion sessions on what we call the state of the situation to revise and assimilate together where we are and where we are heading to’’.

The averages in this column are the average levels of existence of real time analysis and systematization of the lessons learned from the experience, on a 0–10 point scale. b The averages in this column are the average levels of communication within project teams, on a 0–10 point scale. c The averages in this column are the average levels of communication between project teams, on a 0–10 point scale. d The averages in this column are the average levels of project team communication with external agents such as customers, competitors, allies, suppliers y, on a 0–10 point scale.


a

290



291

the interviews, and quantitatively by means of a questionnaire on a 10-scale rating the real-time systematization of the lessons learned from experience. The results reveal that this systematization was important and very high. These results were literally replicated in the four case studies, as shown in the fourth column in Table 3. For example, in Case 1, one of the managers interviewed said, ‘‘We developed a New Knowledge Management Model, a structure which makes it possible, by totally automated, simple and rational means, to capture the flow of knowledge circulating around any area of the bank. Because knowledge is the only asset that grows through consumption (the sharing by employees of training, information and ideas generates enriching individual and collective growth in which both the bank and its people are the winners), transparency has been set as the aim of the New Model. A way to categorize each knowledge resource was sought with the interaction of authors, editors and the appropriate computer tool’’. Third, assimilation of common experiences emerged from the evidence as a subprocess of embodying explicit knowledge into tacit knowledge. We qualitatively assessed this assimilation in terms of the level of involvement and participation of the people in the organization in shared databases and meetings. We also used secondary sources. The last two columns in Table 3 summarize the data regarding this subprocess in the strategy-formation process. The results suggest that the importance and level of assimilation of common experiences were very high in all of the four cases. As one of the interviewees suggested, ‘‘It is not a matter of how much water the rain brings. It is also a matter of the land absorbing that water’’. Another manager commented: ‘‘Work commenced on the development of a Personalized Knowledge Portal for each employee, accessed through the intranet. Each of us has a specific user profile, which is the sum of the profile defined by his/ her job and his/her added personal interests. The user profile will interact with the system and will permit free access to resources of interest. It is both useful and interesting’’. Overall, the data reveal the relevant role of reflection-on-action, which results out of the interaction of the three following social subprocesses: conceptualization of experiences, systematization of concepts, and assimilation of common experiences. Thus, our evidence suggests the importance of the existence of systematic analysis on the different actions by which managers explore the future. The alternative view that other research presents, such as the classical view (e.g., Chandler, 1962; Ansoff, 1965), which relates strategy-making with planning and assumes that strategies are formulated before they are implemented, may be related to the setting. For example, the Rational Actor Model (Allison, 1971), which suggests that

292


strategic success depends on careful analysis and planning before action is taken, might work in relatively stable environments where there are no constraints of lack of information or time to process it (Mintzberg, 1973; Frederickson, 1984). The underlying argument may be that reflectionon-action and ‘‘firsthand learning’’ responds to the fact that the companies are intent on reinventing their industry. Existing knowledge can even be a disadvantage if managers overgeneralize from past situations (Argote, 1999). In addition, analysis helps manage the risks associated with innovative decisions made quickly and helps actors learn from failures as well as successes (Bourgeois & Eisenhardt, 1988). We may find another, unexpected explanation of the evidence from a knowledge-creation perspective. As defined by our respondents, the social processes identified from the evidence related to the reflection-on-action undertaken by the firms may be related respectively to the processes of externalization, combination and internalization proposed by Nonaka and Takeuchi (1995). Those processes are: (1) the conceptualization of experiences (the process of articulating the knowledge gained from the experience into concepts, hypotheses, models, metaphors, or analogies, by means of communication); (2) the systematization of concepts (the process of decanting the different concepts, hypotheses, models, metaphors, or analogies gained from experience into a knowledge system, which involves combining different bodies of explicit knowledge); and (3) the assimilation of common experiences (the process of embodying explicit knowledge into tacit knowledge). The results shown in Tables 2 and 3 indicate that actions (based on a process of socialization) and reflection-on-actions (based on the processes of externalization, combination and internalization) form a SECI3 spiral, as defined by Nonaka and Takeuchi (1995). Thus, we propose that action and reflection-on-action form a spiral of knowledge creation, a dynamic capability crucial in high-velocity environments (Eisenhardt & Martin, 2000). The mix enhances learning because of the interplay among reinforcing sources of knowledge (Lave & Wenger, 1991). In this sense, the data would support Eisenhardt’s (1989a) propositions on dynamic capabilities, which suggest that such capabilities rely more on real-time information, cross-functional relationships and intensive communication among those involved in the process and with the external market. Real-time information alerts people to the need to adjust their actions, since problems and opportunities are spotted more quickly than when individuals are distant from information. Real-time information also builds intuition about the marketplace, allowing managers to understand the changing situation quickly and adapt to it.


293

Accumulation of Actions and Reflections-on-Action, and Critical State The evidence suggests that firms promoted the accumulation of actions and reflections on those actions. In formal terms, Proposition 3. Managers of rule-breaker incumbents in high-velocity environments promote the accumulation of actions and interactions of action and reflection-on-action. Table 4 presents the data grounding this proposition. Managers promoted the accumulation of actions and interactions of action and reflection-onaction, considering three aspects that emerged from the evidence: quantity, quality, and variety. We qualitatively assessed this importance by gathering evidence of this behavior from the interview data. We quantitatively measured the quantity, quality, and variety of the different actions and reflections undertaken in the firm in terms of a questionnaire item on the importance of each item on a 0–10 point Likert scale. The results, which (as shown in Table 4) were literally replicated in the four cases studied, indicate that managers created the right contexts so that people could act and reflect on projects, paying attention to quantity, quality, and variety. For example, in Case 1, one of the managers said, ‘‘We encourage people to get involved in as many projects and discussion sessions as they are interested in and they can cope comfortably with’’, giving an idea of the importance of quantity. Furthermore, they also considered a relevant aspect in the quality of those actions and reflections. As a manager in Case 2 said, ‘‘We are very careful in not drawing in complexity and ‘intoxication’. We try to encourage people to get involved in interesting projects, but we also pay great attention to the fact that their attention is limited’’. Managers tried to include variety, too. For example, in Case 4, a manager said, ‘‘Many different perspectives are melded in our strategy. We invite all kinds of people to take an active role: young ones, experienced ones, ones with different backgrounds y We believe that this is very enriching to us as a company’’. A possible argument that may explain why managers promoted the accumulation of many actions and reflections when making strategy could be related to the understanding of the dynamics of knowledge creation from a perspective of complexity. Complexity theory suggests that, in complex adaptive systems, small changes in behavior can produce small, medium or large changes in outcomes. Bak (1996) proposes that such systems are selforganized critically, so that change occurs avalanche-style, or according to the butterfly effect (Lorenz, 1995), when the system has reached the critical state. This concept is better illustrated by turning to Bak’s (1996) experiment

Case

1

Quantity

Accumulation of Actions and Reflections-on-Actions. Qualityb

Average ¼ 7.66 ‘‘A sabbatical year is contemplated within the professional career development in our company’’

Variety Evidence on participation in joint projects from 3 last columns in Table 2.

New evidencec

Customers, companies within the same industry, companies in different industries

Average ¼ 8 Newcomers, young people, experienced professionals ‘‘The Knowledge Management department motivates employees to discover their talents and seeks to involve them in and heighten their awareness of the competitive edge given by innovation, which depends on each and every employee’’ ‘‘Notable in the year was the start-up of a program specifically aimed at highquality university students, combining recruitment, training and mentoring, in response to concrete requirements in certain areas of the Bank’’ ‘‘Throughout 2002 the economic climate enabled it to continue to pursue a


Average ¼ 8.33 ‘‘We encourage people to get involved in as many projects and discussion sessions as they are interested in and they can cope comfortably with’’

294

Table 4. a

Average ¼ 8.5 ‘‘We participate in different projects, and we attend various meetings y We always learn and share something’’

Average ¼ 9 ‘‘We participate in different projects, and we attend various meetings, subject to our time constraints and responsibilities’’



2

295

recruitment policy based on attraction of the best professionals in the industry. At year-end 236 employees (7.87% of the total headcount) had less than one year’s length of service in the Group, amply demonstrating the Bank’s capacity to renew the talent of its work force’’ Average ¼ 8 Newcomers, young people, companies in different industries ‘‘We challenge the reduced circle’’ ‘‘We are very interested in getting to know other experiences. In particular, we are more interested in how Coke is managed than how (the name of an important bank) is’’ ‘‘There are meetings where we invite external people related to the world of Internet and the New Economy, such as people that are managing important websites, to come and share their point of views, and challenges, with us’’

296

Table 4. (Continued ) Case

3

a

Quantity

Average ¼ 8 ‘‘We are very careful in not drawing in complexity and ‘intoxication.’ We try to encourage people to get involved in interesting projects, but we also pay great attention to the fact that their attention is limited’’

Variety Evidence on participation in joint projects from 3 last columns in Table 2.

New evidencec


Average ¼ 8 Newcomers, young people, experienced professionals ‘‘The Internet team is composed of newcomers of different ages and backgrounds. The big advantage is that we are foreigners to the internal culture of the established bank, so we can do and say things that someone coming from the established bank wouldn’t. This fact prevents peculiarities, susceptibilities, and any kind of politics that may arise otherwise. Our presentation to the world, the language we use, our people, are totally different to those of the established bank’’


Average ¼ 8.2 ‘‘We try to encourage people to get involved in interesting projects’’

Qualityb

a

Average ¼ 8 ‘‘Strategy creation develops at the edge of chaos, as the Management Committee receives various inputs from various parts of the company’’

Average ¼ 8.25 ‘‘We try to be at the edge but we cannot surpass the line that would drive us to complete chaos’’


Average ¼ 8.5 Young people, experienced professionals ‘‘Many different perspectives are melded in our strategy. We invite all kind of people to take an active role: the youngsters, the experienced, people with different backgrounds y We believe that this is very enriching to us as a company’’

The averages in this column are the average levels of the importance of the creation of contexts that enabled quantity in the actions and reflections. b The averages in this column are the average levels of the importance of the creation of contexts that enabled quality in the actions and reflections. c The averages in this column are the average levels of the importance of the creation of contexts that enabled variety in the actions and reflections.


4

297

298


with a sand pile, in which grains of sand fall one by one on the ground, building a cone. The cone becomes steeper and steeper until the slope reaches a critical state. Adding an additional grain of sand would lead to an avalanche. Using an analogy, with every grain (action or reflectionon-action), the mountain (the system, which understood from a scale perspective could be an individual, a team or the organization) gets steeper, coming ever closer to its critical state, in which a new grain will lead to an avalanche, or the emergence of a new idea. Thus, managers may be attempting to provoke the emergence of imagination by accumulating actions and reflection-on-actions. As Roos and Victor (1999) suggest, relevant practice and essential information fuel the emergence of imagination. A reason for the importance of quality in the accumulation of actions and reflection may be in order to stave off chaos. As one of the managers stated: ‘‘We have to pay special attention to staying at the edge but not surpassing the line that would drive us to complete chaos’’. Variety is also explained by previous research that highlighted a common feature of effective knowledge-creation processes (Eisenhardt & Martin, 2000): the explicit linkage between the focal firm and knowledge sources outside the firm (Allen, Piepmeier, & Cooney, 1971; Allen, 1977; Katz & Tushman, 1981; Henderson & Cockburn, 1994; Powell, Koput, & SmithDoerr, 1996). Hamel (1998b) also suggested including preconditions for strategy innovation. Among them, the following could be related to this aspect of variety: (1) new voices (young people, newcomers, and those at the geographic periphery of the organization deserve a larger say); (2) new conversations (creating a dialogue about strategy that cuts across all the usual organizational and industry boundaries substantially increases the odds that new strategy insights will emerge); (3) new perspectives (new conceptual lenses allow individuals to reconceive their industries, their company’s capabilities, their customers’ needs, and so on, substantially aiding the process of strategy innovation. They must search constantly for new lenses that help companies reconceive themselves, their customers, their competitors, and, thereby, their opportunities).

Imagination Previous research suggests the important role of imagination in the strategyformation process (Hamel, 1998b; Roos & Victor, 1999; Scharmer, 2000). Our evidence also highlights this fact and contributes to its further development. In formal terms,


299

Proposition 4. For rule-breaker incumbents in high-velocity environments, imagination is a source of strategy-making. The evidence grounding this data is shown in Table 5. We assessed imagination by considering the social processes that emerged from our data: emergence of a new idea; externalization of the new idea; consensus around the emerging field; and commitment to new directions. The processes we identified were similar to those identified by Roos and Victor (1999) and Scharmer (2000). First, consistent with our respondents, the emergence of an idea referred to the process of sensing the field of emergent possibilities. We qualitatively measured the emergence of new ideas based on the analysis of the data gathered from the interviews as well as secondary sources. The results revealed that the creation of new ideas in the firm was highly appreciated. As shown in the second column in Table 5, the results were literally replicated in the four cases studied. In Case 1, for example, one of the interviewees said, ‘‘The Intranet environment has enabled the creation of new ways to contribute ideas, a crucial process, such as a selection of competitions capable of collecting anything from ideas which totally break with the traditional banking model to ideas/feedback from the employees on the specific demands of the company for the launching, correction or enhancement of any business’’. Second, once the idea had emerged, it was equally important to externalize it, that is, to make the emergent reality explicit. The evidence from the data suggests that all the firms studied had incentives for promoting the sharing of such ideas, of different natures: economic goals, a desire recognition, and error as a source of learning, as shown in columns 3, 4, and 5 in Table 5 respectively. We qualitatively measured the existence of such incentives by means of the interviews and secondary data and quantitatively by means of a questionnaire on a 0–10 point Likert scale. In Case 1, the economic incentives for sharing ideas were illustrated by this statement: ‘‘It is the firm’s wish to highlight the strategic importance it places on creativity and innovation and to take action regarding the development potential shown by the employees most active in this connection. The initial maximum amount of the transaction was h132.22 million, divided into 2,924,633 debentures of h45.21 par value each. At the beginning of this year, the bank’s board of directors decided to redeem the II convertible debenture issue so as to re-launch a new issue with similar conditions to the former but with a par value and conversion price of h38.85, in line with the average market price of the firm’s share over the last annual period. The new issue was subscribed by 99% of the beneficiary

Case

Emergence of a New Idea

Externalization of a New Idea

Consensus Around the Emerging Field

Commitment to New Directions

Incentives for sharing new initiatives

Consensus with qualification

Pro-change culture

Economic

1

300

Imagination.

Table 5.

Recognition

Error ¼ Source of learning

Opportunity to influence the direction of change

‘‘One of our major concerns is that we can face any change. Training is a key aspect in this respect’’

From the Intellectual Capital Report in the Annual Report: ‘‘Employees who received training (%) ¼ 99;


‘‘People ‘‘The ideas are ‘‘The ‘‘The target for this ‘‘The II convertible ‘‘New ways to Management evaluated by an transformation encourage debenture issue year is to Teams are ‘‘Evaluation of knowledge creativity have subscribed in triplicate the consolidated as Committee’’ into value also been March by number of ideas the main composed of 80 through human promoted 91.10% of the we achieved last characters in the members. The creativity is the (systematizing staff (the soyear, to meet the effort to involve ideas are also goal of any recognition, called ‘‘Name’’) challenge posed employees more submitted to a innovation drive contributing aid introduced as at the beginning closely in any ‘‘popular vote’’, in today’s for studies, new variables of this year by decision-making i.e. the opinion business. This offering system affecting the the formula of process that of any employee challenge has subsidies y) allocation 3 1 (three ideas might affect who wishes to been taken up by applicable to criteria, in per bank them’’ grade and our company in persons who addition to employee)’’. comment on the its determined stand out in salary, job and contribution. An policy to link length of service, terms of ‘‘area innovation to all the employee’s quantitative or evaluation’’ is the Bank’s participation in qualitative also made of the activities. In this innovation’’ shared databases From the ideas to indicate, process, one of and his/her level From the Intellectual Intellectual inter alia, their the key factors of contribution Capital Report Capital Report viability. The are errors. We of ideas and in the Annual in the Annual author always learn so much dissemination of Report: ‘‘The Report: ‘‘A large receives a reply from them’’ best practices’’ previous year to number of from the area so the interview: people received that he or she is Employees awards in the informed of

Tools for coping with change

3

‘‘People contribute to the company with their ideas’’

‘‘Our culture promotes learning from mistakes’’

‘‘We consider that ‘‘We are in a trial‘‘We have reward if people in the systems based on and-error organization the contribution process’’ have access to to innovation’’ information and to decision making, we have

301

Average number of training hours per person ¼ 32; Training budget as a proportion of total salaries (%): 3’’ ‘‘People feel ‘‘Deciding whether ‘‘We started this confident project, as we an idea is because they start every new valuable for our know they have project, with firm or not is like the tools and volunteers that painting an support from the want to take part abstract picture. organization’’ in it’’ We, as an organization, have to be able to capture individual aspirations related to our business, build them together and distill a common minimum denominator. The CEO is an excellent artist’’ ‘‘The Committee of ‘‘People involved in ‘‘Training has a Direction meets every project crucial role’’ periodically. have much to say Broad lines of in its action are development’’ proposed, and then opinions are whether the idea is going to be put into practice’’


2

various contests contributing for ideas held with ideas and within the Bank. best practices The following 45%; number of are some of the ideas and winners: experiences (names)’’ shared: 4,641’’ ‘‘New ideas emerge ‘‘A variable part of ‘‘People with ideas are very the bonus is as we learn from respected in this based on our our experience’’ organization’’ contribution with new ideas and proposals’’

Case

Emergence of a New Idea

Externalization of a New Idea

Consensus Around the Emerging Field

Commitment to New Directions

Incentives for sharing new initiatives

Consensus with qualification

Pro-change culture

Economic

‘‘Efforts for ‘‘When they are renovation are ready, new ideas also emerge. We economically cannot control compensated’’ this emergence, but just promote it’’

Recognition

to ask them and hear them carefully, considering their opinions’’ ‘‘We contribute with our energy, ideas and soul’’

Error ¼ Source of learning

Opportunity to influence the direction of change

Tools for coping with change

requested. Based on that, decisions about new intentions are taken’’ ‘‘We explore new ‘‘Strategic decisions ‘‘We have to feel ‘‘In our horizons but comfortable with within the firm organization we with the the new projects are discussed in are sailors. We rucksack full of we engage in’’ periodical navigate, but we the provisions meetings. Most don’t know the required’’ of the time, we destination. Only reach consensus. those sailors able When not, the to navigate role of our CEO without is decisive’’ constantly spotting the coast are the ones that may discover worlds new and unknown to them. We learn from our mistakes and successes as we navigate’’


4

302



303

employees’’. Recognition can also be summarized in the following affirmation: ‘‘New ways to encourage creativity have also been promoted (systematizing recognition, contributing aid for studies, offering system subsidies y) applicable to persons who stand out in terms of quantitative or qualitative innovation’’. A third incentive was error as a source of learning. As one of the managers in Case 1 put it: ‘‘Errors are not only a normal fact when discovering new worlds, they are also very important sources of learning’’. As Sitkin (1992) suggests, small losses, more than either successes or major failures, contribute to effective learning. Success often fails to engage managers’ attention sufficiently so that they learn from experience. Major failures raise defenses that block learning. By contrast, small failures provide the greatest motivation to learn, as they cause individuals to pay greater attention to the process but do not induce a defensive attitude that impedes learning (Eisenhardt & Martin, 2000; Hayward, 2000; Eisenhardt & Sull, 2001; Kim, 1998). A third process that emerged from our data was consensus around the emerging field, which implied sorting, adding, combining, and categorizing the explicit knowledge so that an agreement is reached around the emergent reality. Through interviews and secondary sources, we qualitatively assessed how consensus was reached. Teams attempted to arrive at consensus by involving everyone. If agreement occurred, the choice was made. However, if consensus was not forthcoming, the CEO or the person assigned by him/her made the choice, guided by input from the entire team. The evidence we found, which was literally replicated in the four cases studied (as shown in the sixth column in Table 5), is consistent with what Eisenhardt and Bourgeois (1988) define as consensus with qualification: a way of including richness and diversity in decision-making while coping with the task at high-speed. As one of the managers said in Case 2: ‘‘Deciding whether an idea is valuable for our firm or not is like painting an abstract picture. We, as an organization, have to be able of capturing individual aspirations related to our business, build them together and distill a common minimum denominator. The CEO is an excellent artist. When we reach agreement on that common denominator, the choice is made. If consensus is not possible, he makes the decision based on the different inputs received’’. According to the evidence, a fourth process was commitment to new directions, which related to the internalization of the explicit emergent reality through engagement promoted in the organization via a pro-change culture. In this sense, there were two main aspects whose presence could be highlighted from the data, assessed qualitatively from the interviews and

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secondary sources and literally replicated in the four cases studied (last two columns in Table 5): opportunity to influence the direction of change, and tools for coping with it. These two aspects are similar to those proposed by Hamel (1998b) when he states that change is not the problem, but engagement is. An illustration of an opportunity to influence the direction of change may be the following statement from one of the managers in Case 1: ‘‘People-management teams are consolidated as the main characters in the effort to involve employees more closely in any decision-making process that might affect them’’. The importance of training can also be illustrated by the following statement from one of the managers in Case 1: ‘‘By starting up the training portal, our firm made a qualitative leap in training, since with this tool (available on the employee Intranet and on the agent Extranet) the user has access to a`-la-carte training with a high value added in benefits: personalized training plan, obtainable by way of the comparison established by the tool between the knowledge required according to the map developed for each potential post and the self-evaluation demanded by the tool from the user himself; virtual classroom, through which a wide offering of subsidized courses are made available online, with flexible dates and timetables, tutored and with personal monitoring of each student’s performance; virtual library, through which to access recommendations, summaries and chapters of books of interest on a specific subject-matter, as well as the possibility of acquiring books, and subscribing to magazines and to news bulletins at a reduced price; weekly publication of an essay of interest, access and links to all manner of information relating to training: universities, specialized journals, etc.’’ We may find a reason that explains the evidence presented from a knowledge-creation perspective. The results shown in Table 5 indicate that the four social processes that emerged around imagination in the strategic process presented above – (1) emergence of a new idea (the process of sensing the field of emergent possibilities); (2) externalization of a new idea (making explicit the emergent reality); (3) agreement about the emerging field (sorting, adding, combining, and categorizing the explicit knowledge so that an agreement is reached around the emergent reality); and (4) commitment to new directions (internalization of the explicit emergent reality through engagement) – may be the processes of socialization, externalization, combination, and internalization, as defined by Nonaka and Takeuchi (1995). The interaction of such processes seemed to give rise to the emergence of imagination in the strategy-formation process. Thus, imagination may form a second SECI knowledge-creating spiral.


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Simple Guiding Principles Since the early 1980s, strategic planning – systematic, formalized approaches to strategy formulation – has been questioned by management scholars. Criticism has addressed the theoretical foundations of strategic planning, particularly the impossibility of forecasting (Mintzberg, 1994). As Hamel (1996) states: ‘‘In the vast majority of companies, strategic planning assumes that the future will be more or less like the present’’. Increased volatility of the business environment makes systematic strategic planning more difficult. Recent research (e.g., Grant, 2003) explored whether and how companies’ strategic practices have adapted to a world of rapid and unpredictable change. The main findings suggest that strategy-planning processes embody the concept of simple rules which, models of complex, adaptive systems suggest, can be remarkably effective in guiding the adaptation of nonhierarchical systems to changing environmental conditions (Gell-Mann, 1994; Eisenhardt & Sull, 2001). This evidence is consistent with our data. In our research, we found that the firm had no formal plan but some sort of principles or outlines that guided the actions taken throughout the organization. In formal terms: Proposition 5. In high-velocity environments, rule-breaker incumbents implement what has been imagined via simple guiding principles. Table 6 summarizes the data grounding this proposition, which was literally replicated in the four cases studied. We assessed the existence of simple guiding principles as our informants did, in terms of both the presence of a few simple rules that defined direction without confining it and the absence of a developed and detailed plan that conditioned actions. We undertook the qualitative measurement of these aspects by means of interviews and secondary data and the quantitative measurement by means of a questionnaire on a 10-point Likert scale. For example, one of the interviewees in Case 2 stated: ‘‘What we have defined are a few beats, so that all the members in the firm may play the same melody’’. A possible explanation of the importance of these simple guiding principles in the firms is that they promoted coherence and linked what the organization imagined to what it did. These findings are consistent with complexity theory, according to which a schema dictates each agent’s behavior – a cognitive structure that determines what action the agent initiates – given its perception of the environment. Often, agents’ schemata are modeled by a set of rules (Gell-Mann, 1994) or simple guiding principles

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Table 6.

Simple Guiding Principles.

Case

Existence of a Few Simple Rules that Define Direction without Confining it

Existence of a Developed and Detailed Plan that Guides Action

1

Yes Average ¼ 8.33 ‘‘Regarding our strategic focus, the following strategic lines guide our behavior: we work by projects, we value autonomy in our work, we use assembly type meetings, everybody’s opinion is relevant, the boss ‘disappears’’’ Yes Average ¼ 8.5 ‘‘Every strategic action is faced according to the different accidental and unexpected events that happen continuously. The possibility of the next action will be clearer when interacting with the environment, as a result of various decisions ‘‘ad hoc’’ while a prediction in the long term cannot be accomplished. What we do have is a sort of guidance of how to interact with the environment, which helps us to cope with the unexpected. This is tremendously valuable to us as a guide’’ ‘‘What we have defined are a few beats, so that all the members in the firm may play the same melody’’ Yes Average ¼ 8 ‘‘We have a set of strategic lines that guide our actions. They are very helpful because they are a sort of axis of reference to us’’

No Average ¼ 1.83 ‘‘Gee, we don’t try to plan and control. It wouldn’t work. We just try to promote the existence of a few guiding lines that really matter and work in any circumstance’’

2

3

4

Yes Average ¼ 8 ‘‘We set priorities, and we set broad lines of action on how to act’’

No Average ¼ 2 ‘‘Formal planning processes and management processes of great simplicity are needed. Why? Because when environments are so complex, simple decision models are required. Otherwise, what we put together are exponential factors. Even with the scenario theory, there are always unexpected changes we had never thought about’’

No Average ¼ 2.2 ‘‘The existence of a detailed plan wouldn’t make sense in this new environment. We act in real-time. How can we predict and write that down?’’ No Average ¼ 1.25 ‘‘y but I couldn’t give you a detailed plan written down on a piece of paper’’


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(Lissack & Roos, 1999) that are necessary to face complexity and uncertainty (Levy, 1994). Thus, Internet banks did not control the details in plans but promoted the application of guiding principles. The plan seemed to be substituted by a shared framework of action. The research of Eisenhardt and Martin (2000) supports this evidence. They propose that while simple routines keep managers focused on broadly important issues, they do not lock them into specific forms of behavior. What’s more, the simple routines do not lead to an inappropriate (given the actions required in a particular situation) use of past experience. What do these simple routines do? They often specify boundary conditions on the actions of managers or indicate priorities. In fast-moving markets where attention is in short supply, such boundaries take on a new importance. The evidence we found is consistent with studies on simple routines (Eisenhardt & Sull, 2001; Burgelman, 1994, 1996). They include a sense of prioritization and provide enough structure (Burns & Stalker, 1966; Lawrence & Lorsch, 1967) to allow people to focus their attention amid a cacophony of information and possibilities. They also help people make sense of the situation, giving them confidence to act in these highly uncertain situations where it is easy to become paralyzed by anxiety. In firms undergoing rapid change, people need an anchor for their actions. Clear, simple principles may provide it. Simple guiding principles may also provide the possibility of improvising, as they not only mean that (1) performers intensively communicate in real time with one another (as previously discussed when presenting the construct reflection-on-action) but also (2) that they do so within a structure of a few very specific rules (Bastien & Hostager, 1988; Hatch, 1997). Improvisation is an organizing strategy of ‘‘making it up as you go along’’ – or, more formally, ‘‘activities in which composition and execution of action approach convergence with each other in time’’ (Miner, Moorman, & Bassoff, 1996; Moorman & Miner, 1998).

TOWARD A MODEL OF STRATEGY-MAKING IN ESTABLISHED FIRMS INTENT ON REINVENTING THEIR INDUSTRIES IN HIGH-VELOCITY ENVIRONMENTS Our initial goal was to enhance understanding of how top managers in organizations that are reinventing their industries conceptualize the strategyformation process. Such environments are particularly challenging because of

308


the importance of strategy innovation as a way for incumbents to renew their lease on success and the key to reconceiving the existing industry model in ways that are advantageous to them. The overall result of our work was a model of strategy-making in rule-breaker incumbents operating in highvelocity environments, as shown in Table 7 and Fig. 1. One of the basic sources of strategy-making was action (Proposition 1), by means of two particular tactics: experimental products and participation in joint-products (with customers, companies within the same industry and companies in different industries). Nevertheless, action was not a sufficient condition in the strategy-formation process. Action was closely linked to reflection-on-action (Proposition 2), which seemed to emerge out of the interaction of three different social processes: conceptualization of experiences, systematization of concepts, and assimilation of common experiences. Managers promoted the accumulation of actions and interactions of action and reflection-on-action in quantity, quality, and variety (Proposition 3). The aim was to create adequate conditions for the emergence of imagination as another crucial source of strategy development in the strategic process (Proposition 4). Imagination seemed to emerge out of the interaction of the following four social processes: (1) emergence of a new idea, (2) externalization of that new idea, (3) consenting around the emerging field, and (4) commitment to new directions. Then, what had been imagined seemed to be implemented considering a set of simple guiding principles that guided the actions of the different agents involved while helping them to cope with the unexpected events that continuously happened (Proposition 5). Regarding extant literature that helps us understand the results of our research, knowledge creation and complexity theory in particular seem to shed new light on the five propositions discussed in this paper. First, fundamental research on both knowledge creation and applied knowledge management in companies revolved around the interplay of tacit knowledge and explicit knowledge (e.g., Nonaka & Takeuchi, 1995; Nonaka, Byosiere, & Toyama, 2001). A theoretical framework for understanding knowledge creation in organizations is Nonaka’s and Takeuchi’s (1995) model, where the epistemological and ontological dimensions of knowledge interact to create new knowledge. This interaction is based on four modes of knowledge conversion: Socialization–Externalization–Combination–Internalization (the SECI spiral). Socialization seemed to take place when companies engaged in different strategic actions as part of the strategy-formation process (Proposition 1). According to our findings, through actions, experiences were shared and thereby tacit knowledge such as shared mental models and technical skills

Proposition

1 2

Strategy-Making as a Complex, Double-Loop Process of Knowledge Creation.

Source of StrategyMaking Action Reflection-on-action

3

Promoting the emergence of imagination

4

Imagination

5

Simple guiding principles

Social Actions and Interactions in the Strategic Process

Theoretical Lenses and Related Concepts to Study the Social Actions and Interactions in the Strategic Process

Sharing experiences Conceptualization of experiences Systematization of concepts Assimilation of common experiences Accumulation of actions and reflections-on-actions

Knowledge

Complexity

Critical State

Emergence of a new strategic idea Externalization of the new idea Consensus on the new emerging field Commitment to the new horizons Implementation of the simple guiding principles

Knowledge

Socialization

Socialization Externalization

Knowledge-creation spiral SECI 1

Combination Externalization Qualitative jump from SECI 1 to SECI 2 on a higher level Knowledge-creation spiral SECI 2

Externalization Combination


Table 7.

Externalization Complexity

Simple guiding principles

Qualitative jump from SECI 2 to SECI 1 on a higher level

309


310 Socialization

Externalization

ACTION SECI 1 Sharing experiences

2

REFLECTIONON- ACTION Conceptualization of experiences

REFLECTIONON- ACTION Systematization of concepts

QUALITATIVE JUM P System at a critical state

From SECI 1 to SECI 2 on a higher level 4

SECI 2

From SECI 2 to SECI 1 on a higher level

Combination

2

1*

4

Internalization

2 REFLECTIONON- ACTION Assimilation of common experiences

3

4

4

IM AGINATION

IM AGINATION

IM AGINATION

IM AGINATION

Emergence of a new idea

Externalization of the new idea

Consenting around the emerging field

Commitment to the new directions

QUALITATIVE JUMP

5

Simple guiding principles *Numbers correspond to propositions in the text.

Fig. 1.

Strategy-Making as a Complex, Double-Loop Process of Knowledge Creation.

was created. Externalization, combination, and internalization appeared related to reflection-on-action, another source of strategy-making (Proposition 2). This was so as the different social processes from which reflectionon-action emerged – that is, the conceptualization of experiences (the process of articulating the knowledge gained from the experience into concepts, hypotheses, models, metaphors, or analogies, by means of communication); the systematization of concepts (the process of decanting the different concepts, hypotheses, models, metaphors, or analogies gained from experience into a knowledge system, which involves combining different bodies of explicit knowledge); and the assimilation of common experiences (the process of embodying explicit knowledge into tacit knowledge) – may be related respectively to the above-mentioned processes of externalization, combination, and internalization. Thus, actions (based on a process of socialization), and reflection-on-action (based on the processes of externalization, combination, and internalization) form a first SECI spiral, which we shall refer to as SECI 1. Another source of strategy-making was imagination (Proposition 4). Imagination, seemed to emerge out of the interaction of the emergence of a new


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idea (the process of sensing the field of emergent possibilities); the externalization of a new idea (making explicit the emergent reality); consenting around the emerging field (sorting, adding, combining, and categorizing the explicit knowledge so that an agreement is reached around the emergent reality); and the commitment to new directions (internalization of the explicit emergent reality through engagement). Imagination may be then related to the processes of socialization, externalization, combination, and internalization, respectively, as defined by Nonaka & Takeuchi (1995). Therefore, imagination may form a second SECI spiral in the strategyformation process, which we shall refer to as SECI 2. Consequently, action, reflection-on-action, and imagination form a double-loop process of knowledge creation. Second, we may also shed new light on the qualitative jumps between SECI 1 and SECI 2 and vice versa by using the complementary lens of complexity theory. Out of the interaction of actions and reflectionson-action (SECI 1), imagination (SECI 2) may emerge when the system has reached a critical state (Proposition 3). That may be why managers promoted the accumulation of actions and interactions of action and reflectionon-action in quantity, quality, and variety. What has been imagined (SECI 2) seems to be implemented (SECI 1) by means of a set of simple guiding principles (Proposition 5).

CONCLUSIONS This paper develops grounded theory about strategy-making based on intensive case studies of four Internet banks. Processes of action, reflectionon-action, accumulation of actions and interactions of action and reflectionon-action, imagination, and simple guiding principles are identified and documented, showing that decision-makers in high-velocity environments reinvent their industries following a complex, double-loop process of knowledge creation. Overall, the findings of this study give us reasons to consider the potential of knowledge creation and complexity theory as having much to recommend to the study of the strategy-formation process in complex environments. Considering the relation between the strategic process and the knowledgebased view of the firm, our research adds to the reconciliation suggested by Grant (2003) about the long-running debate between the ‘‘design’’ and ‘‘process’’ schools of strategic management (Mintzberg, 1990, 1991; Ansoff, 1991), representing the classical and modern strategy perspectives

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respectively (Volberda, 2004), in the sense that our data showed evidence regarding knowledge conversions between explicit knowledge, emphasized by the former school, and tacit knowledge, stressed by the latter school. Moreover, our findings suggest the dilatation of this reconciliation between the classical and modern strategy views when focusing on the social actions and interactions in the strategy-formation process by including the postmodern strategy perspective that proposes that reality is defined ‘‘through a process of social interchange in which perceptions are affirmed, modified or replaced according to the apparent congruence with the perception of others’’ (Volberda, 2004, p. 37), in line with an approach of synthesis proposed by the latter author. Likewise, the evidence found adds to the emerging research effort that depicts imagination as a source of strategy creation (Roos & Victor, 1999), by shedding new light on how data and experience are ultimately converted into an original strategy, matter on which both the design and learning schools were silent. In relation to the connection between strategy-making and complexity, our findings on how complexity theory contributes to improving our understanding of the social and knowledge dynamics in the strategy-formation process reinforce and expand on previous findings. Our research corroborates the importance of simple guiding principles (e.g., Eisenhardt & Sull, 2001) and includes the concept of the critical state in the dynamics of the process of strategy formation. Nevertheless, the conceptual perspective proposed in this research should be viewed with some caution, because of the methodological limitations of the present study. Because the purpose was to build, rather than test, theory, we drew on detailed descriptions of a small number of organizations. The extent to which the local explanation of the strategic process summarized in Fig. 1 develops into a more general theory of strategy-making depends on how well it, or its descendants, explains the ‘‘phenomena’’ in other settings. Yet these limitations raise opportunities for further research. Among them, we may highlight the following. First, a question for future work on strategy-making is whether the local model proposed resembles the strategic process in other settings or is idiosyncratic to the firms that we studied. Second, this study focuses on similarities in the strategy-formation process. Theories about organizations can be divided into those emphasizing variables and those focusing on constants (Udy, 1965). Our focus on constants facilitated building a theory that captures the basic structure of strategymaking, and provides initial support for the pervasiveness of these phenomena. As Harris and Sutton (1986) suggest, it is ‘‘difficult to examine features that differ across settings without an idea of how the settings are


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similar’’. Thus, we hope the theory presented may help guide research on the differences among forms of strategy-making.

NOTES 1. We promoted construct validity by using the multiple sources of evidence described in the ‘‘Data sources’’ section and by establishing a chain of evidence as we concluded the interviews. Reliability was enhanced by: (1) Using a case-study protocol in which all firms and all informants were subjects to the same entry and exit procedures and interview questions (see ‘‘Data sources’’ in the section ‘‘Methods’’), and (2) by creating similarly organized case data bases for each firm we visited. External validity was dealt with by the multiple-case research design itself, whereby all cases were firms from the same industry and could be labeled as incumbent rule breakers (see ‘‘Research design’’ in the section ‘‘Methods’’). Finally, we addressed internal validity by the pattern-matching data-analysis method described (see ‘‘Data analysis’’ in the section ‘‘Methods’’). 2. For a detailed description on how we defined and assessed the reinvention of an industry, see ‘‘Research Design’’ in Section ‘‘Methods’’. 3. Socialization–Externalization–Combination–Internalization.

ACKNOWLEDGMENTS We appreciate the invaluable comments from the participants in the AiSM Conference: Expanding Perspectives on the Strategy Process, held at INSEAD, and the insightful suggestions of our two anonymous reviewers and Mauro F. Guilleń. We are also deeply indebted to Philippe Byosiere, Johan Roos, and Bart Victor for stimulating and enriching discussion.

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TOP MANAGERS AND THE PRODUCT IMPROVEMENT PROCESS C. Annique Un and Alvaro Cuervo-Cazurra ABSTRACT We analyze the role of top managers in the process of improving existing products in large established firms. The results of an inductive study reveal two key arguments. First, we find that the process is an ‘‘involved’’ top-down approach, rather than middle-up-down or bottom-up, discussed in previous studies on new product creation. Top managers actively participate throughout the process, taking on four roles: evaluation of product market performance, selection of products for improvement, initiation of the innovation process through delegation to middle managers of the responsibility to organize bottom-level employees to take actions toward product improvement, and monitoring of progress to ensure improvement (ESIM). Top managers become involved as necessary to reduce the resistance of people at the middle and lower levels to change in current routines. Second, we find that in companies that achieve superior product improvement, managers have well-developed professional absorptive capacity and have routinized frequent interactions to evaluate, select, initiate, and monitor. Other characteristics of managers, such as personal absorptive capacity, incentive system, or mandate from above, are common across both high and low performers. Strategy Process Advances in Strategic Management, Volume 22, 319–348 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22011-9

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How do top managers facilitate the process of product improvement in large established firms? Although improvement of existing products through incremental innovations accounts for much of the innovation that determines the firm’s current performance, there is little research on this process and the role of top managers in it. Existing research has focused instead on the role of top managers in new product creation. Previous studies suggest that successful firms follow the middle-up-down (Nonaka, 1988, 1994) or bottom-up (Humphreys, 2003) process for developing new products. Studies indicate little involvement of top managers in new product creation, beyond being in charge of providing grand visions for the firm (Nonaka, 1988), determining the overall strategy (Hambrick, 1981; Garg, Walters, & Priem, 2003), and making strategic decisions (Bourgeois & Eisenhardt, 1988; Burgelman, 2002; Castanias & Helfat, 1991; Eisenhardt & Zbaracki, 1992). Research relating top managers to innovation indicates that some of their characteristics, such as their educational backgrounds and industry experience, predict the firm’s innovative outcomes (Hambrick & Mason, 1984; Hoffman & Hegarty, 1993; Schoenecker, Daellenbach, & McCarthy, 1995). However, this research does not address their involvement in the process. The apparent assumption behind this line of thinking is that top managers delegate the creation of new products to middle managers and bottom-level employees because they do not have the expertise to contribute to it. However, improving an existing product differs from new product development in two ways, pointing to the need for top managers to be more actively involved. First, the product already exists and has a direct impact on the firm’s current competitive advantage and performance. This provides top managers with the motivation to get involved in improving the product, since their incentives are tied to firm performance. Second, improvements and modifications to existing products alter existing routines in different functions. However, these changes in routines are likely to be resisted by personnel. Thus, top managers become involved in order to resolve this resistance using their hierarchical position, facilitating successful product improvement. However, since there is little research on the involvement of top managers in product improvement, and insights from new product creation may not apply due to differences in the two processes, in the current paper we report on a series of comparative case studies that we conducted to shed light on this issue. We analyze six large established photo-imaging firms and 30 product improvement projects, identifying the involvement of top managers in the process of product improvement. Additionally, we identify factors that appear to differentiate firms that are more or less successful in product improvement.

Top Managers and the Product Improvement Process

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We find that the process of product improvement is a top-down approach rather than middle-up-down or bottom-up discussed in studies of new product creation. Top managers actively participate throughout the process by taking on four roles: evaluation of product market performance, selection of products for improvement, initiation of the innovation process through delegation to middle managers of the responsibility to organize bottom-level employees to take actions toward product improvement, and monitoring of progress to ensure improvement (ESIM). They intervene as necessary to reduce middle- and lower-level employees’ resistance to change in current routines and improvement of existing products. Additionally, we find that in companies that achieve superior product improvement, managers have welldeveloped professional absorptive capacity and have routinized frequent meetings to evaluate, select, initiate, and monitor. Other characteristics of managers, such as personal absorptive capacity, incentive system, or mandate from above, are common across both high and low performers. This paper allows a better understanding of one particular strategy process, the process of product improvement to increase financial performance, and the roles that top managers play in it. First, the current paper increases our understanding of new knowledge creation by discussing product improvement, a topic that has received minimal attention despite its importance. It identifies the process of product improvement, complementing previous analyses of the process of new product development. It also identifies factors that lead to superior product improvement. We divide the concept of individual absorptive capacity (Cohen & Levinthal, 1990) into two types, professional and personal, and discuss the importance of routinized frequent meetings among top managers, as opposed to the prevalent view that repeated meetings among top managers are unproductive. Second, the paper highlights the ways in which top managers are important not only in formulating strategies and providing visions for the firm (e.g. Chakravarthy & Doz, 1992; Eisenhardt & Zbaracki, 1992), but also in facilitating less glamorous tasks such as product improvement to improve financial performance. They contribute to knowledge creation within the firm by facilitating the integration of distributed knowledge both within and outside the firm (Grant, 1996; Tsoukas, 1996), resulting in the improvement of existing products. The paper is organized as follows. In the second section we briefly review existing research. The lack of explanation for the role of top managers on product improvement leads us to use an inductive approach, which is described next. In the penultimate section we present the results of the analysis of the firms. We identify the process of product improvement and

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the roles that top managers play in this process. We also identify which characteristics of top managers and their behavior appear to be related to superior product improvement. We finally conclude with a discussion of the contributions to existing research.

THEORETICAL BACKGROUND Product improvement is the innovation of existing products that are currently being offered by the firm for sale in the marketplace. Although much of the innovation literature tends to concentrate its attention on new product creation, improving existing products is also crucial for the firm. First, the firm needs not only to develop new products, or explore future trends, but also to improve upon current ones, or exploit current opportunities, so that it can achieve and sustain a competitive advantage (Ghemawat & Costa, 1993; March, 1991). Second, improving existing products is another avenue for achieving product innovation. Even when the firm has developed a new innovative product, changes in clients’ needs and competitors’ innovative processes will render the initial innovation obsolete (Schumpeter, 1942). The firm will thus be required to improve the original product to meet clients’ changing needs and counter competitors’ offers. As the firm develops solutions for the challenges of existing products, it discovers new ways of doing things that result in innovations in the product, in the manufacturing process,1 or in both.

The Role of Top Managers in the Process of Product Improvement Previous studies of product improvement have identified some of the key firm characteristics that relate to successful improvement (e.g. Adler, Goldoftas, & Levine, 1999; Katila & Ahuja, 2002; Martin & Mitchell, 1998; Quinn, 1992), but have not discussed the process and the role of top managers in it, which is our research question. Since there exists little previous literature on the topic, we turn for guidance to the literature on new product creation and the processes that have been identified in this literature. The literature on new product development has identified three potential roles for top managers that accompany three different methods of organizing the process of innovation (Nonaka, 1988): top-down, middle-up-down, and bottom-up. The top-down approach connects with the concepts of deliberate planning, design, or positioning schools of strategic management


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(Bower, 1970; Porter, 1980; Quinn, 1980). Within this approach, top managers develop the vision and overall strategy of the firm; this is then delegated to middle managers for specification and implementation. Top managers do not get involved in the operational aspects of the innovation, concentrating instead on ‘‘big picture’’ issues. However, this top-down approach may be less effective for new product development (Nonaka, 1988). Lower-level employees are constrained in terms of what and how they can innovate, while top managers may not have the expertise to imagine new products. The bottom-up approach is related to the concepts of emergent, adaptive, and entrepreneurial views of strategy process (Mintzberg & Lampel, 1999; Mintzberg & Waters, 1985). Within this approach, lower-level employees initiate the innovation process. Top managers refine and formalize the suggestions and actions of these employees. The bottom-up approach stresses the importance of utilizing knowledge originating from lower-level employees and of fostering their creativity (Shapero, 1985). However, it does entail certain challenges (Nonaka, 1988). New product development projects need resources. In many cases, however, lower-level employees do not have access to these resources, and the innovation process suffers as a result. The middle-up-down approach is an integration of the previous two (Nonaka, 1988). Within this approach, middle managers initiate the process of innovation. They act as intermediaries between top managers and lowerlevel employees. Top managers create a vision or dream, and middle managers create and implement concrete concepts to solve and transcend the contradictions arising from gaps between what exists at a given point in time and what management hopes to create. In such a process, individuals at the lower level of the organization self-organize to integrate knowledge and create new products. Such an approach appears to encompass many of the new product-development projects, where a middle-level manager organizes a project team and provides it with the mission, resources, and adequate incentive to succeed (e.g. Clark & Wheelwright, 1992; Katz, 1997; Thamhain & Wilemon, 1987). However, we do not know which one of the three processes is more likely to explain the product improvement process. There are differences between product improvement and new product-development that limit the transferability of the insights developed in one area to another: the need to integrate knowledge both from different functions and from outside the firm to solve the current deficiencies of the product, employees’ resistance to undertaking new actions that are not part of their daily tasks, and their reluctance to alter established routines to accommodate changes in existing

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products. Additionally, top managers find it easier to be interested in and understand the improvement of existing products upon which the firm’s performance depends than to focus on products that are yet to be developed and tested in the marketplace. Therefore, we undertake an inductive study to identify the process and role that top managers play in product improvement. Additionally, we identify those characteristics and behaviors of top managers that enable superior product improvement.

RESEARCH DESIGN The study uses a multiple case design that allows replication logic (Yin, 1994): a series of cases is treated as a series of experiments, each case confirming or disconfirming the inferences drawn from the others. Table 1 describes the six firms and the data sources. We chose the six largest firms in the photo-imaging industry. On average, the firms had 70,000 employees, an annual revenue of $8 billion, and a 13% market share. We focus on the photography side of their business, including cameras, photography film, color film, photography paper, X-ray film, professional, and digital cameras. We analyze firms in one industry in order to develop a good understanding of their competitive requirements and to establish meaningful comparisons. We chose the photography industry because of its high innovative requirements and demanding customers. We study large established firms because Table 1. Firm

FLASH FILM X-RAY DIGITAL CAMERA PHOTO Mean Median a

Characteristics of the Firms and Projects Analyzed and the Sources of Data.

Market Share in Percentagea

Employees in Thousandsa

Revenue in US$ Billionsa

0 15 415 0 15 0 15 415 415

50 100 4100 0 50 0 50 0 50 4100

0 10 410 0 10 0 10 0 10 410

13 14

70 43

8 3

Number of Informants Vice presidents

Mid-level managers

Project leaders

Total

5 4 4 5 4 5

5 5 5 4 4 5

15 15 15 12 15 10

25 24 24 21 23 20

The names of the firms are disguised and the figures are provided in intervals to protect confidentiality. The means and medians for the figures are exact numbers, however.


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these companies are more likely to face the need to improve existing products and encounter reluctance to do so, since the operating routines of large established firms tend to lack cross-functional knowledge integration (Dougherty, 1992; Henderson & Clark, 1990; Pavitt, 2002) and individuals working in different functional areas possess separate functional thought worlds (Dougherty, 1992). This makes integration of knowledge to improve existing products more difficult. Moreover, large established firms have welldeveloped routines that create additional resistance to change (Doz, Santos, & Williamson, 2002; Leonard-Barton, 1992; Danneels, 2002).

Data Sources In order to determine whether the improvement process is ‘‘middleup-down,’’ ‘‘bottom-up’’ or ‘‘top-down,’’ we collected data from individuals at three different levels of the firm: top, middle, and bottom. Following Hambrick and Mason (1984) and Schoenecker, Daellenbach, and McCarthy (1995), we consider vice presidents (VPs) to be top managers and thus interviewed these individuals. We interviewed the VPs of customer services, sales/marketing, R&D, manufacturing, and design engineering in each firm, as well as mid-level managers from the same functions. We also conducted interviews with the project leaders selected by the mid-level managers to improve products. We followed Eisenhardt’s (1989a) recommendations in terms of creation and development of case studies using interviews. The interviews were semi-structured; the same set of questions was used for all firms. In order to obtain a complete picture of the process, we asked additional questions when new information was revealed. Rather than discussing product improvement in general, we asked each VP to identify product improvement projects completed, or nearly completed, in the last 2 years, to describe the reasons for their improvement, and to discuss the performance of the projects. In each firm, we studied five projects in detail. We controlled for task complexity by studying only projects that had similar problems in the market based on similar customer feedback. Table 2 summarizes the projects. Interviews with Vice-Presidents The VPs were asked several questions, which we now group by topic. First, in order to determine their characteristics (e.g. Hambrick & Mason, 1984; Hoffman & Hegarty, 1993), we asked them about their job experiences both within and outside the current company, as well as within and outside their

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Table 2.

Category of Problem

Example of Customer Complaint FLASH

Camera

Digital video camera X-ray machine Photocopier

Video projector

Inability of a critical application to run Critical integrity defect Frequency of failure precluded productive use Frequent operational intervention needed to maintain productivity Non-critical integrity defect

FILM

X-RAY

DIGITAL

CAMERA

PHOTO

‘‘Doesn’t turn on’’

‘‘Doesn’t take batteries’’

‘‘Film doesn’t go in’’

‘‘Film jammed’’

‘‘Doesn’t flash in the dark’’

‘‘Doesn’t take pictures’’

‘‘Hazy picture’’

‘‘Gray picture’’

‘‘Blurry picture’’

‘‘Yellow picture’’

‘‘Shaky picture’’

‘‘Blurry picture’’

‘‘Flash light goes out frequently’’

‘‘Unstable overhead’’

‘‘Doesn’t take picture’’

‘‘Unclear pictures’’

‘‘Inaccurate pictures’’

‘‘Feeder problem’’

‘‘Paper jam’’


‘‘Feeder problem’’


‘‘Unreliable timingfrequent need for readjustment’’ ‘‘Paper jam’’

‘‘Slow to start’’

‘‘Noisy’’

‘‘Focus problems’’

‘‘Too heavy’’

‘‘Doesn’t project large enough’’

‘‘Doesn’t project far enough’’


Product

Summary of Products Analyzed and a Common Customer’s Concern in Each Firm.


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current functional areas, and the duration of their tenure in each company and area. We also asked about their educational background, including all degrees earned. Second, in order to understand where they place their attention (Ocasio, 1997) and motivation to undertake certain behaviors, we asked about their compensation package, including the specific percentage that is related to overall firm performance and overall individual performance, as well as key responsibilities that require their attention daily, weekly, monthly, semi-annually, or annually. Third, we asked about their behaviors (Smith, Olian, & Sims, 1994), specifically their interaction with top managers in other functional areas to discuss business-related issues, and whether the interaction occurred daily, weekly, monthly, semi-annually, or annually. Fourth, to understand the process of product improvement, we discussed whether top managers participate in product improvement processes, and if so, how, as well as why top managers decided to pursue improvement in certain products, and whether they or lower-level managers initiated the process. We traced the processes by which responsibility is delegated and discussed who organizes cross-functional project teams for innovation. We talked about specific projects to describe the processes by which managers and other people became involved in the product improvement process. We also asked about what happened to the products after they went back on the market in terms of their financial performance. Fifth, in order to better understand top managers’ social relationships with people in other functional areas, we asked them which managers in other functional areas they had prior relationships with and how these relationships were established. Finally, to complete our understanding of the process, we asked managers about the factors that hindered the process and those that facilitated it, from the point at which it has been decided that a product requires innovation to the point at which it is put back on the market.

Interviews with Mid-Level Managers We interviewed mid-level managers in order to understand how they became involved in the product improvement process. The interview questions we used were similar to the ones used with top managers. Mid-level managers were also asked how they organize people to address the product improvement, and how they choose project leaders from their respective functional areas. We talked about project performance in terms of the improvement in financial performance after the product launch. We also discussed whether mid-level managers could pursue these projects on their own, without waiting for a mandate from the VP.

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Interviews with Project Leaders We interviewed the project leaders that were selected by their middle managers to improve the product. Although many individuals participated in the project at different points in time, only the leaders stayed with the project throughout. In addition to asking questions similar to the ones used with top- and mid-level managers, we inquired about whether project leaders could have initiated the project they worked on. We also talked about their knowledge-sharing patterns and frequency, and the factors that facilitate or hinder their progress. Supplemental Data We complemented the interviews with additional data, including available industry reports and internal documents, informal observations, data about project team demographics, ratings of customer satisfaction with the products before and after the innovation, and assessments of how the informants interacted across functions in performing their daily tasks. Finally, we observed selected teams working on their assigned project.

Analysis We used the methods described in Brown and Eisenhardt (1997), Eisenhardt (1989a), and Miles and Huberman (1984) to develop conceptual insights. First, we built individual case studies. For each project, we used a combination of the ‘‘fishbone method’’ and flow charts documenting the factors by which knowledge is integrated. We entered all responses into a database indexed by firm, project for each firm, and interview questions by number. We constructed a single version of the interviews for each case by collecting all responses to the same question together as a single response. Using the interviews and secondary data, a case study was prepared for each project and for each firm. We presented the findings to informants in participating firms at their request; this also ensured that data were consistent with what actually occurred in each firm at each level. We noted similarities and differences in cases within and across firms, but did not perform further analysis until all cases were written up, in order to maintain independence of the replication logic (Brown & Eisenhardt, 1997). Two independent readers read the interviews and formed a view of each case to crosscheck the emerging story.


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FINDINGS: TOP MANAGERS AND PRODUCT IMPROVEMENT The analysis of the case studies reveals two key ideas regarding the role of top managers in product improvement. First, contrary to studies of new product creation, the process of product improvement is what we call an ‘‘involved’’ top-down approach. Although people at all levels participate in the process and are necessary for its successful completion, top managers, rather than middle-level managers or bottom-line employees, are the key actors in the initiation of the process. Top managers have involved roles in the form of Evaluate, Select, Initiate, and Monitor (ESIM). Second, the factors that appear to relate to superior product improvement, leading to an increase in financial performance, are the professional absorptive capacity of managers and their routinized meeting frequency to undertake ESIM. We now discuss each of these ideas in turn. The Involved Top-Down Process of Product Improvement Fig. 1 summarizes the product improvement process and the ways in which top managers participate in it. The outcome of the overall process is a successful product improvement that increases financial performance because it solves current problems with the product and even innovates the product beyond competitors’ offers. The model has three main stages that correspond to three levels in the hierarchy: top, middle, and bottom. Each stage has a set of sub-stages and a different knowledge integration and creation objective, which becomes input for the next stage. Although we present only a feedback loop and discuss the model in a linear and sequential fashion, there are multiple loops with interactions within and across stages. The process is complex. It has a teleological drive with product improvement as the objective, and a life cycle notion of a sequence of stages (Van de Ven, 1992). To develop a complete picture of this process, we now turn to an explanation of how people at different levels participate in it. In each company, the top management team initiates the product improvement process to meet market needs. VPs from different functional areas, such as sales, marketing, customer services, manufacturing, and engineering, each with their own expertise, evaluate each product in terms of sales performance and customer satisfaction. They obtain information from external sources such as customer surveys, customer visits, complaints, comment cards, field service reports, product returns, sales contact reports, trade show

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C. ANNIQUE UN AND ALVARO CUERVO-CAZURRA LEVELS

PROCESSES

Top managers (ESIM): Evaluate product markets, select products for improvement, initiate product improvement process, monitor progress

Products

Markets

Evaluate performance of current products, select products Knowledge integration & creation

Middle managers: analyze mandate, select project leaders and coordinate information and resources, monitor completion

R&D Sales/marketing Customer Service

Production

Analyze, coordinate and select Knowledge integration & creation

Design/ engineering

Brainstorm about root causes Knowledge integration & creation Lower level: Analyze and test causes, analyze and test solutions, find solution that improves product

Test hypotheses about root causes Knowledge integration & creation Brainstorm about solutions Knowledge integration & creation Test hypotheses about solutions Knowledge integration & creation

Key to boxes: Unobservable Actions

Increase financial performance

Product improvement

Other innovations in product or process

Outcomes

Fig. 1.

Process of Product Improvement.

Note: A Stylized Model is Presented here as Sequential, though Some Processes are Iterative and Spiral Across Levels. Source: Derived from Un (2001).

intelligence, new product suggestions, and the results of benchmarking. This external information is evaluated and discussed by the VPs and they select those products that appear to be performing below expectation. As indicated in their interviews, they are conscientious about this, because their performance evaluation is tied to the firm’s product market performance in terms of customer satisfaction. For example, a VP at FLASH states: ‘‘Since between 20 and 40% of our compensation is based on a customer satisfaction index, it is impossible to ignore customer satisfaction with our products and services.’’


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Moreover, the products have a tangible impact on the firm’s performance and on managers’ own assessments. Hence, their attention is easily focused on those products that appear to have performance problems. The problems identified are sometimes indicated internally, especially when the production system is over budget or not generating products of the desired quality. However, most of the time, customers are the ones who experience the products firsthand and identify any problems with them. Among the multiple products that need improvement at any given time, the top managers select those that are most likely to need urgent action, and discuss the potential steps that should be taken to solve the problems. A representative comment came from the VP of R&D at FILM: ‘‘The company was founded on this product. If we didn’t do something drastic about it soon, we would have to file chapter 11!’’ In addition to selecting the products that need improvement, top managers select the mid-level managers to be in charge of improving the products. It is rare that top and mid-level managers are involved directly in brainstorming about root causes and solutions for product innovation to improve financial performance. As one of these managers stated: ‘‘I am several thousand feet above the actual innovation processes. I watch the market and tell them what is selling and what is not and where else we need to be.’’ Nevertheless, after selecting the product to be improved and the middle managers to deal with it, top managers continue to be involved, monitoring the progress of the solution to the problems identified in the product. Additionally, the next round of product evaluations among top managers serves as a reminder to all top managers of the existence of problems with a particular product and how they affect financial performance. It also helps determine whether these problems have been solved and, if the product has been put back on the market, helps check for any improvement in performance. The customer service VP delegates responsibility to mid-level managers, who consolidate knowledge and information about the product under analysis in order to determine the root causes of their poor performance. The mid-level manager, usually a senior product technician working in customer service, shares this knowledge with the firm’s internal and external linkages. Customer service representatives gather further knowledge about the product from dealers and retailers, and analyze all return sales and interactions with customers and clients that have occurred since the last evaluation. The main objective here is to determine patterns in their comments and collate suggested product improvements. Depending on how critical the product is to the overall financial performance of the firm, the company undertakes

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survey campaigns with major clients and commercial end users. The customer service manager may also hire a marketing research company to analyze competitors’ strategies. Internally, the customer service manager alerts the sales/marketing organization about possible changes in competitors’ pricing, and informs design, manufacturing engineering, and production about product performance. Managers within these areas then select individuals with relevant knowledge and expertise in their area to help analyze, from their functional perspective, why the products are performing poorly in the market. The mid-level managers organize the individuals into a project team to address the problem. Non-management employees find and test causes and solutions to the problems that have been identified. Since product reliability, quality, and design determine customer satisfaction and sales performance, engineers from design and manufacturing are included in the team. Project teams also include individuals from customer service and sales and marketing who provide knowledge from customers, surveys, and marketing-research companies. The first step in product improvement among lower level employees is knowledge sharing and creation through brainstorming about the root causes of underperformance. Once these root causes are identified, the team generates hypotheses about solutions; that is, they suggest innovations to the existing product. Once these solutions are created, they are tested in relevant parts of the organization, usually design or manufacturing. The successful solution is implemented as a change in the design, in the manufacturing process, or in both. In sum, this process of product improvement is a top-down approach. Although people at all three levels must be included for the product innovation to be successful, the initiation of the process and the main thrust comes from the top. Top managers are the ones that integrate existing knowledge about the problem from internal and external sources and initiate the process. To check whether it could be a middle-up-down process, we asked midlevel managers whether they could pursue these projects on their own without waiting for a mandate from the VP. Contrary to what has been seen in prior research on new product development, they commonly responded that they could not initiate the process. Since a change in one part of the product forces changes in work routines of other functional areas, middle managers and their employees resist these changes. For example, in FILM a middle manager in customer services told a middle manager in design and manufacturing about the poor sales performance of a certain camera, a core product, and that a common customer complaint about it was ‘‘a brand new


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camera that doesn’t work.’’ Complaints came mainly from customers on the West Coast and in Japan. Customers had been saying for 2 years that something was wrong with ‘‘the design and/or the manufacturing.’’ The company coded the problem as ‘‘inability of a critical application to run.’’ Lead users faxed in pictures of the camera explaining that it was probably the design of the camera and provided ideas about how to fix it, while others said it was the manufacturing of batteries that caused the problem. Middle managers of camera design engineering and manufacturing of batteries pointed fingers at each other and did nothing for two years. During one of the few meetings to evaluate the firm’s financial performance, the VPs discussed the camera problem. The VP of customer services, whose previous assignment was design engineering, was able to convince the design engineering VP to find the design problems together. He then worked separately with the VP of manufacturing to unveil manufacturing problems. He experienced difficulties in this because the VP of customer service had never worked in manufacturing and had to first spend some time learning about the processes by which batteries were manufactured. Only after they were 93% sure that it was both design and manufacturing, the VPs of these two areas agreed to innovate the product and consequently the manufacturing processes. They assigned the project to their middle managers, who selected representatives to integrate knowledge and innovate the product. Thus, whereas both our model and the middle-up-down model highlight the role of top- and mid-level managers, the latter offers a different interpretation of the role of top managers. The middle-up-down model claims that top managers provide the vision to the firm, but that mid-level managers are the ones who initiate the process (Nonaka, 1988). However, we did not observe such behavior. In the firms we studied, mid-level managers did not have such discretion. Moreover, mid-level managers were not likely to be able to bring other functional managers in line, since the product improvement required changes to existing routines. The VPs had to get involved to initiate the product improvement process and solve the impasses among mid-level managers. To check whether the process could be a bottom-up one, we talked with lower level employees. We asked them whether they could initiate the project on which they worked. A representative response came from a customer service representative working on the video camera at FLASH: ‘‘Sure, we can make all kinds of suggestions, but that’s all they are, suggestions. This product has been in the red for at least five years and we told [middle managers] about the customer complaints. Nothing happened.’’

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Thus, in contrast to the case of new product development, where ideas generated from below become innovations, a bottom-up approach is not feasible in improving existing products. Such an improvement requires changes in the current product and manufacturing process that are out of reach for bottom-level employees. Bottom-level employees are a source of valuable ideas for the firm. They can provide suggestions for product innovation (Van Dijk & Van den Ende, 2002) and process improvement (Schroeder, Bates, & Juntilla, 2002; Yasuda, 1991) although in many cases they must be provided with incentives and with adequate means to integrate their knowledge so that it can be used (Frese, Teng, & Wijnen, 1999; Yasuda, 1991). As such, although knowledge sharing may be bottom-up, the process of product improvement is top-down. In sum, in contrast to the new product development process, which is middle-up-down or bottom-up, the process of product improvement is topdown. This does not diminish the importance of involving employees at the middle and bottom levels. However, it is the top managers who initiate the product improvement process and are able to see it through. The need to promote interactions among people in different functions and the reluctance of these people to alter their established routines force top managers to get involved. Whereas new product development can be moved to a singlefunction team, usually one composed of design engineers who provide a product prototype for the firm, the improvement of existing products requires knowledge and implementation by people from multiple functions. The improvement depends on clients’ current reactions to the product and the offers of competitors. Changes must be analyzed by and implemented across several functions, such as design, production, customer services, marketing, and sales. However, each function has its own routines in place for the current product. Changes in the product will require changes in the routines, which are likely to be resisted. Thus, top managers direct product improvement because they are able to integrate the knowledge from different functions in their evaluation of the products, and can use the power of their hierarchical positions to impose changes on the firm. Such changes are more likely to be successful than they would be if a mid-level manager or bottom-level employee tried to impose them.

Roles of Top Managers: Evaluate, Select, Initiate, and Monitor (ESIM) In the top-down process described, top managers take on the four roles of Evaluate, Select, Initiate, and Monitor (ESIM). These roles result in the


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creation of knowledge at their level and are the first step toward the creation of new knowledge in the form of an improved product, process, or both. The first two roles, evaluation and selection, can be undertaken with little direct interaction with mid-managers and bottom-level employees. In contrast, the other two roles, initiation and monitoring, require close interaction with middle-level managers and bottom-level employees to achieve knowledge creation. These roles are described in the order in which they are used in the product improvement process. The first role top managers take on is the evaluation of the products’ performance. Top managers interact cross-functionally to evaluate the product’s market performance, each adopting the viewpoint of their own function. In the meeting, product performance is first analyzed as a whole, and then segmented by major market. Top managers evaluate each product in terms of sales performance, and integrate different pieces of information to come to an understanding of where the firm’s products stand, and to identify any potential problems they may experience. The discussion that follows enables top managers to identify the products that need further analysis due to discrepancies with previous expectations. These expectations may be formally expressed in the plan or informally held by top managers. This is illustrated by the following quote from the VP of customer service at FILM: ‘‘We’re suffering in Japan. Our X-RAY machines just wouldn’t sell as well as our competitors’. By now we expected sales to be up by 20% but they have only gone up by 3%. Our customer service center there is saying that Japanese doctors and nurses are saying that the lighting isn’t right. If we want to succeed in that market and expand into the rest of Asia as planned we really need to do something about it. We just can’t ignore it.’’ The second role is selection of those products that require further attention and the identification of a potential solution to the problems experienced with the products. This selection depends on the integration not only of information about the products, but also of the various top managers’ understanding and expectations. Knowledge about product markets that has been acquired from customer service and sales/marketing is shared within the firm, and integrated with knowledge acquired from accounting about financial performance by product, market, or by both. The faceto-face meetings among top managers to decide on how to increase financial performance results in knowledge creation in the form of agreement on the product improvement objectives that require further attention. The following representative quote came from a VP of manufacturing at FLASH: ‘‘Decades ago our photocopier was the darling of the industry. It had just the right technological sophistication, elegance, ergonomics, and just the

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right price. But our foreign competitors have been able to beat us on all of these dimensions in the last five years; so we had to ask ourselves, should we leave this market or do something about the product? The new CEO and all of us decided to fix it up and give our competitors a run for their money.’’ The third role is the initiation of the product improvement process. Once top managers select the products that require urgent attention, they initiate the process of product improvement at other levels by selecting mid-level managers and providing them with a mandate to improve the product and resolve the deficiencies identified by top managers. A representative quote came from a VP of Customer service at PHOTO: ‘‘After we decided that the digital video camera needed improvement in order to meet the sales targets for the next four years, and customers are saying that there is a disconnect between speed and lighting, we called up our area [function] managers to work together to identify their best people to work on the project. Some managers resisted this at first, of course.’’ The fourth role is monitoring the progress of the process through interactions with mid-managers and, sometimes, lower-level employees. Top managers are not fully detached from the process of product improvement after they delegate the mandate to mid-level managers. They observe progress and intervene to avoid some of the problems that are likely to appear. These may take the form of a need for resources, as traditionally discussed in the new product development literature, but they may also manifest as reluctance to cooperate on the part of mid-level managers and bottom-level employees, due to both the additional demands on their time and the changes in established routines that accompany product improvement. This way, the hierarchy and the use of fiat acts as an additional mechanism to facilitate knowledge creation, in addition to the establishment of incentive and the development of absorptive capacity (Szulanski, 1996). The following comment from the VP of design engineering at X-RAY is representative of top managers’ involvement in monitoring and reducing barriers to product improvement: ‘‘To ensure progress, all the VPs meet periodically to update each other about the projects. For example, in the case of the X-RAY machines that had problems with lighting and speed, middle managers had to give us status report every two weeks. We met regularly to talk about the next step and any additional resources needed to get it done quickly. When the project fell behind schedule we replaced those in charge [middle managers and project leader] with new ones. This was noted in their performance evaluation when promotion opportunities came up.’’ In sum, the role of top managers in product improvement is more involved than is typically assumed in the new product development literature.


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Problems with current products draw the attention of top managers more than do potential new products, since the firm’s current performance is a function of how well existing products perform in the marketplace. Potential new products are a promise for the future, but the firm must be able to reach this future, which requires success in the present and the improvement of existing products. Although top managers lack the expertise to direct the search for new products, they do possess the expertise to manage the current set of products and to undertake improvement in their performance. There exist more variables under their direct control that can help improve the products, such as the ability to identify the need for improvement, the selection and monitoring of the process, or the breaking down of barriers against the improvement process. The implication of this finding is that, in addition to deciding on the vision and strategy of the firm, top managers play a crucial role in the firm’s knowledge creation process. The quality of the knowledge creation process at the top management level, which results in the identification of problematic products and alternative ways to deal with them, determines the initiation of the product improvement process at other levels as well as its successful completion. The ultimate success of the product improvement process also depends on the behavior of mid-level managers (e.g. Wooldridge & Floyd, 1990), as well as on the cross-functional team and its interactions (e.g. Griffin & Hauser, 1992). However, these steps and their success depend on the quality of top managers’ initiation of the process. Top Managers and Superior Product Improvement So far we have discussed the commonalities among firms in the process of product improvement and identified the process and role of top managers. However, firms differ in terms of the success of the process. This points to the existence of factors that differ across firms and that enable some companies to achieve superior product improvement, which will ultimately lead to better financial performance. Of the five products requiring improvement that the VPs selected for discussion, the managers of FLASH, FILM, and X-RAY could only effectively integrate their knowledge to agree on continuing the process on three, two, and four of the products, respectively. The other products continued to underperform financially and solutions to the problems were not sought. In comparison, the managers of DIGITAL, CAMERA, and of PHOTO agreed on all five of the products that required improvement. Moreover, when the products were put back on the market, DIGITAL, CAMERA,

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and PHOTO experienced an increase in sales of their improved products of 38–41%, while FLASH, FILM, and X-RAY experienced an increase in sales of the improved products of only 10–20%. Table 3 summarizes the characteristics and behaviors of the top managers and the performance of the product improvement projects studied. The analysis presented in this table and the background information serve to identify the factors that are associated with superior product improvement. We separate the factors that appear to enable superior product improvement into two groups: characteristics of the top managers (Hambrick & Mason, 1984; Hoffman & Hegarty, 1993) and characteristics of the behavior of the top managers in their interactions (Smith, Olian, & Sims, 1994). In terms of the characteristics of top managers, we analyze the existing incentive systems and the managers’ absorptive capacity as enablers of knowledge creation. We also distinguish between personal and professional absorptive capacity. We find that what differentiates top managers of successful firms from those of less successful firms is their professional absorptive capacity, or the ability to understand each other’s different functional knowledge. This was acquired as a result of having worked in different functional areas during their professional career, both within and outside the firm. We consider professional absorptive capacity to be a key differentiator because, as in the case of knowledge transfer from one part of the firm to another (e.g. Szulanski, 1996), the characteristics of knowledge itself makes sharing and integration difficult. Recipients lack the complementary knowledge that is necessary if they are to absorb the knowledge shared, reducing their ability to achieve an agreement. Additionally, the misunderstanding in each interaction became so de-motivating that some even stopped interacting. In less successful firms, less than half of the managers, on average, had professional absorptive capacity. A VP of manufacturing at FILM illustrates the problems associated with the lack of professional absorptive capacity among managers in these firms: ‘‘When we get together we always misunderstand each other. The technical people tend to be internally focused and care much less about how we are doing in the market. Sales/marketing and customer services people keep telling us to improve product quality and reliability, which is not that easy. In many cases, we cannot agree despite our effort to meet frequently. Sometimes people get so frustrated that they stop coming to meetings. This forces us to drop the issue and go to the next one.’’ In contrast, in more successful firms, more than half of top managers have developed professional absorptive capacity. A VP of manufacturing explains their ability to understand each other: ‘‘Five of the VPs have

Roles and Characteristics of Top Managers and Performance of the Product Improvement Process. Firms FILM

X-RAY

DIGITAL

CAMERA

PHOTO

20 40%

20 30%

25 40%

10%

10 15%

10 20%

Yes

Yes

Yes

Yes

Yes

Yes

High

High

High

High

High

High

Low

Low

Medium

High

High

High

Low

Low

Medium

High

High

High

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Characteristics Reward VPs’ perception of percentage of their total compensation tied to customer satisfaction with the firm’s products Job design Monitor performance and solve problems of functional area Personal absorptive capacity VPs’ prior relationship with each other across different functional areas: less than half of the VPs knew each other prior to working on these issues ¼ low, half ¼ medium, more than half ¼ high Professional absorptive capacity VPs had job experiences in other functional areas: less than half of the managers had job experiences in other functional areas ¼ low, half ¼ medium, more than half ¼ high Meeting frequency Frequency of meeting to share knowledge about overall company performance, what works or does not work in different functional areas: low ¼ semi-annually or annually, medium ¼ monthly, high ¼ bi-monthly or weekly

FLASH


Table 3.

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Table 3. (Continued ) Firms FLASH

FILM

DIGITAL

CAMERA

PHOTO

80%

100%

100%

100%

20%

38%

40%

41%


Performance Knowledge creation (identify objective of knowledge creation process) Percentage of joint decisions (agreements) to 60% 40% innovate those products that under-performed Financial performance Average percentage increase in sales in the first 10% 12% two years after the products are reintroduced onto the market

X-RAY


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worked in various areas before their current positions. In my case, I have been in customer services and design engineering before working in manufacturing. So when the VP of customer services tells me about low sales of certain products and gives me some information about what customers are saying, I usually have a sense about whether it is manufacturing or design and take appropriate actions.’’ Managers’ personal absorptive capacity and economic incentive systems did not explain the difference between firms in success of product improvement. As indicated in Table 3, top managers in all firms have prior personal relationships with people in other functions that enable them to develop personal absorptive capacity, or the ability to understand each other’s different personalities. This personal absorptive capacity is developed as managers work together over time, and as they interact outside work in social settings. It facilitates social integration (Smith, Olian, & Sims, 1994) and generates social motivations to interact to share knowledge (Hansen, 1999). Moreover, as reflected in Table 3, top managers’ compensation packages are similar across firms and tied to the firm’s overall performance. In sum, in terms of the characteristics of managers, the differentiating factor between successful and less successful firms in product improvement is managers’ professional absorptive capacity. This idea builds on the notion of absorptive capacity at the individual and firm level (Cohen & Levinthal, 1990; Zahra & George, 2002) and its crucial role in knowledge transfer (Szulanski, 1996, 2003) and creation (Nonaka, 1994). Here we separate the concept into two areas at the individual level: personal absorptive capacity, or the individual’s prior knowledge about the personality of those with whom he/she interacts to create knowledge, and professional absorptive capacity, or prior knowledge about the functional knowledge of these individuals. Top managers may be able to function well as a group because, over time, they develop the personal absorptive capacity that enables them to understand others’ personalities. However, top managers may still face difficulties in successfully integrating functional knowledge due to a lack of professional absorptive capacity. Regarding the characteristics of top managers’ behavior during knowledge creation, what distinguishes higher performing firms is the routinized frequency of meetings among top managers to evaluate products and select the ones that need improvement. This entails not only frequent interaction to discuss particular business issues such as product improvement, but also the routinization of frequent meetings to discuss current events in the firm. The more frequently top managers interact on a routine basis, the more likely it is that meaningful knowledge is shared, facilitating agreement about

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which products require innovation to improve financial performance. For example, in the firms FLASH, FILM, and X-RAY, which did not perform as well as DIGITAL, CAMERA, and PHOTO, top managers only interacted to share knowledge on average semi-annually or annually. In contrast, in the more successful firms, top managers interacted two to four times a month on average. Top managers in successful firms met more frequently to evaluate, select, initiate, and monitor the process of improving under-performing products. They could agree on more products that required innovation to increase financial performance, monitor progress better, and catch problems with products earlier. The VP of manufacturing at PHOTO illustrates the benefits of the routinization of frequency of meetings: ‘‘There is a taskforce of VPs that meets bimonthly. We feel a sense of obligation to meet to discuss performance in all areas because some of us have been in the others’ shoes. It is important to know what is happening with the products and make adjustments accordingly. We start the meeting with our sales performance by product lines. We then try to see what customers are saying. For this we turn to the VP of customer services. It is easier to make small changes than when there is a crisis and the whole organization has to get involved.’’ In contrast, in less successful firms, top managers did not have routinized meetings and were not able to integrate their knowledge as effectively. An example is provided by a customer service VP at FLASH: ‘‘We met semi-annually to discuss sales performance and under-performing products. In the last meeting, we talked about one of our core products, a camera that just wouldn’t meet the sales targets. Sales came with their numbers and I explained some of the complaints and suggestions made by thousands of end-users and our retailers, particularly Best Buy and Circuit City. Other than this meeting, we don’t meet at all, despite the fact that we all knew each other from previous meetings.’’ In sum, frequent meetings enable continued monitoring of products’ progress, help top managers assess how previous product improvement efforts are progressing, and provide the opportunity to identify potential problems with the products before they become critical. Although the firm may continuously generate information on product progress, and managers may use information technologies to learn about the products and even to interact with other top managers, such actions have limitations. They are useful for the transfer of information, but not for the creation of knowledge to improve existing products. The integration of knowledge to create new knowledge, such as for product improvement, requires face-to-face interaction among managers. This interaction helps managers to become both the source and recipient of knowledge sharing and to address nonverbal


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communication, in addition to the verbal transfer of knowledge. Whereas the transfer of information can be unidirectional, from source to recipient, the exchange of knowledge to create new knowledge requires bi-directional interaction between the two parties, as they become both source and recipient of the knowledge that is shared. This bi-directional interaction assists them in clarifying their ideas, enables their tacit knowledge to become explicit, and facilitates the subsequent creation of new knowledge (Allen, 1977; Nonaka, 1994). Moreover, the meeting helps pull managers out of their daily tasks and focus their attention on the analysis of existing products and potential improvements to these products, at least for the duration of the meeting. Managers have multiple tasks to perform that limit their ability to undertake new ones (Holmstrom & Milgrom, 1991). The conflicting demands on managers’ attention and effort cannot be solved by providing incentives, because managers would focus on those areas that are easiest to measure, at the expense of others, such as product improvement, which are difficult to measure and are not directly under the control of the manager but are the result of the interaction among multiple individuals. As such, although frequent meetings among top managers are perceived as a waste of time by many, they appear to be a valuable use of time in product improvement.

CONCLUSIONS We examined how top managers facilitate the process of product improvement to improve financial performance. We argued that, in contrast to new product creation (Nonaka, 1988), product improvement is a top-down process where top managers play active roles. Changes to existing products force employees in multiple functions to change their routines. This change is likely to be resisted, and top managers must break such resistance. Additionally, existing products are the basis of the firm’s performance and their management forms part of the top managers’ tasks. As such, top managers have an incentive to get involved in product improvement, since they can see the impact of their decisions, even if they do not have the expertise to come up with the solutions. This idea of product improvement being a top-down approach connects with the tradition of the resource allocation process (Bower, 1970; Eisenmann & Bower, 2000) and, in general, of the strategy process research (Chakravarthy & Doz, 1992). In addition to developing the strategy of the firm, top managers are also involved in knowledge creation for less glamorous tasks such as product improvement, and are a crucial element in this.

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The involved top-down process of product improvement requires the participation of all levels in the hierarchy: top, middle, and bottom. This highlights the notion of the firm as a distributed knowledge system (Tsoukas, 1996). Each level has to integrate knowledge for the next level to undergo its own knowledge integration. However, the objective of knowledge creation differs at each level. Top managers integrate internal and external knowledge to identify the objective of the overall product improvement process, which will eventually increase the financial performance of existing products. Mid-level managers integrate knowledge outside and inside the firm, select project leaders and coordinate resources for the teams. This project team, composed of lower-level employees, integrates their individual knowledge and the knowledge of relevant sources within, and sometimes outside, the firm, to determine the root causes of problems in product improvement and their solutions. The final outcome of the process is the improvement of the product. However, the quality of this final outcome depends not only on lower level employees, but also on top- and midlevel managers. As such, studies of knowledge creation for a particular purpose, such as product improvement, need to take a more holistic approach, studying not only the characteristics and processes in the team, but also the characteristics and processes among managers that determine the establishment and composition of the team. Top managers are key resources for the firm who deserve their large rewards despite the controversy about the size of these rewards (Castanias & Helfat, 1991; Porac, Wade, & Pollock, 1999). Their role in the creation of strategy and strategic decision-making has been widely accepted (Chakravarthy & Doz, 1992; Eisenhardt, 1989b; Eisenhardt & Zbaracki, 1992). However, they tend to be dismissed in the innovation process, based on the assumption that they lack expertise in the technological field. In contrast, we argue that, although they may not be involved in the minute details of the process, such as defining root causes and solutions to lower-than-expected financial performance, they play a crucial role: not only do they initiate the whole process, but the knowledge they create becomes the input for the firm’s lower-level knowledge-creation activities. A misguided or unsuccessful knowledge-creation process among top managers will result in misguided and wasted efforts in the entire product improvement process.

NOTES 1. Although there exists a large literature on quality management and process innovation, we will not review or discuss it here, since our focus is product


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improvement. For a recent review of this literature, see for example Benner and Tushman (2003).

ACKNOWLEDGMENTS We thank the managers and employees of the participating firms for sharing with us their experiences. The first author is also grateful for the Starr Fellowships of the MIT-Japan Program and the Air Products Faculty Fellowship of the Johnson Graduate School of Management at Cornell University for financial support. The second author thanks the Department of Applied Economics and Management at Cornell University for its hospitality while revising the paper. All errors remain ours.

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STRATEGY CONTENT AND PROCESS IN THE CONTEXT OF E-BUSINESS PERFORMANCE Tim R. Coltman, Timothy M. Devinney and David F. Midgley INTRODUCTION The field of strategy has long been preoccupied with explaining, and attempting to predict organizational performance. Indeed, the quest to understand how to gain and hold an advantage over competitors is the primary way in which strategy distinguishes itself from other organizational sciences (Meyer, 1991). Strategic choices are made in anticipation of, or in response to, that competitive context and the performance implications that result, are of central interest to strategy researchers. Most scholarly inquiry directed toward the link between strategic choice and performance has traditionally been divided into content and process research (Summer et al., 1990). Content research focuses on the subject of a strategic decision (i.e., ‘‘what’’ is decided) and thus is concerned with the structural antecedents and their performance consequences. Process research looks at the administrative systems leading to and supporting strategic decisions, or in other words, the role of managers and ‘‘how’’ strategic changes come about.


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Even though the distinction between content and process is artificial (Huff & Reger, 1987), this division has endured because: (a) most business schools find it pedagogically convenient to develop separate courses in this way, and (b) some scholars consider that this separation actually supports the development of strategy as a field (Chakravarthy & Doz, 1992). But this is hardly sufficient justification for ongoing empirical inquiry. Ketchen, Thomas, and McDaniel (1996) argue that the continual separation of content and process creates problems because it obscures the possibility that content influences process, process influences content, or that a synergistic influence exists. However, these calls for greater integration have largely fallen on deaf ears, and the field remains characterized by disagreement of substance, where scholars have at times, been guilty of a desire to advance some ideas long after they have outlived their usefulness. Varadarajan (1999) shows that many of the law-like generalizations in the field of strategy and marketing serve to impede or inhibit us rather than illuminate reality in a meaningful and useful way. Conceivably this is because of artificial separations of phenomena that are in reality interwoven. The complex nature of strategy also has implications for how we might develop empirically testable models that identify the underlying drivers of performance. For example, interpretive models based on in-depth case studies or ethnographic studies can be useful for exploratory purposes, but are characteristically limited to small sample size and non-random selection, that leads to firm or industry specific results that cannot be generalized (Schwab, 1999). Quantitative approaches based on large sample surveys and statistical methods can broaden our understanding of cause and effect, but these too are limited. Hatten and Schendel (1978) demonstrate that indiscriminant data pooling of firms and industries can mask the very essence of strategy and the key factors that make a difference to performance of firms. Thus studies based on aggregated data and looking for singular models that explain performance must be viewed cautiously, both for theoretical and statistical reasons. What is needed are more sophisticated approaches that enable us to capture the heterogeneity that exists within modern business. Our motivations for the remaining sections are twofold. First, we test the relevance and explanatory power of the strategic content and process paradigms in an empirical setting. Second, we show that firm heterogeneity needs to be taken into account when we test such empirical models. The empirical setting in which this study takes place, is a survey of e-business performance in 293 organizations. Like many, we have been intrigued by how IT impacts strategy and sought greater understanding as to why some firms situated in the same industry cannot replicate the e-business performance results of Dell

Strategy Content and Process in the Context of E-Business Performance

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Computer, Cisco Systems, and General Electric. E-business is an ideal setting to use because most managers are familiar with the issues and potential business applications in this area. Moreover, the investment is both significant and strategic, the economic returns uncertain and much of the technology novel to many firms. Deciding to deploy B2C, B2B, or B2G e-business technologies was perhaps the key strategic decision that many firms faced in the period 1999 through 2002. Given our data, the estimation procedure comprises two sets of empirical analyses to test the importance of integrating strategy content and process. The first analysis is a simple ordinary least squares (OLS) regression to empirically test four hypotheses that account for the pressures facing the firm (both inside and outside the firm), the cognitive beliefs of managers and the feasibility of implementation. The second analysis applies finite-mixture regression modeling techniques to evaluate the impact of heterogeneity in the data. This technique allows us to determine whether different forms of the model apply to different groups within the sample. Our results indicate that heterogeneous demands and conditions characterize the business environment, creating differential pressures for change and significant variance in the performance outcomes of such change. Four distinct segments of firms are identified in our data set and these segments explain significantly more variation in e-business performance than a model that does not account for inter-firm heterogeneity. Our analytical approach is further developed in subsequent sections and represents a relatively new approach to understanding unobserved heterogeneity between firms.

CONTENT, PROCESS AND PERFORMANCE THEORY Merging Separate Schools of Thought Historically, the development of strategic management has been such that the concept of strategy has generally been viewed in terms of two relatively mature paradigms – content and process. Finding the right balance between content-based determinism and process-based choice has proven difficult and the literature is characterized by contradictory findings (Rajagopalan & Spreitzer, 1996). Given the diversity of approaches and ideas in this field of scholarly inquiry (Pettigrew, 1992; Mintzberg & Lampel, 1999), this review is not meant to be exhaustive, but instead seeks to address the main schools of thought within each paradigm. Our purpose is to show that these theories

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of firm performance are complementary, and to identify lines of inquiry within each domain that can be used to test this proposition.

STRATEGY CONTENT Most of the literature belonging to the strategic content school of thought can be divided into two distinct themes. Sometimes it refers to ‘‘positional superiority’’ regarding favorable structural characteristics that are associated with membership in a particular industry or strategic group. At other times it refers to ‘‘distinctive competence’’ in terms of relative superiority across bundles of unique material, organizational and location-based resources, and skills and capabilities.

Industry Structure/Positioning Drawing from the Industrial Organization (IO) tradition in economics the structure-conduct-performance paradigm has dominated much of the early strategic management research. Reflected in works by Bain (1956) and Mason (1939) this view maintains that a deterministic relationship exists between market structure, organizational orientation, and competitive advantage. Later work by Michael Porter (1980) in his seminal book Competitive strategy: Techniques for analyzing industries and competitors (New York: The Free Press), has been instrumental in shaping and communicating the attractiveness of the industry as a crucial unit of analysis. According to Porter’s theory, strategy formulation is the product of, and response to, a sophisticated understanding of industry structure. Over time, positioning researchers have increasingly come to see business strategies as systems of related choices (Porter, 1996; Rivkin, 2000; Sigglekow, 2001). These choices are influenced by the multiplicity of connections or interactions that take place within an industry’s performance landscape (Levinthal, 1997). This emphasis is reflected in the popular ‘‘value chain’’ concept, where concrete activities such as procurement, design, production, distribution, sales, and service are emphasized. Hence, the formulation of strategy is complete when: (a) management have identified the broad goals for competing in a particular industry and, (b) they have nailed down the specific activities that will deliver advantage (Porter, 1985). Hence, for the positioning school strategy has come to mean an integrated set of choices about where to play and how to position yourself in an industry to


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win (Gavetti & Rivkin, 2003). To win the firm must not only be good at a particular activity, but it must be better than competitors (Porter, 1996). Superior returns will arise only when a company configures its activities in a distinctive way that drives a wider wedge between operational costs and the creation of customer value (Porter, 1985; Brandenburger & Stuart, 1996; Ghemawat & Rivkin, 1999). Resource-Based View, Dynamic Capabilities and Knowledge The idea that competitive advantage may lie further ‘‘upstream’’ is also fundamental to much of the content-based work conducted in strategy. Rooted in the pioneering efforts of Selznick’s (1957) ‘‘distinctive competence,’’ evolutionary economics (Nelson & Winter, 1982; Winter, 1987) and its Carnegie School precedents (March & Simon, 1958; Cyert & March, 1963) this perspective has evolved significantly from the early work that emphasized the role that unique organizational resources and assets play in the attainment of Ricardian rents (Penrose, 1959). Faced with constantly changing environments, firms soon realized that resource heterogeneity is not sufficient to guarantee sustainability of rents. To achieve sustainable competitive advantages, firms must control resources that are scarce, durable, and difficult to imitate (Wernerfelt, 1984; Barney, 1991, 1995; Amit & Shoemaker, 1993). This body of work labeled ‘‘the resource based view’’ (RBV) of the firm has been instrumental in developing a discourse that has allowed scholars to focus on the conditions necessary for internal resources to create defensible rents. One of the key challenges RBV theorists have faced since Barney (1986, 1991) and Wernerfelt (1984) published their original papers, is to define what is meant by a resource. Various popular adaptations have been used to refer to resources, including ‘‘core competence’’ (Prahalad & Hamel, 1990), ‘‘organizational capabilities’’ (Stalk, Evans, & Shulman, 1992), ‘‘skills’’ (Grant, 1991), ‘‘strategic assets’’ (Amit & Shoemaker, 1993) and ‘‘dynamic capabilities’’ (Teece, Pisano, & Shuen, 1997). This proliferation of definitions and classifications has made it difficult for scholars to reach consensus around key terminology (Priem & Butler, 2001). Makadok’s (2001) recent statement on the distinction between resources and capabilities is perhaps the clearest. In his view, a resource is an observable (but not necessarily tangible) asset that can be valued and traded – such as a brand, a software patent, a parcel of land, network infrastructure, or close relationships with customers. A capability, on the other hand, is not observable (and hence necessarily intangible), cannot be valued, and reflects

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a leaned and stable pattern of collective activity to improve organizational effectiveness.1 The words ‘‘learned and stable’’ highlight the point that dynamic capabilities are structured knowledge based activities used to acquire and shed resources, integrate them together, and recombine them (Zollo & Winter, 2002). A mixture of people and technical resources are often required to enact the competitive advantage in American Airlines yield management system, Wal-Mart’s docking system, and Dell’s logistics system. The proposition that one firm will outperform another if it has a superior ability to integrate, build, reconfigure, and protect internal resources and platform competencies has found growing conceptual (Teece et al., 1997; Lengnick-Hall & Wolff, 1999) and empirical support (Henderson & Cockburn, 1994; Iansiti & Clark, 1994). In common with the positioning view, it is important to note that a distinctive capability is not only what the firm does well, but should also represent a sphere of activity that rivals are not good at. For example, the company might be good at using customer information stored in sophisticated databases and readily transferred from one part of the company to another. But, unless the company is superior in the use of this information then the learning and knowledge gained from this shared information is unlikely to be as great as the competition. Integrating These Views of Strategy Content Although, the volume of recent work indicates a shift in emphasis toward defining the possession and composition of resources and capabilities (Chesbrough & Teece, 1996; Barney, Wright, & Ketchen, 2001) it does not mean that strategic positioning and market attractiveness are any less important. On the contrary, the choice of which capabilities to nurture and which investment commitments to make must be guided by a shared understanding of the industry structure, the needs of target customer segments, the positional advantages being sought, and trends in the environment (Amit & Zott, 2000). Together each of these schools of thought adds to our explanation of the structure of competitive advantage. It is therefore, particularly sensible to utilize both the positioning and resource-based schools of thought when attempting to explain variance in performance.

STRATEGY PROCESS The multidimensional nature of strategy means that variance in one variable can produce quite counterintuitive changes within the firm (Lewin &


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Volberda, 1999). Hence, when firms are faced with changes in environmental pressures, some organizations progress forward, while others remain hesitant or unable to change. Explaining this behavior is the role of process research where the activities leading up to and supporting a choice of strategy are central to this line of inquiry (Huff & Reger, 1987). Two major schools of thought are referred to in this literature: (a) managerial cognitions, and (b) organizational economics.

Managerial Cognition Both the resource and positioning perspectives discussed previously, recognize that organizational evolution involves a system of concrete organizational routines and capabilities – tangible activities – as well as a way of perceiving the environment and a company’s place in it – a cognitive aspect (Gavetti & Rivkin, 2003). The cognitive aspect refers to the interpretative processes through which managers enact a response to a change in the environment or organization. This view of strategy process has been variously defined as knowledge structures, core beliefs, cause maps, and schemas (Walsh, 1995). Although scholars have argued that environmental and organizational constraints severely limit the options available to managers (Aldrich & Pfeffer, 1976; Hannan & Freeman, 1977), the fact that firms can and often do make discretionary choices (Nelson, 1991) is hard to dismiss. John Child’s (1972) influential article on strategic choice was the first among many to argue that managers matter. Discontented with deterministic conceptions of organizational structure by contingencies, Child wrote: y many available contributions to a theory of organizational structure do not incorporate the direct source of variation in formal structural arrangements, namely the strategic decisions of those who have power of structural initiation (p.16)

This article generated renewed interest in the role of managerial beliefs and subsequent work (Gavetti & Levinthal, 2000) has investigated the role of managers’ deliberate strategy making in driving the organization’s accumulation of experience, thus striking a healthier balance between cognition and behavior. Others have also found that managerial interpretations and judgments of organizational and environmental forces play a critical role in explaining strategic choice (e.g., Barr, Stimpert, & Huff, 1992; Ginsberg & Venkatraman, 1992).

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Organizational Economics Strategic change takes place only when an organizational realignment – in response to environment threat or opportunity – results in changes in the content of a firm’s strategy (Rajagopalan & Spreitzer, 1996). Reflected in the difference in the form, quality, or state of the organization over time (Van de Ven & Poole, 1995) the ability to change is based on the level of uncertainty and instability within the organization. This uncertainty and instability is multidimensional and comprises various technological and organizational dimensions (Boyd, Dess, & Rasheed, 1993). The ‘‘neo institutional’’ branch of organizational economics is particularly useful when managers must consider the feasibility of strategic change initiatives. This theory argues that hypothetically ideal strategic orientations and technological innovations are often unattainable by a particular firm and the only relevant comparison a firm should make is between those alternatives feasible to them at the time. This line of thinking builds on a ‘‘remediable efficiency’’ criterion where the strategic orientation of incumbent organizations – with existing operations and technical infrastructure – is presumed to be efficient if no feasible superior alternative orientation can be described and implemented with positive net gain (Williamson, 1999a). The italicized features are also consistent with what we already know about e-business – many incumbent orientations, especially in the B2C arena, proved to be more efficient than the proposed e-business alternatives. Only a few organizations found ways to generate net gains. In contrast, in the B2B arena, many more organizations found superior alternative orientations, particularly in supply chain integration. Strategic change is ultimately a selective process, in that firms choose whether to go ahead with a planned change or not. There are switching costs and uncertainty associated with organizational transformation and any initiative by the firm to alter existing routines and activities can just as easily destroy existing capabilities, as maintain or improve them (Henderson & Clark, 1990). Political challenges can also place impossible barriers on strategic change success. For example, the implementation of technology is typically a collective social action that involves the interaction between key groups, their values, beliefs and common practices (Rao et al., 1992). If current beneficiaries disbelieve the implementation ‘‘promises’’ or stand to lose as a result of the implementation then the requisite agreement required may be impossible to reach and/or enforce. Hence, the best a manager can hope for is a remedially efficient arrangement – one that represents the best that can


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be achieved given the limitations of existing operational systems and the costs of setting up the new arrangement and undoing the old.

Integrating Managerial Cognition and Organizational Economics It is intuitive that cognition and the economic feasibility of strategic change are related. The first is concerned with the role that managers play in deciding whether to initiate strategic change and the second is concerned with the feasibility of implementing the desired change. From the neoinstitutional standpoint, the catalyst for change is to show that the extant orientation in question is based on unacceptable initial conditions, unacceptable operating practices, or conceptual error (Williamson, 1999b). However, the feasibility of change does not require managerial cognition to be underpinned by perfect foresight. Strategic choice is both guided by managerial cognition and the need for managers to come to terms with the considerable inertia firms face. Ideally, we should consider both these aspects of strategy process if we are to realistically account for the tension that exist between new orientations and the change constraints placed on firms by existing forms, systems, and resources.

HYPOTHESES Within this paper we have proposed that strategy content and process are not only necessary elements to understand strategic choice, but are particularly valuable when linked to outcomes such as performance. However, the work in this field has traditionally tended to focus on isolated aspects of the link between strategy and performance (see Pettigrew & Whipp, 1991; Rindova & Fombrun, 1999 for notable exceptions). As a consequence, there has been little theoretical and empirical work devoted to the integration of content and process in explaining the strategy–performance relationship. The subsequent sections make an important contribution to this area of scholarly inquiry by evaluating the relative importance of content and process to e-business performance. This applied context ensures that sufficient richness in the data is available to adequately assess the way content and process drives e-business performance. The hypotheses developed below integrate two content-based and two process-based domains to more completely explain competitive advantage.

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Strategic Content’s Impact on E-Business Performance The content perspective builds on a wealth of empirical support that has examined the relative importance of both strategic positioning and strategic capabilities (Powell, 1996; McGahan & Porter, 1997; Mauri & Michaels, 1998). Early scholarly attention was directed toward industry effects and the moderating effect of environmental conditions on the effectiveness of business initiatives. The importance of market and environmental dynamics is also consistent with a well-established tradition within strategy and organizational theory (Miles & Snow, 1978; Donaldson, 1995). An illustrative example is found in study by Johnston and Carrico (1988). Their study of eleven industries, found that the external environment played a significant role in explaining the link between IT and performance. Industry factors acted as catalysts that set off serious attempts to exploit IT for competitive advantage in airline, financial services, and distribution companies. In less competitive industries (e.g., oil or office equipment) executives did not perceive a need for an all-out effort to build IT advantages. The implications of this work for e-business are that organizational transformation is required whenever conditions in the business environment change. If there is no significant change, then the firm has little incentive to alter its activities significantly. We therefore propose the following: Hypothesis 1. Organizations facing the greater environmental pressure to move online are best positioned to capture e-business performance returns. Another important aspect of the content perspective is that the path to fit is not always externally driven but can arise from internal factors (Henderson & Venkatraman, 1993). This view emphasizes the importance of IT resources (Wernerfelt, 1984; Barney, 1991) and related capabilities (Teece et al., 1997). Firms that achieve excellence in terms of the application of IT will tend to outperform firms in a variety of profit and cost-based performance measures. For example, Oracle’s ability to transform itself into an Internet-enabled e-business would not have been possible without an appropriate IT capability. The wrong technology base, skills, and know-how, would have made such an initiative a massive technological and organizational challenge due to the custom integration required (Sauer & Willcocks, 2003). Building on this literature, a number of scholars have developed operational measures of IT capability. Bharadwaj (2000) classified IT-based resources as: (1) IT infrastructure, (2) technological and managerial skills, and (3) knowledge assets and synergy. Tippins and Sohi (2003) define IT


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competency as consisting of three components: (1) extend to which the firm possesses a body of technical knowledge about IT systems, (2) extent to which the firm uses IT, and (3) number of IT related artifacts. Although it may be possible for competitors to purchase the similar numbers of IT artifacts, it is the use and management of IT that is a socially complex process. This capability normally takes considerable time to develop and offers competitive advantages because it is valuable, rare, and nonimitatible (Barney, 1991). This reasoning allows us to propose the following: Hypothesis 2. Organizations with high levels of IT capability (infrastructure and skills) will be best positioned to capture e-business performance benefits. Strategy Processes’ Impact on E-Business Performance The empirical work that attempts to link strategy process to performance is both paradigmatically diverse and empirically complex (Pettigrew, 1992). As a consequence the empirical results remain mixed and the field has made little progress in investigating the relationship between strategic processes and firm performance (Terarden, Sarason, & Banbury, 2003). For example, some authors have found the extent of an organization’s strategic planning to be a predictor of performance (e.g., Rhyne, 1986) while others claim that there is no systematic relationship (Pearce, Freeman, & Robinson, 1987), or that the link is so tenuous that it cannot be directly measured (Hogarth & Makridakis, 1981). Nevertheless, studies of cognition have found that managerial assessments of the impact of technological innovation strongly influence adoption of new technology (Ginsberg & Venkatraman, 1992). Barr et al. (1992) found that managers’ mental models allow them to make sense of changes in the environment and act within it. Several case studies have shown that strategic changes are more likely to occur when accompanied by shifts in managerial belief structures (Child, 1987; Webb & Dawson, 1991). Collectively, these findings indicate that managerial interpretations of organizational conditions influence the perceived need for strategic change directly and may even provide more objective measures than those commonly used in the rational approaches discussed above. The insights that emerge from these and many similar studies suggest that managerial beliefs offer an appropriate theoretical lens through which we can examine strategic choice. The following hypothesis is proposed:

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Hypothesis 3. Organizations are best positioned to capture e-business when their managers strongly believe in the benefits of an e-business orientation. The ‘‘neo-institutionalist’’ approach differs in that it addresses institutional facilitators of, and constraints to, the implementation of strategy. Carson et al. (1999), suggest that in dynamic and unpredictable environments, it is inappropriate to discuss the formulation of optimal strategic arrangements because switchover costs are high and uncertainty exists as to what is an optimal structure. At best, all a manager can hope for is a ‘‘remedially efficient’’ arrangement – one that represents the best that can be achieved given the limitations of all the affected players and the costs of setting up the new and undoing the old arrangement. The concept of remedial efficiency is relevant to e-business because: (1) it accounts for the uncertainty associated with what is a correct business model, (2) it reflects the fact that there are large set-up and take-down costs in implementing any institutional structure encompassing the Internet, (3) it focuses attention on the fact that there are many players in an arrangement, all of whom must bear some cost if the arrangement is to be successful, and (4) it accounts for those overarching macro-institutional arrangements (legal systems, broadband, etc.) that will impact on issues (1–3). What has been shown to work for one organization might be desirable for managers of others, but may in fact be unattainable when remedial efficiency issues are taken into account. The following testable proposition is derived from this argument: Hypothesis 4. Organizations are best positioned to capture e-business when the constraints (financial, organizational and technical implementation) are low.

EMPIRICAL MODEL AND METHODOLOGY Model Setup The schematic model in Fig. 1 captures the link between each school of thought and e-business performance. According to the model, there are two sets of pressures driving e-business performance: (1) the Business Context – which represents the environmental pressures to move online and the firm specific capabilities to use online information – and (2) Process Constraints. The former pressure is captured in Hypotheses 1 and 2, while the latter as


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STRATEGY PROCESS

STRATEGY CONTENT

Organizational Impediments

Strategic Drivers External Environment

Managerial Beliefs

– Market/Technological and Environmental Pressures to Move Online

– Perceived beliefs

Internal Conditions & Constraints

Change Feasibility – Financial Constraints – Organizational & political constraints – Operational Implementation

– Employee know-how – Infrastructure – Level of usage

Control Variables – Industry and Firmographics – State of Implementation

e-Business Performance Outcomes

Fig. 1.

Links between Organizations and E-Business Performance and the Pressure Driving Them.

identified in Hypotheses 3 and 4 where the ‘‘beliefs of the managers’’ and the ‘‘feasibility constraints that impact on the implementation of change’’ are examined. We apply two sets of empirical analyses to understand how the relationships in our model play out. The first analysis is a simple OLS regression to determine whether or not the model proposed operates in the aggregate. Our intuition suggests that the influence of internal and external pressures will operate both directly and indirectly through managerial beliefs. The second analysis applies finite-mixture regression modeling techniques (assuming mixtures of normal distributions) to determine whether different forms of the model apply to different groups within the sample.

Empirical Data Our four hypotheses are tested using data collected by interviews and a cross-sectional survey of senior managers. The survey was mailed to 2,000 organizations selected from a stratified random sample of firms across seven industry groups. The objectives of this procedure were to ensure the

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relevance and generalizability of results by using a cross-industry sample that varied in markets and technology environments. The questionnaire was addressed to senior managers, with care taken to ensure respondent competency. The number of responses totaled 365 (giving an 18% response rate). Several approaches were used to increase response rates: a personalized cover letter to all respondents, an offer to win a digital camera (worth nearly $500), and an invitation to attend a seminar where the results were to be presented.2 Two reminder e-mails and follow-up phone calls were also used to improve response rates. After eliminating responses due to (1) firms not using e-business or (2) large proportions of missing data, a final sample of 293 responses was used in the analysis. Industry distribution was relatively even across services (39%), government (20%), retail (11%), manufacturing (23%), and agriculture and mining (7%). Firm size was also well distributed, with 46% small- to medium-sized firms (less than 500 employees) and 54% large firms (more than 500 employees). The mean and median sizes for the entire sample were 2,480 and 650 employees respectively. Tests of the distribution of returned questionnaires indicate that no industry or size bias existed in the responses received.

Instrument Development and Validity of Measures Using the strategic business unit (SBU) as the level of analysis, we developed all scales using an extensive and recursive pre-testing procedure. A series of in-depth interviews with senior managers was used to learn firsthand how IT-related activities are being used to drive e-business performance. Academic experts tested the scales for face validity and representativeness. These were then pre-tested with senior managers and further refined. Appendix A lists the constructs, items, and scales used in the study. To ensure the validity of our measures, we examined key informant bias, non-response bias, common method bias, dimensionality, and convergent and discriminant validity. For the sake of brevity we have provided a short summary only. Senior managers were targeted from three functional areas (IT, marketing, and strategy), reducing the impact of key informant bias. Based on responses obtained from a short web-based form sent to all non-respondents, the risk of non-response bias was not considered high. Twenty-five percent of respondents indicated that they were not interested in completing the questionnaire, 10% said the survey was not applicable to their firm, and a further 20% cited a range of reasons why they did not complete


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the form (the questionnaire is too long, we receive too many of these questionnaires with little apparent benefit, and so on). To test for common method bias, we applied Harmann’s ex post one-factor test (Podsakoff & Organ, 1986) across the entire survey, which includes the measures used here. Thirtyeight distinct factors were needed to explain 80% of the variance in the measures used, with the largest factor accounting for only 11% of the variance. Hence, there was no ‘‘general factor’’ in the data that would represent a common method bias. A correlation matrix of the constructs is shown in Table 1. For the reflective constructs, factor analyses of their underlying questionnaire items indicated one dimension for each, making it legitimate to compute Cronbach alphas and to regard them as unitary constructs. We also computed the average variance extracted by these items (Fornell & Larcker, 1981). The fact that these average variances are all above 0.7 indicates adequate convergent validity for their underlying items. Furthermore, the fact that they are higher than the correlations between the various constructs indicates adequate discriminant validity between these constructs.

Method of Estimation Mixture models are particularly useful whenever one is interested in decomposing a population of firms into meaningful segments – because one expects that ambiguity may exist in the data. This technique estimates the likelihood that a specific firm fits into a class of firms for which a particular model applies (Wedel & Kamakura, 2000). The ability to simultaneously identify underlying groups or segments in the data, and then estimate the regression coefficients on the explanatory variables in each segment, allows the researcher to move beyond data pooling and aggregation techniques (see Appendix B for a more detailed explanation of this technique).

RESULTS The results of the OLS and mixture regressions are presented in Table 2 with the effect size estimates shown in Table 4. The OLS estimates provide a basis of comparison to show the extent of heterogeneity in the data and what the failure to account for this implies. Based on the OLS results alone we find support for Hypotheses 1–3. Firms can most likely expect significant e-business performance increases when environmental pressures are high

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Table 1. Performance

IT Infrastructure

Online Activity

IT KnowHow

Organizational Constraints

Financial Cost

Operational Implementation Issues

1.00 0.23 0.13 0.29 0.26 0.13

1.00 0.06 0.15 0.15 0.03

1.00 0.00 0.06 0.05

1.00 0.23 0.13

1.00 0.07

0.73

0.01

0.00

0.08

0.04

0.02

0.22

0.86 0.33

0.84

Management Beliefs

0.06

0.05

0.05

0.09

0.03

0.17

0.39

0.33

0.03

0.16

0.23

0.03

0.02

0.17

0.87

0.26

0.17

0.06

0.15

0.12

0.13

0.11

0.04

0.28

State of Implementation

1.00

Note: (R) indicates a construct measured by reflective indicators. Diagonal elements are the square roots of the average variance extracted. po0.01. po0.05 (two-tailed test).


Performance External pressures IT infrastructure Online activity IT know-how Organizational constraints (R) Financial constraints (R) Operational implementation issues (R) Management beliefs (R) State of implementation

External Pressures

Correlations of Constructs.


Table 2.

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Multiple Regressions and Latent Class Models on E-Business Performance. OLS Estimates

Latent Class Estimates Segment 1 Segment 2 Segment 3 Segment 4

External pressures to move online Organizational conditions IT know-how IT infrastructure Online activity Managerial beliefs

0.88 0.06 (3.53) ( 0.44)

0.02 (1.36) 0.08 (4.18) 0.01 (0.79) 0.95 (4.92)

0.04 0.03 ( 1.48) (1.65) 0.14 0.11 (5.15) (4.27) 0.20 0.01 (20.67) ( 1.49) 2.85 1.03 ( 9.66) (4.60)

0.17 (9.42) 0.01 (0.28) 0.04 ( 3.51) 0.35 (2.57)

0.49 2.54 0.54 (4.97) ( 12.94) ( 4.00) 1.86 1.26 0.49 (3.65) ( 10.31) (6.94) 0.75 0.12 4.95 ( 0.67) (15.92) ( 3.55) 0.02 0.08 0.23 (8.97) ( 3.20) (8.68)

0.51 (5.92) 0.47 ( 3.61) 0.25 (1.75) 0.02 ( 1.38)

0.180 ( 0.501)

0.20 ( 6.05)

0.16 ( 6.45)

0.493 ( 1.355) 0.764 ( 1.887) 0.404 (0.837) 0.109 (0.334) 0.867 (2.420) 0.540 ( 1.440)

0.41 0.36 0.08 ( 2.18) (7.76) (8.86) 0.12 0.05 0.47 ( 3.73) (1.43) ( 9.98) 0.98 0.25 0.07 ( 2.64) ( 13.44) (5.19) 0.27 0.05 0.30 (1.69) (7.98) ( 8.32) 0.03 0.45 0.20 ( 0.91) (11.96) (4.79) 0.10 0.27 0.07 (2.86) ( 6.09) ( 1.70)

(2.253)

0.142 (2.620) 0.094 (1.853) 0.172 (3.207) 0.274 (4.755)

0.152 (2.808) 0.147 (2.795) 0.141 (0.433) 0.141 (0.433)

0.100 ( 1.874) Financial 0.036 (0.657) Operational implementation 0.023 (0.418) issues (OII) State of implementation 0.107 (1.948) Mediating effects External pressuresManagerial beliefs External pressuresOrg. constraints External pressuresFinancial costs External pressuresOII Managerial beliefsOrg. constraints Managerial beliefsFinancial costs Managerial beliefsOII 293 (100) 0.281

Note: t-statistics in parentheses. po0.001. po0.01. po0.05.

1.70 (10.21)

0.092 (1.676)

Feasibility constraints Organizational

Group size (N) (%) R2

0.620

0.204 (0.647) 0.012 (0.032) 0.071 (0.171) 0.090 (1.694)

293 (100) 0.309

88 (30)

0.37 0.04 (6.60) ( 1.16)

52 (17) 0.900

65 (22)

1.04 (9.53)

0.22 ( 9.17) 0.05 ( 1.97) 0.17 (5.41) 0.05 (2.05) 0.26 (9.02) 0.27 ( 7.79) 88 (30)

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(H1), when the IT capability within the firm is at an advanced stage (H2), and when the managerial beliefs concerning the value of e-business are high (H3). On the other hand, feasibility constraints (H4) were not found to significantly influence performance. OLS regression assumes that a single model is appropriate for all firms. Given that there is no indication that this might be true (Hatten, Schendel, & Cooper, 1978), we applied mixture regression modeling. The identification of the segments and simultaneous estimation of coefficients within each segment allow us to directly identify unobserved relationships. The latent class models shown in Table 2 offer considerable explanatory improvement, accounting for a 60% point increase (from 30% to 90%) in R2. According to all the information criteria (see Table 3), the four-segment solution is the most useful. This is based on a combination of the lowest information criteria measures, the highest entropy measure, and the theoretical meaning of the results.3 To increase the interpretability of our results, we compute ‘‘effect size’’ estimates as a means of capturing the differences between the clusters more effectively (see Table 4). The effect size estimates are determined by computing the value of the estimated coefficient for each cluster (bij) multiplied by the mean for each variable (mi), where i is the variable and j the segment or class. This provides a more accurate picture of the contribution of that variable to the dependent variable and allows for aggregation so that direct, mediated, and total effects can be distinguished more clearly. The results indicate that strong effect sizes exist on two variables in particular, external

Table 3.

Measures of Model Fit and Parsimony by Segment. Number of Segments 1

Likelihood AIC CAIC MAIC NEC(S) Entropy R2 DF

2

3

4

5

224.7 475.4 522.9 486.5 — 1.000

211.8 471.3 577.1 494.2 0.021 0.289

201.6 467.2 637.9 502.5 0.016 0.359

169.9 424.4 633.4 471.6 0.013 0.717

139.7 431.8 673.9 490.4 0.008 0.660

0.13 11

0.41 23

0.78 35

0.90 47

0.95 59

Note: Bold items indicate either minimum (AIC, CAIC, and MAIC) or maximum (Entropy) measures.


Table 4.

Effect Size Estimatesa. Segment

External pressure to move online Organizational conditions IT know-how IT infrastructure Online activity Managerial beliefs Feasibility constraints Organizational Financial Operational implementation issues (OII) State of implementation Moderating effects (individual effects) External pressureManagerial beliefs External pressureOrganizational constraints External pressureFinancial costs External pressureOII Managerial beliefsOrganizational constraints Managerial beliefsFinancial costs Managerial beliefsOII Moderating and overall effects (grouped) Moderating effects of external pressureb Moderating effects of managerial beliefsb Overall impact of external pressurec Overall impact of managerial beliefsc Overall impact of organizational constraintsd Overall impact of financial constraintsd Overall impact of OIId Estimated mean performance of group a

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Single Group Estimates

1

2

3

4

6.82

3.46

0.24

4.13

2.48

0.07 0.31 0.04 3.25

0.14 0.53 0.85 9.52

0.11 0.44 0.03 3.53

0.60 0.04 0.15 1.20

0.55 0.58 0.54 0.48

1.48 1.56 0.36

8.18 6.51 15.30

1.72 3.99 2.13

1.52 1.48 0.67

0.63 0.04 0.20

0.05

0.21

0.61

0.05

0.63

2.78

4.90

0.56

2.22

0.23

0.97

5.15

4.68

2.61

2.49

1.53 0.84 0.52

0.69 11.90 3.26

6.06 2.90 2.98

0.63 1.82 0.51

6.06 9.84 4.67

0.33 1.03

5.27 2.82

2.20 0.69

2.82 2.53

1.14 9.56

3.35

7.44

1.52

1.42

11.23

1.22

5.70

1.48

0.79

5.33

3.47 4.47 1.03

3.98 3.82 0.23

1.28 2.06 0.02

2.70 2.00 0.58

8.75 5.81 4.29

0.30

1.93

0.13

0.71

0.24

0.17

0.57

0.08

0.04

0.50

3.21

2.60

2.39

2.90

2.86

Effect sizes based on significant effects (from Table 2) are shown in bold. Excluding the joint effect of external pressures and managerial beliefs. c Excluding the joint effect of external pressures and managerial beliefs, but including the direct effect of the variable in question. d Including the joint effects of external pressures and managerial beliefs. b

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TIM R. COLTMAN ET AL. Segment 1

Segment 3

(Mean Performance = 3.21)

(Mean Performance = 2.39) Ext Press

Ext Press

Mgmt Belief

Mgmt Belief

Feasibility

Feasibility

Smaller Effect Larger Effect

Ext Press

Ext Press

Mgmt Belief

Feasibility

Segment 2 (Mean Performance = 2.60)

Mgmt Belief

Feasibility

Segment 4 (Mean Performance = 2.90)

Fig. 2. Overall Effects by Segment. Note: For the Sake of Clarity, we have not Included the Organizational Capability/Conditions Effect Size. This Construct Revealed Little Variance across Segments and a Fourth Dimension would be Extremely Difficult to Interpret.

pressures to move online and managerial beliefs. In three of the four segments the overall effect sizes across these two variables are strongly positive. But this is only part of the narrative: each segment reveals its own story, providing additional insights that go beyond single group estimates. To aid interpretation we present these results graphically (see Fig. 2). The three-dimensional representation illustrates the overall (direct and indirect) effect of external pressures, management beliefs, and the feasibility of implementation. Capabilities are not shown as there is little variance in the data and a four-dimensional representation would be cognitively difficult to interpret.


369

In the case of segment 1, the highest performing group, firms are most affected by the pressure to move online and the managerial beliefs related to this. The total effect of these two variables is 5:16ð¼ 3:47 þ 4:47 2:78Þ; meaning that it is the direct and moderating effects of the constraints that impair performance. In summary, we can attribute high performance in this segment to strong external pressures, high managerial beliefs, and an ability to overcome organizational constraints that arise from competing business options. In segment 2, the story is vastly different. These firms are driven almost exclusively by their need to overcome operational implementation issues – network performance, information security, brand protection, and customer privacy. This is mediated both by managerial beliefs ( 2:82) and external pressures ( 11:90), but negatively. Similarly, this is the group most affected by financial constraints ( 1:93). Although firms in this segment continue to implement technology, operational implementation issues, and organizational and financial constraints impair performance. Performance in segment 3 is lower than any of the others. Although the direct effect of pressure to move online is insignificant ( 0:24) and that of managerial beliefs is strong (3:53), the performance effect is driven by the moderating effect of these two variables. If we compare mean performance (2:39) with the total effect of both managerial beliefs and external pressures, we see that nearly all of this is driven by these two variables (2:78 ¼ 1:28 þ 2:06 0:56), leaving a slight negative impact to be picked up by the direct effect of organizational conditions and feasibility constraints. Lastly, segment 4, the second best performing group, faces significant pressures to move online (4.13) with slightly less overall impact from managerial beliefs. Firms in this segment are clearly sophisticated operators with a large impact from high IT know-how (0.60) and as such do not spend time arguing about the way in which IT decisions are made, as is evident in low organizational, financial, and business constraints. In summary, while these firms are supporters of e-business, they are also aware of the limits of technology-based solutions and appear to place greater importance on complementary activities and know-how. All these analyses lead to similar conclusions. First, the groups differ in three ways: in terms of constraints, in terms of distribution of online activity, and, very slightly, in terms of infrastructure. What is telling is that industry, size, government ownership, state of implementation, the beliefs of the managers, and the extent of online pressures do not differ significantly between the groups and fail to predict group membership. Segment 4, the

370


second highest performing segment, differs from the best performing group in three significant ways – they are more likely to engage in government-related online activity (41% versus 31%), less likely to be engaged in B2C online activity (62% versus 42%), and have a more effective IT Table 5.

Means by Segment. Segment

Performance External pressure to move online Organizational conditions IT know-how IT infrastructure Online activity Managerial beliefs Feasibility constraints Organizational Financial Operational implementation issues (OII) State of implementation Structural variables Percent multinationals Percent government/quasi-government Size (employees) Online activity distribution Percent having B2C Percent having B2B Percent having B2G or G2B/G2C Industry breakdown Primary industry (mining, construction, etc.) Manufacturing Transport and distribution Retailing Information technology (IT) Finance and banking General business services (exc. IT) General business services (inc. IT) Government or government-owned

F

1

2

3

4

3.21 4.00

2.60 4.02

2.39 4.04

2.90 7.87 3.96 0.09

3.54 3.87 3.59 3.40

3.68 3.96 4.36 3.48

3.60 3.96 4.15 3.51

3.82 4.20 3.19 3.19

0.55 1.12 2.07 1.70

2.97 3.27 2.93 2.57

3.43 3.36 3.01 2.64

3.08 3.12 2.84 2.66

2.91 3.07 2.59 2.52

2.68 1.12 1.63 0.35

62% 12% 2,066

54% 13% 2,027

61% 16% 2,292

63% 22% 1,210

0.41 0.74 0.30

62% 93% 31%

70% 86% 36%

70% 92% 35%

42% 88% 42%

2.54 0.76 1.53

7% 29% 9% 10% 9% 15% 10% 19% 11%

10% 21% 6% 13% 8% 19% 13% 21% 15%

8% 30% 11% 14% 6% 7% 14% 20% 12%

11% 26% 19% 4% 0% 15% 8% 8% 12%

0.18 0.49 1.15 0.95 0.97 1.59 0.13 0.36 0.81

Note: Segment membership was determined by assigning each observation to the segment it was considered most likely to belong to based on the maximum posterior probability. po0.001. po0.01. po0.05 (two-tailed test).


371

infrastructure (4.2 versus 3.87). Segments 2 and 3, the two lowest performing groups, have more online activity (4.36 and 4.15 respectively) compared to either segment 1 (3.59) or segment 4 (3.19). Segment 2 firms face higher levels of organizational constraints (3.43) compared to the other three segments (2.97 for segment 1, 3.08 for segment 3, and 2.91 for segment 4). As a final check on this classification scheme we also ran a multinomial logit with segment membership as the dependent variable and our explanatory constructs as independents. Overall, the MNL is able to correctly predict segment membership in 45% of the cases. When misclassifications occur, segment 1 is misclassified as segment 4 and vice versa, with the same true of segments 2 and 3. Lastly, to demonstrate external validity, the segments selected were evaluated against variables other than those used to generate the solution (Punj & Stewart, 1983). Two analyses of this type were conducted. First, using the four-segment solution as the independent variable we ran a discriminant analysis on ‘‘the level of investment in e-business.’’ The function produced discriminates between segments (po0.10) and correctly identified 88% of the cases where investment had decreased and 52% of the cases where investment had increased. Second, we used some additional variables in our survey (e.g., variables not included in the latent class and multinomial logit (MNL) models) to predict membership in the four segments. This function also discriminates between segments (po0.02) and correctly identified 47% of the cases in a calibration sample (against a chance expectation of 29%) and 34% in a cross-validation sample (against a chance expectation of 27%). The more important variables in the function relate to the ability of the organization to adapt internal business systems to e-business, willingness to share data across departments and the importance of after-sales service and cross-selling competencies. These results provide some external validity to the segment solution and suggest that it is a useful guide to further our understanding of e-business performance (Table 5).

DISCUSSION While earlier research has examined the factors driving adoption of IT resources (e.g., relational databases, computer aided software engineering (CASE), and object-oriented technologies) or administrative processes (e.g., office, groupware, or decision support tools), there has been little research that integrates content and process to develop a more sophisticated understanding of the complex drivers of e-business performance (Chatterjee,

372


Grewal, & Sambamurthy, 2002). That IT is aligned with the external and internal subsystems is a given, but what is poorly understood is the contingent nature of organizational impediments and the influence of managerial cognitions. Our empirical results tell us that beliefs and commitment by managers to an e-business future intervene strongly in the relationship between external pressure and performance. High performance can be expected whenever this aspect of strategy process is aligned with content-based pressures (see Fig. 2, segments 1 and 4). When the perspectives are misaligned, lower performance can be expected. In segment 3 the managers believe in the value of e-business, but the environmental pressures do not demand such a move and in segment 2 the barriers to e-business adoption inhibit any gains in performance. These results not only reveal the most important drivers of e-business performance, but they also hint at what we may be able to ignore. For example, data pooling techniques based on observed factors – firm size, industry type, and corporate status – offer little insight. Only when the unobservable factors that characterize modern business are taken into account does our model’s predictive power increase. By using segmentation techniques we are able to provide an explanation for why Hypothesis 4was not supported in the standard regression analysis. Examination of the coefficients for each segment reveals that most paths are highly significant, but directional differences between the various segments cancel out statistical significances at the aggregate level. Clearly, hypothesis testing based on assumptions of homogeneity across a data set deserves more careful consideration.

Implications for Research and Practice To the best of our knowledge, few empirical studies have integrated strategy content and process perspectives to examine in a systematic manner the influence of strategy content and process on e-business performance. We contend that in the absence of luck, companies interested in exploiting the value opportunities in e-business must start with a thorough analysis of content-based pressures and process-related constraints before they decide to move online. The content domain reflects the stimulus for structural change in the organization and the process perspective provides the intervening drivers. This gives advantages for academics and practitioners by helping them to understand (a) why firms in the same industry respond differently (because of different managerial beliefs) and (b) how firms can


373

maximize the effectiveness of their strategic responses (by understanding the limits to implementation that arise in the form of organizational, financial, and business impediments). These findings are consistent with research on strategic change where, despite exposing a wide range of conflicts and unanswered questions, (Rajagopalan & Spreitzer, 1996) concludes that environmental and organizational conditions, managerial cognitions, and managerial action are crucial constructs in explaining strategic change and firm performance. This requires scholars to adopt an integrated approach that captures both content and process. The consequences of failing to adhere to this practice are evident in the strategic management literature where large errors characterize empirical studies. For example, while Schmalensee’s (1985) study of industry and firm effects concludes that industry effects play a central role in determining profitability, over 80% of the total variance in business unit returns remained unexplained. Although an improvement, the seminal contribution by Rumelt, Schendel, and Teece (1991) that sparked so much interest in the importance of firm effects, is also characterized by a large degree of unexplained variance (36.9% and 44.8% across both samples examined). These examples are reflective of a strategy literature that is inundated by high levels of unexplained variance. The evidence reported in this paper presents a different story and should be of interest to research scholars and practitioners for several reasons. Firstly, employing an integrated approach that captures strategy content and process allows us to directly address the important interactions that contribute to e-business performance. Secondly, we provide a statistical technique that breaks the data into homogeneous segments to dramatically improve the percentage of variance explained (from 30% to 90%). This provides scholars and practitioners with a more sophisticated understanding of e-business performance.

Limitations and Possible Extensions Like any study, our research has limitations that qualify our findings and present opportunities for future research. Although, cross-sectional designs are often justified in studies such as this one – where the aim is to identify emerging theoretical perspectives – this type of research design does not fully capture the complexity in e-business strategy. Therefore, the results of this study should be viewed as only preliminary evidence regarding the importance of an integrated approach to e-business performance. The

374


authors recognize that stronger support for the analysis would come from measuring performance prior to and after an e-business implementation – highlighting the now customary call for the use of longitudinal studies to corroborate cross-sectional findings. Lastly, when applying models of segmentation, one should be mindful that the results are at best workable approximations of reality. One cannot claim with complete certainty that segments exist or that the distribution of unobserved heterogeneity can be captured (i.e., that it is discrete rather than continuous). While we have been rigorous in our approach to segmentation, these are after all applied techniques that seek only to approximate the distribution of heterogeneity. Hence, these results remain inconclusive and demand replication. Nevertheless, they do provide new insight into the factors that are likely to drive increased levels of e-business adoption across the value chain. Academics will find these results important because they provide a more systematic way to analyze the complex interaction between technology and organizational structure. This method will enable senior managers to anticipate and better plan for the e-business challenges ahead, and allow operational managers to act tactically in a way that is responsible and appropriate for the environment in which they operate.

CONCLUSION For more than four decades the field of strategic management has focused on increasing our understanding of the way strategic pressures, capabilities, processes, and actions impact firm performance. However, as claimed at the start of this paper, the failure by scholars to integrate content and process schools of thought may have restricted progress toward a more complete understanding of the link between strategy and performance. The findings of this study support this perspective by showing that each of these four perspectives provide important insight to understanding how organizations build rent generating resources to achieve improved performance. However, we caution against approaches that assume homogeneity. Our analysis shows that the interaction between these theoretical perspectives is complex and needs to be studied from various angles that capture the heterogeneity that exists in modern business. The segmentation approach used in this paper offers an exciting way to capture these differences in a more systematic way. This will allow senior managers to better plan for the e-business challenges ahead.


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NOTES 1. The terms capabilities, competencies, and core competencies are essentially synonymous. According to Sanche, Heene, and Thomas (1996), the only difference between these terms lies in the fact that core competencies are capabilities that achieve competitive advantage. Because the focus of this study is concerned with capabilities that lead to superior positional advantage, we can use the terms interchangeably in this thesis. 2. The value of these inducements can be seen by the fact that two seminars were held and were attended by nearly 500 people. 3. Solutions with more than four segments are also neither parsimonious nor theoretically compelling when one looks at the segment sizes (some of which are small) and the structure of the models (which do not show greater distinctiveness in the added segments).

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APPENDIX A. QUESTIONNAIRE ITEMS Definition of e-intelligence. The term e-intelligence was used in the survey to capture a complex set of e-business activities: e-intelligence is defined as representing the creation of knowledge from the information flowing into and through the firm from its web-based systems. Constructs and Measures Construct Performance

Measures The financial category comprised six measures: return on investment, market share, annual growth in revenue, total sales, and reduction in operating and production costs ða ¼ 0:91Þ 1. To what degree have your expectations been met in return on investment (after tax)? 2. To what degree have expectations been met in the cost of operations? 3. To what degree have expectations been met in terms of market share? 4. To what degree have expectations been met in terms of sales? 5. To what degree have expectations been met in terms of the cost of transactions with customers? 6. To what degree have expectations been met in revenue growth? Five items were used to derive an operational and overall effectiveness measure across various strategic dimensions: the ability of e-business to offer new customer insights, to target the most profitable customers, to work faster, more flexibly, and with greater precision and control ða ¼ 0:80Þ 1. To what extent have e-business applications provided benefits in terms of new customer insights?


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2. To what extent have e-business applications provided benefits in terms of targeting customers? 3. To what extent have e-business applications provided benefits in terms of faster response times? 4. To what extent have e-business applications provided benefits in terms of customized products and services? 5. To what extent have e-business applications provided benefits in terms of information access? These various measures were then combined into one scale that measured overall performance dimensions ða ¼ 0:82Þ Market/technological pressures to move online (external environment)

In this study we chose not to replicate complex measures of the external environment, since our interest lay only in the extent that external pressures are driving firms to adopt e-business. This construct was measured using a single item: 1. Market, technological and/or environmental pressures are moving my firm toward: less (1) or more (5) online services and/or products Note: Rossiter (2002), argues that there is no problem in using a single item measure when respondents understand clearly that only one characteristic is being referred to in the question. Market, technological, and environmental pressures are widely understood as external pressures that drive firms toward more or less online products and/or services. Measures of this type are referred to as concrete singular and can be captured adequately using single item measures

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Internal conditions and constraints (organizational conditions)

The organizational context exerts selection pressures that account, in large part, for differences in strategic choice and performance. These readily identifiable organizational capabilities are both tangible (e.g., physical IT infrastructure) and intangible (e.g., reflected in human know-how) IT know-how 1. To what extent (small ¼ 1; large ¼ 5) is information technology know-how important to your business unit? IT infrastructure 1. Indicate the level of e-mail, Intranet, and Internet application usage Level of online activity 1. What is the relative amount of B2B activity in comparison to your bricks and mortar activity? 2. What is the relative amount of B2C activity in comparison to your bricks and mortar activity? 3. What is the relative amount of B2G activity in comparison to your bricks and mortar activity? Note: we combined these items into a single formative index, no inter-item correlations are calculated because formative items are expected to be independent, making consistency measures inappropriate (Chin, 1998). Our concern with this construct was to obtain a measure of firms with more versus less IT infrastructure.

Managerial beliefs

Managerial beliefs were measured by asking respondents to rate the extent to which they believe that e-business systems will create new operational and strategic benefits. Five items


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were used to capture beliefs they are combined into a multi-item reflective scale ða ¼ 0:72Þ 1. To what extent do you believe the Internet is improving the competitive standing of your firm? 2. To what extent would relationships with major customers/partners have suffered if we had not implemented e-business initiatives? 3. To what extent is it easy to see how eintelligence systems would create new value for our major customers/partners? 4. To what extent will customers and trading partners recognize the opportunity for joint profit as a result of my business unit’s eintelligence strategy? 5. In the next 2 years it is my expectation that the application and development of web-based systems in my firm will have a relatively minor/major strategic impact Feasibility constraints

Three separate items were used to measure organizational and technical ‘‘feasibility constraints’’: (1) financial constraints entailed in setting up new e-business operations, (2) the organizational and political constraints incurred in setting up and taking down complex IT systems, and (3) the operational implementation issues incurred in terms of security, reliability, and privacy considerations Organizational inertia ða ¼ 0:70Þ 1. Gaining consensus among the key decision makers in my organization is a major hurdle in deciding on new business strategies 2. When deciding among strategic alternatives in my firm, political influence and parochial interest play a crucial role

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Financial constraints ða ¼ 0:82Þ 1. In your business unit, to what extent has the cost of infrastructure constrained your organization’s ability to develop an integrated approach to customer data management and customer web interaction? 2. In your business unit, to what extent has the cost of IT personnel constrained your organization’s ability to develop an integrated approach to customer data management and customer web interaction? Operational implementation issues ða ¼ 0:69Þ 1. To what extent have decisions regarding the implementation of an e-intelligence strategy been influenced by network performance problems? 2. To what extent have decisions regarding the implementation of an e-intelligence strategy been influenced by information security? 3. To what extent have decisions regarding the implementation of an e-intelligence strategy been influenced by brand protection? 4. To what extent have decisions regarding the implementation of an e-intelligence strategy been influenced by customer privacy? State of implementation

A number of studies have shown that firms with more advanced states of implementation can expect greater performance returns than those with relatively immature states of implementation (e.g., Chircu and Kauffman, 2000). Differences in the state of e-business implementation range from ‘‘the pilot program stage’’ to ‘‘successful integration into core systems’’ to having ‘‘been wound down because they have proven to be unprofitable’’


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APPENDIX B. MIXTURE REGRESSION MODELING Mixture models assume that we are interested in decomposing a population of firms (indexed by k) for which we have a set of n observations yn ¼ ðynk Þ; which we believe is a mixture of S segments in proportions p1, y ,pS (note: all indicators in bold are vectors). Given that the observations ynk come from segments, the conditional distribution function of yn can be represented as f S ðyn jhS Þ; where hs is the vector of unknown parameters associated with the specific density function chosen, e.g., normal, Poisson, multinomial, Dirichlet, exponential gamma, or inverse Gaussian. Mixture models are estimated using maximum likelihood, where the vector QN/ ¼ ðp; hÞ is estimated based on the likelihood of / being Lð/; yÞ ¼ n¼1 f ðyn j /Þ; where P f ðyn j/Þ ¼ SS¼1 pS f ðyn j/S Þ represents the unconditional probability of yn given /. Once an estimate of / is obtained, it is a simple task of using Bayes’ theorem to calculate the posterior probability that any firm n with yn comes P from any segment s, Pns ¼ ps f ðyn jhs Þ= SS¼1 ps f ðyn jhs Þ: Mixture regression models, the procedure used here, are estimated in an identical way to mixture models except that we are interested in predicting the means of the observations in each segment by using a set of explanatory variables (Wedel & DeSarbo, 1995). For each segment s we can therefore identify a linear predictor Znsk that is the product of a set of P explanatory variables. For example, in the case of the normal distribution the link function would be simply Znsk ¼ msk : In the mixture regression case the parameters being estimated are once more /s ¼ ðps ; hs Þ; with hs ¼ ðbs ; ks Þ; where ks is a measure of dispersion in the distribution of segment s (in the case of the normal distribution, ks would be the variance of the observations in the segment). Like any clustering technique, the appropriateness of mixture models is determined first by theory and second by the ability to find meaningful and significant differences in the population at hand. There is no single criterion for the choice of the number of segments. One such set of criteria, known as information criteria, is based on assessing the degree of improvement in explanatory power adjusted for the number of degrees of freedom taken up by the estimation of additional parameters (essentially adjusting for overparameterization): C ¼ 2nLnðLÞ þ Pd; where L is the likelihood, P is a penalty equal to the number of parameters estimated, and d is a constant. The most common information criteria are the Akaike (1974) information criterion (AIC), which arises when d ¼ 2; and the consistent Akaike information criterion (CAIC), where d ¼ LnðN þ 1Þ and N is the number of firms. The CAIC is more conservative and is skewed to models with fewer

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segments as it imposes an additional sample size penalty. In addition to dealing with over parameterization as the number of segments increases, one needs to be assured that the segments are sufficiently distinctive. To do this, the estimated posterior probabilities of segment membership should be compared. Celeux and Soromenho (1996) propose a normed entropy criterion – NECðSÞ ¼ E S =½ln LðSÞ2ln Lð1Þ2where ES is an entropy measure accounting for the separation in the estimated posterior probabilities and ½ln LðSÞ ln Lð1Þ adjusts for over parameterization relative to a single segPN PS ment model. ES is measured as 1 p ns lnðpns Þ=N; where pns is S¼1 n¼1 the posterior probability of firm n being in segments. Ultimately no single criterion appears able to determine the ‘‘correct’’ number of segments. One must rely on a number of criteria as well as the structure of the models arising and how they relate to the theory being tested.

EMERGENT STRATEGIES AND THEIR CONSEQUENCES: A PROCESS STUDY OF COMPETITION AND COMPLEX DECISION MAKING Quintus R. Jett and Jennifer M. George ABSTRACT Using an Internet-based business simulation, we examine emergent strategy processes and their consequences in a competitive environment. We find that the emergent decision processes of management teams vary in the extent to which they entail forward looking, anticipatory thinking and experimentation, and the attention the teams pay to their organizations’ capabilities. In dynamic and uncertain environments, information search activities and decision processes are key determinants of organizational performance. Our results suggest that effective emergent decision processes necessarily include elements of deliberate strategy. Deliberate forms of strategy making, such as formal planning, are ill advised and often infeasible in highly dynamic and uncertain environments. Formal planning, although serving many worthwhile purposes, can become a ‘‘rigid, Strategy Process Advances in Strategic Management, Volume 22, 387–411 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22013-2

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cumbersome routine’’ (Quinn, 1982, p. 15) that inhibits creative responses to the unexpected. While deliberately and exhaustively considering options to reduce uncertainty certainly has its advantages, it also consumes valuable and scarce time, and can detract from quick and effective decision making on the part of management teams (Eisenhardt, 1989). Moreover, in highly dynamic and uncertain environments, deliberate plans and strategies based on perceived conditions at a specific point in time may become disadvantageous when conditions change (Mintzberg & Waters, 1985). Recognizing the downfalls of deliberate strategy in turbulent environments, strategic management scholars have focused on emergent processes of strategy as feasible alternatives to ‘‘rational’’ and analytical modes of strategy making. For instance, Eisenhardt (1989) found that effective management teams in high-velocity environments track real-time information rather than emphasize planning. Quinn (1982) found that when faced with new problems or opportunities in a changing environment, managers curb irreversible commitments at the outset, treat newly formed problem resolutions as tentative, and gradually make their intentions more concrete as they gain more knowledge in real time. This kind of process allows managers to improve the quality, accuracy, and timeliness of the information they rely on to make decisions as they seek to attain their strategic goals. Within this logic of incrementalism, strategy is an iterative and evolutionary process rather than a formal unchanging plan that is based on comprehensive analyses (Lindblom, 1952; Quinn, 1982). Nevertheless, managers’ a priori goals and intentions play a role in the emergent strategy processes (Quinn, 1982). Theories and research on emergent strategy processes focus on adaptive managerial decision making in the face of unforeseen events and uncertain problems and opportunities (e.g., Mintzberg & Waters, 1985). While this work has advanced our understanding of the strategy-making process, studies that isolate emergent strategies and their potential effects have been very limited. This is partially due to the methodological challenges of studying how managerial decisions and the decision environment interact over time (Mintzberg & Waters, 1985) and contribute to the organizational performance (Henderson & Mitchell, 1997; Schendel, 1997). Research in this vein has frequently focused on a single organizational case, such as Burgelman’s (1994, 1996) research on Intel Corporation’s strategic exit from the memory business in the 1980s. Comparative studies to examine emergent strategies and their outcomes are less common because of the challenges of obtaining in-depth and sometimes confidential access to managers in multiple organizations. Furthermore, the inherent diversity among firms makes it difficult to isolate the different outcomes that can arise from

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dissimilar decision processes. One approach has been to identify and focus on firms with similar histories and/or capabilities that are responding to the same decision-making issues during the same time period. For example, Noda and Bower (1996) adopted this approach in their study of regional companies that resulted from the 1983 breakup of the Bell telephone system monopoly in the United States. Unfortunately, settings that enable researchers to differentiate emergent strategy processes and their performance outcomes in this way are rare. Using an alternative approach to differentiate emergent strategies, we conducted a process study of executive teams competing in an interactive business simulation (i.e., a simulation that has human decision makers interacting with a computing environment in order to resolve a business problem). In our comparative and qualitative study, ten teams of executives with comparable skills and experience levels engage in strategies to maximize the economic performance of a simulated organization and outperform other teams. We examine teams’ interaction with the evolving simulated environment, and we compare the decision activities of superior- and mediocre-performing teams. Our research question is: What emergent processes explain the diverging decision outcomes of management teams in dynamic and uncertain environments? The use of simulated environments is uncommon in strategy research. Traditionally, the study of emergent processes has involved the use of retrospective techniques, such as interviews, which depend on the subjective recollections of decision makers, or observation techniques, such as ethnographies, that are constrained by the inability of a researcher to be in many relevant locations at the same time. We chose an interactivesimulation method to investigate emergent strategies for three reasons. First, researchers can use this approach to study decision makers in a complex, uncertain, and dynamic environment – one in which they must develop, rely on, and learn from emergent strategies. Second, researchers can use this approach to manipulate the options and conditions of decision making, so that emergent processes can be compared in a controlled manner across decision makers. Third, when implemented on an Internet platform, this approach can provide researchers with an unbiased record of unfolding decision-making events. Thus, researchers can study strategic decision processes with impartial data, which is valuable but sometimes difficult to acquire in studies of emergent strategy (Mintzberg & Waters, 1985) and studies of strategy environment performance interaction (Schendel, 1997). The use of an interactive simulation to examine emergent strategies has additional advantages. For example, interactive simulations can be used to

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study both decision processes and decision outcomes, contributing to our understanding of decision-making effectiveness (Eisenhardt & Zbaracki, 1992). In an interactive simulation with multiple participants engaged in competition, the processes of rivalry could also be explored. Managers in rival organizations view competition and unfolding events subjectively, based on their own operating contexts (Chen, 1996; Porac & Thomas, 1994). Interactive simulations provide researchers with a rich environment in which to capture the contexts of multiple rivals and explore how they respond to the cycles of competitive action and response (e.g., Chen & MacMillan, 1992; Chen & Miller, 1994). For example, simulations allow researchers to explore how the actions of rival decision makers form the structure of competition and, conversely, how each rival decision maker is affected by the competitive structure (Schendel, 1997). In sum, in addition to enabling researchers to isolate emergent strategies and their consequences, interactive simulations can add to our understanding of the process of rivalry and decision-making effectiveness. In this study, we focus on the emergent decision processes of management teams and how the emergent processes of high-performing teams differ from the processes of low-performing teams. We find a number of differences in decision process within our study that are measured by teams’ choices and examinations of task-related information. The study’s highest-performing team, which clearly dominated the other teams, acted most deliberately to maximize its organization’s capabilities. The team acted more quickly than the other teams to obtain and produce feedback that reduced the task environment’s uncertainty, and the team focused early and routinely on the critical capability that determined future cumulative performance. In contrast, a number of low-performing teams reacted quickly to immediate performance outcomes, but failed to take proactive steps through the development of organizational capabilities. In other words, they responded to the uncertainty of events in a purely reactive fashion that suggested low levels of deliberation and forward-looking strategies. On the whole, within an uncertain context that required all teams to engage in an emergent decision processing, the decision processes of lower-performing teams were least deliberate, whereas the highest-performing team exhibited the most evidence of forward thinking and attention to long-run capabilities. These results call attention to the necessity of combining deliberate and emergent processes when task environments are dynamic and uncertain. In the next section, we describe our methodology. We follow with a description and interpretation of key findings and a discussion of how our study advances strategic management research. We conclude with implications for future research.

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METHOD Research Setting Littlefield Technologies is an interactive simulation where multiple teams manage identical simulated factories. In the computer-mediated exercise, each team is provided with a manufacturing plant containing three stations. Simulated plant orders come into Station 1 for processing, pass serially through Stations 2 and 3 for additional processing, and then return to Station 2 for a final process step before leaving the plant (see Fig. 1). The plant earns a specific level of cash when an order is completed within the contracted delivery time. The cash payment decreases toward zero with the growing lateness of the order. The goal for each team is to maximize the economic performance of its plant and exceed the performance levels of other plants, which include the competing plants that are managed by other teams and a fully automated ‘‘do-nothing’’ plant that retains the same decision settings throughout the exercise. Much of the data provided to teams during the simulation are stochastic, and teams have incomplete information about a number of factors that drive plant performance. Thus, the

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A Team’s View and Main Interface to its Simulated Factory.

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setting provides high levels of uncertainty that compel all teams to make decisions that are emergent.

Participants Fifty-four executives in a two-year EMBA program participated in the simulation study as an ungraded assignment during regularly scheduled class time in order to provide a shared basis for discussions on decision making in complex environments. The average age of the executives was 37, and they had an average of 14 years of work experience. Outside facilitators had previously organized the 54 executives into ten teams, which served as ongoing project groups for team assignments in the EMBA program. Each team had no more than six members, had no formal leader, and was organized to be diverse in educational background, industry expertise, and years of experience. Each team had at least one member who had either formal education or work experience in production and operations management. The ten teams received identical instructions about the simulation exercise, and each team was provided with a simulated plant to manage. In order to operate their plant, each team was allowed use of a single laptop computer in a private, assigned breakout room.

Task Each team was responsible for managing the capacity and lead time of a factory that produced a brand new satellite receiver. The plant was set up to produce the receivers for approximately nine simulated months, after which time production of the receivers would cease and the plant would be retooled. In the initial months, demand was projected to grow at an approximate linear rate, stabilizing after about five months. After another month, demand was expected to decline at an approximate linear rate. Although orders arrived randomly to the factory, it was expected that demand, on average, would follow a certain trend. (Fig. 2 indicates how a participant would see the first 100 days of market demand in the simulation). A key priority in the simulation is managing a plant’s capacity, taking into account the complex demand pattern. Production delays resulting from insufficient capacity undermine promised lead times, resulting in economic penalties for late orders. Moreover, factories with sufficiently high capacity


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14 12

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Market Growth at an Average Linear Rate.

to reduce lead times can gain premium economic rewards under a fast leadtime contract (described below). Importantly, teams manage their plants in a competitive environment given that each team faces the same set of potential decision points, the same number and timing of incoming orders, and the same opportunities as all other teams to achieve economic gains and surpass rivals. Teams whose decisions result in the effective management of plant capacity and reduction of lead times have an advantage. While the teams operate in a competitive environment, it is not a zero-sum form of competition given that all teams have the same inputs, access to information, and potential decision points. Each team has an opportunity to achieve at a high level of performance, irrespective of the actions of rival teams. Each team started managing its plant on day 50 of a 268-day simulation. The plants of all teams were initially set up the same: one machine at each of the three plant stations. The teams are not informed explicitly in the instructions that the initial plant set up does not have sufficient capacity to fill the increasing number of orders. While eventual insufficient plant capacity is not made explicit, teams can potentially infer the need to increase capacity from information available to them about growth in demand up until day 150 and early signs of insufficient capacity on day 50. Teams eventually realize that they must buy one or more additional machines to avoid longer lead times and resulting lower economic performance as the simulation

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proceeds. Teams also have the option to sell machines for a retirement value whenever they choose. Another plant decision, in addition to buying or retiring machines, is changing the scheduling priority at Station 2, which performs both the second step and the fourth (final) step in production. On day 50, the jobs at Station 2 are initially scheduled First-In-First-Out (FIFO). After a team takes control of its plant on day 50, team members have the option to change scheduling priority at Station 2 whenever and as often as they like. They have three scheduling alternatives to choose from: the original FIFO schedule, a schedule that always gives first priority to step 2 jobs, or a schedule that always gives priority to step 4 jobs. The most complicated potential decision teams can make is changing ‘‘lot size’’ (i.e., the extent to which an order is broken into separate lots during production). Each order is to deliver 60 satellite receivers, and each incomplete order initially travels through the factory as one production lot of 60 satellite kits. After a team takes control of its factory on day 50, it can switch the lot size of incoming orders into any one of the following choices: 1 lot of 60 receivers, 2 lots of 30 receivers, 3 lots of 20 receivers, or 5 lots of 12 receivers. Each lot travels independently through the factory, but an order is not shipped until all the lots that make up the order are completed. Breaking up an order of 60 kits into multiple lots has competing effects, although this is not explained to the teams. On the one hand, smaller lots move through the plant at an accelerated pace, enabling the plant to process orders more quickly. The opposing effect is that at one of the three stations (not specified to the teams), breaking up an order into multiple lots requires more production time due to a required set up activity. Therefore, to the extent that a team breaks up an order into more lots, it increases the processing time for the order at one station (a negative effect on production lead time and possible cash payments) while reducing the processing time for the order at the two other stations (a positive effect on production lead time and possible cash payments). If a team can discover which of the three stations produces the adverse effect with multiple lots, it can purchase more machines (additional capacity) at that station to compensate. In summary, the lot size decision enables teams to greatly enhance the economic performance of their plants if they can learn to manage its effects. If they do not learn about the complexities of the lot size decision, or do so late in the simulation, the economic performance of their plant is adversely affected. The final kind of plant decision available to teams is the factory’s performance contract. Each team has two contracts to choose from. In the default contract, jobs completed within 1 day earn $1,000. Late jobs incur a


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revenue penalty of $500 per day (prorated by fractions of a day), and jobs which take longer than 3 days to complete earn no revenue. In the fast leadtime contract, jobs completed within 1/4 day earn $1,500. Late jobs incur a penalty of $250 per hour (prorated by fractions of an hour), and jobs which take longer than 12 h to complete earn no revenue. A summary of plant decisions is provided in Table 1. When the assignment begins, 50 days of history are available for each team to review. We set the simulator clock to run at a rate of 1 simulated day per minute, giving the teams 168 min to manage their plants between days 50 and 218. After day 218, an additional 50 simulated days are executed at once using the plant’s current (day 218) settings. Thus, there is a total of 268 simulated days corresponding to a product life cycle of about nine months. When a team makes a plant decision, there is a time lag of approximately three simulated days – three actual minutes – before the effects of the decision are observed on the plant indicators. This time lag is noted explicitly in the task instructions that teams receive. To make informed plant decisions, teams can examine a number of plant performance indicators at any time during the simulation. These indicators include average production lead time per simulated day (which determines contract performance), average revenue per day, and average queuing and utilization per day at each of the three stations. Longitudinal measures of each plant indicator can be viewed graphically, in a pop-up window that graphs the current history of that variable, or they can be downloaded in a spreadsheet format. Figs. 3a and 3b show, respectively, a sample graph of the average utilization of machine 1 in one of the plants from days 0 to 150 and a sample of data from the corresponding downloaded spreadsheet. Each team can also access information concerning its plant’s competitive standing vis-a`-vis the automated do-nothing plant and the plants of the other nine teams. Feedback on competitive standing is presented in the format of a table that ranks and lists the cash positions of all plants. This enables each team to view its current cash position relative to other plants. However, each team can only make inferences about how other teams are achieving their performance since the plant decisions of the other teams remain undisclosed. Feedback on plant performance indicators and competitive standing is updated and available to teams on a continuous basis, providing them with the opportunity to learn about their plant and the competition as the simulation progresses, to make informed decisions, and to adjust prior decisions. The ability to access and process real-time information and make and revise decisions accordingly suggests that team-managed factories should

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Table 1. Decision

Decision Variables.

Description

Number of machines at each station

Purchase or retirement of machines at Stations 1, 2, or 3

Lot size of orders

The number of lots that an order of 60 kits is split into as the order progresses through the plant Each lot travels independently through the plant, but the order is not shipped until all the lots that make up the order are completed An order’s process time is proportional to lot size at two of the stations and independent of lot size at 1 station Orders pass through Station 2 twice, in steps 2 and 4 of the 4 step production process Teams can control which orders get priority The contract determines the cash payout that the plant receives for an order based on the delivery time

Processing priority at Station 2

Contract

Values Purchase prices: Station 1 – $90,000 Station 2 – $80,000 Station 3 – $100,000 Salvage value of each machine: $10,000 Default setting at start of task: 1 machine at each station Options: 1 (one lot of 60 kits) 2 (two lots of 30 kits) 3 (three lots of 20 kits) 5 (five lots of 12 kits) The lot size effects on each station are not provided to the management teams, and must be discovered Switching costs: $ 0 Default setting at start of task: 1 batch of 60 lots per order

Station 2 processing options: First-in-first-out (FIFO) Priority to Station 1 orders Priority to Station 3 orders Switching costs: $0 Default setting at start of task: FIFO Contract options: In the default contract, jobs completed within 1 simulated day earn $1,000. Late jobs incur a revenue penalty of $500 per day (prorated by fractions of a day), and jobs that take longer than 3 d to complete earn no revenue. In the fast lead-time contract, jobs completed within 1/4 of a simulated day earn $1,500. Late jobs incur a prorated penalty and jobs that take longer than 1/2 a simulated day to complete earn no revenue.

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Emergent Strategies and their Consequences 1.2

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Utilization 0.157639 0.315278 0.472917 0.294444 0.627674 0.496632 0.568171 0.850579 0.315278 0.157639 0.315278

(a) Machine 1 Utilization of a Plant on Day 75. (b) Machine 1 Utilization of a Plant (Subset of Downloaded Data Corresponding to Fig. 3a).

perform better than the automated do-nothing plant. In contrast to the automated plant, teams can use the feedback they receive to revise their plant’s settings and potentially enhance the plant’s operating performance. In addition, there can be meaningful variation in performance among the team-managed plants, because each team anticipates, responds, and learns from their plant’s feedback in differing ways. Teams that are better able to process information and respond to feedback are likely to perform better than other teams in terms of cash standing at the end of the stimulation.

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Measures We examined the emergent strategies of the ten teams and their associated outcomes using logs within the simulation. These logs included all the taskrelated information of the ten team-managed plants and the automated donothing plant, and we organized the simulator logs into two complementary data sets. One data set, the activity log, is the time-indexed sequences of the actions taken by all teams during the simulation. The other data set is the continuing plant-performance feedback that shaped (and were shaped by) the teams’ decisions. Together, these data sets provide a comprehensive look at the interaction of the teams’ decisions, changing decision-making environment, and unfolding performance. Decision Conduct The activity log documented every plant decision made by each team as well as every query (i.e., deliberate observation) made by a team to obtain information about a plant indicator. The exact sequence of all these actions is preserved, and a time index indicates when each plant decision and each surveying act of the decision-making environment occurred. For instance, the activity log would indicate when and how frequently a team viewed the utilization of the plant’s Station 1, or exactly when a team purchased a new machine at Station 2. A sample of the activity log is provided in Fig. 4, which shows 3 min of decision activity for one team. Teams naturally make many more queries than decisions in the simulation, because the queries provide feedback on multiple performance indicators within the plant. Sim day 163 163 163 164 164 164 165 165 165 165 165 165

Mkt stage Peak Peak Peak Peak Peak Peak Peak Peak Peak Peak Peak Peak

Fig. 4.

Team E E E E E E E E E E E E

Action Plot=JOBT Standing Plot=JOBT Plot=S1UTIL Lots=5 Plot=JOBT Contract=1 CashStatus Standing Plot=S2Q Plot=S1Q Standing

Action type Description Query Plot factory lead time Query Show cash standing table Query Plot factory lead time Query Plot station 1 utilization Decision Change lot size setting to 5 Query Plot factory lead time Decision Change to default contract Query Show cash usage table Query Show cash standing table Query Plot station 2 queue Query Plot station 1 queue Query Show cash standing table

Sample of a Team’s Activity Log (3 Real-Time Minutes).


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Performance Indicators At the start of the simulation, the teams were given the overall objective to maximize the cash standing of their plant at the end of the simulation period and, in so doing, to outperform their competitors. Accordingly, we used each plant’s cash level at the end of the simulation to distinguish high and low performers and the superior- and mediocre-decision processes that accounted for these respective differences. Throughout the simulation, cash level is a cumulative indicator of performance; a plant’s cash level on any simulated day is calculated as the cash level from the previous day, minus plant expenses (e.g., buying raw materials or machines), plus any plant income generated from the plant’s completion of orders or the selling of machines. Cash level at the end of the exercise reflects the cumulative effects of a team’s decision processes. Indicators other than cash level reveal how a plant’s operating performance changed from simulated day to simulated day (minute to minute in real time). Average revenue per day indicates the cash level earned on a specific day through the plant’s current contract. Average queuing and utilization per day indicate the extent to which each of the plant’s three stations has adequate capacity to meet the level of orders. Average lead time per day is an indicator of a plant’s capabilities – the extent to which the plant can process orders quickly enough to fulfill either the default contract or the fast lead-time contract. Together, all of these operating indicators provide several, interrelated perspectives on the state of a simulated plant.

Analysis We conducted comparative case research by treating each team-managed plant as a separate case study and performing qualitative analyses across cases (Brown & Eisenhardt, 1997; Eisenhardt, 1989). After sorting the plants according to their final cash performance from highest to lowest cash level, we examined the changes in cash position of each plant over time and compared their performance trajectories. This provided an overview of how the competitive structure of the simulation evolved over time. Next, we focused on the decision processes of the teams. First, we examined how the timing and frequencies of different plant decisions affected the cumulative performance of each plant as the simulation progressed. Then we examined each team’s queries of plant performance indicators, in order to search for distinctions among higher and lower performing teams. This approach developed into an iterative process of studying the relation

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between decision conduct and performance within a plant and studying the conduct performance relation across plants. Ultimately, we generated a profile of key characteristics that explained differences among high- and low-performing teams.

RESULTS Table 2 presents the final rankings and cash positions of all the plants in the study, including the ‘‘do-nothing’’ (i.e., automated) plant that can be considered a control condition. As expected, the majority of the team-managed plants outperformed the automated plant. Eight of the ten team-managed plants performed better than the automated plant. The highest-performing plant in the exercise surpassed all other plants by a significant margin. Below, we describe the performance trajectories of the plants and the distinctive qualities of the decisions process that set apart the higher and lower performing teams.

Performance Trajectories A preliminary way to understand the performance of the team-managed plants is to compare their trajectories of their cash positions over time relative to that of the automated plant. Cash position is a cumulative measure of plant performance, and the automated plant outperformed the team-managed plants on this measure during the first-half of the simulation. Table 2. Rank 1 2 3 4 5 6 7 8 9 10 11

Final Ranking and Cash Position of All Plants. Team

Cash position

C H E B I A F J Automated D G

$1,847,653 $1,396,817 $1,161,865 $1,076,302 $1,046,182 $1,015,139 $851,435 $845,403 $527,521 $511,224 $485,758


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Although the automated plant had gradually decaying operating performance that would erode its cash position in the long run, it maintained a relatively high-cash position in the short run due to the lack of economic investments to improve plant capabilities. The teams, on the other hand, made decisions to expand their plants’ capabilities (at differing rates and degrees). During the exercise, all teams invested in more machinery; however, the choice of machines (Stations 1, 2, or 3) and the number and timing of machine purchases varied by team. In sum, the cumulative performance (i.e., cash position) of the team-managed plants fell below the automated plant in the first half of the simulation due to these purchases and other plant decisions. Accordingly, these performance differences were also reflected in the public rankings of all plants; the automated plant ranked first throughout most of the early periods of the simulation. As the simulation progressed, the relative standing of the automated plant and the team-managed plants reversed itself in most cases. The automated plant’s cash standing and associated ranking fell due to the continuing erosion in its operating performance, while the cash standings of the majority of the team-managed plants generally increased due to improved operating performance. Eight teams ended up surpassing the performance of the automated plant by the end of the simulation. However, two of the teams made decisions that resulted in poorer long-term performance than the automated plant; for these two teams, taking no action would have resulted in higher performance than the choices that these teams made. We traced variations in performance among the team-managed plants to patterns in the teams’ decisions and queries, as described below. Decisions and Performance All teams made an initial change in plant settings within the first 20 min of the simulation; the extent and timing of these changes varied across teams. Higher performing teams tended to invest more heavily in additional machines during the early periods of the simulation. Teams with relatively poor performance (ranked 8th through 11th) did not purchase any new machines during the first 30 min, while the team that finished first invested in four machines during this same period. However, achieving high performance was not simply a matter of purchasing more machines quickly. For instance, the team that ranked second purchased only one machine in the first 30 min, while the team that finished sixth purchased three machines. Higher performing teams managed the lot size decision early on and incrementally, taking advantage of the ability to engage in experimentation

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at a time that would be least damaging to plant performance. Recall that the effect of the lot-size decision was dependent on the capacity at one of the three stations (and the teams did not know which station was the determining one). The lot-size decision had no immediate economic cost to change, as opposed to the purchase of machines, which immediately decreased cash levels. Some teams took advantage of the absence of costs to switch lot-size settings and experimented incrementally to learn about its effects. For instance, some teams changed the lot size without making any other plant changes, which enabled the effects of the lot-size change to be observed without the overlapping effects of other plant decisions. In contrast, other teams switched lot-sizes frequently and/or changed multiple production settings at once, not allowing time for the potential effects of decisions to be observed before new decisions were made. This latter approach to lot sizes obscured its effects, particularly in regards to which station would have an adverse effect with an increase in the number of lots per order. It is not clear to what extent the more instructive incremental approach was deliberate on the part of those teams who employed it. In any case, teams that exhibited the incremental and experimental approach performed better over time than teams who were less disciplined about the number of decision settings they changed at once and the time they waited between decisions. Additionally, teams that took advantage of experimentation earlier in the simulation had the advantage of discovering the effects of lot-size changes before incoming orders peaked and disruptions in plant performance would have been most damaging to economic performance. Learning about the lot-size decision earlier on also enabled teams to take advantage of the positive consequences of the effective lot-size decisions sooner, contributing to their plants’ cumulative performance. Additionally, the highest-performing team completed a series of plant decisions during a relatively short period of time early in the simulation (i.e., within the first 30 min) during which other teams made only their first decision. The highest-performing team made its first decision about 12 min after receiving control of its plant, then it made a succession of plant decisions. Shortly after completing the decision series, the highest-performing team changed from the default contract to the fast lead time contract that can result in higher financial performance. The timing of this decision was critical because it occurred immediately after the team’s plant had achieved the lead time of a one-fourth of a simulated day, the required lead time to realize the full benefits of the fast lead-time contract. All teams in the exercise switched eventually to the fast lead-time contract at some point in the


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simulation, although some could not subsequently achieve the fast lead-time target reliably. These latter teams switched between contracts opportunistically with fluctuations in their plant’s current lead time. Conversely, the highest-performing team achieved the fast one-fourth day lead time early in the simulation and maintained this level of performance reliably. Thus, it earned higher revenues from the successful execution of the fast lead-time contract at an earlier stage and for a longer portion of the exercise than the other teams.

Queries and Performance We conducted a comparative analysis of the relationship between the teams’ queries and performance levels to gain additional insight into the teams’ decision processes, and this analysis converged upon two items. The first item is the download of data that could help teams anticipate future demand and needed capabilities. The second item is the plot of a plant’s average daily lead times. Teams could choose to download incoming orders early on and throughout the simulation to analyze the evolving pattern of orders and extrapolate how many orders might arrive in the future. The instructions indicated demand would grow linearly for the initial five simulated months, and a downloading of the history of incoming orders would reveal the growing magnitude of orders from day 50 (when teams received control of their plants) to the peak demand period beginning on day 150. Teams could use this downloaded information to anticipate the number of orders to expect throughout the simulation and could manage the capacity of their plants accordingly. In the absence of this information and associated analyses, teams could rely on their rough estimates of the peak capacity required in the future, respond when insufficient capacity produced queues within the plant, and/or respond when the plant was experiencing economic losses. For instance, without an analysis of incoming orders, a team might purchase too few machines to cope with the level of rising orders, or purchase so many machines that the team could not recoup its investment from the number of orders in the product’s lifetime. A team that conducted analyses on the downloaded history of incoming orders could have an advantage relative to other teams who had not acquired and evaluated this data. Only one team downloaded data on incoming orders during the period of increasing market demand, the time when such an action could be leveraged for significant impact. However, that action did not appear to benefit the

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team in that it finished the simulation with a cumulative performance ranking of 8 out of 11 (i.e., the 10 team-managed plants and the automated plant). Interestingly, the highest-performing team never downloaded the history of incoming orders, but did download the history of completed orders leaving its plant. Overall, the eighth- and first-ranked teams were the only teams that downloaded data that could indicate future market demand or plant capabilities. The eighth-ranked team downloaded the history of incoming orders about 20 min after they received control of their plant, and they made their first change in plant settings a few minutes later. The firstranked team downloaded the history of completed orders twice in 5 min, soon after they gained control of their plant. It was near the time of the second download, about 10 min into the simulation that the team began to make the 20 min series of plant decisions that would culminate in its dominance in the simulation over an hour later. We also examined the relation between team queries for plant lead time and team performance. All teams in the simulation made queries to receive plots of their plant’s lead times, but the frequency and timing of these queries varied. As the simulation progressed, the majority of teams began to check their plants’ lead times on a regular basis. Some teams checked lead times many times per minute in the later part of the simulation, even though the task instructions indicated that it would take a few minutes for the effects of a plant decision to be observed. The highest-performing team checked lead time every few minutes from the start of the simulation. Surprisingly, a few teams rarely checked their lead times, and thus had little current information on their plants’ capabilities and the extent to which they would be able to fulfill either the default or fast lead-time contract. A team that routinely checked its plant’s lead time would be aware of its plants’ capabilities to fulfill an order contract. A team that was not so informed would need to rely on other information such as queues at particular stations within its plant or its plant’s change in competitive standing – the kinds of feedback that might encourage a reactive approach to decision making. For example, a team could focus excessively on minimizing factory queues to the detriment of forward-looking strategies that could maximize revenue. Tracking cash levels or competitive rankings, as a substitute for lead time, can be counterproductive since it is a lagging indicator of plant performance. For instance, if a team waited until another team passed it in cash level before acting, its decision-making would be steps behind the team that surpassed it. Lead time is the best measure available to a plant in terms of understanding and managing capabilities, relative to other measures that might address sub-optimal or time-lagged goals.


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The eighth-ranked team (the sole team to download incoming order information) first examined its plant’s lead times after the simulation had been running an hour, and it then observed lead time twice within a few minutes. This team never looked at lead time again, so that most of the team’s decisions were not informed directly by the plant’s capability to fulfill order contracts. In comparison, the majority of teams examined lead times at least dozens of times during the simulation. The sixth-ranked team was the only team other than the eighth-ranked team that paid little attention to lead times, having also viewed it only twice. Overall, we found a number of ways that the decision processes and information search activities of teams related to plant performance. We discuss these results in the next section, and show how the results contribute to the study of emergent strategy processes.

DISCUSSION In this paper, we address a gap in the strategic management literature by uncovering management teams’ emergent strategies and their consequences using a comparative case study methodology. Through use of a business simulation on an Internet platform, we were able to observe and objectively record how managerial decisions and the associated task environment evolved and interacted for ten team-managed plants encountering the same objective, decisions, time pressures, and incomplete task information. Our study reveals the diverging task behavior and task performance of multiple management teams in a dynamic, uncertain environment. Timing, experimentation, and forward-thinking help to explain the decision processes that contributed to the cumulative performance of the team-managed plants. The highest-performing team acted early to make key decisions, acted incrementally for decisions with the most uncertain impact, and moved in a decisive manner to build its plant’s capabilities quickly. Engaging in such actions requires consideration of both short- and long-run consequences. Brown and Eisenhardt (1997) found, in a qualitative study of innovation that effective teams deliberately paced their development of new products and simultaneously considered multiple-time horizons during the development process. They reasoned that such an approach contributes to a perpetual cycle of innovation in a dynamic and uncertain environment. In our study, we found that a similar process appeared to be effective for an uncertain management task with a finite duration. In our experimental setting, as well as in a setting of continuous innovation, some deliberation or

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structure contributes to a more effective decision process in a dynamic and uncertain environment. In both settings, dynamic and uncertain conditions require an emergent process, and a certain amount of deliberation appears to provide direction to emergent decision making. We also found that team decision processes are dependent upon where teams focus their attention. It is often said, ‘‘What gets measured, gets acted upon,’’ and the highest-performing team that dominated all others focused on plant lead time from the start of the simulation. This team regularly monitored lead time as the key driver of order fulfillment (and, thus, economic performance). Other teams began to observe this critical measure later on, some teams attending to lead time only in passing while others monitored lead time more carefully, but only after a considerable amount of time had elapsed. All in all, the highest-performing team most consistently tracked its plant’s lead time throughout the simulation. Our results are consistent with Ancona and Caldwell’s (1992) research that underscores the importance of teams scanning the task environment. While these authors focused on the external political and institutional environment, our study suggests that scanning the internal-task environment is also crucial, particularly in terms of organizational capabilities. Our results suggest that monitoring organizational capability indicators can play a significant role in the emergent decision processes of teams, providing teams with an anchor from which to manage short- and long-run organizational performance. Alternatively, there are other kinds of indicators that can potentially distract teams, particularly if they are overemphasized. For example, teams can become too fixated on lagging indicators of organizational performance and transient gains and losses. As another example, a primary focus on immediate competitive standing vis-a`-vis rivals or the current efficiency of a plant can lead to teams falling into a reactive pattern of decision making that is ineffective in a dynamic and uncertain task environment. In contrast, a focus on capabilities can provide a more structured and proactive approach to decision processes, one that might help a team to reduce uncertainty. To the extent that a team’s decision circumstances are volatile or uncertain, paying attention to the capabilities, which might be a better option than focusing on one’s immediate competitive position and the optimization of current, short-run activities. We believe that it was obvious to the teams in hindsight, if not during the simulation, that the development of the plants’ capabilities (i.e., increased production capacity and shortened lead time) as the incoming orders increased was a major determinant of plant performance. Some teams discovered (much sooner than others) that performance depended upon the


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extent to which capabilities were increased before they were needed, for instance, by investing in machines and experimenting early with decisions, such as those regarding lot size, which had uncertain effects. Although such insights might indeed be apparent after the fact, a number of teams did not appear to observe or act upon these insights in the midst of their strategizing and decision making. The simulation exercise presented information that enabled each team to engage in forward thinking and deliberate choices about building its plant’s capabilities, but many teams either did not see these options or took too long to recognize and act upon them. Teams that recognized these issues and acted more quickly had higher cumulative performance. More generally, a number of decisions in the simulation might seem obvious post hoc. However, a priori, these decisions were not obvious to a number of the management teams in a timely manner. Teams might have been slow to identify and act on key decision points for a number of reasons such as being distracted by an excessive focus on immediate performance, gains, and losses. Teams might also have had trouble making timely team decisions given the ambiguities in team leadership and authority (i.e., the absence of a formal leader in these project teams). The fact that some teams were not able to respond quickly in an efficient manner might appear inconsistent with normative models of rational decision making. However, we suspect that management teams might often experience similar obstacles in actual business settings that detract from their ability to make effective decisions quickly; such decisions often do seem logical post hoc, but a priori, the logic eludes decision makers. Our study makes a number of contributions to the strategy process literature. First, we empirically support, with process data, Mintzberg’s (2001) suggestion that effective decision making requires seeing and doing, and not just ‘‘thinking first.’’ ‘‘Thinking first’’ does play a critical role in emergent decision processes, but the ‘‘seeing and doing’’ elements of decision making are also crucial. The activity and performance indicator logs used in the study enabled us to observe, with some precision, the teams’ choices, their monitoring of the task environment, and the events the teams observed. The rich data we were able to collect and analyze provide a number of insights into emergent decision processes, including the fact that the frequency with which teams monitored events greatly outnumbered the frequency of actual decisions. The fine-grained records of teams’ information queries and task feedback offer an opportunity to advance theories on the impact of environmental scanning and the structuring of attention on decision making. Future research using similar methodologies is needed to understand further

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how group members attend to, collect, and process task-relevant information (Waller, 1999). For example, this methodology can contribute to the development of attention-based theories of organizations. Interactive computer environments, like all simulations, provide an incomplete representation of organizational environments, but they can accurately present some aspects of organizations with great precision (McGrath, 1991). This methodology is advantageous for research, addressing how organizational members direct and structure their attention under conditions of uncertainty (Ocasio, 1997; Simon, 1947). Our study also advances understanding of emergent decision processes (Lindblom, 1952; Mintzberg & Waters, 1985; Quinn, 1982). We tracked the emergent decision processes of teams in a controlled setting, and we observed that superior emergent processes have some elements of deliberate strategy embedded in them. The original formulations of emergent strategy took into account that the emergent decisions of managers would have clear priorities and intentions (Quinn, 1982); our results suggest that decision processes benefit from an ongoing interplay between deliberate and emergent processes. This study points toward the continuing relevance of processes that include both deliberate and emergent elements, and indicates that one priority when making emergent decisions is to focus mindful attention on the development of capabilities. Furthermore, many emergent process studies are based on a unique organizational case (Burgelman, 1996) or on a natural experiment where organizations with similar histories and/or capabilities respond to the same decision-making issue during the same time period (Noda & Bower, 1996). By performing a study in a more controlled setting, we were able to produce a variety of emergent decision process streams from a set of initial conditions, and then distinguish these decision processes according to their performance outcomes. Our experimental simulation approach adds to the portfolio of methods available to study emergent strategy.

Future Studies of Strategy Process with Interactive Simulation Using an interactive computer simulation of a business problem in management research is not new, and other simulations have similar characteristics to the one we used in this study (Lant & Hewlin, 2002). However, simulations used in prior research have generally been confined to discrete time periods that restrict when organizational decisions and feedback can occur. In contrast, our study ran in real time and allowed for a continuous


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process of decision making and feedback that is more characteristic of a natural decision-making environment than decision making confined to particular moments and time periods. Additionally, interactive simulations have historically been used in management education to illustrate the complexity of business operations and decisions (Cohen et al., 1962). They present decision makers with substantial amounts of ill-structured and uncertain information, and they also develop managerial problem solving skills: distinguishing data that are relevant to organizational objectives; isolating problems that deserve immediate attention; and identifying constraints that need to be observed in seeking a solution; and learning to manage the cumulative, as well as immediate, consequences of actions, or a lack of action (Cohen et al., 1962). We believe Internet-driven simulations of business problems also offer emerging possibilities for the advancement of strategy-process research, particularly when the task environment operates continuously and allows multiple decision makers to act simultaneously to form the competitive environment. Nonetheless, our study is not without limitations. Although the simulation replicated some of the complexity and uncertainty that management teams experience, the time span of the strategy-making process was approximately 3 hours, and the feedback that teams received was more rapid than would normally occur in organizational contexts. Also, the events that decision makers observe in a simulation, although complex, have an objective underlying logic that can be discovered. For instance, management teams in this study did not have to address issues of false or distorted information, and thus could remain focused on their strategizing as a problem-solving exercise that had genuine solutions. Furthermore, a simulation of a business problem offers many opportunities for acquiring strategyprocess data, but it is not well suited for replication as a laboratory research study might be. Each simulation exercise is unique – a research sample of one – due to the many idiosyncrasies and competitive dynamics introduced by decision makers (McGrath, 1991; Runkel & McGrath, 1972). Nonetheless, key features of one simulation study can be replicated in future studies. Additionally, we did not actually observe team members as they deliberated, made sense of the unfolding task environment, and made decisions. In future research, videotapes of teams might be combined with the activity and performance indicator logs to gain a better understanding of the team dynamics. For example, Okhuysen (2001) relied on direct observations of teams through videos to capture a number of group-level processes, such as task management activities and interpersonal dynamics, in an experimental setting. Videotaping can also reveal teams’ responses to time

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pressure (Gersick, 1988, 1989), as well as responses to distractions and unexpected events that can interrupt intentional behavior (Jett & George, 2003). Furthermore, the addition of videotaping may lead to more insights into the core strategies of teams and how they adapt to environmental changes and opportunities. Although future studies of strategy processes with interactive simulation face many challenges, they also present important opportunities. Among them, we believe is an opportunity to address a tradeoff in strategy-decision research between ‘‘in-depth, fine-grained, field-based research’’ and ‘‘coarser grained comparative studies’’ (Maritan & Schendel, 1998). Simulation studies have the potential to provide fine-grained in-depth data as well as comparative data across multiple teams/organizations. In any case, we hope that our study spurs other researchers to use Internet-based simulations to gain further understanding of decision making and an emergent strategy processes in uncertain environments.

ACKNOWLEDGMENT We thank Sam Wood and participants in the AiSM-INSEAD conference on Expanding Perspectives on the Strategy Process.

REFERENCES Ancona, D. G., & Caldwell, D. F. (1992). Bridging the boundary: External activity and performance in organizational teams. Administrative Science Quarterly, 37, 634–665. Brown, S. L., & Eisenhardt, K. M. (1997). The art of continuous change: Linking complexity theory and time-paced evolution in relentlessly shifting organizations. Administrative Science Quarterly, 42, 1–34. Burgelman, R. A. (1994). Fading memories: A process theory of strategic business exit in dynamic environments. Administrative Science Quarterly, 39, 24–57. Burgelman, R. A. (1996). A process model of strategic business exit: Implications for an evolutionary perspective on strategy. Strategic Management Journal, 17, 193–215. Chen, M. (1996). Competitor analysis and interfirm rivalry: Toward a theoretical integration. Academy of Management Review, 21, 100–134. Chen, M.-J., & MacMillan, I. C. (1992). Nonresponse and delayed response to competitive moves: The roles of competitor dependence and action irreversibility. Academy of Management Journal, 35, 539–570. Chen, M.-J., & Miller, D. (1994). Competitive attack, retaliation and performance: An expectancy-valence framework. Strategic Management Journal, 15, 85–102. Cohen, K. J., Cyert, R. M., Dill, W. R., Kuehn, A. A., Miller, M. H., Van Wormer, T. A., & Winters, P. R. (1962). The carnegie tech management game. In: H. Guetzkow (Ed.), Simulation in social science. Englewood, Cliffs, NJ: Prentice-Hall, Inc.


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Eisenhardt, K. M. (1989). Making fast strategic decisions in high-velocity environments. Academy of Management Journal, 32, 543–576. Eisenhardt, K. M., & Zbaracki, M. J. (1992). Strategic decision making. Strategic Management Journal, 13, 17–37. Gersick, C. J. G. (1988). Time and transition in work teams: Toward a new model of group development. Academy of Management Journal, 31, 9–41. Gersick, C. J. G. (1989). Marking time: Predictable transitions in task groups. Academy of Management Journal, 32, 274–309. Henderson, R., & Mitchell, W. (1997). The interactions of organizational and competitive influences on strategy and performance. Strategic Management Journal, 18(Summer Special Issue), 5–14. Jett, Q. R., & George, J. M. (2003). Work Interrupted: A closer look at the role of interruptions in organizational life. Academy of Management Review, 28, 494–509. Lant, T. K., & Hewlin, P. F. (2002). Information cues and decision making – the effects of learning, momentum, and social comparison in competing teams. Group and Organization Management, 27, 374–407. Lindblom, C. E. (1952). The science of muddling through. Public Administration Review, 19, 78–88. Maritan, C. A., & Schendel, D. E. (1998). Strategy and decision processes: What is the linkage? In: V. Papadakis & P. Barwise (Eds), Strategic decisions: Context, process and outcomes. Boston: Klumer Academic Publishers. McGrath, J. E. (1991). Dilemmatics: The study of research choices and dilemmas. In: J. E. McGrath, J. Martin & R. A. Kulka (Eds), Judgment calls in research. Beverly Hills, CA: Sage Publications. Mintzberg, H. (2001). Decision making: It’s not what you think. MIT Sloan Management Review, 42, 89–93. Mintzberg, H., & Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6, 257–272. Noda, T., & Bower, J. L. (1996). Strategy making as iterated processes of resource allocation. Strategic Management Journal, 17, 159–193. Ocasio, W. (1997). Towards an attention-based view of the firm. Strategic Management Journal, 18, 187–206. Okhuysen, G. A. (2001). Structuring change: Familiarity and formal interventions in problemsolving groups. Academy of Management Journal, 44, 794–808. Porac, J. F., & Thomas, H. (1994). Cognitive categorization and subjective rivalry among retailers. Journal of Applied Psychology, 79, 54–67. Quinn, J. B. (1982). Managing strategies incrementally. OMEGA, 10, 613–627. Runkel, P. J., & McGrath, J. E. (1972). Research on human behavior: A systematic guide to method. New York: Holt, Rinehart, and Winston, Inc. Schendel, D. (Ed.) (1997). Editor’s introduction to the 1997 summer special issue: The interactions of organizational and competitive influences on strategy and performance. Strategic Management Journal, 18(Summer Special Issue), 1–3. Simon, H. A. (1947). Administrative behavior: A study of decision-making processes in administrative organizations. Chicago, IL: Macmillan. Waller, W. J. (1999). The timing of adaptive group responses to nonroutine events. Academy of Management Journal, 42, 127–137.


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PART IV: META-COMMENTARIES ON METHODOLOGIES FOR STRATEGY PROCESS RESEARCH

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COMPARATIVE CAUSAL ANALYSIS IN PROCESSUAL STRATEGY RESEARCH: A STUDY OF CAUSAL MECHANISMS IN ORGANIZATIONAL DECLINE AND TURNAROUNDS Kalle Pajunen ABSTRACT The lack of systematic methods for reducing the complex reality has hampered many of the contributions that processual research might have produced. This paper presents a methodology for processual strategy research that offers a systematic approach for causal explanation across complex sequences of events and enables theorization about underlying causal mechanisms driving the processes. In addition, a comparative analysis of two organizational decline and turnaround processes is presented in order to illuminate how the methodology is able to generate a substantial advancement in knowledge by indicating the causal


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mechanisms underlying the decline and turnaround processes. The findings show that the turnaround is produced by four causal mechanisms that cumulatively and interdependently work against the mechanism of decline.

INTRODUCTION One of the basic objectives in strategy research is to discover causes. On the one hand, we can follow the conventional view of covering-law explanations and perceive the Humean notion of ‘‘constant conjunction’’, or empirical regularity, as the only legitimate way for explaining cause and effect. Cause is thus understood to be the likelihood of one happening following another and the primacy is given to the scientific laws that should enable the prediction and control of observable events. No attempts need to be made to seek out any underlying causes or generative mechanisms. On the other, we can choose the approach of causal realism to social scientific explanation that proceeds from the viewpoint that the world is an open system of causal processes and mechanisms. Following this approach, we seek to explain an outcome by providing an account of the processes and causal mechanisms that led to the occurrence of the outcome. The idea that causal mechanisms should occupy a central position in social scientific explanation is somewhat explicitly presented, though rising from rather different premises (e.g. Hedstro¨m & Swedberg, 1996; Little, 1991; Mahoney, 2001; Merton, 1968; Sayer, 2000; Stinchcombe, 1991). The literature of the philosophy of science has also paid considerable attention to the causal mechanisms in both natural and social scientific explanations (e.g., Bhaskar, 1978; Bunge, 1997; Elster, 1989; Glennan, 2002; Salmon, 1984, 1998). However, the view that sees causal explanation as a constant conjunction has still the dominant position in social sciences in general and strategy research in particular. The search for explanations that build on processes and causal mechanisms indicates that we are not satisfied with correlational analysis and constant conjunction. Instead, we are interested in revealing why and through what process an outcome was actually brought about (Salmon, 1984). As stated by Hedstro¨m and Swedberg (1996, p. 290), ‘‘understanding is obtained or enhanced by making explicit the underlying generative mechanisms that link one state or event to another, and in social sciences actions constitute this link y [and] it is through abstraction and analytical accentuation, however, that general mechanisms are made visible’’. A satisfactory

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explanation requires that we open the black box that connects independent and dependent variables in a causal relationship (Elster, 1989; Hedstro¨m & Swedberg, 1998). In fact, there exist many correlations that assert no relation of cause and effect. Thus, mere regularities do not mean that we have found causes (Roberts, 1996; Strawson, 1985), and a constant conjunction is only something to be explained. Process research, in particular, is concerned with understanding and explaining how things change over time and why they change in the way they do (Van de Ven, 1992). In strategy research, the processes under examination typically consist of complex sequences of events and are essentially causal because their outcomes are the consequences of the processes. Thus, explanation by causal mechanisms seems to provide a reasonable basis for processual strategy research. Indeed, as suggested by Pettigrew (1997), the aim of processual strategy research is not only to describe the case histories but also analytically to search for patterns in the processes, to compare the patterns of different cases, and to identify the underlying mechanisms driving the processes (see also Tsoukas, 1989). However, in spite of the recent contributions (e.g. Khanna, Gulati, & Nohria, 2000; Langley, 1999; Pentland, 1999; Pettigrew, Woodman, & Cameron, 2001), there is a lack of methods that simultaneously consider these central elements – causality, complexity, and comparison – related to processual strategy research and most importantly, seek to uncover the causal mechanisms that drive the processes. Therefore, this paper seeks to develop a methodology for processual strategy research that offers a systematic procedure for causal explanation across complex sequences of events in order to reveal the underlying mechanisms. The argument of this paper proceeds through four main sections. The first section develops the suggested methodology. Specifically, I begin by shortly discussing causal mechanisms and basic streams of research in comparative historical analysis. This completed, I describe the data analytic techniques of event-structure analysis (ESA) and Boolean comparison/qualitative comparative analysis (QCA) as well as the idea of two-level theories. Finally, I suggest how these approaches can be linked and applied in the analysis of organizational processes and causal mechanisms. To closely demonstrate the advantages and challenges of the methodology, I apply it to analyze two organizational decline and turnaround processes in order to theorize about the underlying mechanisms in organizational turnarounds. Therefore, the second main section describes the analytical framework needed in the analysis of the cases and the third main section reports the analysis and findings. The last section discusses research implications and future research possibilities.

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FROM NARRATIVES TO CAUSAL MECHANISMS Mechanisms A number of social scientists and philosophers of science loosely grouped under the rubric of ‘‘realism’’ have given causal mechanism a central role in their efforts to define causal explanation. For example, according to Harre´ (1970, p. 125) ‘‘scientific explanation consists of finding or imagining plausible generative mechanism for the patterns amongst events’’. A complete discussion of realism in social sciences is beyond the scope of this paper. However, I outline some general standpoints in order to clarify the central role of causal mechanisms in processual research. Little’s (1998, p. 197–198; see also George & Bennett, 2005) argumentation regarding causal realism offers us a relevant starting point. First, realists posit that there exist causal relationships between social phenomena and causal explanation is the central form of social explanation. These relationships are not constituted by regularities or laws connecting classes of social events as the covering law concept maintains. On the contrary, they are constituted by the causal powers of various social events, conditions, and structures as well as the singular causal mechanisms that lead from antecedent conditions to outcomes. Accordingly, a central goal of social research is to identify the causal mechanisms that give rise to social outcomes. As put by Mahoney (2001, p. 578), ‘‘causal analysis consists of identifying the mechanism that underlines and generates empirical regularities and outcomes’’. As such, causal mechanisms involve physical, social, or psychological causal processes that do not need to refer to any particular set of empirical conditions. Thus, they ultimately cannot be seen or directly observed. We can only give robust hypotheses about underlying mechanisms (George & Bennett, 2005; see also Godfrey & Hill, 1995). According to Little (1998), hypotheses about causal mechanisms must be constructed on the basis of an account of the ‘‘microfoundations’’ of the processes. This necessitates intensive examination of particular cases and also working backward from the observed outcome to the theoretical mechanism in question. The value of a causal mechanism can be evaluated, among other ways, by its ability to explain other empirical findings and to suggest new empirical associations (Mahoney, 2001) or by inference to the best explanation (IBE) where one infers the truth of a hypothesis from the fact that the hypothesis would explain the evidence (Harman, 1965). Thus, for realists, a scientific theory is a description or model of underlying causal mechanisms that generate the observable phenomena.


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Narratives and Event-Structure Analysis Realistic standpoints have at least implicitly formed the basis of much of the research in comparative historical analysis where the main theme has been comparison of divergent historical processes in order to more generally understand patterns of stability and change (Abrams, 1982; Mahoney & Rueschemeyer, 2003; Griffin & Stryker, 2000). Griffin and Stryker (2000) have distinguished two basic approaches in comparative historical research and labeled them ‘‘analytical formal comparison’’ and ‘‘interpretive comparison’’. The goal of the former is causal explanation by exploiting formal logical or statistical tools and replicable analytic methods. The latter, in turn, seeks to develop a meaningful understanding of historical patterns, usually by examining entities or cases as wholes using some specific theoretical perspective. However, these are not closed categories. Rather, they can be combined or can overlap with each other. In fact, Griffin and Stryker (2000) argue that the synthesis, ‘‘causal interpretivism’’, constitutes the third and probably the most productive approach in comparative history. This approach seeks causal reasoning by using methodological procedures allowing for replication along with emphasis on historical narrative. Thus, a truly synthetic approach incorporates the strengths of both explanatory and interpretive modes (Griffin & Ragin, 1994; Griffin & Stryker, 2000). The procedure presented in this study builds on this third approach, which, I believe, offers a clear contribution to processual strategy research. Causal interpretivism is successfully applied in the analysis of historical or causal narratives that describe in chronological order what happened, why it happened, and how it happened. Thus, they are tools for combining context, sequentiality, contingency, and generalizability (Abbott, 1992; Aminzade, 1992; Bu¨the, 2002; Griffin, 1993; Sewell, 1996; Stryker, 1996). In this paper, I consider the organizational turnaround process as a causal narrative that is an analytic construct of sequential accounts that organize events and actions into chronological order. Narratives have a beginning, a series of intervening actions, and an end that is a result of the numerous interconnections between the intervening actions (Griffin, 1992). A historical narrative, however, is not the same as a causal explanation, nor adequate for the postulation of causal mechanisms. In order to move beyond narrative to explanations, it is necessary to develop systematic methods for analyzing narratives. In this study, I exploit event-structure analysis (ESA), associated with computer software ETHNO, which is stated to be the most developed account of how narrative can be linked to causal inference (Griffin, 1993; Heise, 1989). In organization research, Stevenson

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and Greenberg (1998) have successfully applied ESA in an analysis of organizational change. ESA provides a formal tool for analyzing events and reconstituting their constituent parts as a causal interpretation of complex historical processes. This method supports causal narrative by identifying the causally tied processes that constitute aggregated variables in cross-case analysis if needed (Mahoney, 1999, 2000). ESA forces the researcher to transform a chronology of actions into a series of yes/no questions where the researcher is asked to decide if a temporal antecedent is required for the incidence of a subsequent action. Thus, it makes it possible to distinguish temporal relationships from causal inference. Moreover, these inferences are strictly replicable. The exploitation of ESA is directly joined to computer software ETHNO (see also Griffin, 1993; Stevenson & Greenberg, 1998). The researcher using ETHNO first constructs a ‘‘raw narrative’’ that can be given as a chronology of actions. This chronology is then input into ETHNO, where it is reshaped as a series of questions about causal connections between actions and events constituting the chronology. The results of ETHNO’s questions are shown as a causal diagram of the logical structure of the action underlying the raw narrative’s chronology. This diagram is the event structure representing the researcher’s deep interpretation of the causal linkages between the sequences that constitute the narrative. The ESA diagrams also help to discover key turning points and outcomes in the multiple sequences of events that constitute a narrative. These turning points direct the causal impact of a sequence of actions and create an opportunity to change actors’ behaviors. It has to be emphasized that ETHNO does not discover causality. It is the researcher that possesses the knowledge needed to structure and interpret the narrative events. ETHNO, in turn, forces the researcher to be precise and careful when making judgments about the relationships between events and to consider the sequence of events causally rather than chronologically. The researcher is thus better able to determine which events have no consequences at all or which may have clear effects for the future (Griffin, 1993; Mahoney, 2000; Stevenson & Greenberg, 1998).

Two-Level Theories The next phase, which occupies a central position in comparative analysis, is the explicit generalization of the concrete configuration of actions. This abstraction consists of two parts. First, the researcher, as a result of deep


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knowledge of the case, can extract from the chronology those actions that are incidental or without any meaning in the causal path. Second, those actions that are retained for further analysis are conceptualized as instances of theoretically general sequential actions, usually by exploiting the theoretical framework. In this phase the notion of two-level theories is needed. According to Goertz and Mahoney (2005), two-level theories propose explanations of outcomes by conceptualizing causal variables at two levels of analysis that are systematically related to one another. One level characterizes the core of the theory, containing the main causal variables and outcome variable at a certain level of aggregation, usually at a higher level that is easily remembered and processed. A second level concentrates on causal variables at a lower level of aggregation. These variables are also causes of the outcome, but their effects cannot be understood independently of their relationship with the causal factors at the higher level. There are three possible theoretical relationships by means of which a lower-level variable can systematically relate to a causal variable of the higher level, namely causal, ontological, and substitutable relationships (Goertz & Mahoney, 2005). In the case of causal relationship, lowerlevel variables represent ‘‘causes of causes’’. The relationship is ontological if the lower-level variables represent the defining features or elements that constitute the higher-level variables. Finally, the relationship is substitutable if the lower-level variables are different ways or alternative means of achieving ends represented by the higher-level variables. Each of these forms of relationships offers interesting possibilities for strategy process research. In this study, to make possible comparison on the one hand and theorizing about causal mechanisms on the other, I apply both substitutable and ontological views of the relationships. Substitutability is only used in order to reduce the number of variables. This simply means that a more generalized concept substitutes for several other concepts describing the same event or action. Substitutability is not needed if the narratives are highly similar, which is, however, unlikely in the social world. In the comparative approach, this reduced number of variables again forms the basic group of lower- or general-level concepts that represents the set of possible properties the higher-level causal variables can ontologically consist of. In sum, ESA and the idea of two-level theories are systematic tools for making sense of complex causal processes. However, they should not be used mechanistically, but rather to accompany the researcher’s methodological and theoretical assumptions and the questions asked.

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Comparative Approach While a single event-structure analysis may provide a relevant description for hypothesizing about causal mechanisms in a particular case, the comparative method is often required in order to examine differences and similarities and in so doing tendencies regarding causal mechanisms in the wider group of cases that represent the same phenomenon at a more aggregate level. The data analytic strategy qualitative comparative analysis (QCA) that is based on Boolean algebra offers a systematic tool for comparing complex cases or processes as configurations in order to reveal their patterned similarities and differences. In particular, it makes it possible to find combinations of variables that can provide evidence in favor of the existence of certain tendencies related to causal mechanisms. A detailed discussion of the rationale and logic of QCA is provided elsewhere (Ragin, 1987, 2000). Here I only present the basic concepts that are needed to apply it. First of all, in QCA cases or processes are either in or outside a set, for example, turnaround and non-turnaround. Similarly, each event or action either exists or is non-existent. Consequently, the Boolean form of QCA exploits binary-coded data, where all variables must be nominal-scale measures. This may lead to some loss of information, but in most cases the exact measurement of phenomena using interval scales is rather fluid. More recently, the technique has been extended to fuzzy sets which allow differentiation between cases with regard to their degree of membership in such categories (Ragin, 2000). However, this method requires that the number of cases be substantial (according to Ragin, over 20). From the point of view of conceptualizing cases as configurations, QCA diverges of statistical techniques that are usually based on independent variables that are considered as independent from each other as possible. In the real world, however, X may be caused by, for example, a simultaneous appearance of the causal factors of A and B (i.e. A B ¼ X ; where the asterisk signifies logical ‘‘and’’). In this example, A and B are necessary conditions that are jointly sufficient for X. There is also a possibility that X can be caused through multiple paths (equifinality) with no necessary conditions (i.e. A þ B ¼ X ; where the plus sign signifies logical ‘‘or’’) or through more complex structures where we have both necessary conditions and equifinality (i.e. Y A þ Y B ¼ X ). Indeed, one of the main advantages of Boolean comparison is its flexibility regarding causal complexity. The simplifying logic of QCA helps in examining configurations of necessary and jointly sufficient conditions. However, when the number of cases is low or the set does not include both negative and positive cases, QCA may


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not provide perfect results. Ragin (1987) suggests that the most suitable number of cases in QCA is something from 5 to 20. However, even when comparing only two complex cases, the combinatorial logic of QCA together with the idea of two levels of analysis gives a systematic and replicable procedure for comparison.

A General Procedure for Theorizing about Causal Mechanisms A dilemma in processual analysis is to resolve how to practically include complexity and comparability in the same study. The combination of the above-presented techniques provides one possibility in that direction and, in particular, offers a systematic way of theorizing about causal mechanisms that generate an outcome of interest. Briefly, the basic logic of the procedure is as follows: The narratives and concrete causal event structures of particular organizational processes are elucidated and then abstracted using ESA, a predefined theoretical framework, and the idea of two-level analysis. Next, using the comparative approach, the abstracted event structures are compared and the causal mechanisms underlying the processes are hypothesized. In further detail, the first task of the researcher is to formulate a theoretically guided analytical framework of the phenomenon and of possible factors or combinations of factors that may have an influence on the process as well as to explicate the substitutive, general concepts that are needed in moving from the narrative level of analysis to the comparative level of analysis. The analytical framework essentially guides the whole research process. However, it does not determine the findings. On the contrary, it only defines the way of seeing, where to look and what kind of factors may be relevant to look for. Consequently, the research process essentially consists of interplay between induction and deduction. During and after the formulation of the framework, the researcher specifies relevant cases and starts the acquisition of research data. In this paper, I have used historical analysis (see e.g. Ventresca & Mohr, 2002) and consulted extensive company archives. This is probably the most convenient method when studying processes that extend over several years or even decades. As a result of the in-depth analysis of the research data, the researcher can construct a narrative of the process and a chronological list of the events and actions that the narrative consists of. Next, the causal event structure of the narrative can be explicated by exploiting ESA and the notion of two-level theories as presented above.

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After the construction of general-level event structures, the processes can be compared. How the comparison is implemented directly depends on the quality of the narratives and the proposed analytical framework. In the case of complex processes, such as organizational decline and turnarounds, it is difficult to compare the complete event structures, and this may even be misleading when the goal is theorization of the underlying mechanisms. One possibility is to divide processes into manageable parts. In that way, as will be shown in the analysis, the comparison can be implemented one phase at a time. The segmentation can be implemented by using the analytic framework, by focusing on the central turning points inductively explicated in the ESA, or by combining both alternatives, which is often the most useful choice. This methodology has not been exploited before. However, recent research has emphasized the possibilities of cross-case comparisons of formally diagrammed event structures (Abell, 2001; Mahoney, 2000). A good example of the implicit use of causal narrative for comparing event structures can be found in Skocpol’s (1979) influential work on social revolutions. Most of Skocpol’s key explanatory variables are, in fact, made up of several causally linked processes, and the result of social revolution is itself composed of a series of causally linked events. These constituent processes provide event structure patterns that can be formally and analytically diagrammed and compared across cases (see Mahoney, 1999). Although Skocpol does not carry out a formal mapping, she implicitly compares the event structures of her cases in order to infer whether they follow a parallel causal logic. Altogether, I now turn to explicitly examine how the procedure can be used in the analysis of organizational decline and turnaround processes.

ANALYTICAL FRAMEWORK Research related to organizational declines and turnarounds has received accumulating attention during the last decades. The literature focused on organizational declines has mainly examined causes of decline (e.g. D’Aveni, 1989; Hambrick & D’Aveni, 1988; Mone, McKinley, & Barker, 1998), whereas the turnaround research has concentrated on examining different turnaround strategies (e.g. Arogyaswamy, Barker, & Yasai-Ardekani, 1995; Barker & Duhaime, 1997; Hambrick & Schecter, 1983; Hofer, 1980; Hoffman, 1989; Robbins & Pearce, 1992). In addition, more detailed issues such as characteristics of turnaround managers and compositions of boards


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have received interest (e.g. Barker, Patterson, & Mueller, 2001; Daily & Dalton, 1994; Goodstein & Boeker, 1991). Despite the growing interest, however, there is no extant coherent theory of organizational decline and turnarounds and the literature is largely overwhelmed by the correlational explanations in terms of statistical relationships between singular dependent and independent variables. This distortion is critical since decline and turnaround is always a matter of process. Although research regarding stage models of organizational turnarounds has identified distinct stages that the declining firm goes through in responding to a crisis and reaching the turnaround and thereby approached the process view, phenomena in the social world rarely straightforwardly follow separate stages. In fact, it is stated that there does not yet exist research on turnarounds that examines them truly as processes (Balgobin & Pandit, 2001; Chowdhury, 2002; Shook, 1998). This view finds support when one reviews the literature. For example, Robbins and Pearce (1992) as well as Pearce and Robbins (1993) use the term ‘‘process’’ as a result of dividing the turnaround into two stages: retrenchment and recovery. Moreover, these ‘‘stage models’’ concentrate on the period of explicit implementation of turnaround actions and their contents rather than on the processes. Altogether, there is an urgent need to explain the underlying mechanisms that drive decline and turnaround processes. Therefore, following the methodological procedure I will next provide a discussion of the substituting concepts regarding the possible events and activities in organizational decline and turnarounds as well as outline the issues an analysis focused on theorizing of causal mechanisms should concentrate on. The stage models propose decline as the first stage in a turnaround process. This is to propose the obvious and does not tell much about the process of decline itself. Consequently, I suggest that it is necessary to consider the process of decline not as a single stage, but rather as a continuum of several causal events and actions. A starting point, though it is also a stage model, can be found in Weitzel and Jonsson’s (1989) model in which the decline is divided into five stages that follow one another: blinded, inaction, faulty action, crisis, and dissolution. The stage of dissolution is irreversible, but the four stages before it can be included in turnaround processes. The whole decline process can be sudden, more gradual, or lingering (D’Aveni, 1989). It is also possible that an organization moves almost directly from the blinded stage to the crisis. Regardless of the speed or the different stages included in the decline, it is always a process. There always exists some reason(s) for organizational decline before the first stage is realized or the general awareness of the decline is received.

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However, during the decline the reasons can change or cumulate. Thus, the initial reasons and the causal relations behind the deepening of the decline can only be traced by examining the organizational development far enough backward. The literature to date has identified several causes related to organizational decline, such as management errors, poor marketing, demand decline, poor quality, increased competition, regression, technological change, lack of economies of scale or scope, distorted organizational culture, inadequate financial control, high costs, failed projects, centralization, etc. (Bibeault, 1982; Chandler, 1990; Grinyer & McKiernan, 1990; Hoffman, 1989; Robbins & Pearce, 1992; Schendel, Patton, & Riggs, 1976). Reasons behind or emerging during organizational decline can also be divided into two higher-level categories: industry contraction and maladjustment of a specific firm to its environment or industry (Cameron, Kim, & Whetten, 1987; Whetten, 1987), or external and internal forces of decline. These two categories of causes are often examined as separate kinds, although there is a strong possibility that the decline results simultaneously from both industry-based and organization-specific problems. Turnaround literature has in particular focused on studying the activities and strategies that are needed to stop the decline, not later than at the stage of crisis, and then on turning the development of an organization around. I want to emphasize here already that there need not be a clear barrier between the process of decline and the beginning of the turnaround. Most probably, there will be interweaving mechanisms of decline and turnaround struggling with each other. This is, however, an area that badly requires further research. Research on turnaround strategies has been somewhat uneven and noncumulative in nature (see Barker & Mone, 1994; Pearce & Robbins, 1994; Robbins & Pearce, 1992), although some attempts to converge divergent aspects have been presented (Arogyaswamy et al., 1995; Barker & Duhaime, 1997). Disagreement has mainly been due to the confused relationship between retrenchment and recovery strategies (Robbins & Pearce, 1992). These activities have also been referred to as operational and strategic (Hofer, 1980; Schendel et al., 1976) or decline-stemming and recovery (Arogyaswamy et al., 1995). I treat these concepts as interchangeable. The controversy has centered round the question of which strategy there is stronger need for, that is retrenchment or recovery, what strategies are actually used and needed during the retrenchment and recovery, and should firms exploit both of the categories of activities equally in turnaround situations. In particular, Arogyaswamy et al. (1995) suggests that retrenchment/decline-stemming and recovery strategies are interdependent rather


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than purely sequential, whereas Pearce and Robbins (1994) propose that retrenchment, in the form of thoughtfully measured cost cuttings and appropriate asset reduction, is usually needed before the firm can concentrate on recovery activities, and that it matters how, when, and how much the firm retrenches. Overall, this is one of the issues that can be attempted to solve through examination of causal mechanisms. As indicated above, previous research has mainly considered that an explicit turnaround consists of two stages. In the first stage, retrenchment activities are exploited to reverse the process of decline, stabilize operations, and restore the firm’s profitability by pursuing a combination of cost cuttings, asset reductions, divestments, production eliminations, and head count cuts. The second stage, in turn, involves changing or adjusting the business that the firm is currently engaged in. These recovery activities attempt to eliminate or cope with the causes of an organization’s decline. There is no clear demarcation, however, between what constitutes a retrenchment strategy and what activities can be labeled recovery strategies. For example, asset reductions, which are assumed necessary for turnarounds (Pearce & Robbins, 1993), can be included in both retrenchment and recovery strategies. In the retrenchment stage, asset reductions most often include sales of stores, closures, and integration of surplus fixed assets such as plant, equipment and offices with the aim of promoting cost cuttings, streamlining the organization, and creating badly needed revenues. In the recovery stage, in turn, asset reductions often include getting rid of over capacity and divestment of subsidiaries. I suggest that the main difference is that retrenchment or operational strategies are exploited to generate shortterm cash flow and profit improvement, whereas with the focus on recovery and strategic activity, asset reductions are used to change the long-term strategic positioning and performance of the organization. Moreover, when asset divestment is an important element, asset investments may also be essential, especially in the recovery stage of the turnaround. The extent to which these retrenchment strategies are used is seen contingent upon the severity of the firm’s decline and available slack resources (Arogyaswamy et al., 1995). Because retrenchment strategies primarily deal with the consequences of a decline, recovery strategies are needed that attempt to manage the causes of an organizational decline and raise a firm’s performance steadily to acceptable levels. Thus, retrenchment strategies of the first stage may be a necessity but not a sufficient condition for successful turnaround in most cases and recovery strategies that do not focus on the causes of decline may leave the stability achieved by retrenchment activities short term.

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Turnarounds may also include other types of activities. Top management replacements are seen as a necessary precondition for a successful turnaround (Barker et al., 2001). This can be a force that provides a necessary impulse for the needed change. Indeed, I propose that an organization may need external or internal impulses in order to obtain an understanding of the decline and crisis. Hofer (1980), for example, states that the basis for almost every successful turnaround involves replacing the old top management with a new one. The old management tends to have obsessive beliefs regarding how to run a business, and these traditions are often unsuitable for solving new problems. Of course, the change in management may be the consequence of an impulse or only one of those impulses that precede turnaround actions. Financial support is also an important element in turnarounds and an example of a cash generation strategy that can be included in both retrenchment and recovery activities. Its purpose is to modify a firm’s capital structure in order to reduce the strain of interest and debt repayments. Financial restructuring can be divided into equity-based and debtbased strategies. The former covers dividend cuts or omissions and equity issues. The latter concerns the wide-ranging restructuring of firm debt in order to resolve existing financial distress or to avoid this by replacing an existing debt by a new contract with changed conditions (Sudarsaman & Lai, 2001). Altogether, building on the previous theory, I suggest that an analysis focused on theorizing about underlying mechanisms in organizational decline and turnarounds should concentrate in particular on (1) forces of decline leading to crisis (both initial and emerging as well as internal and external); (2) events and actions that lead to general awareness of the decline/crisis; (3) events and actions that initiate or trigger the explicit action against the decline; (4) explicit triggering events that lead to retrenchment results; and finally (5) those events that trigger the recovery results and lead to a successful outcome. Indeed, it is likely that the whole complex decline and turnaround process consists of a concatenation of mechanisms or several sub-mechanisms. In the analysis, I concentrate on how and through what events and actions the above five issues are or are not realized. Moreover, I suggest a set of theoretically derived general-level or substitutive concepts that describe different events and actions likely to occur during the process. Table 1 pulls together those concepts and their general codes. This list can also be inductively supplemented after the analysis of event structures. The asterisk

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Table 1.

General Level Concepts.

General Substitutive Concept

General Code

Internal initial force of decline External initial force of decline Organizational disagreement Internal awareness of decline Retrenchment action Financial support External reaction to decline Evaluation of recovery strategy Understanding of crisis Management change Recovery decision Retrenchment effects Recovery results External pressure to decline External support for recovery

IFD EFD OD IAD RA FS ERD ERS* UC MC RD RE RR EPD ESR*

after the general codes in Table 1 indicates that the abstracted concept was introduced after the construction of the concrete event structures.

ANALYSIS Boundaries of the Cases Detailed descriptive accounts of the historical narratives precede the conventional use of ESA. Unfortunately, this design, especially in the case of comparative research, is rarely possible in the article format publications. Thus, I only describe briefly the boundaries of the cases and then directly present the events and construct the event structures. The first case is the decline and turnaround process of the Walkiakoski Paper Factory which extended from 1921 to 1934. The reason for choosing the first and last year is rather straightforward. On the one hand, the political and economic turbulence in the aftermath of the First World War was stabilized in 1920. The production processes and trade relations of Finnish companies had returned to almost normal. Similarly, the business environment for the basic functions of the Walkiakoski Paper Factory, in general, was stable. On the other, the main justification for finishing the narrative in

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1934 is that Walkiakoski merged in that year with United Paper Mills (UPM) and ceased to be an independent company. Another reason is, of course, that the firm had gone through the decline and turnaround process and, moreover, had survived the Great Depression at the beginning of the 1930s. In fact, the financial and production results of Walkiakoski during the years 1931–1934 reinforce the conclusion that the turnaround had changed the basic structures of the firm which had served to support the resistance against and recovery from the depression. Such a merger with another firm could in some cases be interpreted as a consequence of an unsuccessful turnaround. However, in the case of Walkiakoski, the merger was formed because Walkiakoski was attractive from the financial and production point of view. The second case analyzes the decline and turnaround process of UPM in 1963–1979. The selection of the first and last year is not as straightforward as in the previous case of Walkiakoski. However, it is obvious that during these 17 years UPM went through a severe organizational decline and turnaround process that, among other things, included five successive unprofitable years. On the one hand, the first years of the 1960s were prosperous and, on the other, during the first half of the 1970s the firm again achieved satisfactory results. In 1976 and 1977, the total results of operations were unprofitable as a result of worldwide depression, but in 1978 the firm forcefully returned to the positive growth trend that had begun in 1969. Thus, the narrative could be finished in the year 1974 because the firm had already undergone a clear turnaround before it drifted into new difficulties. However, the recovery from the depression was to a large extent enhanced by the improvements implemented during the previous years of the explicit turnaround. Thus, by finishing the narrative in the year 1979, I indicate that the recovery from the depression was already established before the externally diffused difficulties began to show. I had access to all archival material of the respective companies including the minutes of management meetings as well as company and managerial correspondence (Archive references are presented in Appendix C). Moreover, I was able to draw on various secondary sources including the company histories (Hakkarainen, 1993; Juva, 1957; Lehto, 1996; Nordberg, 1980, 1998). By means of an intensive analysis of detailed material, it was possible to produce credible accounts of the events and the development of the individual firms during the periods under analysis (see Ventresca & Mohr, 2002). Appendix A (Walkiakoski) and Appendix B (UPM) present in chronological order the events leading from the beginning of the decline through the crisis and back to success. Following the procedure offered by


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ESA, I was able to modify the event chronologies to the causal event structures presented in Figs. 1 and 2.

Walkiakoski Starting with the Walkiakoski process, Fig. 1 shows 49 events and actions in a causal and, naturally, chronological order. Following the logic of two levels of analysis, each event is substituted in Appendix A by a general concept offered in Table 1 in order to facilitate the comparison. Of course, another similar-looking diagram with the general concept could also be drawn. In the following discussion, the general concepts that substitute for case-specific concepts used in the diagram are given in italics. The causal diagram clearly depicts one external (EFD/EP1) and two internal (IFD/SAT, QC1) initial forces for the organizational decline. At the beginning of the process, the members of the organization and especially its owners were satisfied with the current performance and insisted on huge dividends (IFD/IO). None of the required steps were taken to develop the factories and products, although the customers continuously complained about the poor quality of the paper and problems with accurate deliveries. At the same time, the general conjuncture in the pulp and paper markets was weakening. The complaints of customers, and finally the explicit financial difficulties, made the CEO aware of the decline (IAD/SD). This was the first of the two main impulses which created the general awareness of the decline and initiated resistance to the crisis. The other main impulse was the external reaction of a creditor (ERD/CR). This event together with the main owners’ financial difficulties led to a change of ownership and changes on the board of directors (MC/NC, WS). The changes on the board were a clear turning point in the process leading to the evaluation of the firm’s production strategy (ERS/RS1) and overall situation (ERS/CS) as well as implementation of the first asset divestments (RA/AD1). As a result of the evaluation, a deeper understanding of the crisis (UC/UC) was finally obtained. This led to the explicit action as a form of cost-cutting actions (RA/CC1) and a loan application (FS/ES1), but also to managerial disharmony (OD/MD1, BD) followed by changes in the top management (MC/MC1). The change of CEO deepened the operational restructuring (RA/OR), contributing to the positive results received from the retrenchment actions (RE/RE). The new CEO also suggested a new direction for the firm’s production (ERS/RS2). However, the strategic decision to

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SAT

EP1 QC1

SD

IO CR

General awareness NC

AD1

RS1 WS CS UC

ES1 MD1

Explicit action

CC1

MC1

QC2 BD OR RE

RS2

UPM1

Retrenchment results

ES2 EP2

RD1

CS1 IQ1

CD QC3

EP3 MC2 ES3

SI

IQ2 BF

UPM2 QI1 RD3 RD4

EP4 CC2 RD5 RD6

CS2

Recovery results

ES4 RR1 RR2 MER

Fig. 1.

Causal Event Structure of the Walkiakoski’s Decline and Turnaround Process.

433


EB

IS1

OB

IR IP1 FS1

SI1

FI1 MI1

IS2 CI1

General awareness

HC FS2 DI1 MD1

WI1

ML

FS3

CE

WP

VW UR

MD2 CR MI3

MD3 Explicit action

MC1 HO RD ADP

CP

AS AR

PU1

CI2

NI

SI2 FL

EA1 CC

PD FS4

TF

TP1

Retrenchment results

RE1

IP2 MI4

ES

LI

EA2

CD

FA

IP3 WD

PU2 DI2

FS5 CV SI4

RH

EC

TP2 DF EP RR1

Recovery results

IP4 MI5

Fig. 2.

Causal Event Structure of the UPM’s Decline and Turnaround Process.

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radically change the firm’s existing production structure (RD/RD1) was not made until the financial support had been arranged (FS/ES2) and, more importantly, external pressure had emerged in the form of declining newsprint prices (EPD/EP2). Fortunately, a general agreement of the production quotas soon relieved the external pressure (ESR/CS1). The firm had now reached a rather stable situation. The first initial force behind the decline, incompetent management and ownership, was eliminated and the decisive recovery decision was made that answered the initial external reason for the decline. However, no clear solution had been found for the second initial internal reason for the crisis, that is, the inadequate quality of the paper. Although the financial situation improved as a result of the retrenchment actions, the firm still received complaints about quality (IFD/QC2). Some investments were made to improve the quality (RD/IQ1), but evidently the efforts were not sufficient since the criticism continued (IFD/QC3). Complaints about quality, together with declining prices and diminishing order volume (EPD/EP3) that were partly a result of the disintegration of the cartel agreement (EPD/CD), led to a peaceful change of CEO (MC/MC2), further financial support (FS/ES3), and finally investment in new machines (RD/IQ2) that clearly improved paper quality (RR/QI1). The recovery strategy was further supported by the acquisition of new machineries (RD/RD3) and the founding of a paper converting company (RD/RD4). External support for the recovery was received from UPM, which became the main owner of the firm (ESR/UPM2). The chain of events that led to UPM’s ownership started after the firm had received clear retrenchment results (RE/UPM1) and the required equity issue had been implemented (FS/SI). Moreover, the Bank of Finland promised support for the investments necessary (FS/BF). The cooperation with UPM started in favorable circumstances – just before the Great Depression (EPD/EP4). The cooperation made possible, in response to the depression, bigger cuts in wages and in numbers of employees than would otherwise have been possible (RA/CC2). In spite of the depression, the firm also continued its recovery strategy by investing in research and development (RD/RD5) and in a new paper machine (RD/RD6). These investments were clearly supported by the cooperation with UPM. The ongoing recovery actions, cost cutting in the face of depression, and external recovery impulses – in the form of cartels, decreases in custom duties, and currency devaluations (ESR/CS2, ES4) – led to explicit recovery results (RR/RR1, RR2) and finally to the merger with UPM.


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UPM The causal event structure of UPM is presented in Fig. 2. This also depicts one external (EFD/OB) and two internal (IFD/EB, IS1) initial causes for the organizational decline. However, one of the internal forces (i.e. IS1) can also be seen as an initial consequence of the main internal reason: the CEO’s (Walden) overly expansive business strategy (IFD/IR, IP1, MI1, FI1), which realized through several actions and events and was supported by the main creditor (KOP) and majority of the owners (IFD/FS1, SI1). This strategy might well have produced successful outcomes in some other environment, but during the explicit overcapacity in the world’s pulp and paper production and an unfavorable business cycle, it created existence-threatening problems. The first explicit impulse to resist the decline came from abroad. The CEO and other managers were well aware that UPM’s Italian subsidiaries were making a loss, but not until the top management received a detailed analysis of the performance of these units was it suggested that they should withdraw from Italy in order to avoid catastrophic consequences (IAD/IS2). A second and more important impulse against the deepening decline, which was already showing in the financial statements, came from outside the organization when the main creditors refused to give additional financing (ERD/CI1). Altogether, the general awareness of the decline had been reached. Indeed, the financial situation became so acute that the creditors decided to found a holding company and to set up a working committee for taking over UPM (ERD/HC) before allowing the needed financial support (FS/FS2) for keeping the firm as a going concern. The strong external reaction to the crisis initiated the explicit actions against the decline, but it did not immediately produce radical improvements since the same powerful CEO continued to lead the organization. However, the withdrawal from Italy was clearly boosted (RD/WI1) and investment in a board machine was delayed (RA/DI1), though causing strong managerial disagreement inside the organization (OD/MD1). Unfortunately, these actions did not ameliorate the acute financial distress and the firm was again forced to apply external financial support (FS/FS3, ML). The working committee promised to guarantee the loan only if the main creditor was allowed to make a thorough examination of the firm’s situation (ERS/CE). The CEO first prevented the examination (OD/WP), but was later forced to accept it (OD/VW). After a few months, the detailed results of the examination revealed the severity of the crisis and indicated the necessity of urgent reconstructions (UC/UR). In spite of the explicit facts, the

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CEO wanted considerable dividends (OD/MD2). Finally, the management disagreements and the creditors’ examination led to the CEO’s resignation (OD/CR, MD3). As his last action, however, the old CEO decided to continue the interrupted board machine project (IFD/MI3), which caused further problems. The change of CEO (MC/MC1) basically eliminated the main initiator of the internal problems and finally opened the organization to more explicitly work against the decline, even if some retrenchment activities were already implemented after the creditors’ intervention. Altogether, the forces of decline still existed in the organization. The new CEO started by outlining a new organizational order (ERS/HO, CP) and considering how to reconstruct the organizational functions and governance structures (RD/RD, PU1, AS, ADP) – that is, he concentrated on recovery actions. However, the CEO also realized that clear asset reductions had to be implemented (RA/AR) in order to receive liquid money. Altogether, these actions did not prevent the financial deficit from increasing (IFD/NI). Thus, the Bank of Finland reacted again and decided that UPM had to increase its share capital and that it was not allowed to implement anything other than small maintenance investments (ERD/CI2). This impulse led to the decision of share issue and further loan of the bank (FS/FL, SI2) as well as first emergency agenda (RA/EA1), which included: employee reductions, material savings, delaying investments, finishing unprofitable production, concentration on profitable qualities, diminishing the stocks, and streamlining the work procedures. Retrenchment actions and further investigations (RA/PD) were also started and liquidations in Italy (RD/LI) continued but they did not produce immediate results and during the following months the situation became even worse (IFD/CC). Therefore, even extraordinary measures were declared to be acceptable in order to improve the firm’s situation. Finally, a new emergency agenda was presented (RA/ EA2). At this time the retrenchment actions together with the share issue and a modest loan (FS/FS4) produced clear, positive, effects (RE/RE1). After the situation had stabilized, in order to ensure the future successful performance of the firm, a new investment plan was presented (ERS/IP2). It was followed by a major strategic decision to acquire a new paper machine (RD/MI4). At the same time considerable foreign asset divestments were implemented (RD/FA). Evaluation of the firm’s strategic goals then continued (ERS/ES) leading to new investment plans (ERS/IP3) and introduction of the profit units’ allowance system, which made the units more autonomous (RD/PU2). Important strategic decisions were also investment in thermomechanical pulp production and a cooperation agreement with Haarla Corporation (RD/TP1, TF, TP2, CD).


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These recovery measurements were, however, interrupted by worldwide depression (EPD/WD). As a first reaction, financial support was applied (FS/FS5) for ongoing investment projects, some investments were delayed (RA/DI2), and investigation of the firm’s crisis vulnerability was implemented (ERS/CV). The last measure was followed by an economy campaign (RA/EC) and a share issue (FS/SI4). These internal evaluations and retrenchment actions together with the above recovery actions, acquisition of Haarla (RD/RH), and finally external support (ESR/DF, EP) led to positive production and financial results (RR/RR1). Thereafter, the investment program continued (RD/IP4) and finally after a prosperous year, a new investment plan was launched that became a cornerstone of UPM’s success in the 1980s and 1990s (RR/MI5).

Comparison and Suggestion of the Causal Mechanisms The event structures can be simplified for comparative purposes by using the logic of the ontological form of two levels of analysis and the analytic framework. Consequently, as suggested in the framework, the focus is on (1) forces of decline, (2) events/triggers that led from the blinded level to general awareness, (3) events/triggers that led the organization from awareness to explicit action, (4) events/triggers that led to explicit retrenchment, and (5) events/triggers that led the recovery results and finally to the successful outcome. In the case of Walkiakoski, the following points can be made: (1) The organizational decline was caused by both internal (IFD) and external reasons (EFD), although the former had a stronger influence, and latter reinforced by emerging organizational disagreements (OD) and external pressures (EPD). (2) The transition from the blinded level in decline to the general awareness of the decline required two impulses, one internal (IAD) resulting from the customers’ complaints, and one external as a reaction of the creditor (ERD). (3) The transition from the general awareness to explicit actions was triggered by the changes on the board (MC), evaluation of the firm’s strategic situation and future possibilities (ERS), and understanding of the severity of the crisis (UC). (4) Although the first retrenchment actions started during the evaluation, the above events were needed to trigger the correct retrenchment actions (RA), the application of financial support (FS) and the change in the top management (MC). Together, these events led to the explicit retrenchment results. (5) The explicit actions leading to the first recovery decisions (RD) were triggered by the insight of the new CEO (ERS)

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and financial support (FS). The thorough implementation of the recovery strategy and the achievement of recovery results were further triggered by retrenchment actions (RA), additional financial support (FS), and external support (ESR) as forms of trade policy and cooperation. In the case of UPM, (1) the decline was caused by internal (IFD) and external (EFD) reasons, the former having the main influence, and reinforced by emerging organizational disagreements (OD) and external pressures (EPD). (2) The transition from the blinded level to general awareness of the decline was triggered by internal signals (IAD) from the foreign subsidiaries and by the external reaction of the creditors (ERD). (3) The transition from awareness to the explicit actions was hindered by continuous managerial disagreements also deriving from the initial forces of decline, but finally the creditors’ inspection (ERS), deepened understanding of the severity of the crisis (UC), and the change of CEO (MC) triggered the organization to take explicit action against the crisis. (4) Some modest retrenchment actions were implemented after the creditors’ intervention, but the determined retrenchment (RA) leading to the explicit results required that the new CEO further evaluated the situation (ERS), that the creditor again reacted to the poor situation (ERD), and that the firm received additional financial support (FS). (5) The explicit recovery actions (RD) leading to recovery results followed the CEO’s visioning (ERS) and started at the same time as the determined retrenchment or even earlier. However, the implementation of the recovery strategy was interrupted twice: during the intensive retrenchment and during the worldwide depression. Moreover, retrenchment actions (RA) as well as financial (FS) and external support (ESR), during and after the depression, assisted the implementation of the recovery strategy and finally the realization of the recovery results. The above five combinations of causes form the suggested causal mechanisms underlying the processes. A comparison can now be implemented one mechanism at a time using Boolean logic as presented in Table 2. First, the results show that in both cases the decline was jointly caused by two necessary causes that can be proposed as forming the mechanism of the initial decline which was further enforced by emerging external and internal reasons. Altogether, the mechanism of decline that drove the organizations to the crises and formed the counter force for the turnaround activities was generated through similar elements in both cases. Second, the internal signals of poor performance and the strong external reactions were the jointly sufficient factors that pushed the organizations from the state of blinded decline to the state of general awareness of the decline. Thus, they can be ontologically seen as the defining features forming


Table 2.

439

Results of Boolean Comparison.

Mechanism

Conjuncture of Necessary Causes

1

Walkiakoski (W): IFD EFD (OD EPD) + UPM (U): IFD EFD (OD EPD)

IFD

EFD (OD EPD)

2

W: IAD ERD + U: IAD ERD

IAD

ERD

3

W: MC UC ERS + U: MC UC ERS

MC

UC ERS

4

W: RA FS MC + U: RA FS ERS

RA

FS

RD

ERS FS RA ESR

5

ERD W: RD ERS FS RA ESR + U: RD

Note:

ERS FS RA ESR

signifies logical ‘and’; + signifies logical ‘or’.

the mechanism for general awareness. Third, after reaching the general awareness, both organizations needed a change in management, understanding of the severity of the crisis, and an evaluation of the organizations’ strategic situation and future possibilities before the implementation of the determined turnaround actions became possible. Thus, the combination of the above necessary features formed the sufficient mechanism that was needed to generate explicit action in both cases. Fourth, in the case of Walkiakoski, the retrenchment results were created by the combination of retrenchment actions, financial support, and management change. In UPM, retrenchment results were produced by the combination of retrenchment actions, financial support, further evaluation, and an external impulse. Accordingly, the mechanism generating retrenchment is a good example of equifinality where the same general outcome is produced by different, sufficient combinations of lower-level causes. In fact, only the retrenchment actions and the financial support acted as necessary causes in both cases. However, the missing and diverging factors were present in the preceding mechanisms driving the processes. The turnarounds, however, would not have been successful without the mechanism that finally led the organizations to the recovery results. In both

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cases, this mechanism consisted of evaluation and planning, implementation of recovery actions, further financial support, additional retrenchment actions, and external support. Consequently, in both cases the proposed sufficient mechanism to recovery consists of five defining features, two of them being the necessary conditions that were also generating the retrenchment results in both cases. As a result, building on the findings of the above analyses and the comparison, Fig. 3 depicts a scheme of the mechanisms driving the organizational decline and turnaround processes. It includes the mechanism of decline and the four necessary mechanisms that cumulative and interdependently work against the decline and finally generate the successful turnaround. On the one hand, each of the mechanisms is composed of a combination of defining features that are jointly sufficient to activate the mechanisms. On the other, the existence of the mechanism that drives the organization to the state of general awareness of the decline is assumed to be necessary for the existence of the mechanism that drives it to explicit action, and that mechanism in turn precedes the mechanisms that drive the Mechanisms: 1. Decline 2. For general awareness 3. For explicit action 4. For retrenchment 5. For recovery

Walkiakoski UPM

RD * ERS * FS * RA * ESR 5. RD * ERS * FS * RA * ESR

*

MC * UC * ERS 3. MC * UC * ERS * * IAD * ERD 2.

RA * FS * MC 4.

IAD * ERD

RA * FS * ERS * ERD

IFD * EFD * OD * EPD 1. IFD * EFD * OD * EPD

Time / causality

Fig. 3.

Outcome

Causal Mechanisms in Organizational Decline and Turnaround Process.


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organization to retrenchment and recovery. Altogether, the successful organizational turnaround is sufficiently generated through the activation of four necessary mechanisms acting against the mechanism of organizational decline.

DISCUSSION In social sciences in general and in strategy research in particular, the process approach has offered a promising methodological alternative or complement to correlational analysis. However, the lack of systematic methods and data analytic techniques for reducing the complex reality that the researcher inevitably faces has hampered many of the contributions that processual research might have produced. Another noteworthy deficiency has been the limited discussion of alternative logics of explanation and of what can or should be explained in processual analysis. In the current research, I address these concerns by offering a methodology for causal explanation across complex sequences of events in order to reveal the underlying causal mechanisms that, when activated, generate outcomes and in some cases empirical regularities. The suggested methodological procedure and the analysis of the organizational decline and turnarounds demonstrate how the explanation with mechanisms truly takes advantage of the possibilities processual data offer, thus providing a robust basis for causal explanations that go beyond correlation. Moreover, the study advances our understanding of organizational decline and turnarounds by providing a description of causal mechanisms that drive the decline and turnaround processes. Accordingly, as a most important implication for future researchers, this paper provides a formal methodology for processual analysis that is oriented toward the above-described causal and comparative reasoning. While this is not the first study to introduce the data analytic technique ESA as a systematic tool for identifying the causal structure of an organizational process (Stevenson & Greenberg, 1998), this is the first study that accommodates the comparative element (Ragin, 1987) and the notion of two-level theories (Goertz & Mahoney, 2005) in the causal event-structure analysis. Most importantly, the idea of explanation with causal mechanisms is explicitly introduced in processual strategy research. The methodology provides a valuable addition to the methods used in strategy and organization research by incorporating interpretative and explanatory modes of analysis. On the one hand, the use of in-depth

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qualitative data in ESA makes it possible to consider closely contextual influences and contingencies peculiar to each process and in so doing identify the mechanisms and their constitutive components that generate the outcomes. On the other, abstraction of the event structures by means of the idea of two-level theories and comparison of the abstracted event structures using Boolean comparison support explicit reasoning regarding similarities and differences of mechanisms. As a result, it becomes possible to identify tendencies among the mechanisms producing the same phenomena in a more abstract level. The systematic structure of the methodology allows the researcher to replicate each phase of the study, thereby increasing the internal validity of the analysis. The methodology also makes possible replications by using different data sets in order to further confirm the mechanisms identified. However, since strategy research is never conducted in experimentally controlled conditions, replications cannot provide conclusive verification or falsification of the causal mechanisms proposed (see Tsang & Kwan, 1999). The analysis of the organizational decline and turnaround processes showed in practice how the methodology is able to generate a substantial advancement in knowledge. Even though earlier research has identified different reasons for decline and singular strategies and actions that can be implemented during an explicit turnaround as well as simple stages that organizations are assumed to go through during turnarounds, the causal process itself, that is the way in which events cause other events and how the combinatorial and cumulative influence of different causes finally generates the outcome, has remained unexplained. Thus, the suggestions concerning how the five mentioned causal mechanisms work and finally generate the outcome of interest offers a significant contribution to our understanding of organizational decline and turnaround processes. In particular, the ideas proposed in this paper explicitly show how the turnaround is not a matter of a single cause or a result of several independent and unrelated variables. Instead, the turnaround is argued to be a matter of the cumulative and interrelated influence of four different causal mechanisms that work against the mechanism of decline. An organizational turnaround usually concretizes during the phase of explicit implantation of turnaround activities. However, as this study shows, this phase is not possible without the mechanisms that drive the organization to the states of general awareness and explicit action. Thus, our understanding of decline and turnarounds would remain decisively incomplete if the different causal mechanisms driving the processes were not identified.


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The analysis has also clearly demonstrated that the mechanism is not a single variable, but rather consists of a combination of defining features that are jointly sufficient to activate that mechanism. Thus, explanations that are based on identifying causal mechanisms avoid the danger of the overdeterminism of stage models (Stubbard & Smalley, 1999) and better incorporate the multiple causation, which can be seen as a predominant condition in the complex social world. Accordingly, as the analysis of the decline and turnarounds illustrates, the same defining feature may have a function in different mechanisms producing different outcomes and that the same general level outcome can be produced by different combinations of causes. These findings are consistent with a basic idea of causal complexity, namely that a single cause rarely operates in isolation, while the realized effect is usually the joint result of a combination of different causes. These notions help us to clear up, among other things, the confusion around the retrenchment and recovery strategies (see Barker & Mone, 1994; Pearce & Robbins, 1994). For example, in this study the activation of the causal mechanism that finally drove the organizations to explicit recovery required the same defining features that were needed in the activation of the mechanism generating retrenchment. Moreover, in the case of Walkiakoski the mechanism that produced retrenchment results and the mechanism that drove the organization to successful recovery were somewhat sequential, but in the case of UPM they acted for the most part simultaneously. Altogether, both of the mechanisms were necessary in the elimination of the causes and consequences of the organizational declines. Thus, a successful organizational turnaround is not a matter of separate retrenchment or recovery activities. On the contrary, turnaround is seen as cumulatively and interdependently produced by causal mechanisms that are activated by combinations of causes, which also include explicit retrenchment and recovery activities. Although this paper has provided an account of the issues related to explanation by causal mechanisms in processual research in general and organizational decline and turnaround research in particular, there is a need for future study in several fronts. As regards to causal mechanisms, the close connection with realism and philosophy of science on the whole needs further considerations. Also the role of organizational actors in causal mechanisms requires clarification. In the context of organizational decline and turnaround literature, since this study has analyzed only two cases, future researchers could study a wider set of cases, apply fuzzy-sets methods (Ragin, 2000), and employ replications. Of course, the field of strategy process research includes almost infinite number of other processual

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phenomena in which the methodology could provide new insights. Altogether, I hope that the ideas presented here provide useful guidance for future research in explaining and challenging outcomes and empirical regularities established by correlational analyses as well as will encourage the examination of various issues previously avoided.

ACKNOWLEDGMENTS I thank the two anonymous reviewers, the conference participants at INSEAD, and the editors, Gabriel Szulanski, Yves Doz, and Joe Porac, for helpful comments. Juha-Antti Lamberg, Henrikki Tikkanen, and Mikko Ketokivi provided stimulating discussions on earlier drafts of this paper. I also gratefully acknowledge financial support received from the Academy of Finland’s LIIKE Programme.

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APPENDIX A. CHRONOLOGICAL EVENTS OF THE WALKIAKOSKI’S DECLINE AND TURNAROUND PROCESS Description of the Action Financial performance satisfies owners and managers. Huge dividends. The rate of the Finnish mark revaluates and the price of paper decreases. External pressures. Continuous customers’ complaints about the quality of paper become general. Owners demand huge dividends. Incompetent ownership. CEO founds alarming signs in financial numbers. Explicit signs of decline. The creditor (PYP) does not accept the dividends. Creditor remarks the situation. HOP (a commercial bank) becomes the main owner. New chief, Wegelius, to the board. Decision to sell land and forest because lack of funds. Asset divestment. Wegelius suggests newspaper production extension, no decision. Recovery suggestion. Wegelius recruits Walden to bring new managerial input to the board. Walden starts. Walden tries to instruct new accounting and reporting systems in order to clarify what is the firm’s situation.

ETHNO Code SAT EPI

General Code IFD (initial internal force of decline) EFD (initial internal force of decline)

QC1

IFD

IO

IFD

SD

IAD (internal awareness of decline) ERD (external reaction to decline) MC (management change)

CR

NC

AD1

RA

RS1

ERS (evaluation of recovery strategy)

WS

MC

CS

ERS


APPENDIX A. Walden urges that they have to thoroughly examine how to improve the production and avoid continuous loses. They cannot wait for positive changes in conjunctures. Understanding the crisis. Decision to apply for a considerable loan for the reparations. External support. Walden expresses dissatisfaction to the management’s work. Managerial disharmony. Continuous financial difficulties. Walden suggests a detailed cost cutting and dismissal program. Walden decides to reorganize the top management of the firm by discharging three managers including the CEO. Management change. Still quality complaints. Needed improvements without total realization. Board of administration disagrees of the new CEO’s competence. Board disharmony. The new CEO, Christiansen, improves the reporting systems and seeks effectively the most economical ways of production. Operational restructuring. Christiansen suggests a reorganization and extension of the sulfate production that would change the production direction of the firm. Recovery suggestion.

449

Continued UC

UC (understanding of the crisis)

ES1

FS (financial support)

MD1

OD (organizational disagreement)

CC1

RA

MC1

MC

QC2

IFD

BD

OD

OR

RA

RS2

ERS

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APPENDIX A. First attempt to sell stocks to UPM. Positive production results, no urgent need for a new loan. Retrenchment effects. A new big loan for extensions and reparations. External support for recovery. Declining newsprint and sulfate pulp prices. External pressure. Decision to convert sulfate pulp to craft paper, and strongly diminish newsprint production. The main recovery decision. Scandinavian and Finnish agreement of production quotas. Cartel support. Investments to improve the quality and ability to answer the customers’ wishes. Scandinavian craft paper cartel disintegrates. Prices and orders are declining. External pressure. Quality problems. Quality complaints Christiansen proclaims to leave the firm. Management change. PYP gives more credit. External support. Investments in new machines to improve the quality. Decision to increase equity capital by share issue. The Bank of Finland becomes the name creditor and promises to support Walkiakoski.

Continued UPM1 RE

RE RE (retrenchment effects)

ES2

FS

EP2

EPD (external pressure to decline) RD (recovery decision)

RD1

CS1

IQ1

ESR (external support for recovery) RD

CD

EPD

EP3

EPD

QC3 MC2

IFD MC

ES3

FS

IQ2

RD

SI

FS

BF

FS


APPENDIX A. UPM and its owners become the main owner as a result of the stock issue. Increasing cooperation. Customers report that the quality has improved. Investing a soda boiler to sulfate factory to improve the craft paper production. Recovery decision. Worldwide depression. External pressure. Decision to found a paper converting company. Recovery decision. Considerable employees and wage cuts because of the depression and cooperation with UPM. Cost cutting. Decision to invest on research and development. Recovery decision. Decision to take a loan with UPM and invest to a new paper machine in order to increase the quality of papers. Recovery decision. Scancraft is founded and Walkiakoski becomes a member. Cartel support. Customs in England decrease and Finland’s mark devaluates. External support. Positive production and market signals. Customers satisfied. Recovery results. Prices increase. Recovery results. Walden suggests that UPM and Walkiakoski should merge.

Continued UPM2

ESR

QI1 RD3

RR (recovery results) RD

EP4

EPD

RD4

RD

CC2

RA

RD5

RD

RD6

RD

CS2

ESR

ES4

ESR

RR1

RR

RR2

RR

MER

RR

451

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APPENDIX B. CHRONOLOGICAL EVENTS OF THE UPM’S DECLINE AND TURNAROUND PROCESS Description of the Action CEO Walden’s expansive business strategy. Overcapacity in industry and an unfavorable business cycle. Considerable subventions for Italian subsidiaries. A new newsprint machine comes into operation. Decision to stop the other. Investment realization. Walden introduces a major investment plan consisting of three new machines. The main creditor (KOP) arranges financial support for investments. Share issue is implemented. A new foreign investment suggestion. The analysis of Italian subsidiaries recommends withdrawing from Italy. Decision to construct a board machine and order a new sack paper machine. Major investment. KOP and the Bank of Finland realize the acute financial distress and refuse to give additional financing. Creditors’ intervention. Creditors found a holding company and working committee that would take over UPM. The KOP’s CEO Virkkunen becomes the chair. Also a share issue is required. The holding company allows the needed financial support.

ETHNO Code EB

General Code

IS1

IFD (initial internal force of decline) EFD (initial external force of decline) IFD

IR

IFD

IP1

IFD

FS1

IFD

SI1 FI1 IS2

IFD IFD IAD (internal awareness Of decline) IFD

OB

MI1

CI1

ERD (external reaction to decline)

HC

ERD

FS2

FS


APPENDIX B. Decision to delay the investment program and construction of the board machine. Withdrawing from Italy begins. Managerial disagreement over the board machine investment. The share issue is delayed, the maturity date of loans is extended. A big loan is suggested that needs KOP’s guarantee. Need for financial support. The CEO of KOP guarantees the loan if the creditor is allowed to make a thorough examination in the firm. Walden prevents the examination. Virkkunen forces Walden to accept the examination. The investigation reveals the harsh nature of the situation and suggests urgent reconstructions. Understanding received. Managerial disagreement between the CEO and the working committee over the dividends. The CEO Walden announces that he resigns after the next year. Managerial disagreement over the CEO selection. Walden continues the major board machine investment. New CEO Hakkarainen starts. Management change. Hakkarainen outlines a new organizational order. A plan for the development of R&D functions.

453

Continued DI1

RA (retrenchment action)

WI1

ML

RD (recovery decision) OD (organizational disagreement) FS

FS3

FS

CE

ERS (evaluation of recovery strategy)

WP VW

OD OD

UR

UC (understanding of recovery strategy)

MD2

OD

CR

OD

MD3

OD

MI3

IFD

MC1 HO

MC (management change) ERS

RD

RD

MD1

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APPENDIX B. CEO states that they have no other choices than to considerably cut the expenses and seek profitable areas of production. Restructuring process of the accounting system starts. ADP system is introduced. Wide asset reductions. Introduction of the profit unit organization structure. Managers found no needed improvement in financial and production results. The Bank of Finland refuses future big investments. Creditors’ intervention. A new share issue is decided to implement. The Bank of Finland and KOP provide further loan. An emergency agenda is introduced. Includes heavy cost cutting. A liquidation decision in Italy. The situation has even weakened. The firm is near to the crisis of confidence and the reasons are purely internal. A new emergency agenda. Includes all possible asset reductions and cost cuttings. An investigation in order to solve the production difficulties and the new board machine. The Bank of Finland accepts loans for profitability investments. Financial support. The situation is stabilized but further improvement needs more investments. Retrenchment effects.

Continued CP

ERS

AS

RD

ADP AR PU1

RD RA RD

NI

IFD

CI2

ERD

SI2

FS

FL

FS

EA1

RA

LI CC

RD IFD

EA2

RA

PD

RA

FS4

FS

RE1

RE


APPENDIX B. An investment plan including a new paper machine is accepted. Decision to acquire a newsprint machine to Ja¨msa¨nkoski. Major investment. Considerable foreign asset reductions. A merger with Haarla is suggested. Only a cooperation deal is done. Evaluation project of the firm’s strategic goals. Suggestion to acquire a new board machine to Simpele and paper machine to Kaipola. Investment plan. Suomen Talkki firm is bought. An experimental plant of thermomechanical pulp production starts. Introduction of the profit units’ allowance system. Signs of world depression become explicit. Decision to apply a considerable loan from abroad. Financial support. Some investments are delayed. Investigation of the firm’s crisis vulnerability. A new share issue is suggested. The Bank of Finland is asked to help for arranging credits. An economy campaign is launched. The acquisition of Raf. Haarla. Thermomechanical pulp plant is ready. Three devaluations of the Fmk in 1977/78.

Continued IP2

ERS

MI4

RD

FA CD

RD RD

ES

ERS

IP3

ERS

TF TP1

RD RD

PU2

RD

WD

FS5

EPD (external pressure to decline) FS

DI2 CV

RA ERS

SI4

FS

EC RH TP2 DF

RA RD RD ESR (external support for recovery)

455

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KALLE PAJUNEN

Depression turns to the economic prosperity. Positive market and financial signals. Recovery results. Investment program continues. A major investment plan is suggested and starts.

EP

ESR

RR1

RR

IP4 MI5

RD RR

APPENDIX C. ARCHIVAL REFERENCES UPM-Kymmene Central Archives The archives of the Walkiakoski Paper Factory Records of board and managers meetings 1920–1934 (includes appendixes) Annual reports 1920–1934 Company correspondence 1920–1934 Personal correspondence of the CEO Walden 1927–1930 Financial statements and other internal documents 1920–1934 Records of the UPM and Walkiakoski’s combined board meetings 1932– 1934 The Archives of the United Paper Mills Records of managers meetings 1963–1975 (includes appendixes and other internal documents) Annual reports 1962–1980 Records of administrations meetings 1963–1968 (includes appendixes) CEO Hakkarainen’s correspondence 1970–1973 CEO Hakkarainen’s notes 1969–1972 Virkkunen’s and CEO Walden’s correspondence 1967–1968 (includes internal documents, e.g. the KOP’s credit information department’s report) Financial statements 1963–1980 The Archives of the Central Association of the Finnish Forest Industry Correspondence with UPM 1970–1980

FUTURE DIRECTIONS FROM THE PAST: MANAGEMENT AND ACCOUNTING DISCOURSE IN HISTORICAL PERSPECTIVE Luca Zan ABSTRACT This article reflects on the lack of focus on history characterizing the strategic management field. Reasons and consequences of such a peculiar situation need to be pointed out in order to develop a better historygrounded research approach inside the field. In terms of (the missing) history of thought, a fear of history seems to characterize the field, for a more aware historical understanding of strategic management and practices is likely to question not only notions and concepts, but the very perception of the field as a practically oriented discipline. A lack of historical reflection is usually preferred, wherein strategic management seems to come out of the blue, ignoring its inner evolution over time, and the relationships with previous bodies of knowledge in the business realm, such as for instance administrative sciences and accounting. In terms of the history of practice the situation is – if possible – even worse, with an obscure understanding of contexts and features of managerial practices in the past. Archival research is called for here, drawing Strategy Process Advances in Strategic Management, Volume 22, 457–489 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22015-6

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on two research projects on pre-industrial revolution context (the Spanish Royal Tobacco Factory in the XVIII century, and the Venice Arsenal in the turn of the XVI century), in order to examine how prior management practices can influence and inform our present understanding of the discipline of strategic management. A less simplistic view of managing practices in the past emerges, which challenges the commonly held cycle of innovation and discontinuity perpetually alleged in the strategic management field to legitimize its own existence as a research area. While strategic management tools show a potential contribution to historical understanding in this archival research, a more historically aware understanding of the evolution of the field is thus intended as a way to falsify strategic management theory.

1. MANAGEMENT KNOWLEDGE AND HISTORICAL INQUIRY The idea that strategic management as a research area has a difficult relationship with history is not a new criticism. The a-historical character of mainstreams has been explicitly addressed by Pettigrew (1985) among others, while in general the whole approach to strategic change tried to bring in a more dynamic view of strategic processes – the term itself involving a reality of becoming more than a static equilibrium (cf. Mintzberg, 1978, 1994; Mintzberg & Waters, 1990; Normann, 1977; Kimberly & Miles, 1980; Quinn, 1980; Burgelman, 1983; Johnson & Scholes, 1984; Pennings, 1985; Johnson, 1987; Pettigrew, 1987, 1989, 1990; Pettigrew & Whipp, 1991; Zan, 1987, 1990, 1995; Zan, Zambon, & Pettigrew, 1993; Whipp, 1996, 2002; Baden-Fuller, van den Bosch, & Volberda, 2001; Grant, Wailes, Michelson, Brewer, & Hall, 2002). Yet the lack of a sense of history in the field is intended here in more radical terms, despite few exceptions in the literature (e.g. longitudinal analysis, or the reference to institutionalism that can be found sometimes; or rarely in more explicit terms, as in Kieser, 1994; Rowlinson & Procter, 1999). For what is missing is any serious interest in either the history of thought or the history of practice based on theories and perspectives developed within the strategic management field. In other words, forcing to a great extent the lack of interest on history by management scholars, possible questions could be: What kind of history is needed/implied by management knowledge? Would management scholars simply take history from outside

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their research boundaries, such as developed elsewhere, in other research domains (e.g. economic or business history)? Or is there any change in those narratives deriving (or could, or should derive) from management knowledge and its developments within management studies? For instance, to what extent the crucial de-coupling between thought and action have possible implications in the way in which history can be reconstructed, either in terms of practices or thought? Or the critique by Mintzberg (1978), to the very notion of strategy formulation? Or the problematic relation between theory and practices as discursive practices that operate in separate contexts, the real world vs. the Academia, as Astley (1984), puts it, acknowledging their separation? Or the attention to local and subjective processes of knowledge/partial ignorance (Loasby, 1976) deriving from the management literature particularly on strategic management and decisionmaking debates (cf. also Crozier & Friedberg, 1977; Van de Ven & Astley, 1981; Astley & Van de Ven, 1983; Knights & Morgan, 1991; Clegg, Hardy, & Nord, 1996)? Or a close attention to relational and power profiles, which basically represent one of the features common to much of organizational thought over the last few decades (see Cyert & March, 1993, pp. 214–246). Or, finally, a view of managing that focuses on resources, competences and knowledge creation (e.g. Grant, 1991) has any impact on the way in which history of economic and organizational entities is described? And, in turn, are similar processes understandable without a serious reference to long-term historical context and dynamics? In short – while leading to the following sections of the paper a more detailed argument to the charge of lack of historical interest of strategic management literature – a more historically aware understanding of the field could have two possible impacts: on the one hand the strategic management view and its tools can give an interesting contribution to historical research – or, in other words, historians could benefit using some of its own concepts/tools; and on the other a historical view of our own knowledge in its evolution can provide a useful mechanism for theory testing, or, in contrast, for theory falsification. Though similar questions are rarely posed in the debate, and even more rarely answered, one interesting example of internally developed historical framing arising from theory developments inside the management field is that of distinguishing between before and after the Fordist era (‘‘internally’’ in the sense that neither economic or business history per se have the theoretical notions that are necessary for a similar periodization).

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Unfortunately, the current knee-jerk reference to the Fordist/post-Fordist firm seems to be a rather un-problematized and paralyzing dichotomy, calling for an objective discontinuity in complexity, which will be questioned in these pages, according to a more subjectivist view of complexity, as perceived by organizational actors. It is indeed not too a robust periodization from a historical point of view; but at least a possible example of implications for history research. For, if the distinction between fordism and post-fordism is volatile, isn’t there a sense of weakness of the whole takenfor-granted debate that can be found in the (strategic) management field about our understanding of current ‘‘strategic’’ issues of firms? A further example is the concept of strategy itself, whose genesis is sometimes associated with discontinuities in terms of complexity or turbulence. If we are able to show that – historically speaking – the contexts of managing have been characterized by ‘‘turbulence’’ and ‘‘complexity’’ over centuries, it is not only our understanding of the reasons why the notion of ‘‘strategy’’ emerged that will be affected. In a more radical view, this proves that we (as scholars/experts in the strategic management field) are not sure about what is meant by strategy. In general, it should be argued, theory making in the strategic management field appears to be an unstable process, where perhaps fads are stronger than in other social sciences, questioning to a great extent the very possibility of a process of knowledge accumulation inside the community of scholars. The article is structured as follows: Section 2 focuses on the lack of history of thought inside strategic management, providing arguments for the above criticism; an alternative tradition of history in the administrative sciences is also referred to. Section 3 focuses on the lack of history of practice, a radical critique which opens the door to examples of research on management issues based on archival research, which is then developed in Section 4. Implications are then developed in the last section.

2. A MISSING HISTORY OF THOUGHT When the broad spectrum of management studies refers to history, it is usually the history of thought that is intended. Organizational scholar provide a good examples of such an approach (e.g. Bonazzi, 1982), revisiting the evolution of Organizational Theories across different ‘‘schools of thought’’ that can be highlighted (from Taylor, to Weber, to Human Relations and so on) up to the present day.


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In a similar vein, one can turn to the original description of what was once a journal of management explicitly interested in history: ‘‘The Journal of Management History is the first to offer a specifically academic assessment of current management trends in the light of the contributions made by major thinkers in the field. y [It] critically evaluates the backgrounds, ideas and influences of the major contributors to management thinking y By placing contemporary thinking in a historical context, management theorists and academics gain greater understanding of the roots of new management concepts and how they are developed in response to social, economic and political factors’’ (cf. http://gort.ucsd.edu/newjour/j/msg02375.html, emphasis added). Curiously enough, more recently this journal has been incorporated into Management Decision (cf. http://www.emeraldinsight.com/jmh.htm), though any sense of history is difficult to be found in the characterization provided to that journal: ‘‘The rapid changes in the business environment brought about by technological innovation; socio-cultural development, economic fluctuations and other factors have demanded new answers, innovative approaches and fresh thinking. Management Decision has consistently provided a ready and informative source of all these elements’’ (http://www.emeraldinsight.com/md.htm). The tendency is usually that of focusing on the development of theories more than on practices. Such a situation has of course a first explanation: dwelling on history of practice is much more time-consuming than working on ideas: research time and efforts for archival research is immensely greater than those spent on literature debates. This clearly reveals how few incentives are provided by the ‘‘publish or perish’’ system addressing research attention and for research validation in historical perspective. However, the relevance of a history of thought perspective is further underscored when interactions occur between academics from different backgrounds (in terms of country as well as of discipline, given that the latter is frequently defined by the former). Yet the crucial importance of studying the history of thought must not be misunderstood. Perhaps more than to appreciate variations and differences in managerial practices, its utility lies in grasping the peculiarities and idiosyncrasies of different academic communities, of particular social routes to disciplinary construction (and institutionalization). Far from any naı¨ ve, neutral reconstruction of an objective evolution of ideas, the process involves the struggles between knowledge producers (Whitley, 1984a) competing for resources, defining research issues and validation criteria. In this regard, from an historical point of view, it would be interesting to contrast the strategic management area with a different

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research context, which have been cannibalized by the process of Americanization of administrative sciences since World War II (Whitley, 1984b; Zan, 1994; Zambon, 1995), but which – nonetheless – had a different tradition in historical research. For space limits, in a following section I will simply focus here on similar issues with reference to the Italian accounting historiography. The very selection of these two domains (strategic management and accounting) is largely arbitrary, based on the preferences and knowledge of the writer. Moreover, the very identification of, and the distinction between, strategic management and accounting (or other) sub fields is in itself historically and intellectually contentious, for in other intellectual traditions such as administrative science they could be conceived differently as parts of a whole body of knowledge.

2.1. Strategic Management and the Lack of ‘‘Strategic’’ Historiography: Fear of History? The lack of historical attention in strategic management research is perhaps more intriguing than elsewhere, for several reasons, according to its own evolution over the last decades. Despite its prescriptive bias, the establishment of strategic management literature was largely helped by the diffusion of business history: indeed those of us that were already active at that time will remember that Chandler (1962) was perhaps one of the most quoted authors in strategic management articles during the 1970s, 1980s and 1990s. Take for instance the whole – practically endless – debate on strategyand-structure. Without quoting here extensively the debate of those days, it suffices to focus on two major issues. First, an underlying methodological confusion can be pointed out, considering the temporal gulf that divides the phenomenological reality and managing practices analyzed by Chandler in relation to multi-division firms and, on the other hand, the spread of this analysis across academia and strategic theories in the last 30 years (Zan, 1994). One century or so divides the practice of multi-divisional firm and the extensive use of similar notions between scholars. Second, the theoretical confusion surrounding the notion of strategy itself should be pointed out, and the ambiguity surrounding the notion of strategy over 30 years of debates within strategic management studies provides perhaps the best example (indeed most strategic management textbooks will have a chapter on the concept of strategy itself, though usually with few reference to one another: Zan, 1990). In fact, when such apparently not highly structured notion relating to managerial action is entailed, what


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arises is the tricky task of interpreting such notion from within specialized debates. However, such inner controversies and disputes simply risk being ignored by businessmen (as well as by business, management, or accounting historians), given the effects of disciplinary boundaries; in turn, and for the same reason, management and accounting scholars risk largely misunderstanding the historical meaning of their own contributions and debate.1 The lack of historical attention in strategic management research also highlights the relatively volatile nature of notions and contributions that characterizes the debate, not to mention the irresistible attraction for fads. It is true that any paper usually presents its literature review: but the tendency is to narrow it to a very fragmented portion of the debate, quoting recent papers and articles in the undemonstrated assumption that these contributions overcome the previous one. Simply, previous concepts and issues disappear. For instance, one could wonder (without implying any pre-given answers, just to argue): What is left of thousands of pages on the SWOT analysis and its evolutions (how/when did it emerge how was it transforming, what is still relevant of this approach, what still holds and what does not? Or was it just a question of going in and out of style in management classrooms?)2 Similarly, what happened to the ‘‘matrix’’ approach? Are we convinced of both their merits in the 1980s and their virtual disappearance after that? And what about quotations (millions, literally) of Porter’s five competitive forces, before the institutionalization of the new fashion/mainstream of RBV? How many quotation of Abell (1980) can be found in current days’ journals, in my view one of the best contribution of the rather central issue of business definition in last decades? How many strategic management PhD students still know his name and contribution? If the answer is – as I suspect – not so many, is this due to a theoretical obsolescence of his approach, or the result of academia sociology (Whitley, 1984a): in other words, is it overcome or simply forgotten? Isn’t the rediscovery of incrementalism (cf. Wetlaufer, 2001; HBR, 2001) a bit suspicious for those who read and still have in mind this stream of thought, from Lindbloom (1959, 1968, 1977) onward? Is there any serious innovation in this way of talking about incrementalism or is it simply ignoring the literature (which, I admit, would not probably considered as central to strategic management in most arenas). Or, was the call for revolutionary attitude (Hamel, 2000, 2001, 2003) not something that was already there in that debate?

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Indeed, the feeling is one of a rather chaotic emergence and disappearance of notions over time, with the lack of any accumulation or selection (or retention) of knowledge, where the new rarely dialogues with what was previously there; where differences – either epistemological and theoretical – are simply ignored, in a sense they are simply sinking. Though the relative marginal status of the process view within the strategic management literature is a partial explanation of the lack of interest in history (even merely in terms of history of thought), there is perhaps something more serious here, what I refer to as a fear of ‘‘historicize’’, fear to put in historical (and thus in relativist) terms the strategic thought. This indeed would affect the perceived status of strategic management literature as a prescriptive, practically oriented discipline. It is worth remarking that the inevitable drop in prescriptive capacity that accompanies the assertion of a process view presents a curious outcome, for strategy scholars, a sort of collective drive ‘‘back to origins’’, if one recalls the importance of business history studies in the construction of a disciplinary identity for strategy studies. Once the naive image of a strategy expert (guru) has faded and gone (maybe as a part of the collapse of the ‘‘American Mystique’’: Locke, 1996), the strategy specialist still retains a role of some importance, if not in the exact pinpointing of (more or less mega-) trends, at least in the ex-post reconstruction of historically located processes. For, despite everything, the tools used in management studies may demonstrate great interpretive power, at least in comparison with others; but such a modest view (Jo¨nsson, 1996) is unlikely supported by expensive self-alleged ‘‘experts’’.

2.2. Strategic Management: Out of the Blue? Students can provide a good test for checking the lack of history in our books and literature. Ask your class (even PhD students, I am afraid) the unusual question ‘‘when’’, referring to the emergence of any notion in (strategic) management theory or practice, and you will get a variety of replies, which reveal the total lack of attention to such an issue.3 Not only do strategic management and management studies tend to ignore their own history: it almost appears as if, as a whole, these new research areas took place coming out of the blue. Previous traditions and even historiographies in administrative science are ignored, especially one of a particular relevance: accounting. Indeed, to reckon with history, one must take into account this tradition (or better, different traditions within accounting and accounting historiographies: Zan, 1994). Accounting has been


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one of the early forms of business knowledge for centuries (as known, Pacioli published the first printed book on double entry in 1494). Accounting and issues in the practices of managing were often merged together at that time. Also in terms of alternative historiographies, the very separation between management and accounting was largely questioned in other traditions of administrative science – such as for instance the Italian history and historiography of business administration up to the 1960s (before the diffusion of the American approach: Whitley, 1984b). Moreover, accounting – different from management and strategic management – does have a strong interest in history, and a special area of research,4 which could be used by strategic management scholars in understanding which new ‘‘chapters’’ need to be added to these historiographies in order to incorporate new concepts and notions invented by strategic management theories, while at the same time historically understanding the new insights provided by this field. Finally, accounting also confirms one underlying element in the process of construction of a worldwide community in our field in the last decades: i.e. the process of Americanization, ignoring and removing previous traditions and approaches expressed in languages other than English (e.g. Zan, 1994, 2004a, b; Zambon, 1995; Hopwood & Schroeder, 1984; Engwall, 1998). For whereas the last few years have seen the gathering of a relatively widespread awareness regarding the specifically national characteristics of contemporary accounting thought, what is bewildering is the gulf and incomparability between accounting historiographies, different in periodization, in the writers that are known and deemed interesting, and in the issues they address. It is as if one were looking at the histories of quite unconnected disciplines. Considered in this way, the Anglo centric view betrays a sort of ‘‘cultural imperialism’’, where the inevitable reference to Paciolo and occasionally to some other sixteenth or seventeenth century Italian author goes hand in glove with unalloyed ignorance as to the development of Italian accounting and its related historiography. Indeed, it is not just Italy, but the whole European continent, that remains ‘‘cut off by coastal fog’’. It is not my intention to wave the flag off the Italian accounting tradition. As an accounting historian, I have already rather explicitly questioned the kind of chauvinism characterizing the Italian historiography (Zan, 1994, 2004b). Yet, as a strategic management scholar (and as a ‘‘management historian’’), I am surprised by the systematic removal of previous and different traditions of thought that has the result of reducing theoretical variety.

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Historically speaking, and referring to history concerns, the strategic management field seems to be characterized by three different kinds of ignorance: about its own evolution (the lack of history of thought of strategic management); about disciplines that are close to it, and already available in the Anglo-American world (e.g. Anglo-American accounting); and about discipline that are perceived as close to it in the ‘‘rest of the world’’ and in other languages (e.g. administrative sciences in Europe).

3. A MISSING HISTORY OF (STRATEGIC?) MANAGEMENT PRACTICES If possible, the situation in terms of history of practices is even worse than that of history of thought, apart from the broad-ranging and keen interest in processual approaches and longitudinal investigations, which tend to produce reconstructions or company histories over relatively limited time spans – the literature on strategic change is typical in this regard. This applies not only to strategic management, but also to the management field as a whole (interestingly enough, also accounting history seems much more concerned with the evolution of thought rather than practices – particularly the Italian historiography). A partial – though unsatisfactory – exception is Ansoff (1984, Chapter 2). In Ansoff’s view, new and specific technicalities were associated with three periods respectively: (a) management by extrapolation in the 1940s–1950s, characterized by operations budgeting, capital budgeting, management by objectives, long-range planning; (b) management by anticipation in the 1960s and 1970s, associated with periodic strategic planning, strategic posture management; (c) and management by flexible rapid response from the 1970s on, with approaches such as strategic issue management, weak signals issue management, surprise management. Indeed, faced with such a reconstruction of the development of ‘‘management systems’’, one is struck by two opposing sensations (see Fig. 1). On the one hand, one can see the potential for a historicized view of time and managerial issues. In such a context, ‘‘time’’ no longer stands exclusively for future time, confined within a logic (even in formal terms) of forecasting, anticipating and discounting values, the time of so-called problem-solving approach, a further consequence of the prescriptive bias and the resulting disciplinary identity of management studies. ‘‘Time’’ then covers past time also, that of conditions and practices that ‘‘come from afar’’, however

1900 1930 1950 Familiar Extrapolable • systems and procedures manuals

1970 Familiar Discontinuity

1990 Novel Discontinuity

management by control

Forecastable By Extrapolation

Predictable Threats and Opportunities Partially Predictable “Weak Signals”

• financial control • operations budgeting management • capital budgeting by extrapolation • management by objectives • long range planning management • periodic strategic planning by anticipation of change • strategic posture management

•

Strategic issue management •

Unpredictable Surprises Turbulence Level


Visibility of Future Recurring

Weak signals issue management • Surprise management

1 Stable

Fig. 1.

2 Reactive

3 Anticipating

4 Exploring

5 Creative

The Evolution of Management Systems According to Ansoff (1984). 467

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confusedly and vaguely. Time – historical time – is thus reintroduced in our concerns, after being totally removed from the literature (you can get an MBA without hearing about this notion of time, don’t you?). On the other, the limits of the picture provided by Ansoff are more than serious. Curiously enough, within this picture the past is exclusively recent, indeed quite incapable of reaching back beyond the Second World War, almost as if the world of management had been born at that time and had subsequently evolved in the midst of new and more or less innovative watchwords. Furthermore, crucial historical phenomena in the business and economic realm, such as the Industrial revolution or even the ‘‘managerial revolution’’ (Chandler, 1962, 1977) are virtually missing from such a superficial picture. In parallel, the present assumes the character of a definitive discontinuity, a clean break with all that happened before, which, owing to the turbulence and objective increase in innovative and competitive processes, is irreparable. This is a position that can be referred to as ‘‘presumption of hindsight’’, or arrogance of posterity, according to which present-day processes of change and ‘‘complexification’’ raise issues of knowledge intrinsically greater than those thrown up by any other historical context (cf. Zan, 1995). As a consequence, time framing is used rhetorically to introduce poorly understood ideal types (see for example the prevailing narrative covering the development of planning systems: from Long Range Planning to Strategic Planning to Strategic Management). For, if we are not able to describe in reliable ways the emerging of ‘‘new practices’’ it is likely that this hides a process of obscure understanding of either previous practices or following innovations. We simply pretend to understand what we mean though we are unable to describe it historically. Now an interesting question is why is it so. The weak epistemological foundations of the field (strategic management but perhaps management in general) are an aspect to take into account – this does not necessarily mean that it is an irrelevant field: it simply requires handling with care the assumptions and approaches. The fact that competition of ideas here often means competition between consulting firms (starting with the BCG vs. McKinsey matrixes) fighting for new and up-to-date tools (and fees) does not help in either underlining differences and similarities and the process of knowledge accumulation (Zan, 1990). Surely there is also the fact that a serious historical understanding – and in parallel a historical-grounded development of research and theories – requires huge amounts of time: years of archival research for one paper, and much more time than it takes to ignore time as usually done.


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4. AN ALTERNATIVE APPROACH: ARCHIVAL-BASED MANAGEMENT RESEARCH It is not within the scope of this paper to develop a systematic literature review of the work done from a historical perspective on company practices by accounting and management academics (for a review of recent developments cf. Miller, Hopper, & Laughlin, 1991; Carnegie & Napier, 1996; Gaffikin, 1998; Merino, 1998. Cf. also special issues on the topic as AOS, 1991; AAAJ, 1996; CPA, 1998). Instead I shall focus here briefly on the findings of two pieces of research – into the Spanish Royal Tobacco Factory and the Venice Arsenal. These seem of particular interest as applications of specific management and accounting skills to historical investigation. Moreover, both are the work of a network of European academics straddling the fields of management and accounting within a historical perspective. This kind of research, argued here, is of some interest and has possible implications also in the broader debate, and in particular in opening new perspectives in the strategy field as well. To return to the point made above, if one considers the importance of a relative separation between practices and theories, the need ‘‘to get one’s hands dirty’’ in the study of accounting and managerial practices (as opposed to theories), archive-based research becomes quite unavoidable. Moreover, facing major theoretical issues of academic debate (for example, the concept of strategy and everything that turns upon it), an attempt may be made to falsify concepts and theories by applying them to a variety of temporal situations, possibly even by playing on the concept of strategy or other current constructs in order to gauge to what extent they represent categories that are indissolubly linked to present-day characteristics and phenomena (see Ansoff’s turbulence). Such attempts at falsification could contribute in this way towards a clearer grasp and awareness of theoretical and methodological issues of current debates. 4.1. The Royal Tobacco Factory The article by Carmona, Ezzamel, and Guttierrez (1997) is the first of a series that examine the research project into the Spanish Royal Tobacco Factory. It focuses on the analysis of the accounting and control system that was introduced in 1773. One of the most important primary sources has been a fully fledged ‘‘control manual’’ started that same year entitled the Instruccioń Sobre Costes. Manufacturing presented a series of processes

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articulated in appropriately codified stages and differentiated by product, i.e. snuff and cigars. The control systems took the form of a series of instruments for the physical monitoring of the materials, as well as for costing. In particular the cost accounting system had a bewildering structure based on cost centers (casillas), which gave rise to calculations of the cost of transforming the products, as is fully described in the instruction manual of 1773 and reported by Carmona and colleagues. Working from other primary sources, their article also describes an interesting example of the way in which information on cost was exploited to optimize manufacturing processes and to increase production and productivity, on the basis of a month-long experiment that was successfully conducted in 1778. This indicates a very concrete use of the cost figures that the cost control system generated, with a strong efficiency-orientation, almost ‘‘scientifically’’ used. Some of the experiments conducted in order to reach what one would now refer to as make-or-buy decisions are also highly interesting. This extremely modern system of costs and control as well as the related and also highly advanced managerial practices has numerous points of considerable interest. First, what is surprising in this multi-product company is the capability and sensitivity with which internal ‘‘differentiation’’ (to use Lawrence & Lorsh’s, 1967, term) is treated and managed. For example, differentiation between manufacturing processes led to structuring in distinct stages and separate information pooling centers for snuff and for cigars, with costs calculated and attributed to the two manufacturing processes, according to the differing organization of labor involved. Moreover, the close attention paid to internal differentiation is also apparent in the way that labor was managed with reference to subtle organizational aspects. Worker recruitment and hiring, for instance, were decided in accordance with varying criteria. For the production of snuff, where a simpler manufacturing process requiring less skill was involved, day labor was used. For the more complex process of manufacturing cigars, which demanded greater manual dexterity, workers were hired by the week. In today’s jargon, the human asset specificity of the two manufacturing processes provided the underpinning for this shrewd differentiation in recruitment policies. This was also reflected in the differentiation affecting payment systems themselves. Curiously enough, on the cigar manufacturing side, a team piece-rate was implemented which, moreover, was subject to the achievement of specified standards of quality, revealing a degree of sophistication worthy of today’s control systems. Second, what stands out is the pervasiveness and, at the same time, the selectivity of the control processes within the Compagnia. The confinement


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of managers’ responsibility to matters of manufacturing efficiency (ruling out any assumption of economic accountability for the purchase of raw material) generated a costs system that was extremely responsive to information management requirements, and focused on transformation costs. Thus, in both general terms and at each separate level, the degree of consistency between tasks and control (of quality, quantities and costs) is indeed impressive, showing a strong modern feature on the enterprise. Third, the sophistication of the Compagnia’s calculating practices serves similarly to characterize the entire gamut of the organization’s managerial practices. It is curious, however, to observe the direct and concrete recourse made to ‘‘experiments’’ in assessments of the comparative costs of different alternatives, suggesting a limited capacity for abstract reasoning. That said, the most interesting aspect here is not this set of sophisticated features but rather the spatial and temporal situation in which it took shape, i.e. in a publicly owned company, indeed a state monopoly that was not open to competition, in eighteenth century Spain, a country as yet untouched by any industrial take off. Finding such a ‘‘modern’’ example of control systems in a firm that pre-dates the Industrial revolution supports the contention that undue historical emphasis has been given to the processes associated with the Industrial Revolution in the evaluation of capitalist systems. Such an emphasis focuses on points of rupture rather than points of continuity in the evolution of modern control systems. Pursuing a more ‘‘micro’’ perspective, such as a close examination of individual firms rather than a generalization of ideal types, allows researchers to more carefully evaluate the pre-conditions for capitalist development, if such conditions can be specified. While marginally pre-dating the industrial revolution in the case of the Royal Tobacco Factory or much older in cases of industrial and costs accounting from the fifteenth and sixteenth century, this might have rather more devastating theoretical and methodological implications.

4.2. The Venice Arsenal Interest in the issues raised by the Royal Tobacco Factory case led to an ongoing research project into the Venice Arsenal, conducted with some colleagues (Hoskin, Zambon, & Zan, 1994; Zan & Zambon, 1998). While a discussion of the analytical findings of this research can be found in Zan (2004a), this does seem to be a good opportunity to outline the grounds for interest in such research, the kind of phenomena upon which it can shed

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light, as well as certain of its main theoretical and methodological implications. The unusual time-setting of this event require a short reconstruction of the context and a description of major archival findings before applying strategic management understanding to it (the impatient reader can always skip the following two sub-headings). 4.2.1. Reconstructing the Context Given the body of law overseeing the functioning of the Venetian Republic, regulations that applied to the industrial construction of galleys at the Arsenal as well as many related decisions were the subject of deliberations and other formal documents that were then kept as records. Remarkably, all of these documents have been well preserved, providing fertile ground for the archival-based researcher. But above all they constitute an early example of the emergence of a discourse about managing. It was necessary not just to manage, but also to talk about the management process, to articulate verbally what was being done as a normal matter of course, to construct concepts, ideas and abstractions on the operations undertaken. Moreover, it was necessary to write about them. This constitutes an early example of separation between practice and conceptualization or, in other words, the emergence of a discorso del maneggio as Drachio termed it in 1586.5 And, indeed, what is being uncovered is of vast interest. It is also important to stress that while our research has brought to light some new sources, the bulk of our findings are simply the product of reading the already existing literature on the Arsenal from an accounting and management studies (and strategic management in particular) perspective. Within a broader process of internalization of the construction of military galleys at the Arsenal – which had begun in the first decades of the sixteenth century, transforming the Arsenal into one of the largest manufacturing centers in the world at that time, employing thousands of workers – the victory at Lepanto in 1571 had a number of very far-reaching consequences. For, ironically, the victory highlighted the critical importance and unreliability of the Venetian war machine. Having destroyed and confiscated what remained of the Turkish army, within a short space of time Venice was facing a Turkish army even stronger than before. This prompted the decision to create a reserve force of 100 light galleys and 12 extra-large ones, to be kept in a state of war-readiness (see Lane, 1978). Indeed the Arsenal faced serious problems in managing the production process. Moreover, the literature (Lane, 1934; Davis, 1991) contains clear signs of the emergence of specific initiatives aimed at restructuring the way that the Arsenal was managed, on the basis of indications from two


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professionals, Tadini (the Arsenal’s chief accountant) and Drachio. There are varying opinions on the outcome of these interventions. Lane expressed an optimistic (and simplistic) view, seeming to regard the problems as having been solved merely because they had been identified (once again collapsing managerial thought and action). This, however, is countered by the negative view advanced by Concina, who goes so far as to assert that ‘‘administrative skills seem to be lacking’’ (Concina, 1984, p. 175), thus underestimating the historical problem posed by the construction of the administration itself in a modern industrial complex. 4.2.2. Managing Practices and Management Knowledge Given this context – and keeping in mind the problematic nature of the relationship between saying and doing in the field of business – my research has analyzed in considerable depth the contents and meanings of the strategic manufacturing reorganization, relating them to preceding conditions and attempting to assess their impact. To this end, I have reconstructed the evolution of a systematic stream of periodical reports presented by advisers (savi) and supervisors (provveditori) (for detailed information on the primary sources, see Zan, 2004a). What I am interested in are discursive regularities and changes, i.e. regularities and changes in the ways in which those documents refer to managing issues at the Arsenal, trying in this sense to infer how attention was addressed (according to the view by March, 1988, that management is essentially an issue of addressing attention). The developments in the contents of these reports in terms of appraisal, detailed examination and the identification of issues concerning the organization of the manufacturing processes undertaken at the Arsenal have been analyzed, while also the emergence of lines of argument of an economic-accounting nature can be analyzed. More precisely, discursive regularities and shifts traceable in these documents have been sought, carefully distinguishing between the early documents (1580), pre-dating the contributions made by the two professionals, and the later ones (so far down to 1643). What one finds is a sophisticated awareness of manufacturing processes and issues relating to their organization. What stands out is a widespread ongoing discussion on managing problems relating, for example, to the sourcing of materials, the availability and discipline of the labor force (regarding both appropriations of materials and levels of attendance and industriousness or, in present-day terms, absenteeism and productivity), the conditions under which manufacturing processes were undertaken in terms of both production levels and organization (in particular, discussion on decisions on contracting-out and work discipline and control).

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Revisiting the Drachio and Tadini documents – already familiar to economic historians – one is impressed by the marked air of understatement with which such documents are handled in literature on the Arsenal. The earliest case (Drachio, 1586) represents a clearly worked out and systematic reorganization proposal implicating different levels in a coordinated plan: the whole scheme is permeated by a performative principle that viewed an implicit notion of efficiency not as a tool for maximizing economic returns but as a moral imperative for the safety and prosperity of the Venetian Republic. Examination of the organization of production and logistics touched on a variety of different matters, including the best techniques and methods for cutting, shipping and storing timber. The crucial issue of component standardization was then discussed, with a call for the creation of a ‘‘common timber’’ to overcome the individual character of the component design and construction process (hitherto entrusted to each single craftsman), in order to move away from a workshop model of organization in shipbuilding. Attention also focused on redesigning the manufacturing plant’s layout in order to make a more rational use of space, in line with the demands of production. The issue of labor organization, to use present-day terminology, was addressed, on the one hand, with a definition of task-specific work teams and, on the other, with detailed debate on procedures for monitoring work attendance and performance. Lastly, the overall organizational structure was discussed and a proposal for a single top-level structure, endowed with significant powers, was put forward. In some respects, the proposals made by Tadini (1593, 1594), with their attempt to impose discipline on the workforce and render it governable, were even more far-reaching. Tadini argued that an effort should be made to eliminate unevenness in the day-to-day availability of workers, which undermined any attempt to manage production economically. In an effort to involve gang bosses, what was suggested is a sort of half-yearly productivity target with related incentives (corresponding to approximately 10% of normal wages). This was to be accompanied by a set of scheduling mechanisms covering the coming week, to be updated weekly after checking the extent to which the previous week’s schedule had been fulfilled. While ‘‘middle-level workers’’ were offered the carrot, rather more repressive control regulations were suggested for disciplining the unskilled workforce, and a series of incentives for unbroken attendance, checks on attendance and devices for registering movements were proposed. Lastly, Tadini put forward a special ad hoc work-team structure, to which was, earmarked an annual budget setting out the savings to be achieved by the proposed structure.


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The later period, so far investigated until approximately 1643, saw a further sophistication of discourse on maneggio, with organizational refinements, increasingly effective managing procedures and methods for governing the labor force. An example of this is the introduction of a method for measuring ‘‘work in progress’’ in man months. Also, forecasts and expenses relating to consumption materials became current, as did calculations bearing on the workforce. The type of general complaints made during the preceding period gave way to calculative practices of labor needs that were based on technical parameters, in a sense reifying it as a ‘‘factor’’ of production, for instance in terms of calculating the production made possible by the amount of man months available. Criteria were elaborated for reaching decisions on the restructuring of ships and on contracting out. To all of this was added a further new development: the systematic use of concepts and data regarding annual consumption and costs of materials, culminating with the astonishing document by Molin in 1633 (skillfully described by Forsellini, 1930), which presented the cost of manufacturing extra-large and light galleys. In substantive terms, comments about consumptions of material and waste of working time can be found (Molin, 1633). A more aware discourse on resources of the Arsenal makes it possible to question of feasibility of the 100 galleys goal, autonomously self-reducing the goal to 50. Curiously enough, the critique to the means/ends model finds here rather early empirical evidence. 4.2.3. Understanding ‘‘Strategic Change’’ In terms of interpretation, what is interesting to stress here is that more than strategy itself it is the literature on strategic change that is useful in order to make sense of the overall transformation process. And, indeed, an explicit reference to current days’ literature on strategic change was needed in the discussion about management and accounting innovation and change processes at the Arsenal.6 According to this view, a possible explanation is provided in Fig. 2: The trigger of change was the (military) decision by the Senate to have a reserve of a 100 galleys, with the unanticipated (and unseen) consequences of transforming the production regime from one ‘‘on order’’ to one ‘‘on stock’’. It is this decision that made the complexity of work inside the Arsenal explode, with needs of coordination far greater than before (after all, even today, a similar production regime for shipbuilding will be problematic, despite the benefit of concepts such as the bill of materials and reticular techniques such as CPM and Pert).

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Technological variable - Technological shift caused by the ‘100 galleys’ decision: from on order production to production on storage, which exponentially increases coordination needs;

Cognitive innovations

- hetero-direction: exogenous decision (by the Senate) relative to the Arsenal economy (military rationale, with economic meaning just at a macro level, for protecting trade).

Feed-back on strategic objectives: questioning the 100 galleys goal

Actors and enactment process Actors' role in fabricating new ideas and concepts: - with differences between single actors (Drachio and Tadini as an already problematic relation between management and accounting; untreatability of discourse on power); - transformation from the physic to the economic (cost's concepts and calculative reasoning on resources) and from stock to flow perspective in the discourses about the 100 galleys (invention of w.i.p. in man months).

Organizational action, or enacted organization Emerging of a performative logic and culture, with discourses on power explicit and solved in relation to lower level (towards workers), implicit and unsolved toward the top (and Arsenal vs. Senate relationships): - technical production implications (new procedures for managing and acquiring wood; standardization of timbers etc.); - worker discipline: new organization of labor (gang system); gaining the governance of presence; involving gang bosses in planning and control processes;

Organizational enactment

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Fig. 2. The Management of the Arsenal (1580–1640). Changing Processes between Technology, Actors and Organization.

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- pro-active attitude and autonomisation towards the principal stakeholder, both in new structure proposals (unique superintendent), and in uses of technicalities and specialized language in reports routines.


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Actors inside the Arsenal had to enact their organization, as a relative autonomous body from the Senate, structuring space and time and interpersonal relations, in a word constructing (trying to construct) an organizational order to make things possible. Most interesting in this picture is the cognitive process that took place, what I refer to as a process of double translation: from the physical realm to the economic, and from a view of stock to one of flows. Such invention allowed people inside the Arsenal to link production and resources. On the one hand, the transformation of stock concepts into flow ones required the fabrication of new time-sensitive, dynamic notions of measurement. On the other, such a transformation was only able to be articulated when such notions were to hand. The key breakthrough was the move to measuring work-in-progress for ship production, measuring the amount of work to be done against the manpower required to do it. Given this metric, the unrealistic nature of the 100-galley target could come to be articulated, whereas previously it was literally impossible to address this problem (indeed in the absence of a similar sort of calculation the goal is essentially unspecified). Now the measurement of work-in-progress in terms of man months allowed internal actors to talk about the 100 galleys goal in terms of degree of realization. In the end, this conceptual breakthrough towards the conceptualization and representation of ‘work-in-progress’ is a crucial element in the enactment process, soon followed by other kinds of accounting innovations as tracing costs – annual costs – and calculating aggregate costs (per galley, per item, etc.). All this transformed into terms of daily experienced concreteness, and into conceptually manageable terms, what was previously an exogenous goal (of 100 galleys), expressible only in an inaccessible, even foreign language (in a sense translating the issue of the 100 galley from its original substantive meaning to a formal reasoning, once again in Polanyi’s words). A genuinely new discursive category, the target, could now be operationalized, in a way which could meet the demands of, and so be consistent with the logic of, the policymaking entity, the Senate. At the same time, through this category, the traditional goal could now be rendered meaningful to those who were in charge of ‘getting things done’, using a modern expression, in a way that finally enabled them to comprehend and so manage, at a discursive level, the whole technical production process from beginning to end (Zan, 2004a).

To sum up, while a more detailed illustration of the results of such ongoing research will be available on another occasion, what has been demonstrated is the existence of a well-developed managerial discourse, with a wealth of innovations of a modern kind relating both to accounting calculations (industrial costs as well as the more general process of book and account keeping) and also to management practices, which were designed on the one hand to discipline the work of subordinates and on the other to structure more effectively the organization of managerial work. In the 70-year series of documents under investigation a significant step toward

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the establishment of the performative principle takes place, providing a sort of ‘‘movie’’ of the construction of the economic world, the historical reduction of social life to economic mechanism (Polanyi, 1977). This gives further confirmation that a micro view tends to put the clock back, in the search for antecedents and continuity in the development of modern management practices. In parallel, this shows the possibility of applying modern management knowledge and notion to previous periods as well.

5. DISCUSSION: FORGETTING BY DOING OR LEARNING FROM THE PAST? While in terms of history of thought one is simply left with the idea of the need to fulfill the total lack of contributions in the literature, in terms of practices the case of the Venice Arsenal (and to some extent that of the Spanish Royal Tobacco Factory too) makes it possible to develop a number of implications for historical understanding of business evolution, from a management studies perspective, and in particular revisiting strategic management in its potential historical meaning. These implications apply at three different levels at least: in relation to a number of the dominant approaches in the literature of business history; in relation to a number of issues in management and accounting history; and, thirdly, in relation to particular ideas regarding the nature of management studies seen – themselves – in historical perspective, with particular reference to the strategy issue. 1. Though admittedly from the standpoint of outsiders (i.e. as a strategic management scholar with interests in history more than a business historian) it nonetheless seems reasonable to point to a number of basic limitations in the kind of approach that was adopted by Chandler, with diffusion in the management field. The first limitation of this approach is its Anglo-centric vision: it tends to perceive the emergence of administrative coordination in nineteenth century America because it simply knows nothing about previous (European) history. This bias is even graver if one recalls that, as early as the 1930s, Lane’s work on the Venice Arsenal was available in English, supplying a further example of ‘‘forgetting by doing’’ processes in the academic community. Actually, the Venice Arsenal is an example of ‘‘administrative coordination’’, a modern form of organization permanently devoted to


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manufacturing, in Europe, approximately 300 years earlier. If nothing else, the Royal Tobacco Factory confirms that the Arsenal was not an exceptional case (though it is not argued here any claim to statistical significance). A second limitation is the firm-centrism that dominates the literature of business history, wholly absorbed with the analysis of this kind of economic unit, as if to imply that it was the development of the firm that generated economic innovation and development. Regrettably for such a hypothesis, if one takes the trouble of consulting the records, one soon discovers the extraordinary role played by ‘‘non-profit’’ organizations (or organizations that are other than firms, as for instance the sections and offshoots of prenineteenth century European bureaucracies) in development and innovation, even in managerial innovations. This point holds not only for the Venice Arsenal but also for other state-umbrella bodies, as is confirmed by the incredible management control system implemented by the Royal Tobacco Factory as early as 1773 and also indeed by the introduction of the notion of standards into the Springfield Armory (Chandler, 1977; Hoskin & Macve, 1994). A third limitation, finally, lies in the economist nature of the explanation that ascribed organizational innovations and, crucially, the very creation of administrative coordination to the need to economize on costs and achieve economies of scale in new production plants. The research findings on the Venice Arsenal might be put to amusing use in refuting a good few of Chandler’s statements; for example: ‘‘The modern multi-unit firm took the place of the traditional model when managerial coordination made it possible to achieve greater productivity, lower costs and high profits than through market coordination’’ (Chandler 1977, p. 49 Italian ed.); ‘‘The modern firm made its first historical appearance when the volume of trade reached a level at which managerial coordination became more efficient and profitable than coordination through the workings of the market’’ (ibid., p. 51). The following succinct expression of Chandler’s outlook is revealed as particularly threadbare, bearing in mind the Arsenal research: ‘‘Given the small size of firms prior to mid-nineteenth century, specialization would remain confined within the company circle. The business would be run by the proprietors, while the need for the thorough and meticulous internal organization, detailed statistics and cost-calculation methods, which were to become such a marked feature of the modern firm, was not yet felt’’ (Chandler, 1980, p. 20). The Venice Arsenal does not present economies of scale: rather than any need to economize, what propelled the development of an accounting and managerial discourse was managerial complexity itself, in relation both to the sheer size and to the need for coordination. This had

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grown exponentially with the decision to maintain a reserve of 100 galleys, with all the logical and timing intricacies that this entailed. The Spanish Royal Tobacco Factory case also explodes many of the conventional explanations: for however counter-intuitive it may appear, what one is actually talking about is a company that is run as a monopoly, impervious therefore to competition, not profit-led, and located in pre-industrial revolution Spain. It is curious, on the one hand, to discover that an epistemologically careful use of management studies and strategic management – despite their relative minor status (Whitley, 1984b) – are useful in falsifying some basic understanding of business history. On the other, one could argue how dangerously management studies can re-import the same mistakes and misunderstanding of business historians.7 2. A controversial issue in current literature is the relation between strategic management and accounting (though ‘‘strategic management accounting’’ – Simmonds, 1981; Simon, 1987; Bromwich, 1990; Roslender and Hartt, 2002 – seems an already outdated topic). From this point of view it seems that archival research stresses the importance of accounting in the development of managerialism and managerial innovations. However, what is most immediately striking about the Venice Arsenal relates to ‘‘control’’. It is not so much the (albeit surprising) development of a sophisticated-costing system to handle manufacturing processes of far greater complexity than those involved in the textile industry that seizes one’s attention. What stands out is rather the emergence of an extremely modern management discourse, with broad relevance in terms of the allocation of some sort of economic responsibility and accountability for managerial tasks between the ‘‘principal’’ and their ‘‘agent’’ (right down to gang bosses level). Contrary to what is usually asserted, modern form of management accounting is in fact only a century or so younger than the spread of double-entry bookkeeping: in one way or another it has been around for 400 years. One cannot help being taken aback by the abyss that separates the case of the Venice Arsenal from what accounting history normally indicates to be the relevant period, the nineteenth century. And if, following World War II, management accounting in Italy – along with business practices in general – apparently received a strong impetus from the influence of English-speaking countries, why were the historical antecedents completely mislaid, in terms of both theory and practices, until, say, a couple of decades ago? The relative backwardness of Italy’s economic system and the family basis of Italian capitalism are the justifications that are normally brought in, arguing that, owing to this background, the


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conditions and demands that led elsewhere to the emergence of a modern discourse on management were missing. If what has been stated in relation to the Venice Arsenal is correct, it is not a matter of the failure of something to emerge but rather the interruption of a process of development (or of development that followed other paths, perhaps spreading with the ‘‘Italian method’’ through seventeenth and eighteenth century Europe: a possible topic for future research). But, again, one cannot help wondering to what extent this umpteenth example of ‘‘forgetting by doing’’ relates to the academic world and/or business practices in Italy. More in general, and considering the process of extension of management discourse to the public sector all over the world, isn’t it curious to ‘‘reimport’’ from private sector notions and approaches that have been largely developed inside state bureaucracies centuries ago (as in the Venice case and the Royal Tobacco Factory), but then followed by a similar process of ‘‘forgetting by doing’’? 3. Finally, it is worth explicitly turning the question briefly on its head: what implications might a historical perspective hold for the approach and conceptual framework of management studies, either as a whole or specifically in terms of ‘‘strategic’’ outlook? At a very general level, what the Venice Arsenal and Royal Tobacco Factory cases do is roundly to refute Ansoff’s and similar hypothesis on the genesis of ‘‘strategic’’ management, as well as all the related explanations as to how the concept of strategy (based on turbulence and discontinuity), or more generally, how management studies developed. Such efforts proceed by casting complexity as a distinguishing feature of bodies in modern competitive economies (what I refer to as ‘‘the presumption of hindsight’’). Here too lies a radical rift with the literature dealing with the so-called post-fordism (see also Fontana, 1997). If complexity is a feature common to economic activity, the issue is how to contextualize it within the infinite gamut of shapes that it can assume, rather than to bisect the history of the world into two dichotomous epochs, ‘‘B.F.’’ & ‘‘A.F.’’: before and after Ford. This is not to say that nothing has changed in the life and history of organizations, just that change is always contingent on specific reality and indeed, as it were, constitutes it. This is often what gives usefulness to the notion of strategy itself as a sense-making category, its function in highlighting the specific nature of the individual firm or organization (Zan, 1990, 1995), making one questioning its own differences while educating to a notion of variety; dialoguing with analytical and relational complexity.8 While a renewed sense of history – in methodological terms – suggests the need to go back to the issue of change, on a more general level it could also

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be used as a theory-testing tool to weakening the dominance of the analytical approach (Toninelli, 1999; Zan, 2004b). If one then asks the question ‘‘what really have we invented?’’ in the management field, especially if one considers the furious development of research and managerial education over the last few decades, I would be tempted to declare that a sizable chunk of what is ‘‘new’’ is the wrapping itself and the institutional mechanism by which management discourse has been packaged within the educational and academic institution. Another chunk is the rediscovery of what had been forgotten. And the rest is, indeed, innovation. On a more methodological and theoretical level there are however other elements that can be pointed out from a similar historical investigation, with particular relevance to the Arsenal episode. First of all, this research seems to underline the rhetorical nature of management. This is not to be intended as a negative attribute, a degeneration. Rather, it is the view of management as ‘‘addressing attention’’ (March, 1988), which directly calls for a rhetorical view of management, as talks, as discourse (going back to Mintzberg, 1973 analysis of managerial work, or to Astley, 1984, call for a subjectivistsophist-symbolic approach, or to more recent contributions, e.g. the special forum by AMR, 2004). Interesting enough, such a view of management is the only one possible in the Arsenal case, as an external analyst trying to make sense of arguments and counterarguments by the actors themselves, their process of sense making, acting through ways of convincing and influencing the context that can be found in the narratives of their reports (unless one would impose an anachronistic current days view of ‘‘management’’ as a check for their discorso del maneggio). The need of understanding practices in details is also underlined by the Arsenal story, with an unusual (because it arose from historical inquiry) call for ‘‘micro’’ view in strategy processes (here intended also in the specific meaning that micro-strategies are referred to in strategic management, as for instance Johnson, Melin, & Whittington, 2003, and in this volume elsewhere). And what emerges is that practices themselves are much more complicated social issues compared to what we tend to describe, where complexity is a constitutive part of them, in any context, I would say, of social action per se. In more theoretical terms, the tendency to associate the notion and the theoretical framework of strategy to current day’s business firm can also be questioned. For on the one hand a similar approach can be applied to a great extent to other kinds of organization. This will however call for a more general (and robust) qualification of strategy itself, adopting and tailoring it


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to the nature of the specific organization under investigation, where the notion of competitive advantage not necessarily will prove of any relevance or interest (may be leaving rooms for notion such as Gestalt or configurational identity, order: cf. Normann, 1977; Mintzberg, 1978; Zan, 1990, 1995). In this sense what strikes me as a writer – I must confess – was the need to use the strategic change approach to interpret the change occurring at the Arsenal, still without using a notion of strategy. May be this is simply the (positive) consequence of trying ex post to make sense through the analysis of discursive regularities and changes (possibly other analysts could have used the term strategy referring to the intention or conduct of the actors either within the Senate or the Arsenal). In any case, the ambiguity and the emerging sense of what was going on – in the eyes of actors, to paraphrase a well-known expression – does not seem to allow any reification into a welldefined notion of strategy, even when an interpretative lens is adopted (Zan, 1990). Part of the problem, and part of the ambiguity on the overall sense of social action, is here linked to the lack of any clear definition – at that time and in the shoes of those actors – of performances. The lack of any precise notion of period indeed is part of the problem (an invention that will emerge later, here as elsewhere, though Drachio himself was calling for the need of measuring annual output). And indeed there is not any clear-cut beginning or end in the period under investigation, and the choice of the dates remains – to some extent at least – arbitrary. Paradoxically – as seen with current days’ lenses – there is the establishment of a notion of performative principle without a notion of performances. The only idea of what we call now a day ‘‘performance’’ is that of ‘‘common good’’, or the ‘‘sake of the Republic’’, in the name of which Drachio, Tadini, Molin and others acted, and called for changes. And they themselves were arguing and acting toward a more clear definition of performances, developing new metrics and calculative practices, within a discourse on efficiency and effectiveness, though these terms are never mentioned. Yet, the notion of ‘‘common good’’ was still there, with its ambiguity perhaps, but an overarching ambiguity I would say, capable to give sense to collective action, with a long-term attitude. Can such a moral tension shed some light on pitfalls of current day’s practices and representations of practices by management scholars? As an historian I would avoid any answer, which could suspiciously be used as rhetorically legitimating new mainstreams such as the ‘‘relevance lost’’ debate in management accounting (Johnson & Kaplan, 1987). But

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ironically, short-term issues, focus on infra-annual results, or, in turn, the call for a more resilient kind of organization (Hamel & Valikangas, 2003) could find here some interesting ‘‘lessons’’ understanding practices and the inner complexity of managing: from the past.

NOTES 1. The following wording reveals a tortuous cognitive and theoretical path to the more general debate, well described by Chandler: ‘‘In a recent article y Nelson, taking as his starting point his own early work with Winter as well as more recent work by David Teece, Giovanni Dosi, William Lazonick and myself, presents ‘‘an ongoing theory of the dynamic capacities of the firm’’. The article brings into focus ‘‘three different yet closely linked aspects of the firm that need to be clear if one wishes to describe the firm adequately: its strategy, structure and core capacities’’. In Nelson’s view, it is their strategy and structure that constitute the capacities of firms, rather than the transactions that they undertake. Strategy, Nelson writes, ‘‘[is] what management experts talk about, not that of games theory y’’ (Chandler, 1991, p. 84, my emphasis). It is a pity that he then makes a point that would strike strategic management scholars as no longer tenable, in view of the way that debate has proceeded over the last few decades: ‘‘that is, a set of broad commitments that the firm pursues and that define and rationalize its goals and the way in which it intends to reach them’’. 2. I am in debt to my colleagues Marco Zammarian, Alberto Alvisi and Raffaele Corrado, for an unstructured discussion on this issue. 3. Despite available literature (e.g. Horrigon, 1968), Financial Ratio Analysis was located by my students in a range from middle age to the last 10 years. 4. Indeed accounting historiography is rather old, and already in the end of nineteenth century there were work already dedicated to build up an history of accounting: cf. for Italy Cerboni, 1889; Bariola, 1897. 5. Apart from the coincidental Foucaultian flavour of the expression ‘‘management discourse’’ (discorso del maneggio), it is worth recalling that it is from the Italian term ‘‘maneggio’’ – literarily handling – that the English term ‘‘management’’ derives. 6. ‘‘Though the strategic content of any proposals (as well as the organisational context) at the Arsenal is unlikely to have much in common in substantive terms with what is generally discussed in current strategy literature, a judicious use of such work can help making sense of the new wider dynamics of what get said and thought within and around this organisational space. This also allows one to import the interactionist perspective focussed on the interplay between the ‘actor and the system’ or the calls for a dialectical tension between deterministic and voluntaristic assumptions in organisation theories, thus enriching what is usually approached by new (and old) accounting history’’ (Zan, 2004a). 7. For instance the Chandler’s picture is taken as such, without any critical assessment, in the following quotations from the well-known works by Johnson and Kaplan (1987): ‘‘Before the early nineteenth century, virtually all exchange


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transactions occurred between an owner-entrepreneur and individuals who were not a part of the organisation: y transactions occurred in the market and measures of success were easily obtained. y As a consequence of the Industrial Revolution and the ability to achieve gain through economies of scale, it became efficient foryowners to commit significant sums of capital to their production processes y. The longterm viability and success of these ‘‘managed’’ organisations revealed the gains that could be earned by managing a hierarchical organisation. y The emergence more than 150 years ago of such organizations created a new demand for accounting information. y (A) demand arose for measures to determine the ‘‘price’’ of output from internal operations,y.owners devised measures to summarie the efficiency by which labour and materials were converted to finished products, measures that also served to motivate and evaluate the managersy’’ (Johnson & Kaplan, 1987, pp. 6–7). For a critique see also Ezzamel, Hoskin, and Macve, 2000; Ezzamel, 1994. 8. I would like to refer to a very interesting and stimulating discussion on these issues with Gerry Johnson, Leif Melin, Robin Wensley and Sebastian Green during a two days brain storming meeting, June 2003. Robin and myself were co-opted in the already existing group – founding member was also Roland Calori who sadly passed away on 2002 – which has few rules: ‘‘a small group of European scholars that meet for 2–3 days once a year to talk about issues that we think are important. We decide on the topics for the conversations each time we meet. Two things are not allowed in the meeting: to bring an already existing agenda with you; to present an ongoing paper’’. In terms of ‘‘procedure’’ this an individual reaction to a situation were academics are usually forced to think, read and talk just with a finalized interest to the next paper, lecture and conference. A call – to ourselves at least – for a more uninterested attitude. Funny enough, all of my colleagues to whom I was talking about this experience were absolutely envious and fascinated by such a frame of interaction.

ACKNOWLEDGMENT Many thanks to Allison Hoeltzel and Anne Bowers for their time and assistance in English language editing of the paper, and to the two anonymous referees for their contribution in improving the paper.

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PRACTICES OF ORGANISING: INSIDE AND OUTSIDE THE PROCESSES OF CHANGE$ Eamonn Molloy and Richard Whittington ABSTRACT This paper explores the contradictory pressures for standardisation and customisation in reorganisation processes. Taking a ‘practice lens’ (Orlikowski, 2000), it examines eight on-going reorganisations, from both private and non-private sectors, using photography, observation and extensive interviews. This practice lens goes both outside and inside the processes of reorganising. Outside these processes, it highlights the pervasive influence of standard, even banalised practices, from those embedded in the technologies of Microsoft to the frameworks of McKinsey & Co. Inside these processes, it emphasises the detailed improvisation around these standard practices, with customising the norm. The paper concludes by arguing for the effectiveness of the practice lens in negotiating the contradictory pressures between standardisation and customisation, and by

$

Originally presented at the AiSM-INSEAD conference ‘‘Expanding Perspectives on the Strategy Process’’, INSEAD, Fontainebleau August 24–26, 2003. The research is funded by the Chartered Institute of Personnel and Development. Research team members also include Evelyn Fenton (University of Reading), Michael Mayer (University of Edinburgh), and Anne Smith (Open University). See: www.sbs.ox.ac.uk/html/organising_main.asp


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offering provisional implications for the teaching of organisation design in business schools. People will say: ‘I know the organisation so well, I can redesign it’. I have heard some of the most senior people say: ‘why do I need project management, I know what needs to be done’. It is only when you work out the things you need to do to get from the current position to the desired position that you realise that doing all these requires organisation. It may be that some people can visualise what the new organisation should be, but they sure as hell cannot hold all the balls in the air to get them there (Human Resource Director, Utilco).

This senior manager at a large British utility company expresses a central theme of our paper: the processes of organisational change need organising themselves. The design of a new organisation is not merely the visualisation of a new organisational chart, but a demanding managerial process in itself. We shall examine some key practices by which managers manage the process of reorganisations, from the standard project management techniques referred to in the opening quotation to the creation of striking and individual artefacts. Our argument is that command of such organising practices, and knowing how to adapt them to particular circumstances, are critical and underestimated managerial capabilities. These capabilities are critical because reorganisations have become such a high-stakes, high-frequency activity. During the 1990s, Dell reorganised its customer segments every quarter (Eisenhardt & Brown, 1998). Hewlett Packard produced no less than 11 different organisation charts in the space of two years (Goold & Campbell, 2002). Indeed, the pace of reorganising seems to be accelerating. Over the 1990s, British top 50 companies increased their rate of major reorganisation from once every four years to once every three years (Whittington & Mayer, 2002). These reorganisations can be costly and high-profile. The largest reorganisation in the study reported here, MultiOne’s EXPLORE project, had a starting budget of $250m, a peak workforce of 300 people, a timescale of five years and close identification with the reputation of the chief executive. Capabilities in managing such reorganisation processes clearly matter. Our perspective, however, will take us at once outside and inside these reorganisation processes. The sheer scale and frequency of contemporary reorganisations have led to the creation of a repertoire of organising practices that has become common across a wide range of organisations. Our range of cases – from private sector to public, from small organisations to large – is designed to capture the extent of this repertoire. We shall argue that the prevalence of common practices across otherwise widely different

Practices of Organising

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circumstances qualifies certain perspectives that are sceptical of standardised, programmatic approaches to organisational change (e.g. Weick, 2000). Even change can become routinised. On the other hand, our case methods – observation and photography as well as interviews – aim at penetrating inside the broader processes of organisational change in order to reveal various micro-activities involved in carrying them through (Johnson, Melin, & Whittington, 2003). Here we shall show how even in the seemingly banal minutiae of their organising activities, managers often display underestimated skills and creativity in adapting standardised practices to particular conditions. In other words, organising capabilities rely upon both standardised practices whose origins are external to the process and managerial artistry in applying these practices to the detailed circumstances that arise deep within. The paper continues as follows. The next section starts with some of the managerial challenges and theoretical predicaments posed by the scale and frequency of contemporary reorganisations. This section then goes on to introduce a practice lens on change, in which practices are both traced beyond process boundaries and followed as they are adapted within the micro-level details of action. The following section introduces the research, particularly the eight case studies drawn from a range of sectors in order to capture common practices. The empirical material comes in two parts. The first is an analysis of a particular moment of organising recorded by a single photograph and revealing a substratum of organising tools and activities that finds little place in conventional organisation design theory. The second is a more general account of organising drawn from the range of case studies, which highlights both the role of common practices carried into the process by consultants and change managers and the creative adaptation of these practices at the micro-level. The concluding discussion summarises the findings of the paper, proposes the practice lens as a useful means of interpreting their complexities and discusses implications for the teaching of organisation design in business schools.

THE PROCESSES AND PRACTICES OF ORGANISING In a good deal of organisational theory, organisation design looks to be a matter of drawing an organisation chart and then expecting it stand up on its own (Donaldson, 2001). As for Utilco’s senior managers in the opening quotation, it is about getting the right design, rather than managing a design process. In the reorganisations that we shall be discussing in this paper,

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however, the design process appears equally as fraught as the ultimate design. Here, we are referring to the whole process of deliberately introducing a new form of organisation, in other words a reorganisation. Such reorganisations involve specifically the redesign of organisational structures, systems and cultures (Daft, 2001; McKinley & Scherer, 2000), rather than the larger transformations implied by wholesale strategic change (Pettigrew, 1985; Johnson, 1987). The reorganisation process, the ‘organising’, involves the whole process from conception of the new organisation through to implementation. Recalling the introduction, these deliberate reorganisation processes have become a high-stakes, high-frequency activity. In these conditions of constant change, any particular design is temporary, while capabilities in the reorganisation process will be constantly drawn upon. Yet, we have very few detailed empirical accounts of reorganisation processes and those that exist tend to be single cases (e.g. Bate, Khan, & Pye, 2000; Chakravarthy & Gargiulo, 1998). Such single cases risk missing one of the consequences of the contemporary acceleration of reorganisation activity: the emergence of standardised practices for dealing with change. Single or limited cases are not apt for picking up such generalised practices. Indeed, many theorists of organisation change are deeply suspicious of general approaches to change. Weick (2000, p. 232) warns against faith in ‘off-the-shelf standardised solutions that focus on one issue and are driven through by top management’. Schaffer (2000) points to the repeated failures of consultancies in managing change, because their standard approaches are insensitive to their clients’ actual capacities. Formulaic approaches, based on doubtful notions about ‘best practice’, should be eschewed for ‘contextspecific’ approaches to change (Balogun & Hope-Hailey, 1998). Successful change is about customisation rather than the imposition of standard consulting or programmatic solutions (Pettigrew & Whipp, 1991; Pettigrew, 2000). Yet, managers face contradictory pressures. As for any other activity, if reorganisations are becoming common and repeated, then we should expect a good deal of routinisation (Cohen et al., 1996). In the face of repeated change, managers are likely to develop and rely on well-practised procedures. Such procedures will offer apparently handy and efficient means simply for getting on with the job. Likewise, the expansion of reorganisation activity, as for anything else, will create a market large enough to allow the emergence of supporting specialists and technologies (Stigler, 1951). In the market for reorganisation services, change consultants will seek economies of scale and organisations will be susceptible to current fashion (Abrahamson &


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Fielding, 1999; Ghemawat, 2002). Legitimacy and efficiency combine to favour standardisation. In other words, the sheer frequency of reorganising within and across organisations is likely to give strong appeal to the ‘off-theshelf standardised solutions’ that Weick (2000) and others warn against. The processes of change may easily become subject to a paradoxical kind of stability. This article will use a ‘practice lens’ (Orlikowski, 2000) to explore how managers balance the contradictory pressures of standardisation and customisation in reorganisations. Associated particularly with the practice anthropology of Pierre Bourdieu (1990), this lens combines an appreciation of the common endowment of social and technological practices that actors bring to their activity, with sensitivity to the improvisatory and often tacit skills by which they use these practices in action. Practices are webs of routinised types of behaviour, combining tools, skills and shared forms of understanding, upon which actors draw in achieving particular ends. As such, these practices stand apart from praxis, the actual instantiation of practices in use (Reckwitz, 2002). The distinction between practices and praxis is important to the non-deterministic commitment of the practice lens. A set of practices is like a hand of cards in a game: they define the boundaries of possibility, but the order of play and the final results are down to the skill of the actor in that moment (Bourdieu, 1990). Small differences in the manner of playing the same hand can have a significant impact on outcomes: details matter. This practice lens, then, revolves around three central analytical elements. First, there are practices defined by the broad context of action; next, there are the actors, who carry both an endowment of practices and draw upon them selectively in their activities; finally, there are the ‘practices-in-use’, the manner in which selected practices are actually employed (Jarzabkowski, 2004). Orlikowski’s (2000) study of Lotus Notes implementation offers an illustration from within the management field. She begins by setting Lotus Notes within the wider domain that defines the basic technology across organisations, but then goes on to pay close attention to both the kinds of actors using this technology in different organisations and the various ways in which they actually engage with it. Here, Lotus Notes is acknowledged as embodying a set of possible practices, but the detailed use of it is creative and diverse, depending on the actors. In applying the practice lens to reorganisations, we shall be doing much the same as Orlikowski (2000), only with organising practices rather than computing practices. On the one hand, we shall try to capture generalised practices of organising that originate from outside particular processes: here

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we mean the interconnected tools, routines and concepts engaged in reorganisations (Whittington, 2003). On the other, we shall aim to penetrate deep into the processes of organising in order to grasp at least some of the minute skills actors display in translating these larger practices into action (Johnson et al., 2003). In sum, the practice lens allows us to approach the contradictory pressures involved in reorganisations in a way that acknowledges a basic level of standardisation at the same time as being sensitive to improvisation in practice. In doing so, it mandates a threefold analysis: first, of the broad practices that shape organising activity from project management to management theory; second, of the actors – managers and consultants especially – who carry these practices and instantiate them in action; and third, of the actual interpretation of these practices in use, a non-deterministic and sometimes creative performance. These three dimensions will be explored in the empirical material that follows.

RESEARCH METHODOLOGY The discussion so far suggests some demanding requirements for empirically operationalising a practice lens on reorganising processes. It implies both close attention to actors’ minute activities inside the process and an openness to a range of potentially general experiences from outside the process. As Glick, Huber, Miller, Doty, and Sutcliffe (1990) concluded in their study of reorganisations, we have had to make trade-offs, but we shall nevertheless attempt to minimise losses and be clear about where they are. As summarised in Table 1, we are undertaking multiple case studies, to this point eight, within Pettigrew’s (1997) recommended range. The case studies are not of whole organisations, but of reorganisation projects and initiatives, in the mode of the Minnesota Innovation Research Program’s focus on innovation projects (Van de Ven & Poole, 1990). Selection of multiple case studies is particularly important for our ambition to go outside any particular process. Multiple cases permit theoretical, rather than random sampling, allowing us to test the generality of practices by comparing across highly heterogeneous or polar types of organisations (Pettigrew, 1992; Van de Ven & Poole, 1990). The case organisations described in Table 1 range from publicly quoted multinationals with tens of thousands of employees to non-profit organisations with a hundred or so employees. Within these types, we have achieved several small clusters for internal comparison (Eisenhardt, 1989): thus, there are two multinationals, two

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Table 1. Case

Type of Organisation

Summary of Case Studies.

Type of Reorganisation

Research Entry Point

No. of Employees

No. of Interviews

30 months into 60 months programme

50,000

13

Second stage of 36 months ‘continuous change’ programme One month after launch of 24 months project Merger complete. 18 months into 24 months ‘culture change’ 20 months into 36 months programme Board’s approved the plan

12,000

12

30,000

16

25,000

10

5,000

11

MultiOne

Multi-national FMCG

MultiTwo

Multi-national FMCG

Global SAP implementation & ‘culture change’ Merger followed by ‘culture change’

RetailCo

High street retailer

Moving headquarters

UtilCo

Utility company

InfoCo

Information provider

QualNet

Qualifications accreditation network Qualifications accreditation charity

Post privatisation merger followed by ‘culture change’ Public sector body to private sector organisation From volunteer network to private company From charitable sole provider to competitive provider SAP implementation and associated change

QualOrg

LocalOne

Local Government

Entry at ‘go-live’ in 24 months programme of work Entry one month before ‘go-live’ of 24 months programme

1,000 (network)

6

100

11

20,000

11

non-profit qualifying organisations and two privatised or privatising organisations, as well as the retail company and a local government organisation. Our primary research method is the formal interview, supplemented by numerous casual conversations, some observation of key events such as project meetings, and access to documentation such as board minutes, consultants’ reports or project flowcharts (Eisenhardt, 1989). We have undertaken 89 semi-structured interviews so far, guided by a proforma (Pettigrew, 1997). In order to maximise diversity, interviewees include a range of people involved in the reorganisations, including senior managers, project managers and workers, external consultants and some of those on the receiving end, the ‘consumers’ of the reorganisation. Interviews have generally been about

498


one hour long, and more than three-quarters have been tape-recorded and transcribed verbatim. In order to capture organising ‘in flight’ (Pettigrew, 1992), we have been following reorganisation projects as they unfold. Though our actual point of entry varies from case to case, we have tracked each reorganisation from as early as possible and, following Van de Ven and Poole (1990), at least before we and the interviewees can know whether it is a success or failure. While multiple cases and interviews are suitable for testing the generality of practices, we were also concerned to go inside the processes in order to capture some of the micro-activity involved in the actual use of these practices (Johnson et al., 2003). Given our resources, the kind of ethnographic immersion that might normally be indicated for this had to be excluded for the range of cases we have been investigating here (Balogun, Huff, & Johnson, 2003). However, we have compensated somewhat by utilising a limited amount of observation and photography of managers actually at work on their organising. These techniques allow us to record some of the tacit minutiae of organising that interviewees find hard to talk about. Following some of the precepts of ‘visual anthropology’ (Harper, 1988; Collier & Collier, 1996), we have particularly used photographs to freeze moments in order to allow minute examination of practices in use, as situated through interviews and observation. Such photographs can bring to light objects which do not speak for themselves yet, which can be important in carrying and representing otherwise hidden knowledge and practices (cf. Carlile, 2002). However, we note that our use of photography has been largely opportunistic rather than systematic, so that what follows should be seen as essentially illustrative, intended to sensitise readers to a substratum of practices and activities that are otherwise easily passed over. In order to manage both the abundant empirical materials and to establish traceable analytical processes (Pettigrew, 1997), we have coded interviews and other documentation on NVivo qualitative analysis software. The research has been carried on under the supervision of a steering group of experienced practitioners representing the sponsoring body of the research (the Chartered Institute of Personnel and Development). We have also participated in a multimember research team engaged in both survey and case methods whose varied roles enable both informed and semi-detached devil’s advocacy (Eisenhardt, 1989). In order to develop our findings as they emerge, we have carried out workshops testing emergent findings with our case organisations, our steering group and other informed practitioners (Pettigrew, 1997). However, these findings are to some extent still provisional, as two more case studies remain to be completed. What follows is


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the product of early stage pattern recognition within the emerging data (Pettigrew, 1997).

A MOMENT OF ORGANISING This section examines a moment of organising captured through a single photograph. The photograph is illustrative, a means of highlighting practices and skills that are easily under-appreciated, and, indeed, hard even for their users to talk about. The point is to surface some of these otherwise hidden practices of organising, and to indicate the often tacit skills involved in using them. The focus is on the ‘micro’-level inside the process (Johnson et al., 2003), though we shall see that the photograph hints too at some larger characteristics of organising drawn from outside the particular process in hand. The following section will give these particular skills and practices a wider context through drawing on the interview material. Fig. 1 is a photograph of an awayday addressing the reorganisation of QualNet, observed by the first author of this paper. The scene is a familiar one. It is a hotel conference room, during a pause in the formal proceedings. Even during this break, the room is crowded. At the front of the room is a huddle of senior managers and consultants, busy in talk and recording. To the right, just by the exit, are two junior consultants, intently observant even in this moment of pause. In the foreground, round the tables, are middle managers more desultorily engaged, with some of their peers absent for a coffee. The scene is banal, yet the picture reveals some key organising practices and skills whose significance could be easily underestimated. To start with, many of the everyday objects in the photograph embody significant organising practices. In the ceiling, there are two beamers pointing to a screen at the front, designed for Microsoft PowerPoint presentations. This technology requires advanced preparation, which implies a clear separation between speakers and audience and imposes an ordered interaction between all participants. But there is also an overhead projector that allows for more spontaneous presentations on acetates and there are flipcharts and wallcharts near the huddles of senior practitioners, so that points can accumulate from discussion over the day, typically mediated by the consultants in facilitator mode. Post-It notes just visible on the wallcharts are also intended to encourage all participants (except the junior consultants) to record their comments directly themselves. The tables are arranged in cafe´-style, in order to promote collegiality, participation and equality. The volumes on the tables speak to days of research and preparation mostly

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Fig. 1.

Organising QualNet: Practices in Use.

done by the consultants. In other words, all these physical objects secrete embedded practices – modes of preparing, presenting, participating, intervening and recording – that ease and legitimate certain kinds of activities within the frame of this organising event. These practices are being artfully deployed. The standard practices of soliciting involvement and participation have a purpose – to achieve buy-in from the middle managers who will be critical in making this reorganisation work. Careful choices were made about which managers to invite, how to arrange the tables and the availability of Post-Its. Nevertheless, except for the decisions that will have to be tweaked on the margin – some of those engaging the more senior practitioners in their huddles – this meeting is not about deciding the nature of the reorganisation: that has already been done, deliberately in another more exclusive forum. The practices of participation embodied in the tables and the Post-Its are intended more for incorporation than substantive decision. This is not to say that this awayday is a mere formality. The number of managers and consultants present show that it is something that QualNet has invested in heavily. Buy-in was important and


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the remaining decisions engaged the senior practitioners vigorously even during the break: the picture shows them standing, not relaxing. These senior practitioners knew what was expected of them during the break and how to position themselves to play their roles. The consultant seizing the chance to record selected points on the flipchart too understood the potentialities of unscheduled time. And the junior consultants, observing intently from the sidelines, knew that a break was not a moment to relax their ongoing surveillance of the proceedings. The very banality of the scene in Fig. 1 underscores the generality of the practices being used. However banal, their importance can easily be underestimated. A simple thought experiment makes the point: what if these practices had not been present and skilfully used? The contrast with Hodgkinson and Wright’s (2002) account of an awayday is suggestive: here the chief executive effectively sabotaged the day not only by aggressive interventions but also through a more subtle hierarchical rearrangement of the seating and positioning by the whiteboard. In the photograph of QualNet, the practices embodied in the various objects are being artfully used to a more positive purpose. First of all, the senior managers and consultants have made a deliberate decision about whether and when to use an awayday. They have drawn on their experience in designing the day, finding an off-site location, preparing materials, selecting participants, arranging lay-outs and choosing technologies. During the day, they displayed easy command of a wide range of technologies, from PowerPoint to flipcharts, and were constantly sensitive to the different purposes each could serve. They knew how to position themselves in the room, in relation to their colleagues, to significant technologies and even to the exit. They understood how to intervene and how to disengage, when to relax and when not to relax. They were ever ready to seize opportunities, during breaks or whenever, to shape discussions and the recording of those discussions. In the range of skills and practices engaged, this awayday is a formidable performance. Without these, the awayday, and perhaps the whole reorganisation, might have foundered. But these are practices and skills that are not typically found in the conventional accounts of organisational design (Donaldson, 2001; Daft, 2001), Moreover, these practices and skills are taken from one moment at an awayday that is itself just a snippet in a long process of reorganising QualNet. These are the tip of an iceberg of practices that are essential to getting real organising work done. Without these kinds of practices, and their skilled interpretation in action, the new organisation of QualNet would have been neither designed nor implemented in the way it finally would be. Yet

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such practices and skills are simply assumed as part of the ordinary accomplishments of the professional manager, or compartmentalised in academic curricula as sub-disciplines (in every sense of the word) such as consulting skills or presentation skills. What the practice lens used here reveals is how these kinds of skills are intrinsic to the work of organising, and arbitrarily marginalised in conventional organisation theory.

PRACTICES OF ORGANISING The snapshot of organising at QualNet reveals the non-trivial role of some apparently very micro details involved in organising. But it also points to a larger set of involvements. QualNet’s organising process would not have happened as it did if there were not, outside that particular moment and outside that organisation, an industry of consultants and facilitators supporting the kinds of activities described. It would have been different too if Microsoft had not produced PowerPoint and 3M had not invented the PostIt. The fact that organising is in some sense part of an industry, possessing certain kinds of technologies, takes the practice lens not just inside the process of organising but outside as well. This section draws on interviews to widen the perspective and to tease out the extent to which particular practices of organising are shared and adapted beyond any individual case. The section breaks into three subsections: first, an introduction of some common practices of organising; then a sketch of typical actors involved in this organising with a focus on the kinds of experience and skill they carry; and finally, an account of how these actors were able to interpret these practices in diverse and creative ways in the details of their action.

Standardised Practices We shall highlight here four standard practices of organising, which were particularly prevalent in our reorganisations: use of project management, to which the Utilco Human Resources Director referred in the beginning; the specific role of standard software programs in such project management; the place of management concepts and theories; and various kinds of symbolic objects designed to encapsulate aspects of reorganisation. These run the gamut from the material (actual objects), through software (such as MS Project), to the conceptual (management theory). Following Eisenhardt’s

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Table 2.

Cross-Case Assessment of Relative Reliance on Organising Practices.

Case

Practices Project management

MultiOne MultiTwo RetailCo UtilCo InfoCo QualNet QualOrg LocalOne

High Low High High High Medium High Medium

Project software (e.g. MS project) High Low High High Medium Low Medium Medium

Management theory Medium Medium Medium Medium Medium Low Medium Low

Symbolic objects Medium High High Medium High Low Low Low

(1989) procedure for comparative case analysis, Table 2 offers a simple summary of the use of these practices across the various cases, as reported by the managers and consultants involved in the reorganisations. The proportion of managers and consultants who, in response to queries about tools, techniques and models, reported significant usage of these various practices is indicated as ‘high’, ‘medium’ or ‘low’. The table is not intended to give precise assessments, but rather to give a broad overview of these practices’ penetration in order to orientate the discussion that follows. First of all, project management is indeed widely pervasive. At Utilco, a change leader outlined the procedure in the successive stages of the company’s merger and subsequent change programme: You have a project plan, what are your key milestones, and who is responsible for delivering that. In essence, they were the major things that came out of that project, as well as the [new] organisation. And they have been used, sometimes tailored as appropriate to different projects. But in essence the philosophy about project governance and project management has still stood.

MultiOne was particularly highly reliant in this respect, with nearly all the interviewees reporting usage of project management techniques in their everyday work. The entire reorganisation programme was run in accordance with a very rigorously defined programme and project structure, involving thousands of lines of code and intensive documentation protocols, including a carefully monitored procedure for applying for change requests to any aspects of the project. This rigorous project management

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approach was driven by the large-scale of the overall project, with its $250m budget and 300 workers. This was emphasised by a MultiOne programme director: The difference between a small project and a big programme like this is you have to have a formal process working. You cannot rely on the informal conversations, because there are just too many people involved and too many sources of issues. So having a robust programme office at the centre and project offices locally is critical.

All companies made use of project management of this kind, but MultiTwo was least reliant. In part, this was attributed to the ‘softer’ side of reorganisation at MultiTwo, where change in culture was at least as important as delivering some of the ‘hard’ stuff of departmental shake-ups, information technology implementation and relocations. These last ‘harder’ aspects of reorganisation were project managed much as at any of the other case study organisations. Many of the case organisations went further, adding specific software to their project management. MultiOne, RetailCo, UtilCo and InfoCo all used Microsoft’s MS Project program, part of Microsoft Suite, to help control their project management. This software provides standard recipes for guiding the process, offering a seductively common framework. In the words of one manager at InfoCo: ‘(MS) Project is getting a little bit more specialist, but I tended to have that because people presented plans to me in that format and I had to use it’. To the extent that MS Project insinuated itself into the process, software engineers in Seattle were shaping the ways in which these reorganisations were done, both in terms of organising them as projects and in terms of representing them internally and externally. At MultiOne and RetailCo, the overall reorganisation process was also coordinated via the Ascendant program management software, storing and tracking project data, often in MS Project form. InfoCo and QualOrg also made considerable use of the British civil service PRINCE (short for Projects in Controlled Environments) methodology and associated software, originally developed in 1989 for running IT projects and since used widely in the United Kingdom public and private sectors. All the reorganisations where such kinds of project management software were extensively used also relied heavily on consultants, a point to which we shall return in the next section. Management theories and concepts were also pervasive, in both private and public sectors. However, in no case were these theories and concepts making a high impact in their own right. Nobody was adopting organisation designs straight out of the book. Rather, theories were more often used as


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individual sense-making devices. For example, at QualOrg, one of the two change leaders commented on what had helped her in understanding some of the frustrations of the process: A lot of Peter Senge’s models y. It was very helpful for me, just the research on believers and non-believers. Now that helped me look at things in a different perspective y.Reading through his theory on that was very helpful in terms of, you aren’t going to get everybody on your side, there will be people who won’t come on board. And it helped me deal with that.

This sense-making role could be more systematic. At MultiOne, they still used the McKinsey 7S model: ‘It’s terribly old-fashioned now, but actually it’s a model that gets people to understand alignments and levers, whatever it is. We have a slightly more advanced version on EXPLORE y but yes, 7S or derivatives’. Both MultiOne and MultiTwo made prominent use of James Collins and Jerry Poras’ (1994) Built to Last. The ‘Built to Last’ cases were used as exemplars for emulation by managers in these two long-established corporations. However, management theories could sometimes become overwhelmed by events. As Table 2 indicates, LocalOne engaged little with the kind of ideas and concepts from outside their organisation embodied in management theory. Virtually none of the interview respondents mentioned specific management theories as influences or guides to their activities. One change manager with over 20 years experience in the organisation commented: In this organisation, reorganisation makes people look more internally, not externally. As soon as you announce another reorganisation, people wonder what it means for them, what’s going to happen to their jobs. It soon becomes very political and everybody is preoccupied with the impacts of internal changes on them instead of looking outside for ways to do it better.

This internal focus was ironic in the case of this particular change manager, as he had himself published on change theory. Here, however, the political tensions of the process had squeezed such external reference out. Lastly, various symbolic objects were quite widely used in order to epitomise the purposes of reorganisation or manage the process. These symbolic objects ranged from glossy brochures to the creation of special artefacts (see Fig. 2 for examples). InfoCo was amongst the high users of such symbolic objects. Thus, the initial workshop with senior managers was designed around striking photographs of what the organisation was at that time, its possible future clients and a range of options for what the organisation could be in response to these clients. The proposed change journey was also mapped out onto a carpet, along which employees were invited to walk. To

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Fig. 2.

Symbolic Objects Involved in Organising.

symbolise physically the importance of reflection and innovation within the InfoCo project, a large garden-shed was installed at the end of the project room, labelled ‘research and development’, this wooden shed was opened officially by the chief executive in a comic-serious ceremony. Another high user of the objects was MultiOne, which designed a garishly decorated project room, with hearts, streamers and personalised posters, intended to exemplify the informal but passionate thinking behind the reorganisation. MultiTwo used art objects, typically produced by employees themselves but assisted by an ‘artist-in-residence’, to express the entrepreneurship, creativity and innovation the company now sought (see left foreground of Fig. 2). At RetailCo, the strategy behind the new organisation was summed up in seven sets of bullet-points, so the consultants designed a ‘seven-sided cube’ with a slice coming out of the top, each surface conveying one of the bullet-point sets (to the right in Fig. 2). UtilCo designed a set of coloured casino-style chips that could be used explicitly in project meetings to signal what participants were feeling and intending in their interventions.

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Apart from InfoCo, non-private sector organisations relied less heavily on such symbolic objects, perhaps because of financial constraints. The typical form was glossy documents and the branding of initiatives with internally generated logos (rear of Fig. 2). Reorganisations, then, appear to rely upon practices that are to a considerable extent common across very different circumstances. Of course, the details of how these practices are actually used vary, as we shall see in a later section. However, the overall picture is one of a good deal of homogenisation. Project management techniques are standard, and often routinised through such widely disseminated technologies as MS Project, Ascendant or PRINCE. Symbolic objects are common, although InfoCo’s investments were unusual by comparison with the other non-private sector organisations. Management theories provide a general background theme. The private sector organisations, even though widely different – a retailer, a utility and fmcg multinationals – turn out to be particularly alike. These kinds of commonalities owe a great deal to the kinds of actors involved, experienced consultants and managers who carry practices from reorganisation to reorganisation, across and within particular organisations.

Carriers of Practices The commonalities in organising practices across the eight cases might be a source of anxiety to those distrustful of standardised solutions, but are not entirely surprising, given the actors involved. Many of these are hardened change practitioners, able to draw on extensive prior experience from within their own organisation or outside. External consultants were used in all eight of these reorganisations, and the change leaders themselves stressed the importance of experience in previous reorganisations. External consultants were used in a range of roles, from simple number crunching by junior consultants to membership of change programme boards by senior consultants. The senior consultants could play an influential part as carriers of certain practices. At Utilco, one of the project managers acknowledged the input of a key external consultant in terms not just of external objectivity but also of methodologies from outside: Jake, having not grown up in Utilco, having the consulting background, what he has is an ability to challenge and step-back a bit y. He has these skill sets that nobody else I have seen in the company ever had. So a lot of the discipline, in terms of those methodologies, we have got through there, y. that we have never before had in our business.

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Jake himself had this account of how he was able to draw on his external skills, developed in a major change management consultancy: On the bad cop routine, my view was, particularly at that time, was just the persistent ability to get things delivered, and get answers out of people y. And that was good, because that was like, you know, your typical [major consultancy] storm-trooper type stuff. Slapping in and just getting things done.

For all that UtilCo’s reorganisation was unique, Jake was bringing things into the company’s change process – both methodologies and ‘storm-trooping’ – that were utterly routine elsewhere. At MultiOne too the reorganisation relied heavily upon experienced consultants. One of the senior consultants on the EXPLORE project commented: ‘I think so many companies underestimate the complexity of doing this. This has been my third one of these. I have got some scars on my back’. However, MultiOne had been through enough reorganisations to have its’ own experienced change managers to draw upon as well. One of the project managers on the EXPLORE reorganisation described the importance of previous experience in creating credible and established routines: It must have been fairly successful because when Project EXPLORE came out and they wanted a role of a process director for [part of the project], they came to me y. It helps to have a war story to go into. I think it is very difficult for somebody if you haven’t gone through something, if it is only book knowledge and you say [major competitor A] is doing this or this organisation is doing this. My gut feel is that it puts people off, because the first response you get y is ‘we are not [major competitor A], we are not [major competitor B]. If you can say ‘within MultiOne we do this’, it gives you a little bit of an edge’.

For internal change managers, then, relying on previous experience within the organisation, gave substantial legitimacy. However, external experience on the part of internal change managers was also commonly emphasised. Such experience need not even be sectorally related. At state-owned InfoCo, one of the change leaders made a virtue of her external experience: It was having been involved in and worked in a very fast moving commercial organisation [food retail] for a very long period of time y there are all sorts of things that are second nature to me that are completely alien to people in this environment y I did quite a bit of stuff [in food retail] on managing change, organisational change and cultural change, coming up with innovative solutions for different things in the future. So around that there are loads of different experiences that I have had that are totally applicable to this challenge.

At QualOrg, facing an equivalent revolution to that at InfoCo, the two change leaders were also from outside the caring profession that the

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organisation served. One commented: ‘The bottom line of it is we have been quite brutal. As I say, Ruth and I have not come from this political or educational environment. We have both come from hard-nosed sectors’. The change leader at MultiOne deliberately brought in as one of his senior change agents somebody who had worked with him on a change programme at another company in the past, and claimed to have learnt from that experience: ‘Paul and I both worked on a similar, smaller scale programme to EXPLORE in [fmcg company] – in which we made every mistake in the book. EXPLORE hasn’t made many’. A common theme, then, among consultants, internal change agents and change leaders is the importance of tools and experience from outside the particular process, either from the organisation’s own past or, frequently, from different companies or sectors altogether. In large part, these actors are the carriers of the standardised and routinised practices that some change theorists fear. However, as we shall see, the more astute of them at least were very careful to adapt these practices to the particular circumstances of use. Practices-in-Use Actors might carry a common endowment of practices drawn from well outside particular processes, but the practice lens insists that the details of their instantiation may vary strongly within particular sites: there is a distinction between practices as potentialities and practices in actual use (Jarzabkowski, 2004). The perils of inflexible enactment of standard operating procedures were exemplified by the fate of some consultants on MultiOne’s EXPLORE project, as recounted by the senior change leader: [We] need people who are prepared to understand the difference, who are not going to over-complicate life. One of the consultants we had early on was just anal about it, so she went pretty quickly – we just could not cope with that. The other one thought she knew everything about it, as all [large consulting firm] people do, and ended up knowing an awful lot about the theory and not a lot about the practice. And she went quickly as well.

Thus, while acknowledging the importance of practices from outside the process, this section will examine some of the creative means by which these practices are adapted to the detailed circumstances that lie within the process. All the four types of practice introduced earlier were subject to subtle adaptation. To start with project management, although it was commonly praised as offering a set of disciplines, it had frequently to be relaxed. At

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MultiOne, the senior change leader commented on his response to the frustrations of the originally highly disciplined process: One of the interesting things is that planning is important but you have to decide what sort of planning you are doing. And part of the problems with the project we’ve had, is that every time we decided to change anything, this great big machine called project planning comes in and it takes up vast amounts of time and systems space because of all these critical paths which chunter away y. Paul and I have come up with what we call a ‘living plan’.

At UtilCo, the same manager who praised the project methodologies brought in by Jake, the storm-trooping consultant, also commented: ‘In terms of that sort of methodology and that discipline, it has been key y. But some of it I have dropped, because I think it is too much system’. Jake himself commented on his own creative adaptation of the Microsoft software over successive projects: There was Microsoft Suite, but the important thing was to use separate tools that I had developed over a certain period of time, for planning and estimating. And basically, we just ran through all the numbers on them: number of interviews, number of training sessions to be done – quite detailed y. And then we basically just add that together on a Gannt chart, and up pops the plan.

Here the process was represented as an entirely routine and nearly automatic, but in fact it remained the product of customised software over which Jake retained reflexive control. More mundane was the need to adapt standardised management theories to unique circumstances. MultiOne’s change leader had developed a three stage change tool (based on ‘visioning’, ‘enrolling’ and ‘implementing’) more than a decade ago, and thought it had sufficient generality to put it into a change management handbook he had written. But EXPLORE required some adaptation: We pulled that [model] together twelve years ago when we were thinking about organisational change and development in [fmcg company]. I think it is as classic a change model as you will get y. In fact for EXPLORE, EXPLORE is doing all three of these stages [visioning, enrolling and implementing] at once all the time, because of course it is a rolling implementation. So although we have done the visioning change, you just sort of use it for the first, second and third time. For the fifth time, it is less the enrolment, and the implementation happens every time.

In other words, such a management theory could be constantly appealed to at the same time as being repeatedly adapted. The development of some symbolic objects was typically adaptive too, sometimes creatively so. Creativity was possible with even the most banalised notions. For example, infoco had adapted De Bono’s (1999) popular

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‘six thinking hats’, a procedure for debating and intervening, by manufacturing the six hats covered in the kinds of information that the company produced (at centre of Fig. 2). As already observed, MultiOne and MultiTwo both drew on Collins and Poras’s (1994) ideas, but each did so in different ways. MultiTwo incorporated quotations from the book in its art exhibitions, framed just like the other exhibits. MultiOne invited project team members to select favourite quotations and to paste them, enlarged on to a faux-naı¨ f collage, prominently displayed in the colourful project room. The evolution of RetailCo’s ‘seven-sided cube’ showed particularly dynamic adaptation (to the right in Fig. 2). The cube’s career started in March 2002 as a large cardboard box with four surfaces, each summarising statements concerning, respectively, the company’s new vision, mission and values; its strategy; its strengths and its desired behaviours. Six months later, following revisions by the Senior Management team and feedback from staff, a second cube was produced by the Communications Department. This cube had six sides displaying similar, though updated information, but with two new sides detailing ‘Ways of Working’ and ‘Unique Fundamental Strengths’. This cube was larger than its predecessor and more brightly coloured. The new cube was distributed among departments in head office, where the reorganisation was focused. Another 6 months later, in March 2003, the six-sided cube was superseded by a lighter, more easily transported seven-sided cube (see Fig. 2). The seventh side was added following reworking of the corporate strategy and further work directed at defining the organisational culture. The aim was to emphasise the development of key themes to guide the activities of workers in the organisation. Approximately 10,000 of these cubes were produced, designed in-house at RetailCo and manufactured by a specialist-marketing firm. The cubes are now circulating throughout head office, branch stores and among suppliers. It has also been produced in screen-saver form, allowing it to proliferate still further.

CONCLUSIONS The opening contention that formal organising has become a high-stakes, high-frequency activity has important but complex implications. In the first place, this constant change accentuates the capacity to manage repeated reorganisation processes, with the merits of any particular design becoming transitory. Organising, rather than organisation, becomes the source of enduring advantage. At the same time, however, this rise in reorganisation activity has also stimulated the creation of organising routines within

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organisations and common practices between them, resulting in a theoretically awkward tendency to standardise the change. This seems to run in the face of authoritative academic advice, which suspects ‘off-the-shelf solutions’ and urges ‘customisation’ (Weick, 2000; Pettigrew, 2000). Here, the ‘practice lens’ (Bourdieu, 1990; Orlikowski, 2000) provides a means for negotiating the contradictory pressures for standardisation and customisation. This approach both recognises the common social, cognitive and technological endowments that actors bring to their activities, and focuses on the detail of how such endowments are actually interpreted in use. In this sense, the practice lens takes us first outside the particular processes of any organisation to acknowledge the role of external practices such as Microsoft Project or the McKinsey 7Ss, and then deep inside the processes to examine them as actual ‘practices-in-use’ (Jarzabkowski, 2004). Here inside the process, the same tool can be used quite differently – as for example, Collins and Poras’ Built to Last book at MultiOne and MultiTwo. The practice lens makes sense of standard practices by attending to the details of use. From a practice perspective, standardisation and customisation need not be in opposition. On the basis of this study, the combination of standardisation and customisation appears quite widespread. Practices of project management are widely used, across large and small organisations, private and non-private sectors. These project management practices are often reinforced by specific software; management theories and concepts that provide a common background hum; symbolic objects are frequently used in order to embody intended change. Consulting companies’ storm-trooping methods and software companies’ norms of organising shape what is done across widely different kinds of organisation. At the same time, however, managers and consultants are frequently creative in the manner in which they put these kinds of practices to use. As at MultiOne, ‘anal’ adhesion to standardised practices can have fatal consequences for consultants and others. Jake’s selfdeveloped software tools or the materials of InfoCo’s ‘thinking hats’ suggests that adaptation of common practices, rather than invention of the entirely novel, is a normal and essential part of effectiveness in organising. Standard repertoires of change need not be disdained, but should be mastered as platforms for improvisation and creativity. Like Bourdieu’s (1990) hand of cards, these practices afford potentialities rather than determine responses. This conclusion is tentative, however. We are reporting here on just the first eight of ten cases. Although the range of organisations is wide, they are not necessarily representative. Collaborators with external researchers are,

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almost by definition, more likely to be open as well to external practices such as standard methodologies of project management or management theory. These cases do allow us to say that common organising practices can work in a range of polar types of organisation – from small charities to large multinationals – but we cannot be sure that this is the norm across the whole population of organisations. We are, therefore, continuing to extend the range of case organisations and carrying out a questionnaire survey of the wider organisational population within the United Kingdom. These together will enhance our confidence in understanding the commonality of practices and customisation in use. In the meantime, though, we offer a provisional implication for the teaching of organisation design in business schools. Here, we can echo the sentiments of the opening quotation from UtilCo and underline the importance of the process over the design. In addressing reorganisation processes, we do not find simply the drawing of organisational charts and the like, as in traditional organisation design. Our interviews, observation and photography reveal organising as involving an extensive range of often creative activities that go far beyond academic disciplinary boundaries. This organising work assumes a facility not just with the established principles of organisation design, but also with appropriate software use, meeting behaviours and project routines. These kinds of activities are as intrinsic to organising as any of the models of traditional organisation theory, and their marginalisation, while maybe academically convenient, is deeply misleading. It squeezes out the effort and improvisation of organisation design, reducing it to dry abstraction. The teaching of organisation design needs to take seriously designing as well as designs.

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