STRATEGY PROCESS
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ADVANCES IN STRATEGIC MANAGEMENT Series Editor: Joel A. C. Baum Recent Volumes Volume 15:
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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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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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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 Marı´a P. Salmador and Eduardo Bueno
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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 Auto´noma 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
Marı´a P. Salmador
Universidad Auto´noma 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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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.
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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).
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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, non- verbal 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
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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.
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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
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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
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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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Pfeffer, J., & Salancik, G. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row. Prahalad, C. K., & Bettis, R. A. (1986). The dominant logic: A new linkage between diversity and performance. Strategic Management Journal, 7, 485–501. Prussia, G. E., & Kinicki, A. J. (1996). A motivational investigation of group effectiveness using social cognitive theory. Journal of Applied Psychology, 81, 187–198. Puffer, S. M., & Weintrop, J. (1991). Corporate performance: The role of performance expectations. Administrative Science Quarterly, 36, 1–19. Rajagopalan, N., & Spreitzer, G. M. (1997). Toward a theory of strategic change: A multi-lens perspective and integrative framework. Academy of Management Review, 22, 48–79. Rotter, J. B. (1971). External control and internal control. Psychology Today, 5, 37–42. Ryan, T. A. (1970). Intentional behavior. New York: Ronald Press. Simon, H. A. (1991). Bounded rationality and organizational learning. Organization Science, 2, 125–134. Sitkin, S. B., & Pablo, A. L. (1992). Reconciling the determinants of risk behavior. Academy of Management Review, 17, 9–38. Sutcliffe, K. M., & Huber, G. P. (1998). Firm and industry determinants of executive perceptions of the environment. Strategic Management Journal, 19, 793–807. Thomas, J. B., Clark, S. M., & Gioia, D. A. (1993). Strategic sensemaking and organization performance: Linkage among scanning, interpretation, action and outcomes. Academy of Management Journal, 36, 239–271. Tushman, M. L., & Anderson, P. A. (1986). Technological discontinuities and organizational environments. Administrative Science Quarterly, 31, 439–465. Wagner, J. A., & Gooding, R. Z. (1997). Equivocal information and attribution: An investigation of patterns of managerial sense-making. Strategic Management Journal, 18, 275–286. Walsh, J. P. (1995). Managerial and organizational cognition: Notes from a trip down memory lane. Organization Science, 6, 280–321. Walsh, J. P., & Fahey, L. (1986). The role of negotiated belief structures in strategy making. Journal of Management, 12, 325–338. Weiner, B. (1986). An attributional theory of motivation and emotion. New York: Springer. Whyte, G. (1989). Groupthink reconsidered. Academy of Management Review, 14, 40–56. Wiersema, M. F., & Bantel, K. A. (1992). Top management team demography and corporate strategic change. Academy of Management Journal, 35, 91–121. Wood, R. E., & Bandura, A. (1989). Social cognitive theory of organizational management. Academy of Management Review, 14, 361–384. Zajac, E. J., & Kraatz, M. S. (1993). A diametric forces model of strategic change: Assessing the antecedents and consequences of restructuring in the higher education industry. Strategic Management Journal, 14, 83–102.
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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,
Strategy Process Advances in Strategic Management, Volume 22, 93–116 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22004-1
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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 Sa´nchez-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.
Strategy Process Advances in Strategic Management, Volume 22, 117–150 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22005-3
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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
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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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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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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,
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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
