Organizational Learning and Competitive Advantage

Organ izational Learn i n g and Competi tive Advant age

Organizational Learning and Competitive Advantage

edited by Bertrand Moi n geon and Amy Edmondson

SAGE Publications

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SUITeI·

Contents

N otes on t h e Contri butors

VII

Prologue : Toward a Comprehensive Theory or Ma nagement Chris A rgyris Introduction : O rganizational Learning as a Source or Competitive Advant age A my Edmondson and Be/rand Moingcon Part I: Learning Processes and Competitive Advan tage When to Learn How and When to Learn Why : Appropriate Organ izational Lea rn i ng Processes as a Source of Competitive Advantage A my Edmondson and Bertrand Moingcon 2

Organizational Learning Style as a Core Capability Anthony 1. DiBella. Edwin C. Ncvis and Janet M. Could

3

Competitive Advant age from Tacit Knowledge') U npack ing the Concept and its S t rategic Implications .l. -c. Spender

7

16

17 3R

56

4 Organ izations i n the Fog: An I nvestigation into the Dynamics of Knowledge Philippe Baumard Part 2: Organ izational Learning and Strategic Capability 5

Resources . Capabilities and Competencies Ashish Nanda

6

Core Capabilities and I n formation Tech nology : An Orga nizational Learn i ng Approach Rafael Andrcu and Claudio Ciborra

7

Organizat ional Capabi lity as a Source of Profit David Collis

Part 3: Strategic Change and Organ izational Learni ng R

9

74 Y2 Y3

121 139 164

Developing an O rganization Capable of St rategy Implementation and Reformulation : A Preliminary Test Michael Beer. Russell A . Eisenstat and Ralph Biggadike

165

Reorgan ization al Learn ing: Some Conceptual Tools from Weick 's Model of Organizing 1. Douglas Orton

IR5

VI

10

Organizational Learning and Competitive A dvantage The Epistemology of Strategic Consulting: Generic A nalytical Activi ties and Organizational Learning James A. Phil/s Jr

I ndex

202 225

Notes on the Contributors

Rafael Andreu is Professor of I n formation Systems at lES E , Barcelona . He holds a Doctor's degree from U P C a n d a P h D in management from t h e Massachusetts Institute of Technology . He has written articles in leading j ournals and is co-author of the book Information Systems Strategic Planning: A Source of Competitive A dvantage. Chris Argyris is James Bryant Conant Professor of Education and Organizational Behavior in the graduate schools of Business and Educa­ tion at Harvard U n iversit y . He has also served as a faculty member and chai rperson of the Administrative Sciences Department at Yale U niver­ sity. With Donald Schon of MIT, he has developed a theory of individual and organizational learning that sets the standard for depth of insight and focus on action . He is author of thirty books and three hu ndred articles. Philippe Baumard is Assistant Professor at the U n iversity of Paris-XI I and

Lecturer in Strategic Management at the Ecole des Hautes Etudes Commerciales ( H E C) . He holds an MSc in economics ( U n iversity of Aix­ en-Provence) and a Ph D i n management ( U niversity of Paris-Dauphine) , and has published three books about knowledge and competitiveness and is currently publishing a fourt h . Philippe was a Visiting Scholar with New York Unive rsity ( 1 993- 1 994) . Michael Beer is Professor of Busi ness Admin istration at the Harvard

Business Schoo l , where his research and teaching have been in the areas of organization e ffecti veness , human resource management, and organization change . He recei ved a PhD i n organizational psychology and business from Ohio State Unive rsity . Prior to joining the Harvard faculty, Mike was Di rector of O rganization Research and Development at Corning Glass Works . Mike Beer has authored or co-authored several books and many articles. E. Ralph Biggadike is Vice-Presiden t of Strategic Management at Becton

Dickinson and Company . Formerly , he was Group President in charge of the company's drug del ivery business . Prior to joining Becton Dickinson , he was Paul M . Hammaker Professor at the D arden G raduate School of Business Administration , Un iversity of Virginia, where he headed the Business Policy and Political Economy area . Claudio Ciborra is Professor a n d Head of MIS a nd Organization Depart­

ment at Theseus I nstitute and Associate Professor of I nformation Systems and Economics at the U niversity of Bologn a , School of Political Sciences.

VIII

Organizatiollal Lcarnillg alld COIl1{Jctitil'c A dl'antagc

He rece ived his degree in engineering at the Politecn ico of Milan . He has been Visiting Professor at the University of Aarhus and NYU Stern School of Business Admin istration . David Collis is an Associate Professor in the Business, Gove rnment and Competition area at the Harvard G raduate School of Busi ness Admin ist ra­ tion . He is an expert on global competition and corporate strategy. His work has rece ntly been published in the Harvard Business Revicw, Strategic Management Journal, EUJ'O{Jcall Managcment Journal, and in several books. He graduated a s a Baker Scholar from Harvard Business Schoo l , M B A , and received a PhD i n business economics from Harvard U n iversity, where he was a Dean's Doctoral Fe llow. Anthony J. DiBella holds a PhD in management from t he MIT Sloan School of Management where he is a Visiting Scholar in the Center for Organ izational Le arning. His applied research and con sultation focus on the interplay of culture , change and learning in organ izations . Dr DiBella has conducted fieldwork worldwide and consulted for many companies, including AT&T, EDF, Exxon Chem ical , and Fiat. Amy Edmondson is an Assista nt Professor in the Technology and Opera­

tions Ma nagement group at the Harvard Busi ness Schoo l . She received her P h D i n Organ izational Behavior from Harvard University . Her current research explores organizational learning and work team e ffectiveness, and she has published both em pirical and t heoretical articles in scholarly jou rnals. Previously she was Chief Engineer to the late arch itect and i nventor, Buckmi nster Fu ller, and author of a book about Fuller's mathematical ideas, entit led A FiliiI!!' Explallation: The Synergetic Geo­ mctry of Blickminster Fuller. Russell A. Eisenstat is an independent consultant special izing i n the

mn anagement of large scale organizat ional ch ange and innovation , stra­ tegic h uman resource ma nagement and strategy im plementation . His prior work experience includes six years on the faculty of the Harvard G raduate School of Business Admi nistration. Dr Eisenstat received his PhD i n o rgan izational psychology from Yale U niversity , a n d h i s B A from Harvard U n ive rsi ty. Janet M. Gould is Director of the Organizations as Learn ing Systems

Project at the MIT Center for Organi zat ional Learn i ng and co-founder of G K A Associates , an INC SOO consulting company, Her research focuses on managers' understanding of com plex systems and the tran sfer of learning. Ms Gould is an Associate Edi tor of Systems Dynamics Review and a Vice-President for the Systems Dynamic Society. Bertrand Moingeon is an Associate Professor in the Strategic Management

Department at the HEC G raduate School of Management - Paris. He

Notes on t/7e Contriblltors

IX

received a postgraduate diploma in strategy and management (HEC Doctoral Program ) , a PhD in sociology from Besanc;on Universit y . and a postdoctoral diploma in manage ment ( A ix-Marseille University ) . He is the author of several publicat ions in the area of socio-economics. strategic manage ment and organizat ional learn ing. In IlIlI4. he was a Visiting Research Scholar at the Harvard Business School . Ashish Nanda is an Assistant Professor at the Harvard Business Schoo l . H e teaches courses i n general manage ment . administrative theory and j oint ventures. He received a BTech in electrical engineering from the Indian Institute of Technology and a postgraduate diploma in management from the Indian Institute of Management . He was awarded a PhD in business economics from Harvard University in IlIlI3. He has written numerous monographs, articles, case studies and teach ing notes at Har­ vard . Edwin C. Nevis recently retired from the MIT Sloan School of Manage­

ment . where he was a faculty me mber in the Organization Studies Group. Director of the Program for Senior E xecutives . and a member of the Center for Organizational Learn ing. He has also practiced organizational consu lting for forty years. His newest book , publ ished in Apri l IlI<')6, is entitled Intentional Revollltions: A Seven-Point Strategy j()/' Transforming Organ iz([tions. James A. Phills Jr is an Assistant Professor at Yale University's School of

Management , and recei ved the Yale A lumni Associat ion Award for excellence in teaching in I <,)<,)5 . His research focuses on strategic change and organizational learning. Phills received his PhD in organizational beh avior from Harvard University . He has consulted to a wide array of organiza­ tions for over ten years and has written e xtensively about the consulting process and the development of cl ient-consul tant relationships. J. Douglas Orton is an Assistant Professor in the Strategic Management

Department at the HEC Graduate School of Management - Paris. His IlI94 dissertation at the University of Michigan was an analysis of reorganization decision processes in the I <,)76 reorganization of the US intell igence community . At HEC he teaches courses in strategy , strategic redesign and organization theory, and recent ly received a grant from the HEC Foundat ion to study the 19<,)6 reorganizat ion of US intelligence . J.-c. Spender is Professor of Strategy , Chair of Enterprise and Small

Business and the Director of the R utgers Center for International Business Education and Research. He studied engineering at Oxford , worked in the nuclear engineering and computer fields before doing his PhD in strategy at Manchester (UK ) . He has taught on four continents and has published three books.

Prologue : Toward a Comprehen sive Theory of Man agement Chris A rgyris

There are two requirements that I believe are im portant to make further progress in managerial theory and practice . The first is a greater emphasis on integrating the m anageria l functional disciplines into a coherent , actionable whole o f managerial govern ance . The second trend i s incorpor­ ating into the more comprehensive theory knowledge about causes of barriers to the implemen tation of such a theory and how to overcome them. The chapters in this volume provide many i mportant insights in how to m ake progress in both of these requirements. The Features of a Comprehensive Theory of Management

In order to indicate how the i ntegration of the various managerial functional disciplines can be achieved, we begin by stipulating the basic features of managerial theory . First, all management theories are about taking action to achieve goals, obj ectives, or i ntended consequences. This volume focuses on such goals, especially producing competitive advantage . A maj or claim is t hat organi­ zational learning is key to achieving these goals. Organizational l earning is importan t because no m anagerial theory , no matter how comprehensive , is l i kely to cover t he complexity of t he context in which the implementation is occurrin g. There will always be gaps and there will always be gap-filling . Organizational learning is critical to detecting and fi lling the gaps . Second , all managerial theories are normative because the ulti mate goals they are inte nded to satisfy and the values upon which action is based are choices m ade by human be ings . At the core of all managerial theories is the concept of effectiveness . Effective ness is accomplishing the goals or objectives in ways that they persist and do not destroy the present level of effectiveness . Third , all managerial theories contain propositions describing causally what is required to produce the i ntended consequences. All theories that

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are based on causal expl anations must also contain rules to test the validity of the causal claims. Fourt h , all managerial theories about action should be testable in the world of action which they claim to understand and explain. Moreover, the processes of test ing should be so ex plicit and user-friendly that practi­ tioners should be able to usc them in everyday practice . Managerial theories that claim to understand causality and to generate predictions useful in the worl d of practice. must contain testing procedures t hat are producible under the condi tions of everyday practice. Fift h , managerial theories are designs about effective action. At the outse t , the designs are espoused theories of action. That is , they contain propositions of the form . 'i f you beh ave A t hen B is likely to follow , given certain defined conditions ' . The creators o f t hese espoused theories strive t o make the propositions so clear that anyone educated in the concepts will be able to produce them . For exampl e , the theory of activity-based costing specifies the actions to be taken in order to identify cost drivers. This is an espoused theory because it is a design for action not yet implemented in an actual situation. All creators of managerial functional discipl ines strive to def-ine their espoused theories so that they work as advertised. For example, if an individual fol lows the specification of how to ident ify cost drivers, the cost drivers will be identified . The speci fications are so explicit that if two indi viduals use the same numbers . arrive at different conclusions about the cost drivers , an error has been created. It is possible to trace backwards the steps taken to identify where the error was made . Sixth , the aspira tion is to define the espoused theories rigorously enough so that individuals can produce the results with a low likeli hood that the espoused t h eories ( t hat is. their specifications) are wrong. This feature may be defined as internal validity . The validity is internal in the sense that it represents a test of the causal claims embedded in t he theory of activity­ based costing. Sevent h , theories of managerial functional disciplines also contain claims about the relevance of its idea to consequences that matter such as contribution to profi t . In the case of activity-based cost ing, the external validity of the t heory can be tested by observing if the reduction of costs does lead to predicted consequences such as contribution to profi t . Eighth , put simpl y . internal and external validity are about making sure that we are not bl indly kidding ourse lves or others. This concern is as salient for the creators as well as the users of the theories. Pro ducing internal and external validity requires a particular type of reasoning. I call it productive reasoning. Productive reasoning specifies the prem ises , the inferences that can be made from the prem ises , and the conclusion that can be derived . These specifications are necessary because they are the foundation for thought and action. Productive reasoning therefore requires that the users make their premises e xplicit . The inferences made from the premises should also be explici t . The conclusions

Prologue arrived at should be crafted in ways that the claims made are testable preferably as rigorously as possible. For example, t he tests should al low for falsification or disconfirmation, not simply confirmation (Popper, 1(59). Integrating Functional Theories of Action

In order to accomplish integration, we must first identify the concepts to be integrated. But , in order to identify them we must understand them . This is usually a simple task if one rema ins within one's own discipline . L as an organizational theorist, find it very di fficult to ident ify the correct concepts from fields such as accounting , finance , and so on. What makes the task even more difficult for individuals like mysel f is the fact that in most functional fields there may be several di ffe rent concepts purporting to be relevant to the same em pirical phenomena . In order to help me to choose I must understand the ways in which these concepts are used in their respective domains . I must also understand the history of the use of these concepts. Most of the chapters in this volume provide such information and indicate how the concepts may be organized into a more comprehensive theory of manage ment . The Implementation of Newly Integrated Theories of Action

Integration will take time . It will be incremental because it will be driven by lessons learned as we t ry to usc the theories . One set of lessons has to do with what is required to fu lfi l l the criteria of internal and external validity described above . There is another set of lessons that is relevant to implementation. The world of practice , I believe , is fu ll of cxamples where cl icnts agree with the recommendat ion of studies that they have commissione d , yet they do not implement them effectively. The cause of the lack of effective implementa­ tion has less to do with the internal and external validity of the analysis. It has more to do with the fact that those who are to implement t he findings, find doing so , for a whole set of reasons , em barrassing and th reatening ( Argy ris and Kaplan, 1(94). The commonly accepted answer to this problem is to involve the cl ient early in the design . One meaning of involvement is to generate, t h rough joint participation, a sense of comm itment for the implementation of the recom mendations . Unfortunately, in too many cases this means genuine participation until one engages individual, group, or organizational defens­ ive rout ines . Involvement now takes on an addi tional meaning , namel y , t h a t of bypassing the defensiveness and covering u p t h e bypass. This not only inhibits effective implementation, it also reinforces the existing defenses. In order for progress to be made in implementing the new , more comprehensive theory of management , we require that it contain a body of

4

Organizational Learning and Competitive A dvantage

propositions about how to deal with defensiveness effective ly at all levels of the organization . Behavioral Theories of Action

It is time to i ntroduce a distinctio n . The basis of the managerial functional disciplines i s their objectives and their propositions about how to achieve them . For example, i n di viduals trained in activity-based costing will k now how to discover cost drivers . The ideas, rules and procedures that they use come from the techn ical theory of action called activity-based cost accounting. I cal l such theories technical because their underlying intellectual architecture is in the service of objectives and values that are e mbedded i n technical theories of management. Finance , marketi ng, operations and strategy are other examples of techn ical theories. Another feature of such technical theories is that the major role they require of human beings is to act consistently with the technical imperat­ ives embedded in them . Human beings can accomplish this requirement by knowing technical theories and procedures. Techn ical theories, i n other words, do not require human involvement beyond that needed to make them ' i mplementation clones' of the theory . There is very l ittle attention paid by the creators of techn ical theories to the problem of barriers to i m pleme ntation , especially when everyone i n volved accepts the recommendations developed from the technical analysis as valid. I am aware of two exceptions. One is the work of Professor M ichael J e nsen in his econom ic-fi nancial theory of governance . He has i ntroduced the concept of Pain Avoidance as part of the inte llectual structure of his theory in order to explain such phenomena as defenses. Professor Robert Kaplan has taken on the task of dealing with defenses by making the concept of organi zational defenses a part of implementing the techn ical theory of activity-based costi ng. Many of the chapters in this volume provide further i l lustration . The moment that implementation of any technical theory requires actions that go beyond the required routi nes of that theory because of e mbarrassment or threat, the greater the l i kelihood that i ndivi duals wil l activate their personal theories o f action about how to deal with embarrass­ ment or threat. T call these behavioral theories of action because they are based upon theories of human i ntention , learning and action . These theories of action di ffer from the technical theories of action described above in several ways . First, they require the use of defensive reasoning. I ndividuals are advised to keep their prem ises tacit and to make their i n ferences tacit. More importantl y , they craft conclusions that are not easily testable by logic independent of that which they used to create the concl usions . The testing is often self-referential and self-sealing. Second, it is not possible to correct error by tracing backwards to identify the point of devi ancy . The reason is that each actor believes that

Prologue

5

his or her theory of action is correct. If there are differences, they are based on di ffe rent views of reality and different values. Third , there are discrepancies between the theories of action they espouse and the ones that they use . For example, many individuals espouse the value of productive reasoning and tough tests, yet they use defensive reasoning and soft tests. The defensive reasoning they use helps them to be unaware of the gap between their espoused theories and their theories-in­ use. Indeed , it also helps them to be unaware of the defensive program in their heads that keeps them unaware . The unawareness is caused by the fact that the behavior to deal with em barrassment or threat is learned in early life . Hence the behavior is highly skilled. All skillful activity is so automatic that it is taken fo r granted. It becomes tacit. Organizational Defensive Routines

The use of defensive reasoning results not only in skil led unawareness of the gaps between espoused theories and theories-in-use ; it also leads to skil led incompetence . Individuals skillfully follow the dictates of their defensive reasoning which leads them to become highly lim ited learners and to create organizational learning systems that are also highly limited in learning. Organizational defensive routines are the most powe rful learning systems that limit learning at all levels of the organization. Organizational defensive routines are any actions, policies, or practices that prevent the experience of embarrassment or threat, and at the same time prevent discovery and reduce the cause of embarrassment or threat. Organizational defensive routines li mit learning; indeed they are often anti-learning. Learning and its Relationship to Competitive Advantage

Learning occurs w hen e rrors are detected and corrected. An e rror is any mismatch between intention and what actually happens. Learning there­ fore does not occur when an error is discovered (or a new insight is obtained ) . Learning occurs w hen the discovery or insight is followed by action. There are at least two kinds of learning. Single loop learning occurs when the mismatch is corrected by altering behavior or actions. Double loop learning occurs when the underlying values are changed and then new actions follow . The chapters by Andreu and Ciborra ; Beer, Eisenstat and Biggadike ; Edmondson and Moingeon ; and Phills ill ustrate the differences between single loop and double loop learning . They also cite many examples of how single loop learning is likely to lead to information processing and dialogue (by individuals, within groups and between groups) that will make it difficult to implement an effective problem

6

Organizational Learning and Competitive A dvantage

solving process as requi red to produce competitive advantage that persists. In every chapter , the reader will find contributions that indicate li mits of single and double loop learn ing and cont ributions of new ways to conceptuali ze fe atures of organizational learning. The chapter by Collis re-examines some basic economic concepts and suggests ways that they may be redefined in order to be more clearly related to competitive advantage . Nanda's chapter helps to define the steps that would have to be taken for a resource-based view of organizations to become more i mplementable. Andreu and Ci borra describe how informa­ tion technology can be used to formulate and implement features of a more comprehensive theory of manage ment . There are seve ral ch apters that make contributions to the behavioral theories of action, especially about organizational lea rning, and show how they are rel ated to competitive advantage . They are the ch apters by Beer, Eisenstat and Biggadike ; Orton ; Edmondson and Moingeon; DiBe l l a , N e v i s and Gould ; Phills ; and Spender. In conclusion, I beli eve that two important requirements for producing effective theories of management are , first . to integrate the existing manage rial functional discipl ines into a more comprehensive theory that is actionable in everyday practi ce . This will require some alterations in the internal structure of the theories as well as explicit ways to connect them to each other. The second requi rement is a theory of effective implementation, where the effective use of the technical theories is adequate for effective implementation. This volume of readings is an important cont ribution to these two chal lenges . References Argyris. Chris and Kaplan, Robcrt S.

(1<)<)4)

' Implemcnting new knowledge: The case of

activity-based costing', ACCOlllllillg Hori:olls, Popper, K.

X( 3 ) : tn-IDS.

(I<)S<)) Thc iAlgic of Sciclllific [)i,\(,(I\'ClT

New York: Basic Books,

Introduction : Organ izational Learning as a So urce of Competitive Advant age A my Edmondson {{nd Bertrand Moillgeon

Organizations facing unce rta i n . changing. or ambiguous market conditions need to be able to learn . Few managers or organi zational scholars \vould disagree with this statemcn t : however. most are aware of the difficul ty of taking action based on this as a prescription. For over a year. the editors of this book have been cngaged in a spirited t ransatlantic dia logue focuscd on furthering linkages between strategic manage mcnt and organizational behavior. Bert rand Moi ngeon is a scho lar of sociology and strategic manage ment at G roupe H EC in France and Amy Ed mondson is a scho lar of social psychol ogy and organizational behavior at Harvard in the United States. Our collaboration began in early 1 l)l)4 when Moingeon was a visiting professor at Harvard Business School. and since then we have spent many hours teach ing each other t he latest ( a nd t he earl iest . or classic) fi ndi ngs in our own areas of interest . Our initial goal for col laborat­ ing was to demonstrate with empirical data from some of Edmondson's held research that organizational learn ing is a source of compCli tive advantage . Howe ver. wc soon found that this initial goal pointed to an area of investigation that might occupy us for years. and we ident ilied opportunities to conduct furt her em pirical research on this subj ect together. as reported in our own chapter in this volume . Thus. despite the i ncon venience of being separated by an ocean. our ent husiasm for this ongoing dialogue shows no signs of waning. We continue to seek c xamples and to develop arguments to understand and show how learning processes can provide competitive advantage for orga nizations. The editors' collaboration is almost inci dental in terms of t he timing of this book . The two streams of research that we represe nt appear to be on a (mutually productive , in our view ) col l ision course . hardly nceding our facil itat ion. In this introduction , we provide some context to show how two streams of research are coming together - each encroaching upon te rritory previously claimed by the other fie ld - in ways that we believe will be of interest to scholars and practitioners working in the areas of organization theory and manage ment.

8

Organizational Learning and Competitive A dvantage

Developing a Comprehensive Theory of Management

In the prologue , Chris A rgyris proposes that developing a comprehensive theory of management requires i ntegration between techn ical theories i n management a n d the behavioral t heories that delineate barriers t o their im plementatio n . As he notes, the contributors to this volume - coming from both strategy and from organizational behavior - have begun to forge such an integration . I n this i ntroduction , we describe how the field of strategic management is shifting to embrace a dynamic view that calls attention to issues of learning. We also note that many organizational learning and orga n izational developmen t (00) theorists are increasingly paying attention to technical discipl ines such as strategic manageme n t . As described i n the next section , i n the field of strategy , a new emph asis on organizational capabil i ties raises the question of how to develop them . Similarly, in 0 0 , a new awareness of the limitations of ignoring substant­ ive busi ness issues has led to an i n te rest in i ntegration . However, in both fields, t hese shifts have led very few researchers to alter their approaches substantially enough to use many tools and definitions from other discip­ lines. The strategy l i terature stops short of examining actual learning processes , and the orga n ization development literature contains few examples of coll aboration or i n tegration across research traditions ( Edmondso n , 1996) . This book represents a step toward such integration . Its aim is to bring together perspectives from two streams of m anagement research - strategy and organizational l earni ng and developmen t . Ten original chapters, both theoretical and empirica l , have been cont ributed by seventeen authors from the two fields. Each of the chapters lives at or near the boundary between these fields, and each thereby makes a contribution toward building what A rgyris has called a comprehensive theory of management. To develop man agement theory that is more comprehensive - or less fragmented by disciplinary boundaries - we fi rst m ust engage in cross­ disciplinary dialog to become familiar with other perspectives . This strategy is based on the premise that different theoretical approaches can each provide a valuable lens through which to view an organization , and that by using multiple lenses a more complete understanding of organiza­ tional phenomena w i l l be achieved . In this view , describing the 'elephant ' of a n o rganization'S behavior requires more than o n e l e n s ( Adams, 1994; Waldo , 1 96 1 ) . Ultimatel y , out of such dialogue , a new or m eta-theory may be constructed (such as a comprehensive theory of managemen t , as A rgyris suggests) , that weaves other theories together to specify a set of p ropositions that are all i ntegral components of producing organizational effectiveness . Thus, as an initial step toward strengthening relationships between strategy and 0 0 , this book presents a multiple-lens view of organizational phenomena related to achieving competitive advantage th rough learning processes. To provide a context for t hese different lenses,

9

In/melue/ion the next section describes current changes description of similar shifts in 0 0 .

In

strategy , fol lowed by a

Strategic Management: A n Emerging Dynamic View

The aim of strategy theorists is to explain sustained superior perform ance , o r above average profitability, of companies ( Bowm an , 1 974 ; McG rath et aI . , 1 995) . For years the dom i nant view - derived from the industrial o rganization (TO) theory framework - explained superior performance through structural features of i ndustries such as barriers to competition ( Porter, 1 980) . In this view, industry characteristics explain much of t he variance in firm performance , and industry analysis is the means by which managers can attempt to improve their company's competitive advantage. N anda, in Chapter 5, describes this emphasis on the external environment at the expense of a firm's internal activities as a persistent 'bias' in the strategy fiel d . An alte rnative view proposes that fi rm-specific resources and compet­ encies are critical factors enabling firms to achieve superior performance in the marke t . Th is perspective can be t raced back to Selznick ( 1 957) who proposed that organizations each have 'disti nctive competence' that al lows them to earn superior profits, and to Pen rose ( 1 959) who described the firm as a 'collection of productive resou rces'. More rece ntly, Wernerfe lt ( 1 984) and Barney ( 1 99 1 ) have proposed that ana lysis of a firm's skills and capabilities is of greater strategic value than analysis of its competitive environment. Subsequently, an empirical study found that stable differ­ e nces across business units accounted for more varia nce in returns than industry effects ( Rumelt, 1 99 1 ) , and a ' resource based view of the firm' began to earn i ncreased attention by strategists. The resource-based view does not represen t a pendulum swing to an oppos i ng view, but rather explicitly calls for a dual focus on i ndustry ana lysis and firm capability ( Collis and Montgomery, J 995 ) . In his chapter in this volume , Nanda describes the history and implications of the resource-based view in some deta i l , and this i n troduction does not attempt to do the same , but instead focuses on drawing connections to organizational learning. Two impl ications of the resource-based view of the firm make it relevant to organizational learning research . First is the recognition that resources encompass both tangible , material assets as well as in tangible and tacit assets (Prahalad and Hame l , 1 990) . Idiosyncratic bundles of know ledge and skill - clearly within the domain of organizational learning (e.g. Huber , 1 99 1 ) - can be legi timate firm-specific resources. In Chapter 7, Collis formalizes the argument that tacit collective knowledge c a n be a source of profit or economic re n t . Second, as firm-specific resources receive more emphasis , questions of how they can be acquired and developed become increasingly re leva n t , which is the domain of learning. Th us, as Nanda (in this volume) poi nts out, the resources pe rspective views fi rms as learning organ izations that improve their capabi lities through

I( )

Org({niwliona/ Lcaming ({nd COII/pclilivc Adv({l1 Iagc

cxperi e n ce . This is a s h i ft toward a dynamic rather than static vIew of stratcgy ( McG rath et a! . . IYY5 ) . How does possess i n g a capabi lity become a source o f competitive adva ntage? Orga n i zational capabilities a re bundles of resources - capital asse ts. human k n ow-how . and rout ines - co mbined i n path-depe ndent ways that makc them d i fficu lt to u n bundle or deci phe r ( sce chapters by Nanda and by Co l l i s ) . Sociologist Pierre Bourdieu proposes that a given capa b i l i t y functions as CII/J i{({/ i n contexts i n which i t is valued: i n other contexts the same capabi lity may not be val ucd and is thus simply a Icalllrl'. as d i scussed by Edmondson a n d Moi ngcon in Chapter I . S i m i l a rl y . Col l i s ( 1 99-+) c a l l s attention t o the contex t-depe ndent nature of capabi l i tics a s sources o f economic re n t . Thus . i n strategic t e r m s . a capability m a y b e a sou rce of advan tage or clse simply be a featur e of the organ ization that possesses i t . depe n d i n g upon \\ hether that capability is valued in the m a rket i n which the orga n ization com petes. The dynam ics of markets are the refore critica l . as a given capabi lity may i n itially be highly val uable i n a m a rket but later become com monplace a n d thus simply a feat ure . H e n ry Ford 's i n t roduction of m ass production i n to the automotive i n d ustry provides a well-k nown h istorical example . wh ich i l lustrates additionally that features fa l l i n to t\\ O cat ego ries: one is esse ntial capabilities such as m ass prod uction in the automot i \ e i n dustry. wh ich function as ·the price o f e n try' - and t h e other is a n act i \ ity o r resource n o t direct ly re levant t o a n orga n i zation's a b i l i t y to compcte i n its mark e t . I n the fie l d o f stratcgy . this i ncreas i n g e m phasis on capabi l i t ies a n d l e a rn i n g is n o t l i m i ted to acade mic j ou rn a l s . A highly successful strategic consu l t i n g fi r m . The Monit or Compa n y - fou nded over ten years ago to implement M i chael Port e r' s i nd ustry a n a lysis fra mework - has u ndergone a pro found s h i ft in e m phasis from a sole focus on tech n i ca l exce l lence in strategic analysis to i ncorporating a n orga n izational l e a rn i n g capability based on the work o f Chris A rgyri s . Monitor co nsultant Roge r Mart i n ( 1 993) descri bes t h e bchavioral a n d cogniti ve barriers t o i m plemen tation of tec h n i ca l l y exce l l e n t strategies that led his company to bcgi n to examine how people learn or become w i l l i n g to e m brace ncw perspectives. U l t i m a t e l y . work i n g close l y \\ ith Argyris i n a n i n t e n sive m u lti-year developmc ntal process. Mon itor's se n i or consultants learned to address their own and thcir c l i e n ts' det£'I/.\ i I "C' I"O l I lincs in a way that helps them a n d t h e i r c l i c n ts avoid predictable i mplement ation fai l ures. From this i n vest­ m e n t , the compa n y is developing an i n tcgrated consul t i n g pract ice that combi nes tech n i cal exce l l e nce in strategic ana lysis with a rigorous behavi­ oral pract i ce cal led pmdllClil'c rcasoning ( A rgyris. 1 993 ) . In this example . strategy and l e a rn i n g come together i n two ways. Fi rst . a model of strategic consu l t i n g i s bei ng expanded to i n corporate behavioral tools developed from the orga n izati onal learn i ng pe rspective to provide added value for c l i e n t s . Second . it i l l ustratcs Mon itor i n vest i n g in the deve lopment of a n orga n izational capabi lity t h a t c a n provide competitive adva ntage for t h e fi rm ( for additional d i sclIssion . s e e the chapter b y Edmondson a nd

Illtmalictioll

II

Moi ngeo n ) . This dual focus runs t h rough this boo k : several chapters i l l ustrate the in tegration of behav ioral and technical disci pl ines ( such as t hose by Phills: Chapter 10: Beer, Eisenstat and Biggad i k e : Chapter K : and Andreu and Ci borra : Chapter 6) ; others examine tacit k nowledge or learning processes as sources of competitive adva ntage (such as t hose by Col lis: Chapter 7; Spender: Chapter 3 : and Baumard : Chapter 4 ) . As al luded to above , t he line separating strategic approaches i s blurred , and S/{flic versus dynamic is not a clear-cut dist i nction . For instance, the capabi l i t y of analysing industry forces and ge nerating new insights provides one of the ways a firm can achi eve com pet i tive advant age ( Collis, 1 994 ) . Diagnosis can b e an organizational capabi l i t y , a n d thus process ( learning to analyse) and framework ( Porter's five forces) coexist in the resource-based view. In sum , questions of how to m anage the development of new capabilities a re becoming increasi n gly re levant to st rategy research as k nowledge and capabilities a re recognized as potential sources of com petit­ ive advan tage . However strategy researchers have stopped short of focusing di rect ly on learning processes and how to enco urage t h e m . Thus, we turn to rese arch in organizational learning and deve lopment to explore th ese issues .

Organizational Learning: Toward an Integrative Approach

Rece n t l y , both academic and popular man age ment writi ngs have e m phas­ ized people and k nowledge as determ inants of organizational competi ti ve­ ness . Pfeffer ( 1994) argues that effective m a nage ment of people - including developing and e mpowe ring people , sharing i n formation , creating se l f­ managed teams, training and cross- t raining people - is a more i m portant determinant o f competitive adva ntage than industry ana lysis and structure . CEO Ray Stata ( 1989) describes e m ployee learning as critical to A n alog Dev ices' success , and Senge ( 1990) drew widespread attention to the notion o f the learning organization in his management bestse l l e r The FiJih Discipline. As part o f this t re n d , organizational deve lopment ( 0 0 ) consu ltants a re widespread in companies, a s are d iscussions o f such int angibles as exce llence , vision and corporate cultur e ( e . g . Deal and Kennedy , 1 982 ; Peters and Wate rman , 1 982 ) . Much of the focus of 00 has been on inspiring com m it me n t and participation by people t h roughout the organization . Despite t h e increased awareness and legi timacy of behavioral issues, 00 practices h ave been t hwarted by organizational resistance to ch ange , and by other sources of i n e ffectiveness. Beer, Eisenstat and Bi ggadi k e (in this volume) describe traditional 00 as being plagued by a weak ness of remai ning too focused on behavior and thus disconnected from substant ive issues of business strategy . They argue t ha t 00 methods fai l in part due to management resista nce to naive prescriptions for openness, participation

12

Organizational Learning and Competitive A dvantage

and team work across a l l situations regardl ess of task or strategy , and in part due to a focus on i n te rpersonal behavior without sufficient connection to strategy , customer and t ask as driving forces for chan ge . Other scholars h ave criticized 00 approaches as bei ng too focused on motivation and self-actualization ( for i nstance , Perro w , 1 986) and as i gnoring how organizations function as syste ms ( B lake and Mouton , 1 988) . I n recent popular manage ment l i teratur e , l e a rn i ng i s presen ted as a source of competit ive advan tage ( e . g . Reddi ng and Catalenello, 1 994; Senge, 1 990 ; Stat a , 1 989) , but defi n i tions and mechanisms invol ved in achieving this advantage a re not specified. Moreover , little e m pi rical evidence has been prese nted to support this clai m . Meanwh i l e , rece n t research i n the st rategy field has show n , for example , t h a t taci t , behavioral fea tures of total quality man agement (TO M ) programs such as executive commitment and employee e m powerment a re associated with superior fi rm profi tability, while the technical features of TO M such as quality training and benchmarking do not seem to produce competitive advan tage ( Powel l , 1 995 ) . Other strategy research has shown that fi rm identity and culture can l i m i t the e ffectiveness of new strategic initi atives such as fi rm mergers ( Moi ngeon and Ramanantsoa , 1 995 ) . One of the aims of t hi s vol u m e i s t o promote active sharing of defin itions and research questions across management d isciplines. to support further i n tegrative research ; more w i l l be said about this below . There is pre l i m i nary evidence that integrating techn ical and behavioral t h eories is both possible and worthwhi l e . A rgyris and Kaplan ( 1 994) h ave col l a borated across the disciplin es of organizational behavior and account­ ing to explore the implementation of activity-based cost accounting i n the face of organizational defensive rolltilles . And, a recent study of organiza­ tional learning at Monitor i l l ustrates how techn ical e xpertise alone is i nsufficient to produce desired organizational outcomes ; new behaviors and ski l l s m ust be learned to supplement the organization'S competency i n strategy consu lting ( A rgyris. 1 993 ) . S i m i larly. A ndreu a n d Ciborra ( i n this vol u m e ) explore organizational resources and competencies in information tech nology as outcomes of learning processes .

Overview o f the Book

The fi rst part - Learn i ng Processes and Competitive Advantage - examines organizational learni ng processes and tacit k nowledge as potential sources of competit ive advan tage . Edmondson and Moi ngeon ( Chapter I) propose that differen t ki nds of learning processes are appropriate in d i fferen t environ ments, and D i B e l l a , N e v i s and G o u l d (Chapter 2 ) show i n a multi­ company e m pi rical study that organizations differ from one another based on t he kinds of learning processes they employ. Spender (Chapter 3) e x p licates how tacit knowledge can function as a source of competitive

Introduction

13

advantage , and Baumard ( Chapter 4 ) conducts case study research to e l ucidate some of the mechanisms by which t h is occurs. The second part - O rganizational Learn ing and Strategic Capab i l ity exami nes the resource-based view of the fi rm in some deta i l . Nanda (Chapter 5 ) provides a thoughtful review of defi n i t ions and terms, and describes the i m portance of the resource-based view for current strategic t h i nking. Andreu and Ciborra (Chapter 6) show , through a study of information technologies, that capa bi l i ties and competencies a re ou tcomes of learning processes, and are sustained by the organization's structure . Thirdly , Col l i s (Chapter 7 ) presents a formal economic argument that learning and tacit knowledge can provide economic re nt or profit for firms. The shift toward a learning perspective is evident i n each of t hese three chapters . The fi n a l part - Strategic Change a n d Organ izational Learning - focuses on i mplementing new strategi es. The chapter by Beer, E isenstat and B iggadike (Chapter 8 ) prese nts an i n novative syste ms-based in tervention methodology designed to e n h ance organ izat ional learning and strategic change ; it is a process designed to help executives a lign the corporate strategy with orga nizat ional struct u re . O rton ( Ch apter 9) operational izes many of Weick's (1 979) process categories, and explores the i m p lications of a process view for m anagers and scholars i nterested i n reorganizing and restructu ring organizations. Finally, Ph i l ls (Chapter 1 0) expl icates four cogn itive processes in which st rategy consultants engage as part of their efforts to help clients. Each of the three parts of the book includes a short introduction to provide further description of the papers and the relation­ ships between t h e m .

Conclusion

This book is a first step in promoting i nterdisciplinary tho ught and research a i m ed at understanding the rol e of organizational learning in achieving competitive advantage . The concept of organ izational learn i ng has received growing attention as a source of competit iveness i n both academ ic and popular m anage m e nt l iteratures over the past few years. Meanwh i l e , assessment of competitive advan tage traditionally h a s belonged to scholars and practitioners i n t he field of strategy . The p urpose of this volume is to focus explicitly on the l i n k between t hese constructs by prese nting a variety of papers by scholars whose work bridges the two a reas of research . Fina l l y , given the p re l i m i n a ry nature of this e ndeavor, this book presents a variety of pe rspectives, often with very d i fferent views. research met hods and styles. Some chapte rs are theoretical , some are empirica l ; some p resent formal academ i c a rguments, others e m brace a more informal accessible style . We hope that its diversity w i l l a l low Organizational Learning and Competitive A dvantage to appeal to a range of readers, and that i t w i l l i nspire further work in this promising new a re a of inquiry.

14

Organizational Learning and Competitive A dvantage

References Adams. G . B. ( I lJlJ.+) ' B lindsided by the elephan t " . Puhlic A dlllillistratioll Rel'ie ", . 54( I ) : 77-'1',3. Argyris. e. ( I lJl(3) KIIOIdedge FJr A Ciioll. A Guide to Opercolllillg Barriers 10 Orgallizatiollal Change. San Francisco. C A : Jossey-Bass. Argyris. e. and Kapl a n . R. ( l lJ lJ.j) ' I mplementing new knowledge: The case of activity-based costing' . Accoullling Horizons. '1',(3 ) : '1',3- 1 05 . Barney. J . B . ( l lJlJ l ) 'Firm resources a n d sustained competitive advantage ' . Journal of Managell/ent. 1 7( 1 ) : lJlJ- 1 20 . B l a k e . R . R . a n d Mouto n . J . S . ( l lJ'I',R) 'Comparing strategies for incremental a n d transforma­ tional change ' . in R . H . Kilmann . T . J . Covin et a l . (cds ) . Corporate Transforll1ation. San Francisco. CA: Jossey-Bass. Bowman . E . H . ( l lJ74) · Epistemology . corporate strategy and academ e ' . Sloan Managell1ent Review. 1 5 : 35-50. Coll i s . D. ( l lJlJ4) ' Research note: How valuable arc organizational capabilities? ' . Strategic Mallagell1ent Joumal. 1 5 : 1 43- 1 52 . Collis. D . a n d Montgomery. e . ( l lJlJ)) 'Competing o n resources: Strategy in t h e I lJlJOs·. Harvard Business ReI'ie",. J uly-August : 1 1 8- 1 28. Deal . T. E . and Kennedy. A . A . ( IlJ82 ) Corporate Cultures: Tile Rites a n d Rituals of Corporate Life. Reading. M A : Addison-Wesley. Edmondso n . A . ( I lJ()6) 'Three faces of Eden: The persistence of competing theories and m ul tiple diagnoses i n organizational intervention research' . HUll1an Relations. 4lJ( 5 ) : 5 7 1 5lJ5 . H uber. G . ( I lJlJ I ) 'Organizational learning: The contributing processes and a review of the literature'. Organization Science. 2( 1 ) : 'l',R- 1 1 5 . McGrat h . R . G . . MacM i l lan . I . e. and Venkataraman . S . ( l lJlJ5) ' Defining and developing competence: A strategic process paradigm' . Strategic Mallagell7ent Joumal. 16: 25 1 -275. Marti n . R . ( l lJlJ3) 'Changing the mind of the corporation'. Harvard Business Review Nov.­ Dec. Moingeon . B. and Ramanantsoa. B. (I lJl(5) . An identity study of firm mergers: The case of a French savings bank ' . in H . E . Klein (cds ) . Case Method Research and Applicalion. Needham . MA: WACRA . pp. 253-260. Penrose. E.T. ( l lJSlJ) The Theory of the Groll'lh of the Firlll . White Plains. N Y : M . E . Sharpe . Perrow. e. ( l lJR6) COll7plex Organizatiom: A Critical Essay . 3rd edn . New Yor k : Random House . Peters. T.J . and Waterman . R . H . ( l lJR2 ) In Search of Excellence: Lessons froll1 A merica 's Rest Run Companies. New Yor k : Warner Brothers. Pfeffer. J. (I lJl(4) Competitil'e A dmntage Through People. Boston. M A : Harvard Business School Press, Porter. M . E . ( l lJ80) COll1petitil·e Strategy: Techniqlles for A nalyzing Indllstries and Com­ petitors. New York: Free Press. Powe l l . T . e . ( I lJl(5 ) 'Total quality management as competitive advantage: A review and e mpirical study'. Strategic Management Journal. 1 6( 1 ) : 1 5-37. Prahalad. e . K . and Hamel . G. ( l lJ90) 'The core competence of the corporation ' . Harvard Business Review. May-J une (68): 79-9 1 . Redding. J . e. and Catalenello. R . F . ( 1 994) Slrategic Readiness: The Making of the Learning Organization . San Francisco. CA: Jossey-Bass. Rumelt . R . P. ( l lJlJ l ) ' How m uch docs industry matter � · . Stralegic Managell7ent JOllrnal. 1 2( 3 ) : 1 67- 1 85 . Selzn ick . P . ( l lJ57) Leadership and A dll7inistration. N e w York : Harper and Row . Senge . P. ( 1 990) The Fifth Discipline: The A rt and Practice of the Leaming Organization . New York: Doubleday.

Introdllction

15

Stata, R , ( l lJXlJ) 'Organizational 1e,lInJlH'. The kcv to managcll1cnt innovation ' , S/Ollll Ml/l1l/gelllelll RITieu', I �( I ): 6:\-74, Waldo, D, ( l lJ6 1 ) 'Organization theory: An clephantinc problell1 ' , Pllhiic A dlllillislmlioll Rel'i<,u', 21 ( A utull1 n ) : 2 10-225 , Weick , K , 1 979 The Socill/ PSl'ch% gl' o/ Orglllli:illg, Ncw York: R,lIldoll1 House , Wernerfc l ! . B, ( 1 9X4 ) 'A resource-based view of the firm ' , Slml<'gic MilllIIg<'III<'I/l jO/l/'llll/, 5(�) 1 7 1 - I XO,

Part 1 LEARNING PROCESSES AND COMPETITIVE ADVANTAGE Scholars, consultants and ma nagers who advocate organizational learn i n g as a source of competit ive advan tage confront a notable lack of e m pi rical data to support their case . The four chapters in this part are thus of particular i nterest . as each presents some empiri cal evide nce to support the argument that learning processes can provide com pet itive advantage for a range of differen t ki nds of organ izations. Th ree of the chapters present n e w data from the aut hors' curre n t field research efforts, and one (the chapte r by Spender) reviews previously publi shed research to shed n ew l ight o n the way diffe ren t types of k nowledge are put to strategic use i n organ izat ions. I n the fi rst chapter, Edmondson a n d Moin geon review the range of e xisting perspectives on organ izational learn i n g , and propose a clarifica­ tion of terms to facilitate furt her discussion of learning and strategic advantage . They also distinguish between 'learning how' and ' learning why ' , and m a i n ta i n that i n some market e nviro n ments, learning how i s n eeded , while i n others , I('arnillg why i s more appropri ate . Examples o f b o t h types of learning processes a r e used to i l l ustrate ways i n which learning how and learn i n g why each can gen e rate advan tage i n d i ffe ren t corporate settings. Simila rly. t h e chapter b y D i B e l l a , Gould a n d Nevis proposes that organ izations have diffe re n t learn i ng styles, and that these can be modified to fit the demands of different market envi ro n ments. These aut hors identify five disti nct organ izat ional learn i ng styles based on exte nsive field research i n four i n terna tional corporation s , as described in t his chapter. Learn i n g can ge n e rate more than one kind of k nowledge . The third chapter prese n ts a careful an alysis of the types of tacit knowledge i n orga n izations . Spender reviews different ways of classifying k n owledge a n d considers rece n t evidence o f different ways of k nowing. H e maintains that there are three types of tacit k n ow ledge , each with different st rategic i m p l icat ions. The experience of an organ ization called E M I with CT sca n n i n g i s re-examined to i l l ustrate the i nterplay between these differen t t ypes of k nowl edge . I n the fi nal chapter, Baumard builds o n Spender's t ypology to understand how organizations use tacit k nowledge to deal with ambiguity. Brief case studies i l l ustrate how tacit k n ow ledge provided a tangible source of advan tage for two very diffe ren t organization s .

1 When to Learn H ow and When to Learn Why : Appropri ate Organ izat i o n a l Learn i n g Processes as a Source o f Competi tive Advant age A my Edmondson a n d Bertrand Moingeon

Scholars and praCti tIOners have pursued t h e e l usive phenomenon of organizational learning for a number of years ( for i n stance , A rgyris, 1 982; Hayes et a I . , 1 988; H u ber, 1 99 1 ; Jones and Hendry, 1 992 ; Levitt and March , 1 988 ; Sch e i n , 1 993b ; Se nge , 1 990 ; Stat a , 1 989 ) . In a world cha racterized by rapid ch ange and a mbiguous signals, the ability of organizations to decipher the environment and to respond accordingly is of considerable t heoretical and p ractical in t erest . Many researchers, includ­ ing those refe renced above , h ave made sign ificant con t ribut ions to under­ standing these processes . H oweve r , the term i tself, which dates back at least as far as March and Simon's ( 1 958) Organizations, is the only po int of broad agreemen t . Organizational learning is presented i n the literature as occu rring at di ffe re n t levels of analysis - from individuals ( A rgyris, 1 982) to organizations ( Levitt and March, 1 988) - and as applying to such d isparate processes as di ffusion of i n formation within an orga nization ( Huber, 1 99 1 ) , i ndividua l interpretive processes and i n t e rpersonal com­ m unication ( A rgyris and Schon , 1 978; Daft and Weick , 1 984 ; Weick , 1 979) , and the e ncod ing of routines i n an organization ( eyert and Marc h , 1 963 ; Levi tt and Marc h , 1 988 ; Ne lson a n d W i n t e r , 1 982 ) . I n some conceptions, organizational learning is prescriptive and t hus v iewed as manipulable ( for exampl e , A rgyris, 1 993 ; Hayes e t a I . , 1 988 ; Se nge , 1 990) and e lsewhere is the basis of descriptive t heory , documenting factors influencing or i m peding organizational adaptation (see Hube r , 1 99 1 ; Levitt and M arch , 1 (88) . Given t h e variety of defi n itions of organ izational learning and the different processes described i n this l iterature , skepticism m ust accompany the simple proposition , 'organizational learning is a source of competitive advan tage ' . In this chapter, we review existing ideas about organizational learning, i n cluding con t ribut ions from both academic and business au­ thors, and presen t a new fram ework with w hich to t h i n k about empirical

18

Org({nization{{1 L('aming and COlllpctilil'c Adv({n /{{gc

resea rch and manage rial pract ice . We propose that diffe rent types of l e a rn i ng identi fied i n the l i te rature are appropriate in diffe re n t situations. and therefore that t i m i n g and choice may he critical e l ements of gai ning advan tage from organ izational learning processes . The fi rst part of the chapter orga nizes di fferent approaches to organ iza­ tional learning into fou r categories. Themes that run thro ugh these approaches are then h ighl ighted . and a new fra mework , which attempts to sharpen an existing distinction between d i ffe rent levels of learning. is propose d . The focus of the l ast part of the chapter is on descri bing and operationalizing 'learning how' and 'learning why' . toward developing the u t i l i t y of these differe nt processes fo r diffe re nt organizational settings. Two brief case st udies a re used to i l lustrate the fra mework . A Fragmented Construct Defining Organizational Lcaming

Several theorists have noted that the organ izational learning l i terat ure is fragm ented. con sisting of m u ltiple const ructs and l i ttle cross-fertil ization among pockets of scholars ( see Fiol and Lyles. 1 985 ; Huber, 1 99 1 ; S h rivastava . 1 983 ) . The fol l owing rev iew w i l l not avoid re-e m phasizi ng this poi n t ; however. obse rvat ions al so w i l l be made about common themes across the diffe rent treatments. Defini tions of organizational learning found i n the literatur e i nclude : encoding and modify i ng routines, acquiring k nowledge useful to the organ ization . i ncreasing the orga n i zational capa­ city to take prod uctive act ion . i n te rpretation and sense-ma k i n g . develop­ i n g k n owledge about action-o utcome re lationships, and detection and correction of erro r . In t h is array of definitions. some primarily i nvolve individual human actors. while others take place at the organizational level o f analysis. Some are the basis of intervention mode l s . while others are components of descriptive theory. Th us. pri mary unit of ana lysis prov ides one cri tical dist i nction i n the organizational learning lit e rat ure : research objective provides another. Some resea rchers study how organizations learn - that i s , how these social syste m s adapt, or cha nge . or process i ncom i ng st i m u l i ; t hese outcomes are t ypical l y functions of i ndividual cogn itive properties or of organ ization policies or structures. Other researchers primarily examine how individuals l e a rn - that i s . how i ndividuals e m bedded in organizations develop, adapt , o r u pdate cognitive models. A l though they study organizations, the starting poi nt for their analysis of organ izational phenomena is individuals. A t the same time. some of each of the above groups primarily attempt to desc ribe factors i n fl uencing t hese adaptive processes, or to document phenomena such as dilemmas or sources of gai n . The desi red research p roduct , in this case , is a precise description and/or a robust model of causa l i t y . Others undertake research primarily aimed at i mp roving organ­ izations. The i r research object i ve is to identify managerial actions to

Learning How and Learning Why

19

improve organi zational effectiveness. A two-by-two matrix depicts the resulting categories of learning phenomena (see Figure 1 . 1 ) . These are : ( 1 ) organizations as embodiments of past learning; (2) individual learning and development in organization s ; (3) organizations increasing their capaci ty for change through active , intel ligent participatio n , and (4) i ndividuals gaining awareness of personal causal responsibility and developing inter­ personal skill (see Figure 1 . 2 ) . Theorists in the first two categories tend to describe how organizations or i ndividuals learn whatever it is they learn , while those i n the latter two view learning as something to be encouraged or ini tiated . Organizations as Embodiments of Past Learning Descriptive research at the organ ization level of analysis includes approaches stemming from behavioral theories of the firm and from theories of social construction . Thus a range of phenomena, from the role of routines to the role of interpretive processes in shaping organizations, are described as organizational learning. Routines Learning processes such as imitation and trial and error have been viewed as explaining existing behavior in organ izations. In contrast to normative approaches, learni ng is viewed here as a faulty mechanism that leaves organizations dom inated by routines - i n which 'action stems from a logic of appropriateness or legi timacy , more than from a logic of con­ sequentiality or intention' ( Levitt and M arch , ] 988 : 320) . Organizational actors are more habit driven and i mi tative than rational . Behavior in organizations is thus highly dependent upon and structured by routines ( Cyert and M arch , 1 963 ; Nelson and Winter, 1 982) . Learn i ng , in this view , is the accum ul ated residue of past i n fe rences, which are encoded into routines; the focus is on how t hese routines are formed and how they change . How routi nes are transmitted among actors is viewed as comparat­ ively straightforward - occurring through such phenomena as socialization , education , i m itation , and professionalization ( Levitt and Marc h , 1 988) , mechanisms similar t o those described b y i nstitutional theories ( Powell and D iM aggio , 1 99 1 ) . Finally, representing an inventory of past learning, routi nes i n organizations can make new learning especially problematic. This perspective i s explicitly based at the organ izational level of analysis, focusing on how routines are encoded and selected. A central message is that learning from experience leads to predictable traps ; when organ iza­ tions build up experience in given routines, they become less likely to actively seek better alternatives. These dynamics create built-in barriers to learning at the organ izational level , such as 'supersti tious learning' and 'competency t raps' ( Levitt and March , 1 988) . In supersti tious learning, organizational membe rs erroneously bel ieve desired outcomes to be results of well-honed organ izational activities. Similarly, a competency trap occurs when accumulated past experience leads an organization to favor the conti nuity of inferior work processes. I n both cases , current paradigms and

20

Organizational Learning and Competitive A dvantage

The two dimensions

Primary unit of analysis, or starting point for analysis: Some researchers study how organizations learn (behave, adapt, process stimuli) as a function of i nputs such as

structures, design, or cogn itive properties. Others focus primarily on how individuals learn (develop, adapt, acquire knowledge and skills) in organizational settings. 2

Research objective: Some researchers are primarily analytic, attempting to model adaptive processes and/or document di lemmas, traps, or sources of gain. The desired research product is a robust model of causality or precise description. Others undertake research primarily aimed at improving organizations; they seek policies and processes that will enhance organizational effectiveness. The desired product from this kind of research is managerial actions to i mprove organizational effectiveness.

P R I MARY U N IT OF ANALYSIS Organization

Individual

Levitt and March:

Brown and Duguid:

competency traps.

becoming an insider

Huber; Cyert and

is learning.

March; Nelson and

Pedler et al.: flatter

Winter: routines.

organizations create a

Shrivastava:

tension that elicits

individual learning as

new learning and

poor metaphor for

personal

Descriptive

organizational

development.

research

learn i n g .

Pettigrew and Whipp:

BCG , E p p l e e t a l . :

widespread individual

learning curves. Weick: organizations as interpretive systems. Daft and Weick; Duncan and Weiss: language and

RESEARCH

i nterpretation.

OBJECTIVE

learning is a kind of organization capability. Stata: individual learning makes organization more flexible and responsive.

Hayes et al.: institute

Senge: individuals

'people first'

can learn to

assumptions.

experience awareness

Ciborra and

of personal causal

Schneider: question

responsibility.

formative context to

Isaacs and Senge:

Intervention

enable organizations

simulations that help

research

to adapt.

individuals diagnose

Schein: culture as

causality.

learning and as

Argyris: understand

malleable.

and change individuals' theories in use to promote effectiveness.

Figure 1 . 1

A rypo!ogy oj orglll/izllriol/a! !earnil/g lirerrtrllre

Learning How and Learning Why

21

P R I MARY U N I T OF ANALYSIS

Oescriptive research

RESEARCH

Organization

Individual

(1 ) Organizations as

(2) Individual learning

embodiments of past

and development in

learning

organizations

(3) Organizations

(4) Individuals gaining

OBJECTIVE Intervention research

increasing the

awareness of

capacity for change

personal causal

through active,

responsibility and

intelligent

i nterpersonal skill

participation

Figure

1 .2

Categories oj' orgallizationa/ /earnillg research

practices have staying power , and sensitivity to in dications of the need for change is low. Only e xceptionally i nappropriate routines are likely to lead to a perceived need for change . This phenomenon is described as a product of organizational characteristics .

A cquiring and distributing knowledge Several theorists have defined organizational learning as a process by which an organization expands its repertoi re of actions. Citing behavioral learning theory , H uber ( 1 99 1 ) defines learning as a process that enables an entity to i ncrease its range of potential behavior through its processing of i n formation . Organizational learning is then defined as occu rri ng when any of an organization's units acquires knowledge that the unit recogn izes as potentially useful to the organization - an explicit attempt to avoid ' n arrow concept ions' that 'decrease the chances of encountering useful findings or ideas' ( H ube r , 1 99 1 : 89) . Because the organization is the potential beneficiary o f the k nowledge , this learning is organizational . These concepts remain at a h igh level of abstraction , and l ack attention to ways organizational actors can put the new pote ntially useful knowledge to use . Learning cu rves have been studied extensive l y in manufacturing environments ( see Epple et a I . , 1 99 1 ) . The con ventional ' learning curve' i ndicates that the number of l abor hours per unit produced can decrease rapid l y with cumulative output . The resu lting curve represents an ex­ ponential i ncrease in productivity, some of which is attributed to the effects of learning. As d iscussed by B ruce A nde rson of Boston Con sulting G roup, there is also a n experie nce curve effect i n these reduct ions; that is, other aspects of cum u l ative production experience such as econom ies of sca le and i mproved tech nology a lso contribute to decreasing costs . However , increased k nowledge and ski l l are i m portant components o f such i mprove­ ments. This learning, which constitutes the refinement of routines ( Cohe n , 1 99 1 ) , i s t ransferable within and across plants i n the same company ; it becomes a k i n d of stored knowledge that is useful to the organ ization . Recent researchers have proposed ways to en hance learning curves to

22

Org({niZOlioll({/ L('({millg ({lid COlllp ('liliv(' Adv({lI(({g('

incre ase compet i t i ve adva ntage ( for example, Hayes e t aI . , 1 988 , whose work w i l l be revi sited below ) . in lcrpr('(({liv(' IJroC('sscs Organizations a re i nterpretive syste ms ( Daft and Weick , 1 984 ) , in constant I� ux - a rt i ficially stabil ized t h rough i nterpretive processes , rou t i nes and st and ard operating procedures . Thus, referring back to psychologists' ' t raditional d e finition o f learni ng' , Weick finds learning i n organ izations rare l y able 10 satisfy its conditions o f producing a 'diffe re n t response' i n the 'same situation' ( 1 99 1 : 1 1 6 ) . Shrivastava ( 1 983) also finds ind ividual Icarning a poor metaphor for organizational adaptive processes. Defining organ izational learning i nstead in a ' nontraditional way' favors an i n formation-processing view of learning, in which stimuli a re not actual physical evcnts but a re i n terpretations of events ( Weick , 1 99 1 ) . S i m i larly , orga n izations have been viewed as shared agreements, with a primary organizational activity being sense-making ( D uncan and Weiss, 1 979 ) . Individua/ Lcaming alld O C I '(,/Op"I(,1I1 in Organiz{{/ions

Some orga n izational learning t heorists examine processes of individual adaptation or deve lopment i n organizational se t t i ngs. Fo r example , B rown and D uguid ( 1 99 1 ) descri be learning as becoming 'an i nsider' by acq u i ring tacit or 'noncanonical' knowledge . A l t hough t hese researchers studied how work groups became com m u n i t ies of learning, i t is the i ndividuals who l earn , beco m e i nsiders, and con tribute to differences among groups. Ray Stata , CEO o f Analog Devices, describes i n dividual learning as a source of compet i t i ve advant age for his organization (Stat a , 1 989 ) . Descriptive t heory at the i n divid ual level o f analysis incl udes model s that specify co nditions which elicit e m ployee learning, as well as models that descri be beneficial outcomes of an organizations' i ndividuals e ngaging in learn i n g act ivit ies. Persona/ alld illlerperSOn({/ i/('I'e/opmelli Flatter orga n i zational structures create a te nsion that elicits learning and personal deve lopment by e m p loyees ( Pedler et aI . , 1 990 ) . New interpersonal challenges encountered i n l ess h i e ra rchica l . more team-based organizations encou rage individuals to engage i n developing their com mun ication and other i n te rpersonal s k i l l s . O rganizations can i m plement activities that develop t h e knowledge and s k i l l s of t h e individual . creating a k i n d of insti tutional ized learning or 'orga n izational capa bility' (Pettigrew and Whipp, 1 99 1 ) . Here the learn i n g of its i n dividual actors con stitu tes an enha nced capabi l i t y o f the organ iza­ tion . These authors suggest that explicit plans and structured processes con t ribute to e ffectiveness, and that individual learning in organizations is relevant in the degree that it does so. However, t hese studies can be disti nguished from i n terve ntion research in t h a t , despite expl icit conce rn about e ffectiveness, they do not focus on how to i m plement change , nor do they advocate and test actions designed to produce desi red changes. T n

Learning Ho w and Learning Why cont rast , resea rchers i n the fol lowing two sections have embraced this objective .

Organizations Increasing their Capacity for Change through Intelligent Participation I ntervention resea rch at the o rganization level of a n al ysis explores questions of how to create organizations that act as flexible and responsive entities. Some researchers advocate human resou rces or manufacturing pol icies to i m p rove organizational respon siveness . Othe rs have noted organizational resistance to attempted changes, and proposed mechanisms to surmount that resistance . Man ufacturing e x pe rt s H ayes et a l . ( 1 988 ) describe the implementation of j ust-in-time p roduction systems to create learning organizations. Making crit ical i n formation accessible and t ra nsparent by i ncreasing the on-line inte rdependencies among workers is one element of increasing both the i m portance and chances of learning by individuals, who thereby con tribute to creating learning orga n izations. The i r pragmatic resea rch primarily focuses on technical sol u tions to the problem of sustaining con tin uous organizational responsiveness; howeve r, they devote a fu l l chapter to the i m portance of h u m a n resources issues. Institutionalizing ' people fi rst' assumptions, such as 'all e mployees are responsi b l e , thinking adults who i n he re n t l y want to do their best ' , and e ncouragi ng local experimentation a re described as critical components of creating a learning organ i zation ( Hayes et a I . , 1 988: 250) . Fostering the participation and learning of all e mployees i s described as essential for sustai ning compe tit­ ive advantage . A growing n umber of executives, consu ltants, and scholars advocate the benefits of organizational learning. The potential for disi l l usionment among organizational decision makers , however, is great, as they discover that subtle be l iefs and structures can sabotage well intentioned change processes. Studying e fforts to i m p lement new technologies i n organiza­ tions, Ci borra and Sch neider define organ izational learning as 'the process from perception of a bad fit between the existing organizational design . . . and presen t contingencies t o i n te rvention to achieve a better m atch among the various components of the whole' ( 1 992: 269 ) .

Culture as learning and learning about cllllUre Schein ( 1 993a ) a rgues that organizational culture is a kind of learning. It is ' a learned product of group e xperience' and its strength is a fu nction of the convictions of an organization's founders, the stabi lity of the group or organization , and the i ntensity and nature of past learning e xperie nces ( Sche i n , 1 990: 1 4- 1 5 ) . Secondly, the widely-shared , tacit assu mptions which const itute a n organ­ ization's culture can preclude organizational learning. Belie fs held by founders a re extre m e l y powerfu l , carrying on for years after the founders themselves have ceased to run the company ( Schei n , 1 993a , 1 993b) . Thus a company's processes and struct ures reflect and a re shaped by cult ural

24

Organizational Learning and Competitive A dvantage

assum ptions (Schei n , 1 990) , which m ust be uncovere d , examined and often change d , to enable o rganizational learning. Th ree k i n ds of learning occu r naturally i n organi zations - know ledge acquisition , habit or skill learning and emotional conditioning ( such as l earned anxiety) ( Sche i n , 1 993b ) . The emotional component contributes to m a k i n g cultural assu mptions based on past mi stakes rather than successes e x tremely d i fficul t to u n learn ; organization membe rs can be paralyzed by a fea r of m a k i n g a m i stake ( Schei n , 1 993b ) .

Individuals Developing Interpersonal 5'kill or A wareness of Personal Causal ResponsibilitJ' Some theorists portray organ izational l earning as a phenomenon i n which i ndividuals in orga n izations develop and refine their cognitive maps - that is, their theories-in-use ( A rgyris and Schon , 1 974) or 'mental models' (Senge , 1 990) - and thus become m ore e ffective decision m akers.

Cognition interacting with organizational complexity The fie l d of system dynamics, pioneered by Jay Forrester ( 1 96 1 ) and e xpanded by his students John Sterman and Peter Senge , e xplores ch aracteristics of organ izations as com p l e x systems, as well as how cogniti ve fe at ures of i ndividuals i n te ract with t hese characteristics to produce profound learning d i l emmas. The dynamic behavior of systems l i k e corporations is d i fficult to decip he r , i n part because human cogn ition is i nsensitive t o the e ffects of feedback delays and non l i nearities (Sterman , 1 989 ) . A cen t ra l premise of system dynamics i s that structllres determ i n e results in organ izations although man agers tend to perceive these results as be ing caused by recen t events. Thus, learning about the effects of one's actions or decisions in an o rganization is fraught with d i fficulty. Feedback is e i ther m issed - or misunderstood , as in Levitt and M arch 's superst i tious learn i n g . System dynamicists propose t h a t for organ izational learn i ng to occur tools and trai n i ng a re req u i red to facilitate diagnosis of the dynam ics of the organ izations i n which actors find the mselves ( Isaacs and Senge , 1 992) . Sterm a n 's work focuses on the cognitive features that l i e behi nd the fau l ty o rganization designs obse rved by Forrester, and he advocates the use of computer models to i ncorporate more factors than a l lowed by l i mited mental models (Sterman , 1 988 ) . Senge , whose 1 990 bestseller, The Fifth Discipline , introduces system dynam ics models i n accessible term s , emphas izes the role of a wareness of personal callsal responsibility i n helping t o create a n d sustai n t h e systems i n which w e play a part , a s a first step i n creating a learn i ng organ ization . The subtle science of taking action Learni n g in organizations is dependent upon being able to t ransm it relevant i n formation without d istortion - to enable h i gh levels of understanding and producti ve decision m a k i n g . However , interpersonal compete nce i s ge nerally s o low and based on such fl awed reasoning that com mun ication about issues that a re d i fficult or

Learning How and Learning Why

25

threatening rarely occurs wi thout significant d istortion ( A rgyris, 1 962, 1 982) . Chris A rgyris demonst rates i n study after study that i ndividuals' implicit theories, o r ' theories-in-use ' , l ead them to produce outcomes that are exactly contra ry to what they hope to produce i n i nterpersonal i n teractions . Moreover , these theories-in-use systematica l l y preclude learning about ways to escape their coun terproductive effects , and ulti­ mately create organizational systems which rei n force anti-learning i n ter­ personal dynam ics ( A rgyris and Schon , 1 974; Argyris, 1 982) . Analogous to competency traps, these a re built-in i mpediments to learn i ng a t the micro­ l evel of i ndividual reasoning processes. Individuals' theories-i n-use i nfl uence organizational outcomes in the fol lowing way. There are two k inds of programs in people's heads ; one is the espoused kind - i f-then propositions we think lie beh i nd our actions that is, what we tell ourselves and others. The other kind of program is the theory-i n-use - the ' i f-then proposi t ions a n individual actually uses when he or she acts' ( Argyris , 1 982) . The dilemma is that individuals, while acting, a re unaware of the discrepancy between their espoused theories and their theories-in-use. The unaware ness of this gap i s part l y due to the fact that we are l arge ly unaware of our theories-i n-use , having learned them so early in l i fe . More insidiously, however, specific features of theories-i n-use keep people unaware of the discrepancy . Values of rationality, maintaining contro l , and maximizing winning shape the strategies people use i n i nterpersonal i n te ractio n . Cal led ' Model I ' by A rgyris and Schon ( 1 974) , these strategies i nvolve forming private attri butions and evaluations about others and then crafting one's l anguage so as to mini m ize the defensiveness one e xpects to be evoked i n the m . Overa l l , these strategies reduce sensitivity to feedback and i n h ibit the production of 'valid k nowledge' ( Argyris, 1 993) . Thus, the resulting ineffectiveness i n m anagers' conversation is 'self-sealing ' . Argyris ( 1 982) defines learning a s detection a n d correction of error, and disti nguishes between single loop learning (detecting m ismatches without questioning underlying policies) and double loop learning, which does i nvolve questioning and changing governi n g conditions or values. One of the central features of Model I theories-in-use is their rel ia nce on abstractions and evaluations - i n ferences we have made that can be quite remote from 'directly observable data' but are treated by us as fact . Subsequent behavior is thus handicapped by piling error upon error. Model I is a system of wel l-learned interpersonal strategies that are not consciously e mployed, but a re nonetheless highly skil led - m uch l i ke riding a bicycle. A rgyris calls this well-learned skil l fulness, 'sk i l l ed i ncompetence' - a perplexing oxymoron that begins to suggest causes of i ntractabil i ty i n soci al behavior in organizations. Individuals using Model I wi l l create O rganizational I (0-1) systems , which a re characterized by defe nsiveness, self-fulfilling prophecies, self­ fuel ing processes and escal a ting e rror ( A rgyris, 1 982) . 0-1 systems are characterized by i m bedded reinforcing dynamics, held in place by defens-

26

Organizational Learning and Competitive A dvantage

ive reasoning strategies that actors are unaware of usi ng. Th us, inter­ dependent features of social systems ( governing conditions, action strate­ gies and conse quences) feed back and re inforce e ach other and the status quo . This creates a d i l e m m a . I n dividuals 'cause' socia l systems to m al function by vi rtue of their theories-in-use - yet at the same time 0-1 social systems 'cause' individuals to reason and act as they do' It is a vicious cycle of i n e ffectiveness which A rgyris maintains can be alte red th rough a kind of intervention ca lled action science ( A rgyris et aI . , 1 985 ) . The process is long and req u i res considerable sk i l l on the part of the interventionist and comm i t m e n t on the part of the organization . H oweve r , as the source of dysfunction is the i m pl icit theories of individuals, there is no way to avoid this investment if the vicious cycle is to be t ranscended .

Summary A review of theories of organizational learning reveals con siderable diversi t y . Some theorists describe how organizations learn whatever it is they learn , while others view learning as something that needs to be created . Those who have tackled the issue of usabi lity of their theories and include intervention m ode ls in their thinking form a particular subset of the orga n izational learning l i terature . We propose that the learning organiza­ tion rubric can be used to disti nguish research aimed at creating organ iza­ tional learning from the l arge r body of work . This disti nction serves to clari fy terms for discussing the re lationship between competitive advantage and l e a rn ing processes in organizations. Given the variety of phenomena both beneficial and detrime ntal to achieving organizational goals - that have been labeled organizational learning, we found that our own discussions about the e ffect of 'orga nizational learni ng' on 'competi tive advant age' were hampe red by this a m biguity. We thus re-framed our i n q u i ry , to ask whether and how learning organizations gain competitive advantage , such as from the ki nds of learning efforts proposed by the above researchers . Learning How and Learning Why

The e xiste nce of diffe re n t levels of learning is a central issue in inte rvention theories - that is, those related to creating learning organ izations. E x ­ a m p l e s include single versus double loop learning ( A rgyris, 1 982 ) a n d i ncre mental versus second-order learning ( Ciborra a n d Schneider, 1 992 ) . B ateson ( 1 97 2 ) previously articulated this distinction as Learning I ( detect­ ing e rrors, refining processes and selecting among k nown a l ternatives) and Learning II (changi ng the set of ava i l able a lternatives, re-fra ming the situation and expanding the rea l m of activi t y ) . In all of these constructs , the lower l e v e l i nvolves i m proving existing behaviors and making progress toward stated goal s , while the higher level req u i res question ing the

Learning How and Learning Why

27

appropriateness of the goa l s , and recognizing the subjectivity of meaning. I n developing theories for intervention purposes, an awareness of these d i ffe rences as we l l as of a need to shift from one level to another to escape the se l f-sealing n ature of fra mes or contexts , appears to be critica l . However, despite these appare nt com monal ities i n discerning two levels of learning, and despite the theoretical precisio n , operation alizing these different levels i n troduces some a m biguity. D isti nctions between first- and second-order learning a re often abst ract and difficu lt to identify in rea l organizational settings. We propose that organizational learning processes can be characte rized as learning how or learning why, a distinction that i s simi lar to those described above but with an advan tage of more co l loquial fam i l iarity. These terms a re inspired by educat ional philosopher Ol ivier Reboul ( 1 980) , who descri bed three ki nds of learning for ind ividuals - learning that , learning how and learning to understand - but our meani ngs depart significantly from his. A recen t a rticle by K i m ( 1 993) uses the terms operational learning and conceptual learning, which we bel ieve capture the essence of the d isti nction between learning how and learning why. Our goal here i s to e laborate furt her on this d istinction , and to draw con­ nections between these two ki nds of learning processes and competitive advan tage . We d e fine learning how as organizational members engagi ng i n pro­ cesses designed to tra nsfe r and/or i mprove existing sk i l l s and routines. Learning how i n volves acquiring a ' recipe' or process, i n which a re levant instruct ion might be 'just tell me how to do it, not why it works ' . When learning how , the learner is atten tive to feedback , and , within the scope of the given conte x t , deve lops both skill and valuable i n formation about conti ngencies . Orga nizations can develop learn i ng how as a st rategic capahi l i t y , such that they become expert at i m plementing new processes quickly and with a h igh degree of consistency throughout a large syste m . This kind o f capability can b e applied to and i mplemented i n a variety of new situations. We define learning why as organizational me m be rs inquir­ ing into causal ity using d iagnostic ski l l s . The objective in learning why is to d iscern underlying l ogic or causal factors . Organizations can develop these processes as a strategic capabi l i ty , such that i ndividual membe rs develop the capacity to di agnose and iden tify underlying causes i n a variety of new situations, including potenti a l l y d i fficult in terpersonal situations such as A rgyris describes. These terms a re not meant to suggest mutual exclusivity . I ndividuals engaged i n learning why necessari l y w i l l incorporate elements of skill acq uisitio n ; A rgyris's teach ing of Model II s k i l l s , which a re designed to help people diagnose causal factors in problematic in te rpersonal in ter­ action , i l l ustrates how one can be learning how to use new skills while engaged i n an encompassing ' learn i ng why' e xperience . S i m i l arly, one may be actively i n ferring reasons for the e ffect iveness o f a specific procedure (hence , d iagnosing) while engaged in a process of learning how . Our

28

Organizational Learning and Competitive A dvantage

purpose in identifying the two categories of learning how and learning why is two-fo l d . First , we want to poi nt out that two distinct kinds of activities a re both widely referred to as 'learning' , which may cause some confusion in attempting to d raw conclusions about outcomes of organizational learning. Second , we want to call attention to - and question - an implicit hiera rchy of these two kinds of acti vities in the organizational learning literature . Reflecting on the definitions given above . it is tempting t o conclude that 'learning why' is better . and in deed much of the organizational learning literature does j ust that - by focusing on those situations in which problematic barriers cannot be surmounted otherwise . One of the purposes of this chapter is to propose that learning how and learning why a re both important , and that e ach is appropriate in qualitatively different situations. This proposal is based on an observation that not all competitive advan tage requi res frame-breaking change . There are situations which call for effective mobil ization to meet relatively clear criteria for competitive­ ness, such that by being bette r, faster. more thorough . or incl usive of more employees, an organization can de rive considerable competitive advant­ age . This is competitive advantage from developing an organizational capabi li ty of learning how . I n other situations , diagnosing the whole system , or evaluating opportunities to change governing values or con­ texts, may offer critical opportun ities for success. such that learning why serves as a source of competitive advantage . These differences will be e xplored in the next sectio n . Another w a y i n which some existing theories m a y b e misleading lies in the implication t ha t moving from learning how t o learning why is not only a desirable shift but one that in volves leaving mundane learning how processes behind. We propose that learning how and learning why are i n te rtwined and i n te rdepende n t , such that organizations may benefit from members engaging i n both types of processes in an ongoing way, depend­ ing on the needs of diffe re nt situations. I n summary , rather than assuming the necessity of learning why and attempting to understand factors influencing its implementatio n . organization al researchers can step back to ask first when it is necessary . Re-framing Organizational Leamillg Research A general research q uestion emerges from this integrative approach . This can be ph rased as: under what condi tions is it desirable for organ izational actors to become aware of their own fra ming of a si tuation , to understand causal factors. and to experiment with a di fferent way of see ing the same situation ? Similarly, when is it helpful in stead to focus more attention on correcting e rrors and refining existing processes? Theoretical context Structural theories of organizational behavior, such as contingency theories ( Lawrence and Lorsch . \ 986) or t heories of work

Learning Ho w and Learning Why

29

design and leadership ( Hackman and Oldham , 1 980 ; H ackman and Walton , 1 986) propose that i f the right conditions are put in place , the desired behaviors a re more l i ke l y to occur. In contrast, cognitive theories, from social construction (see Weick , 1 979) to the theory of action ( Argyris, 1 993) , maintain that mental models of i ndividual actors play the pivotal role in infl uencing o rgan izational outcomes . Therefore, structuralists will focus on processes related t o learning how a s vital for organizational e ffectiveness. I n this view, a wel l-designed organ izational system is more dependent on its members learning how to do their j obs and actively engaging in self-regul ation (both as i nd ividuals and as teams) to alleviate e rrors and deviations. Cogn itivists, on the other hand, wil l require organizational members to learn why, because of the n at ure of their theories, in which ineffectiveness i n organ izations is seen as a matter of faulty mental models o r sel f-seali ng i n terpersonal processes. I ndividuals , in this view, m ust learn to confront , question , and rethink the frames that they themselves have imposed on reality. A n integrative approach maintains that both bodies of theory have a corner on part of the truth. These different theories may emerge out of experience in diffe rent kinds of organ izational situations. There are situations in which , i f the right structu re is in place , participation and fine­ tuning are all that is required for the foreseeable future . There are others in which organizations are stuck in i n te rpersonal or business traps they themselves have created, and they must become aware of their active role in doing so before they can become un-stuck . Sim i l arly, there are difficult, face-threatening interpersonal situations in which self-sealing dynamics make progress impossi ble without double loop learning. A Strategic Perspective on Organizational Learning I ntangible resources such as organizational knowledge are a particularly viable source of competi tive advantage because they can be causal l y am biguous a n d difficult to imi tate as Nanda and Collis show in their chapters in this volume . I f i n tangible resources can be put to use to provide competitive advantage , those resources are considered 'strategic' and they constitute a kind of capital as described by Pierre Bourdieu ( 1 993) . We view both learning how and learning why as organizational capabilities, each of which involves the application of distinct intangible resources, and each of which can constitute a kind of capital in certain market environ­ ments. This means each capabil i ty can be a source of competitive advantage , and is then a 'strategic capability'. Learning how involves the application of a set of routines characterized by imitation and error­ correction behaviors. It is thus a col lective capability to mobilize human resources to new tasks , to replicate processes, and to organize systems and structures for widespread diffusion of routines. Learning how is a capabil­ ity that resides i n the o rganization and is difficult to imitate because it involves interweavi ng a complex array of administrative and human skills. Similarly , learning w hy is t he application of a set of routines characterized

30

Organiza(ional Learning and Competitil'e A dv(ln/{{ge

by asking questions about contexts and systems. I t is a capability character­ ized by intelligent application of diagnostic tools , and can be similarly difficult to imitate . An organizational capability of learning how can facilitate implementing a new production process , or providing a new service , to produce a particular outcome valued by the mark e t. The same basic capability thus can be applied in diffe rent situations. for different activities. With changing customer demands or changing technologies, a capability of learning how can be applied again and again to di fferent specific conten t . Similarly, an o rganizational capability of learning why can be applied to understanding a new customer need, or to surmounting behavioral barriers to change , or to diagnosing a top management team problem. or to designing an in novative corporate strategy . This is a capability of creating a new model - which then faci litates taking action . lIIus(rations of Competiti\!e A d\!antage jimn Learning Capabilities Operationalizing learning how Learning how in volves processes associ­ ated with the transfer and improvement of existing skills and routines. Programs focused on reducing errors or increasing yields typically require widespread learning how. Quality improvement activities, in which small teams are assigned im provement goals also il lustrate this construct . Participants i n t hese learning processes are working within a well-defined scope of activities, even i f facing and achieving ambit ious targets. Activi­ ties supporting the implementation of new trai ning programs or problem­ solving initiatives throughout an organization also exemplify learning how . I n such design s , a we l l-honed formula for success is being transferred as accurately and across as many parts of the organization as possi ble . The cri teria for the U S Government's Malcom Baldrige Award ill ustrate one format for structuring such learning processes. An organization that uses the Baldrige Award's elaborate set of guidelines and check lists for i mprovi ng quality as a blueprint for im plementing widespread learning i nitiatives is engagi ng in learning how. An illustration of competitive advantage from learning how Intel Corpora­ tion , a producer of computer components. maintains a leading posi tion in its i nd ustry i n b ot h reve nues and profits, thro ugh a unique se t of o rganization capabilities. A com bination of util izing scie ntific expert ise to develop revolutionary techn ology . managing external relationships to i n fl ue nce i ndust ry standards . and maintaining effective internal coordina­ tion has contributed to I n tel's phenomenal growth for the past twenty years ( N anda and Bartlett , 1 994 ) . One critical component to achieving exponen­ tial growth i n reven ues was developing the capability to con tinue to produce rapidly increasing man ufacturing volumes as needed in an expand­ i ng market . B oth product quality and production yields are critical in the

Learning How and Learning Why

31

microprocessor business, posing a particularly acute cha llenge gIven the frequent i n troduction of new generations of tech nologies. As described by an I n tel manager special izing in installing new fabrica­ tion plants, 'the rate of learning is the key to short and long term success of the fab ' . 1 And , in reflecting on a decade of change , another Intel manager claims that the i r man ufacturing abil ities have evolved from hardly adequate ten years ago to become a source of com petitive advan tage today - not in terms of low cost , but in terms of speed of reach ing full production runs. Intel's man ufacturing costs are in fact higher than others in the industry ; they have i nstead focused on bringing new technologies from design engineering to full-scale manufacturing faster than other com­ panies. To do this, I ntel developed a process of learning how , called 'Copy Exactly', to transfer new technology from research and development to a new or existing fabrication plan t . Copy Exactly is both a ph i losophy a n d a system for t raining a ll plant employees - both engineers and technicians - i n copying exact procedures, as a way to transfer new technologies from one location to another and to enable the desi red i ncreases in prod uction . I t is a kind of institutionalized ' forced learning' - a ph rase used by one of the managers i nterviewed which involves acquiring skills and routines with phenomenal attention to detail . Thus, while other companies may be as advanced technically as Inte l , Intel's speed i n ' ramping up' production runs for new process and component technologies has allowed them to gain sizable market share in a sti l l expanding market. This success can be traced to many factors, including technological expertise and a w illingness to invest aggressively in new plants; however, the ability to bri ng several thousand employees up to speed in new manufacturing procedures plays a major role. Intel is the leader in an i ndust ry that currently has clear customer preferences and clear rules for success. Both technological excel lence and production volume are rewarded. The com pany has developed a unique set of capabilities for servi ng these customer needs, and successful l y engaged a large number of em ployees in uti lizing these capabil ities. Furthe r, they have successfully exploited a wi ndow of opportunity, during which the market has been able to absorb as many chips as they can make. We propose that having developed an organizational capability of learn i ng how is a critical component of I n tel's competitive advantage . Windows of opportunity, by definitio n , have l im i ted time spans. The capabil ity of learning how is less useful i n situations with unclear criteria for success or fundamental changes in the market environ ment. In such ambiguous contexts, having the capability to learn why - that is, to diagnose causal factors and taken-for-gran ted sources o f i ne ffectiveness - becomes critica l . Operationalizing learning why Learning w h y is a first step i n developing interpersonal com petence as A rgyris ( 1 985 , 1 993) descri bes, which can be a source of competitive advantage i n situations that requ i re establishing

32

Organizational Learning and Competitive A dvantage

and maintaining re lationshi ps . As discussed above , A rgyris maintains that individuals must first become aware of how their own theories-in-use are causing communication problems - and limiting their own and others' abilities to learn - before modifying them to enable more productive i nteractions. Learning to engage in conversation about difficult or threatening issues without counterproductive dynamics i nvol ves extensive training, i n which individuals learn to diagnose and change their theories­ i n-use . Similarly, management teams can engage in dialogue designed to u ncover taken-for-granted assumptions ( I saacs, 1 993) . System dynamicists have in itiated learn i ng proj ects in which teams of managers create models of the dynamics of their organization and in so doing discover t hat they the mselves have been contributing to the problems which they face ( K i m , 1 993 ; Senge , 1 990) . A n automotive design team working w i t h researchers at M IT has d ramatically improved its design process in part due to learning to diagnose the whole system in which they work . I n summary, an o rgan izational capability of 'learning why' can be applied to understanding strategic, structura l , or i n terpersonal prob lems. An illustration of competitive advan tage from learning why A rgyris describes a long-term research project in which he worked with a strategy consulting firm , Monitor Compa n y . to help deve lop the inquiry skills of its di rectors and consultants. According to Argyris ( 1 993) participants i n the project increased their capacity for productive inquiry, especially in the diagnosis of interpersonal dynamics . and have been thus able to work through difficult problems with clients, as well as to improve the quality of i n ternal i n teractions. To learn more about these results, we i nterviewed di rectors and consultants at Monitor to gather their obse rvations about the reasons for , and results of. the learning process in which they engaged. Our goal was to unde rstand how e n hancing the capability to learn why might give them a competitive advantage over other consu lting firms. Two themes emerged from these in terviews: improved client rel ationships and improved efficiency through a reduction of internal interpersonal tensions. The forme r is a source of di fferent iation . The latter is a source of increased efficiency and he nce cost an d/or speed advan tage . One of the directors describes his own and others' enhanced abi lity to diagnose interpersonal dynam ics , in particular to understand causes of dysfunction i n interactions with clients. I n his view, this capability serves two vital functions. The first is the ability to avoid counterproductive interpersonal interactions which lead clients ulti mately to reject sound advice . The second is the ability to actively teach clients to learn why, themse l ves - that is, to learn to diagnose causal factors in their own business enviro n ments. Th is director was careful to point out that not all clients value learning why ; som e , i n fact, are in search of a simple solution - and, i n Ollr terminology . want to Icarn how - that is, to implement a recipe . However, the director explains that having this interpersonal

Learning Ho w and Learning Why

33

diagnostic capability 'al lows us to get 'good' clients' - meaning 'CEO-level contacts' and fi rms facing i nteresting strategic challenges. Thus, client firms who are themselves interested i n pursuing diagnostic capabilities those who want to ' learn why' - are more l i kely to select Monitor over other companies . Moreover, the di rector believes that this capability will be extremely difficult to copy . Moni tor has i nvested more than five years i n developing t h e skills of i t s consultants, thus creating a lead that will make i t difficu lt for others to catch up. More critically, however, t he unique combination of developmental processes in which they have engaged would be difficult for others to discern and hence difficu lt to copy. A consultant we interviewed focused on t he i n ternal efficiencies Monitor has gained from diagnosing behavioral dynamics and being able to avoid the unproductive internal competitio n 'that is typical of professional service firms' . 'We are better at working out problems interna lly because we can di agnose them and figure out ways to avoid them ' , he explains. This ability to exam ine 'unproductive frames' , that is, to examine causes of interpersonal tension , as well as to experiment with implementing new behaviors, creates sizable savings i n consultants' time . As he explains, 'being stuck i n behavioral dynamics costs money' . Another director explains that 'several years ago , we found ourselves faced with classic professional-services-firm nastiness, and we decided to t ry to change it' . Through work ing with A rgyris, 'we learned - and are sti l l learning - how to diagnose and fix t hese dynamics , which are a sign i ficant source of i neffectiveness' . A third di rector sheds l ight on both i nternal and external sources of advan tage . In his view , 'we built this b usiness out of teaching clients how to diagnose their own busi ness issues. This was to be our source of differentia­ tion - but we didn't have the i nterpersonal competence to implement this strategy . . . . I nept interpersonal styles of some of us high-powered consultants made it i m possible for us to gain advantage from the analytical rigor we had on board . ' He bel ieves that it is possible to differentiate the firm with a unique combi nation of technical and behavioral skills, and that 'you can't implement good ideas without both ' . A l l o f those interviewed believe that Monitor has developed a unique ability to cope with complex problems - those which combine i n te l lectual rigor and behavioral dynamics - such as t he 'defensive routines' i dentified by A rgyris . Several cited client situations in which Monitor succeeded i n maintain i ng contracts w i t h clients t hat had rej ected several previous consul t i ng firms. In their view, Monitor's ability to diagnose and work to change clients' 'defensive routines' made t hese productive relationships possible. However, as the first director we inte rviewed explained, some clients do have 'rout ine prob lems' , and, for the m , learning why is not important . For these clients, a consulting approach which tells them what to do and how to do i t is appropriate . These clients can 'be given a recipe and use i t ' . Mon i tor, in contrast, wants to work with clients who do not yet

34

Organizaliollal Lcamillg alld COlllpctitivc A dvalltagc

u nde rst and what their problem is. requiring a blend of causal diagnosis, design and action . A Working Conclllsio/l alld Dircuioll for FlIlllrc Rcscarch For situations in which technical success ( i ncluding such features as speed . consiste ncy , productivity, quality and product excel le nce ) is the ce ntral determi nant of market competitiveness. an organ izational capabi lity of leaming how is likely to be an important source of competitive advantage . For si tuations i n which relationship success i s t h e critical determinant of market competitiveness or internal organizational effectiveness. learning why will be a source of competit ive advan tage . In selecting the second case described above, we have focused on learning to understand one's own and others theories-in-use in i n te rpersonal interact ion (and t hereby learning to avoid the counterproductive . non learning dyna mics Argyris has identified) as a particular k i nd of learni ng why : however, we see developing organization members' diagnostic skills i n a more general sense as an im portant source of advantage i n am biguous and complex market environ­ ments. For example. situations req uiring creative , frame-breaking solu­ tions t o problems also involve the capabi lity of learning why. Fina lly , we propose that most organ izations can develop both capabil­ i ties - learning how and learning why - as potential sources of competi tive advantage . Learning how is req uired for the many situations in which speed and quality matter : learning why is required for diagnosis and relationship building. Most organ izations face both kinds of situations in an ongoing way . Thus, the meta-source of competi tive advantage is knowing when t o u s e w h i c h resource . D e v e l o p i n g t h e org a n i z a t i o n a l capabi l i ty of j udicious application of the right ' i n tangible resource' - whether the behavioral routines of learning how or the behavioral routines of learni ng why - is one aspect of becoming a learn ing organization . Th us analyzing when to learn how and when to learn why is itself a capability. To i llustrate , i n this chapter. we focused on I n tel's ability to man ufacture successive new generations of computer chips, an example of learning how . However, as these learning how processes are underway, others at I n tel Corporation are actively learning why - diagnosi n g current and fut ure market and technological developme nts in anticipation of making critical changes. Simi larly, as an i l l ustration of learning why, we showed Monitor consu l tants learn ing to di agnose and change counterproductive inter­ personal dynamics with each other and with clients. Meanwhile , as part of day-to-day ope rations. others at Monitor are actively learning how ; new recruits are being trained in sophisticated techniques of data analysis, as well as learning how to use the com pany's strategy m odels. In summary , we propose that at differen t points i n an organization's history , competitive advantage may be more determined by learning how than by learning why , and vice versa , depending on the market en viron ment ; however, both capabil ities wi l l typically be i n use in an organ ization at any given time, and both are sources of competitive advantage i n different environ ments.

Learning How and Learning Why

35

Conclusions

The organ izational learning literature encompasses a range of phenomena , some of which i nvolve learning a s a source of business effectiveness. I n this chapter, we have proposed that 'the learning organization' rubric be used to distinguish these normative approaches from the larger body of work . Second, to faci litate exploring the re lationship between organ izational learning processes and competitive advantage , we have proposed a new framework , which attempts to clari fy a distinction between different kinds of learning processes in organizations. We have defined learning how as organ izational membe rs engagi ng in processes to tran sfer and improve existing skills or routines, and defined learning why as organizational members diagnosi ng causality . We argue that these represent two disti nct organizational capabilities, which each can become st rategic capabilities in different market environments. Where such factors as cost , quality and prod uctivity are key determinants of market success, learning how is a strategic capabi lity. Where relationship-building and thoughtful analysis matter, learning why becomes a strategic capability. Further empirical research must be undertaken to understand factors infl uencing the use and development of both of these learning capabilities, as we l l as to assess the effects of these processes on market success . Notes I This section is hased on i nterviews with manufacturing executives from I ntel's computer components divisions. conducted hy Amy Edmondso n . as part of research with the Center for Organizational Learning at M IT.

References Argyris. C ( 1 '162 ) Interpersonal COIl1{JetenCl' and OrganiZiltiona/ I:JJ<'ctil'('//ess. Homewood. I L: Dorsey Press. Argyris. C ( 1 '111 2 ) Reasoning. Leaming ({nd Actio/l." Individllal alld Orgallizatiolla/. San Francisco . CA : Jossey-Bass. Argyris. C ( 1 '1115 ) Strategy. Ch({lIge and f)ej<'lIsil'e ROlltines. Boston. M A : Pitman. A rgyris. C ( 1 '1'13 ) Kllo w/edge fill" A ction: A GlIide ,l(Jr OI'l!rcoming f)et<'nsil'e Behaviors. San Francisco. CA: Jossey-Bass. Argyris. C and Schii n . D. ( 1 '174) Theory ill Practice. San Francisco. C A : Jossey-Bass. Argyris. C and Schiin . D. ( 1 '1711) OrgalliZiitiolla/ /A'amillg: A T/U'OI"\" of ACl/OII Perspectil'e. Reading. MA: Addison-Wesley. Argyris. C .. Putnam. R. and S m i t h . D . M . ( I <)IIS ) A ctioll Sciellce. San Francisco. CA: JosseyBass. Bateson, G . ( 1 '17 2 ) Steps to ({II T:c% gy of Milld. San Francisco. C A : Chandler. Bourdiell . P. ( 1 '1<)3) Sociology III QlIestioll . London: Sage. Brown. J .S. and Duguid. P. ( 1 '1'1 I ) 'Organizational learning and communities 01' practice: Toward a un ified view of working. learning. and innovation' . OrgalliZiltiolla/ Sci('//ce. 2( I ) : 40-S 7 .

Ciborra. C U . and Schneider. L.S . ( 1 '1'12) 'Transforming the routines and contexts of management, work and technology ' . in P.S. Adler (cd . ) . Tec//lw/ogr alld The Flllllre of Work . Cambridge . M A : M I T Press. pp. 26'1-2'1 1 .

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Coh e n , M . D . ( 1 99 1 ) ' Individual learning and organizational routine: Emerging connections', Organizational Science, 2 ( 1 ) : 1 35-1 39 . Cyert, R . M . a n d Marc h , J . G . ( 1 963) A Behavioral Theory of the Firm . Englewood Cliffs, NJ: Prentice H al l . Daft , R . L . a n d Weick, K . E . ( 1 984) 'Toward a model o f organizations a s interpretation systcms' , A cademy of Management Review, 9: 284--2 95. D uncan , R. and Weiss, A. ( 1 979) 'Organizational learning: I m p lications for organizational design' , i n B. Staw ( ed . ) , Research in Organizational Behavior, vol . 1 . Greenwich, CT: J A I . pp. 75- 1 23 . Eppl e , D . , Argote, L . a n d Devadas, R . ( 1 99 1 ) 'Organizational learning curves: A method for investigating i ntra-plant transfer of knowledge acquired through learning by doing' , Organizational Science, 2( 1 ) : 58-70. Fiol , C . M . and Lyles, M . A . ( 1 985) 'Organizational learning', A cademy of Management Review, 1 0(4) : 803-81 3 . Forrester, J . W . ( 1 96 1 ) Industrial Dynamics. Cambridge, M A : Productivity Press. Hackman , J . R . and Oldham , G. ( 1 980) Work Redesign . Reading, M A : Addison-Wesley. H ackm a n , J . R. and Walton , R . E . ( 1 986) ' Leading groups in organizations', in P. Goodman (ed . ) , Designing Effective Work Groups. San Francisco, CA : Jossey-Bass. pp. 73- 1 1 9 . Hayes, R . H . , Wheelwright , S.c. and Clark , K . B. ( 1 988) Dynamic Manufacturing: Creating the Learning Organization . London: The Free Press. H uber, G. P. ( 1 99 1 ) 'Organizational learn ing: The contributing processes and the l iterature', Organizational Science, 2( 1 ) : 88- 1 1 5 . Isaacs, W . N . ( 1 993) 'Taking flight: D i a logue, collective thinking and organizational learning' , Organizational Dynamics, 22(2): 24--3 9. Isaacs, W . N . and Senge, P . M . ( 1 992) 'Overcoming l i mits to learni ng i n computer-based learning environments', European lournal of Operational Research , 59: 1 83-1 96 Jones, A . M . and Hendry, C. ( 1 992) The Learning Organization: A Review of Literature and Practice. U n i versity of Warwick , Coventry, U K : The H R D Partnership. K i m , D . H . ( 1 993) 'The l i n k between i ndividual and organizational learning', Sloan Manage­ ment Review, 35( I ) : 37-50. Lawrence. P. and Lorsch , J . ( 1 986 [ 1 967 ] ) Organizations and Environment, 2nd edn . Boston, M A : Harvard B usiness School Press. Lev i t t , B. and March . J. ( 1 988) 'Organizational learning', A nnual Review of Sociology , 1 4 : 3 1 9-340. March , J . and Simon , H . ( 1 958) Organizations. New York: John Wi ley. Nanda, A. and Bart l e t t , C . A . ( 1 994) ' Intel Corporation - Leveraging capabil ities for strategic renewal ' , Harvard Business School Case No. N9-394-- 1 4 1 . Nelson , R . and Winter, S. ( 1 982) An Evolutionary Theory of Economic Change. Cambridge: H arvard U niversity Press. Pedler, M . , B urgoyne, J. and Boyde l l , T. (cds) ( 1 990) Self-Development in Organizations. Londo n : McGraw- H i l I . Pettigrew, A . M . a n d Whipp , R . ( 1 99 1 ) Managing Change for Competitive Success. Oxford: B lackwe l l . Powe l l , W . W . a n d D i M aggio, P . l . (eds) ( 1 99 1 ) The New Institutionalism i n Organizational A nalysis. Chicago, I L : U n i versity of Chicago Press. Reboul , O. ( 1 980) Qu 'est-ce qu 'apprendre? Paris: PUF. Sche i n , E . H . ( 1 990) ' I nnovative cultures and adaptive organizations' , Sri Lanka lournal of Development A dministration, 7 ( 2 ) : 9-39. Sche i n , E . H . ( 1 993a) Organizational Culture and Leadership . San Francisco, CA : Jossey­ Bass. Sch e i n , E. H . ( 1 993b) ' H ow can organizations learn faster: The problem of e n tering the green room ' , Sloan Management Review, 34( 2 ) : 85-92. Senge , P . ( 1 990) The Fifth Discipline: The A rt and Practice of the Learning Organization . New York : Doubleday.

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Shrivastava , P. ( 1 9Kl ) 'A typology of organizational learning' , Journal of Management Srudies , 20( I ): 7-28. Stata, R. ( 1 989) 'Organizational learning: The key to management innovation' , Sloan Mw/{/gemel1l Review, 1 2( 1 ) : 63-74. Sterm a n , J . D. ( 1 988) 'A skeptic's guide to computer models' , in L Grant (ed . ) , Foresight and Natio/lal Decisions: The Horseman and the Bureallcrat. Lanham , M D : U niversity Press of A merica . pp. 1 33- 1 69 . Sterm a n , J . D . ( 1 989) 'Model i ng managerial behavior: Misperceptions o f feedback i n dynamic decision-making' , Managemel1l Science, 35( 3 ) : 32 1 -339. Weick , K . ( 1 979) The Social Psychology of Organizing. New York: Random House . Weic k , K . E . ( 1 99 1 ) 'The nontraditional quality of organizational learning' , Organizational Science, 2( 1 ) : 1 1 6- 1 24.

2 Organization al Le arning Style as a Core Capability A n th o ny 1. Di Bella, Edwin C. Nevis and Janet M. Gould

'Core capability' has become a popu lar concept i n the literature on corporate st rategy . Through the establishment of goals and the impleme ntation of strategic action . firms may choose to create capabilities t hat give them a decided adva ntage i n the marketplace . The key is that core capabil ities and competencies diffe rentiate a company so that it has a distinct advantage over its competi tors ( H amel and Prahalad. 1 994 ; Leonard-B arton . 1 992; Co llis. this volume ; Nanda. this volume ) . Organizational learning has been defined a s t h e capability of an o rganization to adapt to its environment ( Hedberg. 1 98 1 ) . As firms operate in an environment that appears to be increasingly more prone to change . organ ization al learning has been iden tified as a capability required of a l l firms ( Garvi n . 1 993 ) . But where are firms to find such capability and how is it to be strategically constructed') While there appears to be no shortage of theorists who can discuss how the learning organization is to be bui l t , the notion of core capability as set forth by Prahalad and Hamel ( 1 990) suggests that fi rms begi n by looking at themselves . They define core competence as existing capability that represe nts collective learning. Thus the question is not how to build capabi lity . but how to identify it and then st rategical l y use it for compet it ive advantage . The relationship bet ween learning and capability has been considered in terms of frameworks for thin king about an organization's learn ing style. For exampl e , Stata ( 1 989 ) and McKee ( 1 992) discuss the capability of o rgan i zations to learn from in novation as opposed to production . Bolton ( 1 993) discusses the competitive advantage of learning t h rough imitation ve rsus i n n ovation . Shrivastava ( 1 983 ) used a matrix of two bipolar dime nsions to develop a typology of six organizational learning styles, which represen t di fferent capabilities. We have been engaged in field research to identify learning capabil ities within a small set of firms and to develop a typology of organizational learning styles. Firms may alter their capabi lities by improving on existing learning styles, developing complemen tary styles, or radical ly transforming their culture which is the key factor that determines what , why and how organizations learn . Th rough our research we have developed a framework

Learning Style as Core Capability

39

to identify learning styles on the basis of seven orientations to learning. Th is chapter presents our model and describes its key elements. Method

Our research was based on inte nsive fie ld observations at four com panies: Motorola Corporation , Mutual Investment Corporation ( M I C ) , Elect ricite De France ( E D F ) , and FI AT. Our data collection at Motorola involved observations of and interviews with fifty senior managers, site visits, and a review of about twenty-five internal documents. At MIC, we observed and interviewed managers i n the Corporation I nvestment Funds Group and the Marketing G roup. 1 AT EDF, we observed and interviewed staff in N uclear Powe r Operations, and at FI AT we observed and interviewed managers in the Direzione Technica ( Engineering Division) of FIAT Auto Company in Italy. Several criteria were used i n selecting these sites . We wanted to have both service and manufacturi ng settings and both US and European environments. We chose two sites where we had access to very senior management and two where we were able to study o rganization units at lower levels. Three fi rms were selected because of their associ ation with our sponsor and, in the case of EDF, a base to start from because of another study done by us at EDF. Motorola was selected as an example of a company that has been identified as a good learning organization , and for providing an opportunity to observe organizational learning in their fourteen-year quality improvement effort . As an M IT Orga nizational Learning Center Sponso r , Motorola was also accessible . We did not attempt to study entire finns or to conce ntrate on individual work units. Using the ini tial fi ndings from the field observations, supplemented by our study of reports on other com panies , we constructed a two-part model that em braces the critical factors requi red to describe organ izations as learning systems. Then as our fieldwork con tinued, we focused our data collection on these specific dimensions of learning. The fo llowing section discusses this model together with our site findings. Findings

A ll Organizations have Learning Capability All the sites we studied have learning capabi lity. There are formal and informal processes and structures i n place for acquisition , sharing and utilization of knowledge and skills i n all of these firms . Values, norms, procedures and outcome data are communicated broadly and assimi lated by members, starting with early soci alization and continuing through all kinds of group communications, both formal and informal . We have talked with staff in some firms who claim that their companies were not good learning organizations, but in each of these instances we were able to

40

Organizational Learning and Competitive A dvantage

identify one or more core competencies that could only have come into existence if there were learning investments in those areas. There would have to be some type of structure and process to support the informed experience and formal educational i n terventions that are required for knowledge acquisitio n , knowledge sharing and k nowledge utilization to take place . A n d , i ndeed , that is what we found i n both our field si tes and other finns . For example , one fi rm that considers itself to be a poor learning organization because of its difficulty i n changing some dysfunctional activities, has a reputation in its industry for having a superior field marketing function . I n looking at this group it is clear that they have well­ developed recruiting, sociali zatio n , trai ning and development, and rota­ tional assignment practices t hat support a continuously filled cadre of respected marketing people . Obviousl y , some learning has been assi mil­ ated at a fai rl y deep leve l . Learning Conforms to Organizational Culture The nat ure of the learning and the way in which it takes place are determi ned i n large measure by the culture of the organization . For example, the entrepreneurial nature of MICs I nvestment Funds Group results i n a learni ng approach in which considerable amounts of i n forma­ tion are made avai lable to fund managers and analysts but the use of that i n formation remains at the discretion of the managers. I n addition , there is a good deal of leeway as to how the fund managers make their investment decisions; some are i n tuitive, some re ly heavily on historic performance , and a few use computer programs of some sophistication . I t fol lows from this that the utilization or application of learning among fund managers is l arge ly an i n formal process and not one dictated by form al , firm-wide programs . By con t rast . the Mutual Funds Marketing Groups strive to develop a more col l aborative culture and base their learning more on the work of cross-functional work groups and improved communication. The fi ndi ngs at Motorola are i lluminating in a different way . There is no question that a great deal of organizational learning about quality has occu rred in the firm , but the emphasis on engineering and technical concerns resul ted in a much earlier and complete embrace of the total quality quest by discrete product manufacturing groups than by other functions. As a culture that heavily rewards discrete product group performance , total quality in products and processes that require i nteg­ rated, inter-group action l ags behi nd, particularly in the marketing of systems that cut across divisions . There are Stylistic Variatiolls in Organizational Learning Systems From the above , it fol lows that there are a variety of ways in which organizations attempt to create and maxi mize their learning. Basic assump­ tions of the culture lead to learning values , and to select i nvestments in different aspects of the business. Th is produces a learning style which will

Learning Style as Core Capability

41

be differe nt for one with another pattern o f values and investments. These variations in style are based on a series of learning orientations (dime nsions of learni ng) which may or may not be consciously perceived by members of the organization . We identified seven learning orientations, expressed as bipolar vari ables. These are discussed below. As an example of these factors, each of two disti nct groups at both Motorola and M I C I nvestments had a different approach to the way knowledge and skills were accrued and uti l ized . In one of the Motorola groups there was a great deal of concern for specifying the metrics that would be used to define and measure the targeted learning. In the other. there was much less concern with very specific measures. I nstead , broad obj ectives we re stressed . In the two groups at M I C, the methods for sharing and utilizing knowledge were very differe n t . One was informal and the other was more formal and collaborative. From these variations, we concluded that the pattern of the learning orientations is a large part of what makes up an organ izational learning system . It may not tell us how weI/ learn ing is promoted , but i t does tell us a great deal about what is learned and where learning takes place. We identified three styles in our four sites, and two more in other organiza­ tions. These are discussed in detail below . Learning is Facilitated by Several Generic Processes How well an o rganization maxim izes learning within its chosen style is not a haphazard matter. There is a normative aspect to our findi ngs which suggests that to talk about 'the learning organization' is partially correct . Some policies, structures and processes do seem to make a differe nce . The difference is in how easy or hard it is for useful learning to occur, and i n how effective t h e organ ization is in 'working i t s style ' . While we d i d not see a l l of these factors in each of the four sites we studied intensively, we did see most of the m , and we do see them i n other sites. Thus, we are prepared to view them as generic factors , those which any organ ization can benefit fro m , regardless of its learning style. For example , scan ning, in which benchmarking plays an i mportant rol e , was so central to the learning at Motorola that it is now an in tegral , ongoing aspect of every important i n itiative i n the company. A lthough MIC tends to create knowledge and ski l l internally, it main tains an ongoing vigi lance with regard to its external environment. On the negative side , the absence of sol id, ongoing external scanning in other organizations is considered to be an importan t factor in their economic di fficu lties. Others have com mented on this i n case analyses of mature firms. A ltogether we identified ten such factors, which are discussed below. A Model of Organizations as Learning Systems

Based on the above findings, we propose a two-part model of organ izations as learning systems . One part is composed of facilitating factors, the

42

Organizaliolllli Lcarnillg and Compctitivc Advan tagc

DESCRIPTIVE

NORMA TIVE

(What and where learning

(What promotes learn ing)

occurs) LEA R N I N G O R I ENTATIONS

}

LEARNING STYLE

FAC I LITATI NG FACTO RS

ORGANIZATIONAL LEARNING SYSTEM

Based on:

Based on:

CULTURE

BEST PRACTICES

EXPERIENCE

COM M ON PROCESSES

CORE COMPETENCE

Figure 2 . 1

A II/odel of org{llli::{[[ioll{ll le{lmillg

structures and processes t h at affect how easy or hard it is for learning to occur and the amount of effective learning that takes place . These are normat ive factors based on the best practices in dealing with generic issues. The second part is composed of learnillg orienlalions , the values and attitudes that determine where learning will take place and the nature of what is learned. These orientations form a pattern t hat defines a given o rganization's 'learning style ' . In this sense , they are descriptive factors which help us to understand without making value j udgments. The complete model is depicted in Figure 2 . 1 . We show it as an addi tive model for con venie nce and for lack of sufficient knowledge at this t i me as to the relat ive im portance of t h e two sets of factors (i ndividually or as a group) . The i m portant thing is that both sets of factors are requi red for an understanding of an organization as a learning syste m ; one without the other provides an i n complete picture. I n addition , separating the factors in this way en ables orga nizations to see t hat they do indeed function as learning systems of some k i n d , and t hat their t ask is to understand better w hat they do we ll and what t hey do poorly . The notion of assessment of what exists is more supportive to useful actions than is the pejorative notion that t h e re is only one good way to be a learning organization . Fi nal l y , we bel ieve that a more refi ned , detailed listing of factors related to o rgan izational learning Ill ay be hel pful in selecting ent ry poi n ts for learning improve ment that do not demand drastic cult ure change but, rather, can lead to incremental culture change over time. These im plications will be discussed further in a later sect ion . Facilitating factors

The faci litating factors a re summarized in Table 2 . 1 . I n this section we expand on the d e fi n ition of each of t he ten factors and provide examples that support the import a nce of the factor . I Scanning imperalive By this we mean an ongoing e ffort backed by a wel l-assi m i lated accepta nce of the i m portance of vigi lance . Sound learning

Learning Style as Core Capability Table 2. I

Flicililalillg filelors

I Scann ing imperative

2

43

Performance gap

Intcrcst in external happenings and in the nat ure of one's environment. Valuing the processes of awareness and data generation. Curious about what is 'out there ' as opposed to 'in here'. Shared perception of a gap between actual and desi red state of performance. Disconfirming feedback i nterrupts a string of successes. Performance shortfalls arc scen as opportunities for learning.

:l Conccrn for measurement

Spend considerable effort in defin ing and measuring key factors when venturing into new areas: strive for specific. quantifiable measures: discourse over metrics is seen as a learning activity.

4 Experimental mindset

Support for trying new things: curiosity about how things work : ability to 'play' with t hings. Small failures arc encouraged. not punished. Sec changes in work processes . policies. and structures as a continuous series of graded tryouts.

:'i Climate of openness

Accessibility of information : relatively open boundaries. Opportunities to observe others: problcms/crrors arc shared. not hidde n : debate and conflict arc acceptable .

6

Continuous education

Ongoing commitment to education at a l l levels: support for growth and development of members.

7 Operational variety

Variety exists i n response modes. procedures . systems: signiticant diversity in personnel . Plural istic rather than monolithic definition of valued internal capabi lities.

R Mul tiplc advocates

Top-down and bottom-up initiatives arc possible : multiple advocates and gatekeepers exist .

l) I n volved leadership

Leadership at significant levels articulatcs vision and is very actively engaged in its actualization : takes ongoing steps to i m plement vision : 'hanus-on' involvement in educational and other i m plementation steps.

1 0 Systems perspective

Strong focus on how parts of the organization arc interdependen t ; seck optimization of organizational goals at the highest levels: sec problems and solutions i n terms of systemic relationships.

cannot occur without a foundation of enhanced consciousness or apprehen­ sion of the environ ment in which one is funct ioning. In recent years much has been w ritten about the importance of environmental scanning, with substantial agreement that many organ izations got into trouble because of l i mited or poor efforts in this regard. In Motorola's quality effort , it was not until five years i n to the program that a significant scanning effort showed them what others, part icularly the Japanese , were doi ng. As a reaction to this new awareness, Motorola substantially changed their approach and won the first Baldrige Award four years later. By contrast, it seems fair to say that mai nframe computer manufacturers ( Cray , Unisys,

44

Organizational Learning and Competitive A dvantage

I BM ) got i nto t rouble by fai ling to respond to changes that sound i nvestigative work would have made painfully visible. Performance gap There are two aspects of this factor. One h as to do with the kind of variance an alysis that managers are familiar with in looking at the differences between targeted outcomes and actual per­ formance . When feedback shows a gap . particularly if it impl ies failure, ana lysis often leads to correction or the development of new i nsights and ski l l s . One of the reasons that we ll-established organizations often are not good learn i ng systems is that they experience lengthy periods i n which feedback is almost entirely positive. The lack of disconjirming evidence is a barri er to learn i ng. The second aspect of this factor is related to vision and the possibi lities for generative learning. I n this vari ation , there is a potentially new o utcome that i s not simply a quantitative extension of the old or goes we l l beyond the level of performance that has been seen as achievable i n the old vision . The process here is one in which one or more membe rs of the firm visualize something which previously h as not been noted . O nce articulated , this he lps to create a performance gap of a di fferent k i n d . One of the reasons why awareness of a performance gap is so i m portant for learni ng to occur is that i t often leads to awareness that something needs to be learned or that something believed to be known may not be operable. Even i f a group can not articulate exactl y what the n eeded knowledge might be , awareness of ignorance can be a powerful motivator of learning i n i ti ative .

2

Concern for measlIremel1l This refers to the importance given to developing and using metri cs that support learning in a given area . I t includes such issues a s whether t h e measures are internall y or externally focused , the degree of specificity sough t . the use of custom built or standard measures, and so on . The importance of metrics i n total quality programs has been well documented ( for example , by Schmidt and Finniga n , 1 992 ) . and in target setting programs such as management by obj ectives. Here, the in terest is in how the discourse about metrics , and the search for the most appropriate ones, is a critical aspect of the learning, al most as much as the learning that comes about from responding to the feedback that the metri cs provide . Motorola executives bel ieve that concern for measurement was one of the most critical re asons for their success i n the quality program . At three or fou r critical j u nctions in this progra m , re-examination of measurement issues help propel move ment to a new level of learning. This factor is being applied to new initiatives, and was a major concern of the executive groups we observed in this study . The value of met rics is clearly associated with 'performance gap' at E DF. Its nuclear power plants are authorized to operate at certain specifications which . if not met, may suggest or predict an unplanned event leading to shutdown . Each occasion becomes an opportunity for learning to take place.

3

Learning Style as Core Capability

45

Experimental mindset This factor overlaps somewhat with that of 'cli mate of ope nness ' , but it emphasizes encouragement to try out things on an ongoing basis. If learning comes through experience , it fol lows that the more one can plan guided experie nces , the more one will learn. U ntil organizing for production at any stage of the value chain is seen as a learning experime nt as well as a production activity, learning will come slowly. Man agers need to learn to act l i ke applied research scient ists at the same time as they del iver goods and services. Th is point of view is supported by Leonard-Barton ( 1 992) who considers the next production frontier to be organization of the factory as a learning laboratory. Sitkin ( 1 992) has written eloquently on the importance of 'small failures' in promoting organ izational learning, and these can only occur if one vent ures i nto uncharted waters. Fol lowing Sitkin's lead, we suggest that organizations who wish to i mprove their experimentation find t he organ­ izational equivalent of Vygotsky's 'zone of proximal [potenti al] develop­ ment' ( We rtsch , 1 985 ) , which he defined at the individual level as the very next learning task that a child can attempt while remaining supported by a teacher . 4

Climate of openness This factor is related to t he permeability of boundaries around information flow and the degree to which obse rvation opportunity is avai lable to people. Much i nformal learning that takes place is a function of daily , often unplanned interactions among people . I n addition , t h e opportunity t o b e part o f meeti ngs with other groups a n d to see higher levels of management in operation promotes learn ing. This has been referred to as 'legitimate peripheral participation' by Lave and Wenger ( 1 990) . The factor incl udes the freedom with which people can express their views and the degree of disagreement and debate that is legit imate. Another very critical a spect is the e x t e n t to which errors are shared and not hidden . A rgyris ( 1 985 ) has made a very cogent argument that organ izational learning is seve rely hampe red by the widespread habit of managers to cover over or hide e rrors in order to avoid organ izational pun ishment.

5

Continuous education By this we mean internalization of a com mit­ ment to lifel ong education at all levels of the organization . This incl udes the existence of formal educational programs but goes wel l beyond that to more pervasive support of any kind of developmental experience for members of the organ ization . Mere presence of traditional training and development activities is not considered sufficie n t ; it must be accompanied by a palpable sense that one is never fi nished learning and practicing (something akin to the t radi t ion of the Samurai ) . In many ways, this factor is another way of expressing what Peter Se nge ( 1 990) called 'personal mastery' in his mode l . MIC does a n excellent job o f exposing its young analysts t o powerful deve lopmental experiences. Its chairman is also known to be a seeker for

6

46

Org({lI iZlltioll(l1 Lcarnillg 1I11d Competitille A dva!7lagc

new knowledge in many areas, not j ust di rect financial matters, Motorola appears to have em braced this concept vigorously. This includes a policy that every employee rece ives some educational experience every year, joint ventures with several com munity col leges around the US, j oint programs with the State of I l l inois for software competence development and training of school superi ntendents, and on-the-job as well as cl assroom expe rie nces for ma nagers up to se nior executives, Motorola spends 3 , 6 perce nt of i t s reve n ues o n education ( Reese , 1 993 ) . 7 Operatiollal varicty This factor i s a compan ion to 'experimental mind­ set' i n that it implies that there are more ways than one to accomplish work goals. It states that an organ ization that supports variation in strategy , policy, process , structure and personnel is more adaptable when unfore­ seen problems arise . It provides more options from which to choose and, perhaps even more im portan t l y , it allows for richer stimulation and interpretation in the consciousness of all organ izational mem bers . This should help to e n h ance fu ture learning in a way that a singular approach does not make possibl e . We did not see a great deal of operational variety at our si tes except at MIC I n vestment Funds G roup where we iden t i fied thre e diffe rent methods used by fund man agers i n making investment decisions.

Multiple advocatcs Whilc involved leadership sets the stage for learn­ ing, robust organizational learning requires more than one 'champion' i f it is to succeed. This is particularly true i n the case of learn ing that is related to changing a basic value or a lo ng-cherished method . The greater the n umber of gate keepers who bring k nowledge into the syste m , and the greate r the n umber of advocates who promote a new idea, the more rapidly and extensively will the learning take place . Moreover, in an e ffective learning system it ought to be possi ble for any member to be an awaren ess-e n hancing age n t or an advocate for new com petence develop­ m e nt . In this way, both top-down and bottom-up i n itiatives are made possible .

8

9 In volvcd le({dership Much has been said about the importance of l eadership i n setting vision that mobilizes enhanced performance . Our fi ndi ngs suggest that merely creating vision is not enough . For assimi lated learning to occur, leadership at any organizational level must engage in hands-on implementation of t he vision . This i ncludes e l i min ating the layers of management, being visible i n the ' bowels' of the organization , and being an active early participant in any learning effort . Only t hrough direct involvement that reflects coordination, vision and integration can leader­ ship obtai n important data. as well as provide a powerful role model . At Motorola, CEO Bob Galvin not only drove the quality vision , he was a stude nt i n the first se minars designed to learn about i t , and he made it the fi rst item to be reported to him by his division executives i n their monthly meetings .

Learning Style as Core Capability Table 2 . 2

47

Lcarning oricl/latiol/S

Knowledge source

Preference for developing knowledge i ntern,lIly versus seeking inspirat ion in ideas developed externa l l y .

2 Product-process focus

Emphasize accum u l ation of product knowledge versus expanding competencies in basic processes.

:1 Documentation mode

Knowledge seen in persona l . tacit terms. as something possessed by i ndividuals versus being seen as explicit statements of publicly available know-how .

4 Dissemination mode

Emphasize informal methods of sharing learning. such as role modeling and communit ies of practice. versus forma l . prescribed organization-wide programs.

5 Learning focus

Emphasize incrcment a l . single loop learning versus t ransform'ltion a l . double loop learning.

IJ Value-chain focus

Center learning investments on 'design and make' side of t he value chain versus the 'de liver" side.

7 S k i l l development

Stress development of individuals versus development of teams or groups. Emphasize individual skills versus skills in learning and working col lectively.

1 0 Systems perspective Th is factor deals with the ability of key actors to keep a broad perspective and to thi nk in terms of the interdependency of organ izational variables. I nvolved here is the degree to which organiza­ tions can look to their internal systems as a sou rce of their difficulties, as opposed to blaming external factors . Studies at the M IT System Dynamics G roup and e lsewhere have demonstrated how managers e l icit unintended consequences by taking actions in one area without seeing the dynamic relationship of that action to its effects . Senge ( 1 990) considers this 'discipline' as the one that in tegrates all the others i n his five-factor model of organizational learning. Despite its importance , this factor is relatively l acking i n our sites . MIC and Motorola are structured so that the boundaries between groups and functions tend to be strong. Both have heightened their perspective in recent years, MIC as a consequence of unexpected internal problems re lated to the October 1 987 , d rop in the stock marke t , and Motorola after experiencing difficulties in sel l i ng large-scale systems ( as opposed to discrete products) .

Learning Orientations The learni ng orientations are sum mari zed i n Table 2 . 2 . In the next section of the chapter we expand on the defi nition of the seve n orientations and provide examples t hat support the existe nce of each . I Kno wledge source This orientation is defined as the extent to which the organ ization prefers to develop new knowledge i nternally versus the extent to which it is more l i kely to seek inspiration in the ideas deve loped by external sources. Th is distinction is often thought of as be ing the diffe rence

48

Organizational Learning and Competitive Advantage

between in novation and adaptation , or im itatio n . In the U n ited States there has been a tendency to value the i n novative approach more highly and to look down on t hose who seem to be ·copiers' . American critiques of Japanese businesses often mention the J apanese as being good i m itators but not good in novators . We see both of t hese approaches as h aving great merit, and we propose that they be seen as stylistic opposing choices rather than as normative or pejorative behaviors. In a recent , well-argued paper , Bolton ( 1 993) makes a distinction between learning b y doing ( innovation) and l earn ing by watch ing (im itation ) . She breaks im i tation into two varieties: pure imi tation and reflective imitation . Pure imitation is the 'unch ewed' introjection of an idea and results i n a low level of learning because t here is not an en riched ground upon which to build new knowledge . Reflective i mitation requi res active adaptation , comprehen­ sion , or i n terpretation of the knowl edge to a new setting and requires real work to assimi late a new possibility. Bolton shows the competi tive advantages of both i n novation and reflective imitations, i ndicating Japanese successes that have come from reflective imitation . To see that this di ffe rence is not a phenomenon of n ational culture , one need only look at how r B M used reflective i m i tation some forty-five years ago to take what U ni vac had i n novated and to gain domination of the field by better i mplementation o f the concept . Our findi ngs show a tendency for organ iza­ tions to prefer one mode over the other, t hough the distinction is not clear­ cut . While MIC does scan its environment, it prefers to i nnovate i n respond i ng t o customer needs a n d problems a n d h a s been a leader in coming up with new financial products and services. EDF modeled its n uclear power plants on American tech nology . Motorola is i nteresting i n that t h e firm appears t o be equally vigorous i n i n novation and i n reflective i m itation . Product-process focus This orientation refers to a preference for accumulation of knowledge related to product and service outcomes, versus a prefe rence to invest i n knowledge about basic processes that might u nderlie or support various products. Many observers have stated that one of the reasons t he Japan ese are so competitive i s that they make considerable i n vestment in process technologies compared with American lack of i nvestment i n this are a . The di fference here is between i n terest in 'getting prod uct out the door' and curiosi ty about the steps i n the processes i n volved at each state of the endeavor. We propose that both interests are n ecessary but that organ izations place more value on one side than the other. A l l organizations give some attention to both sides; the question is one of organ izing for learning in these two domai ns.

2

3 Documentation mode This refers to variations i n attitude as to what constitutes knowledge , and as to the repositories of knowledge that are supported . At one pole , knowledge is seen in very personal terms, as something that an individual possesses by virtue of education and experi-

Learning Style as Core Capability

49

ence . This is the kind of knowledge that is lost when an old hand leaves an organization ; processes and i nsights evaporate because they were not made a part of a collective memory . This approach legitim izes highly subjective ways of k nowi ng. At the other pol e , the emphasis is on defining knowledge in more objective , social terms, as being a consensually supported resul t of information processing. I t emphasizes organizational memory or a publicly documented body of known things. Nonaka ( 1 99 1 ) , borrowing from M . Pola nyi's distinction between tacit and explicit knowledge , has shown how both of these approaches exist in a dynamic relationship in a knowledge­ creating setting. Dissemination mode Though re lated to documentation mode , this has to do with the difference between establishing an atmosphere in which learning evolves, and one in which a more structured , cont rol led approach is taken to induce learning. In the more structured approach , a decision is made that a valuable i nsight or method should be shared and used by others on a broad, institutionalized basis . Various forms of written com munication and formal educational methods are generally em ployed for this purpose. Another approach is the certification of learning through the writing of procedures. In the more informal approach , learning is spread through encoun ters with role models and gatekeepers who actualize the insight or method by behaving in a compelling way . Another version of the informal approach is the kind of learning that occurs when members of an occupational group or work team share their experiences in ongoing dia logue. B rown and Duguid ( 1 99 1 ) have referred to this as learning through 'communities of pract ice ' , and suggest that it will take place as a result of the social nature of most work . Organizational policies and rules can act to enhance this learning or they can act as barriers to its ful fi l lment . 4

Learning focus The disti nction we make here is another one that has been seen in value terms, rather than as stylistic differences. It has to do with whether learning is concentrated on methods and tools to improve what is already being done , versus concentration on testing the assump­ tions underlying what is being done . A rgyris and Schon ( 1 978) call the former 'single loop learni ng' and the latter 'double loop learning' . They rightfully have argued that organizational performance problems are more likely re lated to a l ack of awareness and abi lity to articulate and check underlying assumptions, than are they a function of poor efficiency in what they do. We see these learn i ng capabili ties as re inforci ng each other. Organ izations may have a preference for one mode over the other, but a sound learning system can be nefit from good work at both modes.

5

Value-chain focus This orientation indicates which core competencies and learning i nvestments are valued and supported . By learning invest­ ment we mean a l l personnel and money allocations to develop knowledge

6

50

Org({nizational Lcarnillg alld Compctitivc Advan tagc

and skill over t i me . This i n cludes t rai ning and education, pilot projects, developmental assignments, slack in overall budge t, and so on. Thus , when we say that a particular organization is 'e nginee ring-focused' or 'marketing-d rive n ' , it is safe to assume that they are biased in favor of substantial learning i n vestments in that area over time. Prahalad and Hamel ( 1 990) , i n their se m i nal paper on core competencies , observed that a decision to exit a function or stage in the value chain and to have an all iance with another t-irm that performed that service , is a decision to de­ i nvest i n ongoing learning i n that area . I n det-ining the value chai n for prese n t pu rposes , we have taken some liberties and divided it i nto two categories: those activities of an internally directed , 'design and make' nature , and those o f a more externally focused 'sell and deliver' nature . At MICs I nvestment Funds G roup the focus is clearly on the 'design and make' side and on the nat ure of the products. While this is balanced by learni n g i nvestments on the 'deliver' side in the MTC Marketing Gro ups, there is a strong boundary between these groups , and fund m anagement is regarded as the core of the organ ization . Motorol a's total quality e ffort clearly recognizes the importance of value-added at both sides of the chai n , b u t the 'design and make' side i s sign ificantly ahead i n learning investm e n ts around quality than is the 'del iver' side . FI AT's Direzione Technica is oriented toward the 'design and make' side , although its new system of simu lt aneous engineering is giving them a more balanced approach with i ncreased sensitivity to the 'deliver' side . EDF N uclear Operations focuses squarely on eft-icient producti on . 7 Skill de vcloplIlcllt The area of te a m or group learn i n g ha s received m uch atten tion i n recen t literature on organ izational learning ( Kasl et aI . , 1 99 2 ; M ell' s ick e t al . 1 99 1 : Senge , 1 990 ) . These authors have argued that col laborative learning is better for organizational purposes than is i ndivi­ dual learning, and that team skills are sorely needed in today's i nter­ dependen t , networked worl d . Others have shown how American product development and prod uction are hampered by a lack of cooperation among interdependent groups ( Dertouzos et aI . , 1 989) . We support the need for team skills but bel ieve that both individual and group develop­ m ent are necessary , and that it might help to look at them as stylistic choices, as opposed to see i ng them in normative terms. Tn this way , o rganizations can assess how they are doing on both sides and take action for i m provement in either one . MICs Invest ment Funds Group is designed to promote i ndividual learn ing, which seems to fit with its individualistic culture and its reward syst e m . On the other hand, M ICs Marketing G roups are more supportive of col lective learning, and are now investi ng i n team development as one way to improve their effectiveness as a total u n i t . FI AT's Direzione Techn ica has been more oriented toward individual developme n t . However, with i ts new re l i ance on cross-functional work teams, group development is increasingly more importan t . Motorola has become more team-oriented in recen t years and is making heavy i nvest.

Learning Style as Core Capability

51

Table 2 . 3 A typology oj' leamillg styles PA TTi:RN OF Li:ARNING O R I i:NTA TlONS:

Rugged individual ism

Create knowledge internally Emphasize product knowledge I ndividual development Knowledge as 'personal property' I n formal disse mination mode

Techno-analytic

Emphasize incremental learning Focus on 'design/make' side I ndividual development Emphasize process knowledge Knowledge as 'personal property' Forma l . firm-wide d isse m ination

Communal

Seck internal and external knowledge Emphasize incremental learning Emphasize team development Knowledge is col lect ively available

Traditional

Create knowledge internally Emphasize incremental learning Focus on 'design/make' side I ndividual development Formal. firm-wide dissemination

Evangelical

Create knowledge internally Transformational learning Emphasize process knowledge I ndividual development I n formal desseminat ion

ments in collaborative learn i ng. As Motorola is usmg more and more teams, documented cases of team development in the firm have now appeared ( Katzenbach and Smith, 1 993 ) . At EDF both individual and group deve lopment are employed , especial ly with respect to con t rol room teams. A l l EDF employees fo llow individual trai ning programs to be certified in their craft or to prepare them for promotion . Control room teams also learn together, in groups, th rough the use of plant simulators.

Toward a Typology of Organizational Learning Styles

The above learning orientations can be arranged in a matri x . An organiza­ tional unit may be described in terms of the pattern of i ts orientations in this matri x . This provides a way of describing i ts learning style . Based on the data from the sites i n this study , and other sites with which we are fam iliar, we bel ieve that it may be possible to identi fy patterns, or styles. As a starting poi n t for further exploration , we have identified five styles. The first three of these can be seen in our sites; the last two appear in other settings. Table 2 . 3 lists the fi ve styles, together with the pattern of the ir

52

Organizational Learning and Competitive A dvantage

m ajor learning orientations. I n looking at these styles, the reader will note that some orientations appear i n more than one styl e . The important consideration here is the pattern of the orientations taken as a whole. S ubsequent field resea rch will explore the validity of these and other styles. Rugged Individualism This pattern reflects some of the basic values in individualistic cul tures . I t assumes that people learn best when they have a great deal o f freedom and when they a re a llowed to 'stand on their own two feet' . The style assumes that the best deve lopment is se lf-development , and that if you staff your o rganization with highly i n tell igen t , wel l-motivated, ambi tious people, their i n dividual actions will aggregate i n to a high-performing uni t . We can t h ink of this as an heroic learning style for which John Wayne's movie roles might se rve as a metaphor. M ICs I nvest ment Funds Group fits this style. A nonsite firm with this pattern is Digital Equipment Corporation ; MIT belongs in the category with regard to its style of learning ( as opposed to styles of teaching) . Techno-analytic This assumes that ration a l , detailed approaches, backed by wel l-organized plans and programs, a re the best way to ensure learning. The style is i n teresting i n that it e mbraces knowledge from without and develops k nowledge internally. A major element is the need to define. understand and measure any process that is considered of value . The style tends to be supported by engi neeri ng cul tures and companies based on wel l -defined technologies that favor ana lytic modes. It appears also to be an accompani­ ment to values of fairness, con flict avoidance and the i mportance of the 'best ' process. Model-building is also valued as an activity in this sty le . Motorola and EDF show t hi s as a predominant style. Organizations that have we l l-developed competency models are likely to show this learning style. Royal D utch Shell has a strong component here , but also displays signs of a Com munal Learning Style. Communal The key assumption here is that the most critical organizational learning is around skills for binding people into a collective identity. Valued norms and response modes should be possessed by all unit members . Although this may be stated as an attempt to achieve a high level of efficiency and e ffectiveness , there is an implici t , but very strongly experienced , assump­ tion t ha t loyalty to the firm is essential . I n our study , FIATs Direzione Technica appears to fit this style . MICs Marketing Group is moving in this direction , as part of a growing belief that they could do more for their customers i f they funct ioned as a communal learning system. Others that

Leaming Style as Core Capability

53

appear to fi t this style are some organ ized rel igious groups and mil itary units such as the U S Mari nes . Traditional This style is somewhat similar to the tech no-analytic style , but has some other characteristics that lead us to propose it as a separate pattern . The maj or assumption is that the best learning is that which adds to what is already know n . Learning from past experience is critical to understanding the present, and, i f a system has worked we ll over time , learning investments should focus on its mainte nance and improvement. Dis­ con tinuous, radical approaches should be viewed with caution ; conservat­ ism is the byword. When it works well this style builds on solid foundations and passes on that which has enduring utility. We saw some elements of this in our sites , but none of them truly fit this category . Since the style was constructed as an additional pattern of our learning orientations, we bel ieve that research with additional organ izational units will strengthen or refute its legitimacy. I t appears that many large , old-line firms, such as General Motors , have had this as a learning style . EDF has some qualities that suggest it might be placed in this category . Evangelical We did not see evidence to support the existence of this style at any of our sites. but we have form ulated it as one which may exist elsewhere , and which well might be included in further studies. The emphasis in this style is on change and transformation , on attempts to go beyond what currently exists, and on challenges to current dogm a . I t derives much energy from a vision or from some new knowledge that is generated internal to the unit, with a few people acting as cata lysts for t ru l y discon tinuous learning. Missionary zeal appears to be an important aspect of the styl e . We do see individuals attem pting to move their organizations in this direction . Moreover , it seems that a sign i ficant number of new, knowledge-based firms start out with this style ( for i nstance , the early Apple Computer was based on and util ized numerous contrarian ideas ) , but we have no detailed knowledge o f any units that function this way . We hope to locate some in the next phase of this research . Implications

Our results suggest that it is possi ble to study organizational units as though they have learning capabilities. Guided by our list of the quali ties of a good learning organization, we were able to make on-site observations of aspects of learning and to develop a revised list of factors that appear to have more focus and more breadth. Alt hough we did not see a ll of our factors in any of our sites. there was enough data for each in either the si tes

54

Organizational I_earning and Competitive A dvantage

or other setti ngs to warrant including a l l of them in the model we w i l l use i n further research . I f one accepts the pote ntial of the two- part model of normative ( fac i l itating factors) and descriptive ( learning orientations) vari ables, it fol l ows that two general d i rect ions a re indicated for enh ancing learning in a n organ izational unit. One d i rection i s to embrace the style that exists and to t ry to i m prove the effecti veness of this sty l e . This is the strategy of actualizing a fundamental part of the cultu re t o the ful lest extent possib l e . For example , a fi rm t h a t is more o f a reflective i m i tator than an in novator could accept this with heightened awareness of its value . One that has benefited from heavy learning i nvest ments in the 'make' side of the value chain would see the value of this and decide to bui ld further on it. This approach builds on the notion that fu l l accepta nce of what has been accompl ished is very validating and energizing for those i nvolved . It is s i m i la r to the appreciative inquiry being advocated by numerous organiza­ tion change consu ltants ( Sri vastva and Cooperrider, 1 990) . The work would then be that of looking at the faci litating factors and selecting two or t h ree to i m prove upo n . The second d i rection is t o change t h e l e a rn i n g style by addressi ng the learning orientations so as to move toward the opposite pole of what exists curre n t l y . Tn this approach , an organization would look at its patte rn and attempt to muve to the opposi te pole on e ach of the orie ntations. This group would strive to m ake more learning invest ments at a different part of the value chai n , try to be an innovator i f i t is now more of an i m i tator, and so o n . These a re d iffe re n t changes than those i nvolved in e n hancing the facil i tating factors , and the cha nge tactics will be di ffe rent ; some w i l l be seen as a n attack upon the organ ization's basic values. T t may be possi ble to get a round this by advocat ing a move toward more balance between the two poles; the e xisting style would be supported and the 'new loo k ' would be advocated as a supplementary m easure . Learn i ng style represe nts an organ ization's acquired capabi l i t y . To use that capability for competitive advant age , organizations m ust h rst be able to recognize what t hat capability consists of. Identifying one's l ea rn i ng style provides a start i ng poi nt for strategic action to change , augm e n t , or e n hance one's styl e . Rather than presuming no existing compete nce and the need to build i t from the bottom u p , man agers are advised to heed the dynam ics of organization cha nge and to work with and from what is. S trategic interventions can then be designed to ensure the success of st rategy i m plementation . Notes Support for this research lVas provided by a grant from the I n ternational ConsortiulTl for E xecutive Development Research and by the MIT Organizational Learn ing Center. I Mutual I n vestment Corporation is the pseudonvm for a large financial services company located on the East Coast of the U n i ted States.

Learning SlyIe

(IS

Core Capabilily

55

References Argyris, C ( 1 9�5) Strategy, Challge alld Defellsive ROlltilles, Bosto n , M A : Pitman , Argyris, C and Schiin , D , A . ( 1 971-:) Organizatiolla/ Leamillg. Reading, M A : Addison­ Wesley. Bolton . M . K . ( 1 ')93) ' I mitation versus i nnovation ' . OrgalliZiitioll [) \'IIWllics, 30-45 . Brow n , J . S . and Duguid. P. ( 1 9') I ) ' Organizational learning and com m u n ities of practice ' , Orgallizatioll Science. 2( I ) : 40--5 7.

Dcrtouzos. M .. Lester. R . and Solow . R . ( I ,)�,)) Made ill A li/eriC({. Cambridge . MA: MIT Press. Garv i n . D . A . ( 1 9')3) ' Building a learning organization ' . f-/arl'ilrd RII.lilless Rel·ielv. 7�--,) 1 . Hame l . G . and Prahalad. C K . ( 1 ')')4) Competing FJr the Flltllre. Boston . M A : Harvard Business School Press. Hedberg, R. ( 1 9� 1 ) ' How organizations learn and unlearn ' . in N . C Nystrom and W . H . Starbuck (cds ) . f-/al/(/hook of OrgalliZiitiona/ Desigll . Oxford: Oxford Un iversity Press. Kasl . E . Marsic k . V. and Dechant . K. ( 1 9')2 ) 'A conceptual model for group learning' , Proceedings, A dllit [;dllcalioll Research COllferellce, Col lege of Education . Saskatoon, Canada. 1 3 1 -- I :\�. Katzenbach . J . R . and S m i t h . O . K . ( 1 ')')3) The Wisdoll/ of Tewlls. Boston . MA: Harvard Business School Press. Lave, J . and Wenger, E. ( 1 ')90) Sitllwed I,earnillg: Legitimate Peripheral Participation, I RL Report ')0--00 1 3 . Palo Alto. CA, I nstitute for Research on Learning. Leonard-Barton . D . ( 1 ')')2) 'The factory as a learning laboratory'. Sioall Mallagemellt Reviell·. 39--5 2 .

McKee, D . ( 1 ')')2 ) ' A n organizational learning approach t o product innovation'. JOllmal of Prodllct /nIlOl'atioll Managell/ent. ') : 232--245 . Marsic k . V . J . Dechant. K. and Kasl. E. ( 1 ')9 1 ) ' P rofessional ways of knowing ' . Proceedings: Commissioll for CO!1lillllillg [:dllcation of the A A A CC Montre a l . Canada . Nonaka . I . ( I ')') I ) 'The knowledge-creating compan y ' . f-/arvard Rllsilless Rel'ieH' . 96-- 1 04. Prahalad. C K. and Hamel . G. ( 1 990) 'The core competencies of the corporation'. Han'ard Rllsiness Review, 7')--') I .

Reese. Jennifer ( 1 993) 'America's most admired corporations', Fortlllle, 44--81-:. Schmidt. W . H . and Finniga n . J . P . ( 1 99 2 ) The Race Withollt a Fillish LillI': A l1lerica 's Qllest for TO/al Qllality. San Francisco. C A : Jossey-Bass. Senge . P . M . ( 1 9')0) The Fiflh Discipline. New Yor k : Doubleday. Shrivastava. P. ( 1 ,)�3) 'A typology of organizational lea rn i ng systems' . JOllrlla/ of Manage­ mellt Stlldies. 20: 7--21-:.

Si tki n. S . B . ( 1 992 ) ' Learning through fai l ure: The strategy of small losses' . R('scarch in Orgallizatiolla/ [J('/iavior. 1 4 : 23 1 --266.

Srivastva. S . . Cooperrider . D. L. and Associates ( 1 9')0) Appr('ciatil'e Managem(,lIt and /,eadership . San Francisco. CA : Jossey-Bass. Stata. R. ( 1 9�9 ) 'Organizational learning -- thc key to management innovation ' , Sloan Mallagel1l(,!11 Rl'I'i('lV. 63--74.

Wertseh . J . D . (cd . ) ( 1 <)�5) CII/llIre, COlfllflllniClition alld Cognition: Vigotskiall Perspectives. New Yor k : Cambridge U n i versity Press.

3 Competitive Advantage fro m Tacit Knowledge ? Unpacking the Concept and i ts Strategic Impl ications .J. - c. Spender

Knowledge as the Basis of Competitive Advantage

I t is now widely accepted that the firm's competit ive advantage flows from its unique knowledge ( Prahalad and Hamel, 1 990 ; Rumelt et aI . , 1 99 1 ) . This idea has been i n our literature for many years, from the t raditional SWOT analysis (strengths, weak nesses, opport uni ties and threats) to Selznick's ( 1 957) 'distinctive competence ' . But it has been repackaged recently as the rent-oriented ' resource-based' theory of the firm (Conner, 1 99 1 ; Wernerfe l t . 1 984) . St rategic interest is focused on idiosyncratic k nowl edge that is rare , sustainable and immobile ( B arney, 1 99 1 ) . This, it is argued, leads to economic rents ( see Collis, this volume ) . There are n o fewer than th ree types o f economic ren t : Ricardia n , monopolistic a n d entrepreneurial ( Mahoney a n d Pand ian , 1 992 ; Rume l t , 1 987) . The sources of the first two are exogenous a n d the refore typical ly beyond management's con trol . The third type of re n t is diffe rent i n that i ts source is endogenous . One concept of entrepreneurial rent is that i t derives from the particular knowledge which the entrepre neur brings to the firm . Here it is the firm that is being entrepreneurial rather than the entre­ preneur. The impl icit model of thc firm is that it not only t ransforms inputs i nto outputs , employing knowledge in the process , but also generates unique knowledge about new combinations and processes. This leads to renewed interest i n organizational learning ( for example , A ttewell , 1 992 ; B rown and Dugu i d . 1 99 1 : Van de Ven and Pol ley, 1 992) . These writers assume that the learning is under management's control and that a theory about managing learning is also a theory of rent gen eration . A t the same time theorists have begu n to try to analyze the knowledge which is the result of the learning process ( for example , H irschhorn , 1 984 ; Kagono et a I . , 1 985 ; Kogut and Zande r, 1 <)92 ; Nelson and Winter, 1 982 ; Nonaka, 1 99 1 ; Nonaka and Takeuchi , 1 995 ; Senker, 1 995; Winter, 1 987). One approach to integrating knowledge into strategy theory is to see rents as accruing direct ly from information asymmetry, the heterogeneous

Competitive A dvantage from Tacit Know/edge?

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distribution of knowledge among economic actors . This assumes that the knowledge itself, o r what these actors know, is unproblem atic. One example is the owne r's 'inside' knowledge about whether the second-hand auto being offered for sale is a 'lemon' ( A kerlof, 1 970) . Moving away from a classification based o n the simple presence or absence of common knowledge to one based on experience is fraught with difficulties. Writers such as Winter, Teece or Nonaka have sought other ways of classifyi ng the organization's knowledge as a precursor to develop­ ing theories which re late strategic management to knowledge manage­ ment. It turns out that neither knowledge nor learning are straightforward concepts. For i nstance , it is not enough j ust to talk about learning, we must identify ways of retai ning and benefiting from learning. There are also questions about how the resulting knowledge is stored. Is i t 'of the o rgan ization' or is it 'of those participating i n the organization's activities'? What are the agency implications of i ndividuals being cen t ral to the organization's learning process? Does the organization's k nowledge 'go home in the evening'? How is it to be protected or moved around? How is it to be t ransferred from the times whe n , and pl aces where , it is generated to when and where it is applied? How are we to value unapplied or 'slack' knowledge? Organizational Knowledge

With the term ' knowledge' most theorists a llude to what they have learned of the positivist model of science . This treats knowledge as a model of a reality 'out there ' , empirically tested and validated. I t is obj ective in that it is independent of the knower. All admissible knowledge , positivists believe , is of this one 'scientific' type . Knowledge is unproblematic except for in its absence , which is called uncertainty. This leads some theorists to focus on u ncertainty (or ambiguity) and on the firm's ability to deal with it , as the basis for its competitive advantage . Others suggest that scien­ t i fic knowledge is only problematic because i t needs to be transformed into technology before it can be of use , that it is the presence of tech­ nology rather than of scientific knowledge that leads to advantage . In this view, the winning firm is the one best organized to absorb and apply scientific knowledge through its i n novation processes ( Cohen and Levi nthal , 1 990) . Quite different possi bilities open up as soon as we go beyond the narrow positivist notion of science and suggest that organizational knowledge may be of several types . For i nstance , some analysts suggest a distinction between technological and administrative knowledge ( D aft , 1 982 ; Ettlie, 1 988) . Others see diffe rences between core skills (competencies) and those which are peripheral or complementary ( Prahalad and Hamel , 1 990 ; Teece , 1 987) . Differences in the accessibility and mobi lity of knowledge obviously matter. Some knowledge can be protected and immobil ized , some cannot and is readily appropriated by others. If the firm i tself is not

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Organizational Learning {lnd Competitive A dvantage

aware of its rent sources, they may be in appropriable on that score ( Lippman and Rumelt, 1 98 2 ) . Si nce the fi rm has to deal with environmen­ tal u ncertainty as well as with its i n ternal productio n , some knowledge will fit its core technology , some will be more relevant to its boundary-spanning activities (Thompso n , 1 967 ) . While these categories are i nteresting, none o f them challenge the epistemological lim its of scientific knowl edge . Nor do they seem adequate to a t heory of know ledge manageme n t . They merely i ndicate preferred types of scientific knowledge without helping us understand the relation­ ship between knowledge and strategy . Thus a n umber of theorists ( N elson and Winter, 1 982 ; Teece , 1 987 ; Winter, 1 987) have recently turned to Polanyi's ( 1 962) distinction between obj ective and tacit knowledge . This chal lenges the positivist defi n i tion of knowledge direct ly . While obj ective knowledge is similar to science - abst ract and i ndependent of the knower ­ tacit k nowledge is subj ective and i n timately tied up with the knower's experience. Thus , Hi rschhorn ( 1 984) has suggested that the engineer's way of knowing a n i n d ustri al plant can be distinguished from the skill of the craftsman who made i t , for this knowledge is too lim ited, and from the operator's, for his tacit understanding lacks theoretical depth. Polanyi argued that tacit k nowledge is the underlying fertile i n tellectual ground for all scien t i fic work (Ge lwic k , 1 977) . Yet he illustrated tacit k nowledge with kinetic examples, such as that which bicycle riders can demonstrate but cannot explain (Polanyi , 1 962 ) . The incommun icability of the fi rm 's craft-like tacit knowledge seems an appropriate way to poin t to its idiosyncratic experie nce-based knowledge . I ndeed , it may be that the esse ntial diffe rence between sci ence and technology lies i n their tacit components. But, given Polanyi's sketchy an alysis, m uch about the notion of tacit knowledge remains unclear, and it is obviously a long leap from bike riding to a theory of the creation of competiti ve advantage based on some kind of epistemological en trepreneursh ip. One of the aims of this chapter is to poi n t out that the term tacit is underspec ified , and means too m an y things to be a useful analytic term , in spite of its see m ing appeal . Fi rst of a l l , tacit does not mean knowledge that cannot be codified (see N o naka's t reatment ) ; it is best defi n ed as " not yet explicated' . This chapter presents t hree different reasons why knowledge re mains uncodi fied, or not explicated . The Categories of Tacit Knowledge

In this section we unpack Po lanyi's concept of tacit knowledge by considering some recent empi rical research . Polanyi tended to define the tacit i n terms of its i ncommunicabi l i t y . A lthough t h i s seems clarifying a t fi rst , it makes it difficult to see h o w we can relate i ncommunicable personal knowledge to a useful and communic­ able theory of organizational strategy . Several other l i n es of research , such as that on 'bi as' by Tversk y and Kahneman , explore the difference

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between the universal rational ity of scie nce and the restricted nature of human reasoning. Here the argument is that much human k nowledge is personal , rest ricted and 'biased' while scie nce is public. The scie ntific method is about elim i nating such experientially grou nded 'bias' so as to generate the unive rsal obj ective models of reality which belong to Popper's ( 1 973) 'third world' . Different again is the argument that all knowledge is socially constructed , that there can be neither truly value-free obj ective knowledge , nor can there be private knowledge . A l l knowledge is in the social domain , there is none i n the pri vacy of personal experience . Knowledge becomes evident in the col lective l anguage and practices that are understood and commun icated to other membe rs of the society, but it never captures the i m mediacy of individual experience . These essentially epistemological questions about whether knowledge is objective , personal or social , have recently become the subject of empirical research by cultural ethnographers such as Kusterer ( 1 978) and Scri bner. Scribner and her associates ( Scribner et aI . , 1 99 1 ) researched the activities of various workers i n a commerci al dairy - warehouse order packers, del ivery drivers , i nventory takers, and clerks from the offices - and observed a kind of effort less expertise with which many of these workers performed complex calculations in their jobs. Scribner's theorizing was based on Vygotsky's activity theory , which stresses the centrality of workplace activity in analyzing the thinking applied in practices such as those she observed in the dairy . While Polanyi presumed activity yielded tacit knowledge that remained private, Vygotsky argued that activity shaped consciousness in ways that were social and were eventual ly reflected in language and social structure ( Vygotsky , 1 962 ; We rtsch , 1 985 ) . Thus practical knowledge is not only integrated with practice , as Polanyi suggests, it is also i n tegrated with the consciousness of the community of practitioners . I n this sense the expe rt workers were not simply usi ng heuristics, which are purely i ntel lectual tools; rather they were using practical knowledge intimately bound up with the products involved and with the social and physical context in which the products were handled . Importantly, these expe rts l ost their expertise when they were presented with identical problems i n a new context - in this case a classroom . When their task was decontextualized and rendered unfamiliar - and they were forced into the differe n t practices of abstract analysis they we re suddenly far from expert , becoming both unprod uctive and error prone. Simon ( 1 987) has also commented that becoming an expert may have more to do with accum ulating a large number of recal l able instances of appropriately con textualized problems ( around 1 (5 ) than with the deve lopment of powerful intellectual heuristics or proto-theories. Scri bner's research suggested that much of workplace expertise lies in being able to formulate problems i n ways that successfully reflect the context and its possibilities. Knowing the problem cannot be separated from knowing the environ ment i n which the prob lem occurs . Her research demonstrated the gu lf between scientific and workplace knowledge . I t

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established the bounded ness and com plex specificity of workplace know­ ledge . Explicit individual knowledge can be tacit when it is bound to the context i n which i t is used. The Automatic Element of Tacit Knowledge

E ffortlessness seems to be one of the characteristics of tacit k nowledge . It suggests that t he user is unaware of the tacit knowledge being applied, for example , in the case of Scri bner's dairy workers. This l ack of awareness makes research into workplace knowledge doubly difficul t , but also more i mporta n t . Being unaware of their taken-for-granted knowledge , workers are often unable to tell management about the costs and consequences of actions which force them to change their knowledge-base ( H irschhorn , 1 984) . Ethnographers are trained to discover what people take for granted in their activities. As they research the modern workplace they reveal more of the vast store of complex knowledge which actually m akes up the firm's technological and competitive capabi lities. The metaphor of the iceberg may apply , what is k nown explicitly by individuals is little i ndication of the vast mass of k n owledge that lies beneath the surface of everyday organiza­ tional activit y . S i m o n ( 1 987) h a s denied t h e automatic or unconscious element of o rganizational k nowledge , and has argued that intuition (the automatic) is simply anal ysis (the conscious) 'frozen into habi t ' . We can re-express this by saying that intuition is analysis habituated or sedimented i n to the taken­ for-granted. Polanyi , on the other hand , struggled to distinguish the automatic with his distinction between 'focal" (conscious) and 'subsidiary' (unconscious) awareness . Again he ill ustrated this ki neticall y , arguing that an e xpert carpenter focuses on the nail and remains unaware of the hammer's shaft in his or her hand. This relates consciousness to attentio n , while al lowing that w e can do certain things automatica lly , despite not attending to the m . Tools are especially important in the way they direct our focal attention away from the irrelevant (the way the tool works) toward the task that we wish to perform , thus separating the subsidiary and focal awareness . Wel l-designed tools offer 'affordances' which make them ' user-friendly' so that they leave our attention free to attend to the task at hand ( N orman , 1 989 ) . The tool's affordances are not detachable from the tool's use ; they are the aspects that call forth the user's non-conscious automatic knowledge . They are meaningless without this knowledge , for without such afford­ ances they ca l l forth nothing. This may be because the user has no relevant k nowledge . No amount of effort to create user friendliness at the design stage can make up for the user's ignorance of skilled performance . In this sense a tool is always an aid to skil led performance , not a substitute . Even if the user's automatic knowledge is prese nt , acquired through consider­ able practice , it may sti l l be inaccessible at the purely conscious level . For example, Norman ( 1 989) reported that expert typists are seldom able to

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arrange key caps correct ly i n the pattern o f the QWERTY keyboard that they use all day. Similarly experienced d rivers maintain several fields of subsidiary attention, on the sound of the auto's e ngine and transmission , on the rear-view m i rror that shows the t raffic coming u p behind, on t h e feel of the road th rough the steeri ng whee l , on the radio, and so fort h . The skil led musician is completely focused on t he work being played and on the nuances of its i n te rpretation , unaware of the mechanics of his or her performance . I ndeed a switch of attention , reversing the focal and the subsidi ary , will interrupt t he expert performance , the auto weaves , the pianist stumbles, the carpenter bends the n a i l . Bargh , an experimental psychologist , h a s unpacked some of t h e com­ plexities of the automatic mode of knowing ( 1 989) . He a rgued that 'automaticity' is a notion with several dimensions: ( 1 ) awareness , (2) attention , (3) i n te ntion and (4) cont rol . These terms can be i l l ustrated in the fol lowing ways . First , an actor is often unaware of his or her activity when it is effortless. Thus high-i ntensity activity seems effort less when one is in a state of ' flow' and one's entire attention is focused outwards on the obj ective of the activity rather than on its process (Csi kszentm ihalyi , 1 988) . Second , some actions are automatic because they do not require one's conscious atten tion . Reacting to sudden noises or avoidi ng near accidents l i ke t ripping or catching a fal ling obj ect , involve skil led per­ formance , but without the actor's attention being focused . Thi rd , activity is also automatic when it cannot be associated with a goal and is thus without intentio n . One example of this is 'side-effect encoding', when people remember patterns which are unrelated t o their tas k . Another is the 'action slip' , for instance , William J ames's oft-repeated story of the man who , on going upstai rs to dress for dinner, ' fi nds' himself in bed . Fourt h , automatic­ ity also impl ies loss of conscious control . Habits are not only effortless and beyond one's attention , they are frequent l y uncon t rollable even when one is aware of them . They refuse to remain i n one's focal awareness, sliding u ncontrollably to the subsidiary leve l . While the automaticity is clearly psychological l y complex , research underlines that automatic behavior is both prevalen t and researchable . It is also clear that one way to build up automatic knowledge is via conscious practice . This 'sediments' the incommunicable aspects of practice i n to the nonconscious domain while it adds to the inventory of contextualized practice that Simon noted . I n the sections above we suggest that workplace knowledge is ( 1 ) l i kely to be practical rather than scientific, and (2) can be either conscious or automatic. We can also suggest that the conscious and the automatic complement each other in an actor's practice . It fol lows that an actor might be able to switch attention between the conscious and automatic modes according to whether the practice is succeeding or fai l i ng ( Louis and Sutton , 1 99 1 ) . However this implies a problematic meta-rationality cap­ able of monitoring performance in the nonconscious automatic mode . I t also presupposes t h e priority of t h e conscious mode of knowing, which i s t h e opposite of what Polanyi believed .

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Organizational Learning alld Competitive A dvantage

The Collective Component of Tacit Knowledge

In this section we recall Vygotsky's action theory and extend our typology in a different way by suggesting that practical knowledge may be more of a soci al or col lective feature than an individual property. We disti nguish between the knowledge that has been developed by the individual and shared with others, and that which is part and parcel of the soci al syste m . Without positing a coll ective m i n d. it see ms di fficult to argue for col lective k nowledge . But we have j ust argued that much practical knowledge is 'automatic' and inaccessible to the individual. I n Polanyi's oft-quoted phrase , 'we know more than we can say ' . Cultural anthropologists recognize that m uch of what people do is the result of the taken-for­ granted knowledge which they have acqui red during their upbringing. I n this sense , t he y are agents of a col lective body of knowledge . People are often unaware of how m uch they know about their society's norms and col lective knowledge until they are confronted with morally questionable actions. Then they learn something about the character they have acquired from their social context. They have that im mediate 'gut-reaction' which en ables them to distinguish right from wrong and reveals the exte nt and power of their taken-for-granted acculturati o n . This is col lective rather than universal knowledge and it only becomes conscious to the individual th rough such character-shaping events or thro ugh disciplined study, introspection or psychoanalysis. Much of the cult ure of the modern workplace is about col l ective k nowledge . Often lumped together with organizational culture , this goes well beyond affect or the constraints or individual cognition . The Haw­ thorne experiments made us aware of the power of the work-group and the way knowledge is wrapped up i n processes which no one worker can articu late . Simil arly Ne lson and Winter argue that organ izations retain their knowledge i n 'organizational routines' which no one person under­ stands ( 1 982) . Orr ( 1 990) uncovered some o f the processes which generated and stored practical knowledge as his fel low repairmen fixed photocopier machines at customer sites and later socialized together. First he showed that their work process was social and i nvolved the customers as well as the machines. The real service problems occurred in the relationship between the customer and the copier, so knowing how to 'fix the customer' was as important as knowing how to fi x the machine. Second he showed that the k nowledge which the repairmen requi red was contextualized in the user's p ractice rather than i n the practice of the machine's designers. The faults would generally be beyond those imagi ned by the designers, so they were not covered i n the machine manuals. Nor could the problems be t raced to fau l ty manufacture . Third , by paying attention to the stories which the repairmen swapped , Orr found the technicians operated as a cohesive community of practice ( B rown and Dugu id, 1 99 1 ) . The story-telling connected them with their col lective me mory . Faced with a new break-

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down , the repairmen would swap stories, drawing on this col lective me mory and proposing tentative diagnoses of the fau l t . As they converged on a common diagnosis their story-te l ling would cease . When they rej oined their col leagues, they would tell new stories of the latest repa ir, so adding to the coll ective memory . There is more to this than sharing data. Science is not only a body of knowledge , it is also the methodology of a comm unity of practice , a socially legitim ized way of gathering and communicating evidence . Scient­ ific knowledge is structured as obj ective causal relationships, models and theories. But those who generate and exchange these models form a com mun ity of scientific thought and analysis . Scientific discourse is designed to be obj ective , free from ambiguity, and to be an appropriate means for communicating this community's abstract ions. But it is still embedded within the com munity's less structured conversatio n . Orr's repairmen were engaged in an overtly na rrative form of discourse , much closer to the bal lads that carry forward our social knowledge and ancient myths . Both Hunter ( 1 99 1 ) and Schon ( 1 983) have argued that narrative en ables practitioners to bridge between the abstractions of principles, and scie ntific knowledge , and the particulars of a situatio n . The impl ication is that narrative is an essential part of the acquisition of practical knowledge . It is an ambiguous medi u m , able to capture more of t he profession's technica l , social and moral context ( Daft and Wiginton , 1 979 ; Weick , 1 987) . Narrative is obviously soci a l , for it uses language . Thus it both reflects and reconstitutes the community of practice . Its ambiguity lets individuals adopt any of the many legitimate social roles within the community , to be a l iste ner or a participan t , a supporter or a detractor within the ongoing conversatio n . The spoken word i s not t h e o n l y form o f collective memory . Eth no­ graphy teaches us much about signs and symbols as keys or pointers to a society's col lective database . Professionals, especially technical pro­ fessionals, make great use of d rawi ngs to key into elements of their collective knowledge . Vincenti ( 1 990) and Ferguson ( 1 992) have argued that much of engineering's col lective knowledge is retained as visual images. Sometimes these are formalized in reference books , but more often the images are acqui red through years of study , careful observation and design experience as enginee rs move through their careers. As Simon implied, the expe rienced designer starts with a vast body of taken-for­ granted practical im ages, whether they be of airplanes, bridges, or e lectronic circuits. The previous sections suggest four types of organizational knowledge , one scien ti fic and familiar, three tacit and less easi ly understood . These are the conscious, the automatic, and the col lective . We can show their rel ationship in a matri x ; see Figure 3 . 1 . The individual types of knowledge (the conscious and the automatic) derive from the two ways i n which we can k now as isolated individuals. The social types of knowledge suggest other inventories of k nowl edge . I ndivi-

64

Figure

Organization{/I Le({rning and Competitive A dvantage

3. 1

Individual

Social

Explicit

Conscious

Objectified

Implicit

Automatic

Collective

Types 0/ organizllliollal kllo ll-/cdge

duals may draw on t hese to add to or complement their own k nowledge . We suggest that actors can only draw on scientific knowledge explicit ly . Howeve r , a s cultural anthropology demonstrates, individuals often draw on col lective knowledge without being aware of doing so. Strategic Relationships with the Types of Knowledge

Each of the four types o f organizat ional knowledge could provide the basis for a t heory of competitive advantage . Thus one firm might have more 'i ndividual automatic' knowledge ( wh ich we might call skil l ) than another fi rm . A l ternatively there might be differences in the degree to which fi rms a re able to absorb and apply 'col lective' knowledge . Although advantage might accrue from any of these types of knowledge , the strategic implica­ tions of each , and the approach that the executives should take to the management of eac h , are clearly quite different. I f the fi rm's advantage is based on scie ntific knowledge , t he n it s strategy m ust recognize that such knowledge tends to be professionally accessible, abstract and mob i l e . Appropriability is likely to be a key issue , and patents, con tracts, nondisclosure agreements and simi lar appeals to l egal or institutional structures may or may not protect the advantage (Teece , 1 987) . The knowledge itself. and the ability to create similar knowledge through re-engineering or parallel research , is l ikely to be widely held outside the fi rm . By cont rast . i f the advantage is based narrowly on automatic knowledge , such as that of a high-performing fund manager or industrial designer, then appropriability may be less of an issue , possibly quite the opposite . Now the real difficulty may be to find ways of i n tegrating this individual's special knowledge with the complementary assets necessary to generate the rent stream and into the rest of the o rgan izatio n . On the other hand , i f the crucial knowledge is practical , local and con scious , then secrecy , bonding or behavioral incentives may be required. T n the l ast two instances , where the knowledge is knowingly held by a single i n dividual or small group , the dominant strategic issue for the firm may be the moral hazard , the temptation for the knowledge holde rs to 'hold up' the organization in an attempt to capture the rent for the mselves ( Kotowitz, 1 989 ; Wil l iamson , 1 975 ) . However, if the advantage is based on col lective knowledge , the st rategic problems wi l l be reduced because

Competitive A dvantage from Tacit Knowledge?

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individuals, such as a star copywriter or performer , cannot so readi l y hold the firm to ransom . Nor is i t e asy for another firm to imitate and put together a similar high perform ing tea m . One way to deal with the moral hazard me ntioned above is to ensure that the firm has secure possession of one or more of the complementary assets which the star entertainer or copywriter needs to develop the rent-stream . For instance , recording artists need a distribution network as well as talent. John D. Rockefeller was able to dominate the oil i nd ustry by con t rolling its means of distribution. Only later did he translate this power i nto cont rol over t he means of production . We can suspect that the firm's competitive advantage generall y arises from the interaction of different types of k nowledge , o r of diffe rent types of people ( A khian and Demsetz, 1 972) . The simplistic model , which attributes advantage to a single source such as a core competence , is almost certainly inadequate . Teece's ( 1 987) notion of complementarity adds a second dimension of complexity, but it also throws doubt onto the u nderlying soundness of t he idea of core competencies. If possession of the complementary assets becomes the explanation of success (Teece , 1 987) then these assets have sure ly become the core assets. Thus the notion core competence may be little more than a tautology . Seeing competitive advan tage we presume competence . But until we identify the substance or nature of a core competence we have only a substitute for the idea of competitive advantage , not an explanation . The CT Scan Story

To get a sense of how these diffe rent types of k nowledge might i nteract in practice we c a n consider t he example of computed a xia l tomography (sometimes called CAT scanning, though now generally known as com­ puted tomography or CT scann i ng) . a great deal has been written about this technology and the strategic shifts it occasioned within the medical imaging i ndustry . At first sight E M I 's experience in this industry was a classic case of the weakness of a strategy based upon some scientific k nowledge that could be readily appropriated by others (Teece , ] 987 ) . Blit the reality that the i n novating firm's strategists con fronted was really quite differen t . The popular version o f t he story is simple. Hounsfie l d , t h e inventor of CT scanning, won the Nobel Prize i n 1 979. However, E M I , his British employer, had by then lost their leadersh ip i n the medical imaging business. In 1 980 they exited after first making good profits but then making losses as they came i n to competition with a number of internatio­ nal maj ors, including G E , who eventually bought the remains of EM I's patent and market position. Teece suggests that had EM f been able to secure legal con trol of the CT technology , they could have leveraged that into con trol of the complemen tary assets and so assured themselves a long­ term dominant posi tio n . Thei r fai lure to do this was 'a strategic error'

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Organizational Learning and Competitive A dvantage

( 1 987: 207) . Teece 's anal ysis , which relies heavil y on Martin's ( 1 984) brief h istory , was a substantial improveme nt over the lay view that E M I was yet another research company that was badly managed by scientists and e ngineers who failed to pay proper attention to market forces. Teece ( 1 987) leaves open some questions about whether E M I lacked the necessary training, support and service facilities which , he suggests, could h ave been supplied by Siemens, or whether it was their inadequate defense of their patent position that was at the heart of their strategic error. Teece's story is written with one kind of knowledge i n mind, scientific, or m aybe technological . Our fourfold typology above suggests that other types of knowledge may have pl ayed an i mportant part in the CT story . We must note a general criticism of such stories of the developmen t of technology whenever they are extracted from their social and historical con text. Bijker and Law ( 1 992) argue that history shows that tech nologies do not develop a long 'traj ectories' determined by their inner scientific momen t u m . They suggest i n stead that technologies are developed and applied i n a social world which also develops, or stagnates, at the same t i me . This i s clearly the case i n CT scanning, and the case also rei n forces the significance of the individual and collective tacit k nowledge that complemented the obj ectified scientific knowledge to which Teece refe rs . In fact, the C T story cannot b e told properly without paying attention to the collective k nowledge and the communities of practice which interacted as a result of t he i n novation ( Mitchell , 1 995) . B l ume's ( 1 992) analysis shows that Hounsfield had l ittle understanding of the potential of CT scanning when he built the first prototype. H e was a senior researcher i n E M I ' s computer research l aboratory . H is primary i nterest was i n computers and, i n this particular application , exploring t h e potential o f computers to capture more mean i ng from X-ray images. H e k n e w virtually nothing of the medical field. I n particular he lacked the appropriate tacit understanding of m edical i m aging equipment, or of the radiological community by whom i t would be used. Webb ( 1 990) and others have shown that computed tomography was well establ ished before Hounsfield became i n te rested i n the subj ect . I ndeed radioisotope scanning, especially Kuhl's CT-scanner-like apparatus, was wide ly adopted i n the 1 950s (Webb, 1 990) . B y the l ate 1 960s a l arge number of researchers were working on CT, and a large number of radiologists had both obj ective k nowledge or practical experience of a variety of head and body scan ning techniques and ideas . The most sign ificant inventors were Oldenburg and Kuhl in America and Cormack in South A frica, though there was also a Russian group at the Kiev Polytechnic I nstitute . A number of mathematicians were a lso strug­ gling with the special problem of the mathematical reconstruction of the l inear e mission data which , ironically, had already been solved in 1 9 1 7 by the A ustrian mathematician Johann Radon . The E M I division i n which Hounsfield worked was primarily a military electronics R and 0 and subcontract man ufactu ring faci lity. They knew l ittle of the medical i m aging business and had n o wish to develop a

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revolutionary apparatus for an unfamiliar market. But, seeing the possibili­ ties after some desk research , they t hought to tempt an arm of the U K government, the Department of Health and Social Services ( D H SS) , into providing research funding. The DHSS, which was i n i tia lly i nterested in mass-screening for poli tical reasons , eventuall y rose to t he ba it and supported the work . Hounsfield was able to work with Ambrose , a senior neuro-radiologist based at the Atki nson Morley Hospital , who began to work out the practical implications of the new apparatus for the radio­ logical community. It was the D HS S funding, rather than either Houns­ field or E MI's m an agemen t , that set the strategic agenda. E M I only embraced the agenda after Powe l l , their new technical director, cham­ pioned it and because , at that t i me , they were anxious to increase the nonmilitary portion of their business. As the first prototype was being hand-built in EMI's H ayes workshop, it became obvious that the capital com mitments involved were far beyond E MI 's normal leve ls , especia lly as Hounsfield's patent was seen to be vulnerable and the company had determined that they should build a defensible position t hrough aggressive man ufactu ring and marketing. They discovered that there were many previous U S patents as well as other man ufacturers , such as Kuh l , already active in the field. Hounsfield eventual l y shared the Nobel Prize with Cormack , with Oldenburg, Goetl i n and m a n y other significant contributors feeling distinct l y p u t out . The point is less th e scientific one of w ho could l ay t he best c la im to the i nventio n , t h a n the broader one that m a n y radiologists, m a n y enginee rs and most o f the medical i maging companies h a d contributed to t h e body of collective k nowledge and i mmediately understood what the E M I scanner was able to do. I t combined new computer analysis of the X-ray data with more powerful X-ray sources . But i t was nevertheless only an incremental i nnovation for the radiological community. Thus EMI had almost no chance of developing a l ong-term winning strategy . Powell saw that E MI's opportunity was dependent on securing and exploiting a fi rst mover advantage . Through happenstance (the meeting with B u l l , the surgeon , which led Hounsfield to apply his i maging ide as to the medical field) they had stumbled upon a widely understood technology which was of sufficient i n terest to the DHSS, who would fun d their research , but which had tremendous overseas potenti a l , especia lly in the US market. EMI started out wi thout knowledge of these markets . Had they know n , t hey probably would have realized that they did not have the funds or manufacturing skills necessary to compete in t he m . Yet this ignorance led them to proceed and succeed . B l ume's anal ysis showed that CT scanning, a s the D HSS had defined i t for E M f , was a radiological procedure which would extend current radiological practice . In this sense it was strategicall y located in the center of an existing and powerful community of practice . CT scan ning was not l i ke ultra-soun d , a radicall y new technology that foretold of a new community of sonic i magi ng practitioners among gynecologists ( Blume ,

68

Organizational Learning and Competitive A dvantage

1 992) . The X-ray community existed already. E M I , for its part , was not a member of this comm unity, so their immedi ate strategic obj ective was to gain entrance . They chose to show off their technology , so fal ling into a classic t rap for owners of i n tel lectual property rights. When they m ade their first clin ical scan in October 1 971 , successfully diagnosing a brain tumor i n a forty-one year old wom a n , the entire project was stil l a closel y guarded medical a n d technological secret . O n l y those involved at the E M I H ayes laboratories a n d i n t h e special department set u p at the Atki nson Morley Hospital knew what was goi ng on . I n April 1 972, with the working prototype and initial clinical tests behind the m , they pl unged ahead and announced their work to the world's press at the B ritish I nstitute of Radiology Conference . They issued complete technical specificat ions. In the fol lowing October they demonstrated the machine i n Chicago at the ann ual conference of the Radiological Society of North A merica . The response to the machine and to Am brose's paper was overwhel m i ng , not only from the i n ternational radiological com munity but also from every maj o r imagi ng equipment supplier ( except Siemens, which merely noted this increase of activity from a distance ) . E M I , whose initial market estimate was for ten machines, were eventual l y backlogged with o rders for 250 machines. Much to their own surprise ( l i ke IBM's surprise at the market's response to the PC) they inadvertently triggered a major response within a commun i ty of practice domin ated by a small number of substantially larger and more aggressive competitors . Of course this community i ncluded the radiologists who determined the equipment's purchase and use . But i t also i ncluded the few large and powerful suppliers who domi nated the i nternational X- ray imagi ng and supplies business. These oligopolists saw immediately that the new CT scanner threatened their livel ihood and hurried to develop a strategic response . They had a substantial understanding of how their industry worked and were able to bring new machines to market in short order, often by buying the small specialist firms which had been work ing on similar equipment for years ( such as Pfizer's support of Digital I n formation Systems, the result of Ledley's col laboration with Olden burg and Corm ack , Technicare's acquisi­ tion of Ohio N uclear, and GE"s work with Neuroscan) . E M l 's lack of unde rstanding o f the tacit components o f radiological practice put t hem at a substantial disadvan tage to the established suppliers because the purchase decisions were shaped by the radiologists. Barley ( 1 986) has shown how these radiologists protected their power base as the new CT scanning equipment was introduced, for they had to teach themselves how to i n tegrate the equipment into their practice . The practice of radiology , especially the i nterpretation of X-ray images, depends on tacit knowledge and is st ill relatively uncodified. Had CT scanning been a radical i n novation , one which destroyed rather than enhanced the radio­ logists' existing competencies (Tush man and Anderson , 1 986) , the inter­ action between EMI and the radiologists' col lective knowledge would have been very different . As it was, there was an immediate but short-lived

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premium on radiologists who had recently graduated from the teaching hospitals where CT scanners were installed si nce they could assist the radiologists i n the field as they struggled to upgrade their practical knowledge . The radiologists also had to realign their relationships with the radiology department technicians who were often relatively more know­ ledgeable about both the CT machine and the interpretation of its images. From a strategic poi n t of view, we can see that E M I's decision to let the radiologists teach themse lves and so extend their existing col lective k nowledge made E M I extremely vulnerable to competitive suppliers, such as Siemens, Philips and G E , who had long-established relationships with both the radiologists and t he hospital financial executives. The 'strategic error' was that they failed to take control of this body of knowledge . Clearly E M I never had an oppo rtunity to do this, nor did they think otherwise . It would have requi red a new technology which effectively rendered obsolete the existing body of collective radiological k nowledge . Teece's charge , therefore , arises from a misunderstanding of the relation­ ship between obj ectified k nowledge , such as might be patented or built into a machine , and the col lective k nowledge which is embedded in practice . But the CT interaction was not solely between E M I and the radiological commun ity of practice . In the late 1 970s and early 1 980s the US market made up well over fifty percen t of the entire world market for CT scanners, and within the U ni ted States the hospitals the Federal gove rnment and the medical i nsure rs were a lso i nvolved . Between 1 972 and 1 983 the market was signi ficantly shaped by the third party reimbursement syste m . Though , as we argue above , the CT scanner was an extension of existing practice , it nonetheless provided hospitals an opportunity to offer a completely new service which could be charged separately and this gave them a new profit center. The possession of a scanner was also a useful way for gaining prestige in the community, for competing against neighboring hospitals, and for attracting the leading surgeons and physicians (Trajtenberg, 1 990) . The U S market for scanners developed extreme ly rapidly even though the scanner's actual diagnostic value remained in some doubt . The equipment played to the competitive busi ness practices of both t he radiologists and the kinds of hospitals i n which they were located . B y 1 982 virt ua lly every US hospital with more than 400 beds had its own scanner, while only three percent of the hospi tals with less than 100 beds were so equipped . The pace of the market attracted t he attention of the Federal govern­ ment which worried that the thi rd-party reimbursement system might be combining with t he hospitals' competitive practices in ways which were socially dysfunctional . They were especially conce rned at the amount of money being spe n t , and m ade , on CT scanning ( Iglehart , 1 982) . As a resu lt, they attempted to slow the i nt roduction by establishing Certificates of N eed (CON) under Section 1 1 22 of the Social Security Act . To a certain exte n t , this institutional pressure dampened the market . But with Reagan's election and the decay of many types of Federal regulation, the radiologists

70

Organizatiollal Lcaming alld COl1lpctitil'c A dvantage

began to take matters into the i r own hands. se tting up private CT clinics and circumventing the CON syst e m. The CT market peaked for a second time . However. by now it was begin ning to be sat urated , with all the large hospitals and specialist clinics adeq uately equipped. In addition . an even more expensive competing technology appeare d . magnetic resonance i maging ( M RI ) . By 1 985 the CT market in the US was becoming severely saturated and the boom was finishing as quickly as it had begu n . The futu re growth areas would be down-market in low cost scan ners for the rest of the worl d . Here the U S firms would lock horns with Siemens, Philips, and especially the J apanese manufacturers such as Tosh iba. The distribution and manufacturi ng problems would be radically differe n t . Thorn , which had bought EMI for reasons unconnected with this imaging busi ness , had no intention of e n teri ng this escalating global market. Wi thout going furt her into the details o f the CT indust ry's dynamics we can see that E M I 's st rategic problems were very much tied up in the varieties o f knowl edge wh ich they n eeded to master the X-ray im agi ng busi ness. They ce rtainly had some crucial scientific expertise , but their proprie tary k nowledge was neither complete nor inim itable . Pfizer's secon d generation whole body scan n e r. with its Automatic Computerized Tra nsve rse Axial (ACTA ) technology . was successfully patented as a significant advance on HOllnsfield's technology and came onto the market i n 1 975 . The third and fourth generation syste ms. with first rotating and then a fi xed 3600 ring of m u ltiple detectors . fo llowed quickly (Traj tenberg , 1 990) . E M I also needed new manufactur i n g expertise which had signi ficant tacit content (Coll i n s . 1 974) . In the event they had few man ufacturing problems and did surprisi ngly well given where they started . But they also comm i t ted the mselves st rategically to the US market . Powe l l . short on time and resources . gambled on a si ngle st rategy , choosing to e n ter the major and most competitive ma rket with force and speed. but also with complete tech nological exposure . Wi thout an international presence or a place i n the radiological com m un i ty of practice , they were more or less forced to create and depend on ma rket pull by exposing their technology to radiologists, in ventors, researchers and compet itive manufactu rers alike. They legitimized themselves by significant contributions to the com­ m u nity's knowledge via publications in the leading medical journals and appearances at t rade shows . Powe l l 's strategy succeeded in drawi n g the attention o f the radiologists who would be their eventual customers , and they m ade a substantial amount of money. Nevertheless , t hey also triggered compet i tive responses with which they were relatively i l l ­ equipped to deal . E v e n though t h e E M f patents sti l l domi n ated t h e CT field i n 1 980 (Traj tenberg. 1 99() ) . the combination of fin ancial troubles i n the pare n t company a n d t h e saturation o f t h e U S market made withdrawal an in t e l li ge n t strategic choice . With the fi nancial stakes rising rapidly , Thorn chose a digni fied retreat over a Pyrrhic wa r against the en trenched oligopolists that Hounsfield had sti rred into action . I ronically , the collect-

Competitive A dvantage from Tacit Kno w/edge ?

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ive k nowledge E M I had built up, and their understanding of the tacit aspects of radiological and hospital practice , were of little value to G E , who sought only their scientific assets. Conclusions

In this chapter we explore the st rategic implications of the proposition that tacit knowledge is at the root of competitive advant age . We turn to recent empirical research into workplace activity to help us sort out the various types of knowledge which are applied i n organizations. We suggest a four­ fold typology that disti nguishes three types of tacit knowledge from the objective or scientific knowledge with which organizational theorists are most comfortable . The three types of tacit knowledge are ( I ) conscious practical knowledge , (2) automatic practical knowledge , and ( 3 ) collective practical knowledge . Each of these types of knowledge can provide the basis for a competitive advantage . But their strategic implications are radically diffe re n t . The problems or threats which each pose , and the ways in which fi rms can deal with these , are also differe n t . It follows that there w ill be a set of strategic conti ngencies relating the di ffe rent kinds of knowledge to particular marke t , institutional and technological circumstances. Our types are also 'ideal types' of knowledge . Real organizations contain all types of knowledge . But our principal argument is that we cannot perform effective st rategic analysis, especially of knowledge intensive activities, without paying attention to all these types of knowledge . In our discussion of the CT story we add to Teece's, and Bijker and Law's, argum ents, and suggest that an analysis of the st rategic process or competitive advantage m ust consider the interplay of knowledge types. Using this story we are able to go beyond strategy's current typologies and consider briefly the interplay of scien tific, individual and collective knowledge . References A kerlof, G . ( 1 l)70) 'The market for lemons ' , Quarterly Journal of Economics. �4: 4�H-500. A lchian, A . and Demsetz, H . ( 1 l)72) ' Production , information costs and economic organiza­ tion ' . A ml.'rican I:cot/O/nic Rl.'view, 62: 777-7l) 5 . Attewel l . P. ( 1 l)l)2 ) 'Technology d i ffusion a n d organizational learning: T h e case o f business computing', Organization Science. :1 : I - I l) . Bargh . J . A . ( I l)�l)) 'Conditional automaticity: Varieties o f automatic intluence i n cognition'. i n .1 . 5 . U leman and .I . A . Bargh (cds ) . Unintended Thought. New York : Guilford Press. pp. :1-5 1 .

Barley, S . R . ( I l)X6) 'Tcchnology as an occasion for structuring: Evidence from observations of CT scan ners and thc social order of radiology depart ments', Admin istrative Scicncl.' Quarterly , :1 1 : 7�-1 OX. Barney. J. ( 1 l)l) I ) 'Firm resources and sustained compc t itive advantage' , Journal of Manage­ ment. 1 7 : l)l)- 1 20.

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Bijker, W . E . and Law, J . (eds) ( 1 992) Shaping Technology/Building Society . Cambridge , M A : M I T Press. B l u m e , S . S . ( 1 992) Insight and Industry: On the Dynamics of Technological Change in Medicine . Cambridge, M A : M IT Press. Brow n , 1 . S . and D uguid, P. ( 1 99 1 ) 'Organizational learning and comm u n i ties-of-practice: Towards a unified view of working, learn i ng, and i nnovation', Organization Science, 2: 40-57. Coh e n , W . M . and Levintha l , D . A . ( 1 990) ' Absorptive capacity: A new perspective on learning and i nnovation ' , A dministrative Science Quarterly , 35: 1 28-1 52. Col l i ns, H . M . ( 1 974) 'The TEA set : Tacit knowledge and scientific n e tworks', Science Studies, 4: 1 65 . Con ner, K . R . ( 1 991 ) ' A h istorical comparison o f resource-based theory a n d five schools of thought within i ndustrial organization economics: Do we have a new theory of the firm?' Journal of Management, 1 7: 1 2 1- 1 54. Csikszentmihalyi , M. ( 1 988) 'The flow experience and its significance for human psychology' , in M . Csikszentmihalyi and I .S. Csikszentmihalyi (eds), Optimal Experience: Psychological Studies of Flow in Consciousness. Cambridge: Cambridge U niversity Press. pp. 1 5-35. D aft , R. L. ( 1 982) ' Bureaucratic versus non bureaucratic structure and the process of innovation and change ' , in S . B . Bacharach (ed. ) , Research in the Sociology of Organiza­ tions, vol . I . Greenwich , CT: J A r Press. pp. 1 29-1 66 . Daft , R . L. a n d Wiginton , J . ( 1 979) 'Language a n d organization', A cademy of Management Review, 4: 1 79- 1 9 1 . E t t l i e , J . E . ( 1 988) Taking Charge of Manufacturing: How Companies are Combining Technological and Organizational Inno vations to Compete Successfully . San Francisco, C A : 10ssey-Bass. Ferguson , E . S . ( 1 992) Engineering and the Mind's Eye. Cambridge, M A : MIT Press. G e lwick , R. ( 1 977) The Way of Discovery: A n Introduction to the Thought of Michael Polanyi. New York : Oxford U niversity Press. H i rschhorn, L. ( 1 984) Beyond Mechanization: Work and Technology in a Postindustrial Age. Cambridge, M A : M IT Press. Hunter, M . K . ( 1 99 1 ) Doctor's Stories: The Narrative Structure of Medical Knowledge. Princeton , N J : Princeton U niversity Press. Iglehart , J. K. ( 1 982) 'The cost and regulation of medical technology', i n J . B . McKinlay (ed. ) , Technology and the Future of Healthcare. Cambridge , M A : M IT Press. pp. 69- 1 03 . Kagono, T . , Non a k a , I . , Sakakibara, K . a n d Omura, A . ( 1 985) Strategic vs. Evolutionary Management: A US-Japan Comparison of Strategy and Organ ization . Amsterdam : North­ Holland. Kogut, B . and Zander, U. ( 1 992) ' Knowledge of the firm, combinative capabil i ties, and the rep lication of technology', Organization Science, 3: 383-397. Kotowitz, Y. ( 1 989) ' Moral hazard', in J. Eatwell , M. M i llgate and P. Newman (eds) , The New Palgrave: A llocation , Information, and Markets. New York: W . W . Norton. pp. 207-2 1 3 . Kusterer, K .C . ( 1 978) Knowhow on the Job: The Important Working Knowledge of ' Unskilled' Workers. Boulder, CO: Westview Press. L i ppma n , S. and Rumelt , R . P. ( 1 982) 'Uncertain i m i tability: An analysis of i nterfirm differences i n efficiency under competition', Bell Journal of Economics, 1 2: 4 1 3-438. Louis, M . R . and Sutton , R . 1 . ( 1 99 1 ) 'Switching cogni tive gears: From habits of mind to active t h i n king', Human Relations, 44: 55-76. M ahoney, J .T. and Pandian, J . R . ( 1 992) 'The resource-based view within the conversation of strategic management', Strategic Management Journal, 1 3: 363-380. Mart i n , M. ( 1 984) Managing Technical Innovation and Entrepreneurship . Reston , V A : Reston Publishing. M itche l l , W . ( 1 995) ' Medical diagnostic i m aging manufacturers', i n G . R . Carrol l and M .T. Hannan (eds) , Organizations in Industry: Strategy, Structure and Selection. New York: Oxford U n i versity Press. pp. 244-272.

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Nelson. R . R . and Winter. S . G . ( l lJR2) A n Evoilltionary Theory of Economic Change. Cambridge. M A : Belknap Press. Nonak a , I. ( l lJlJ l ) 'The knowledge-creating compa n y ' . Harvard Bllsiness Review, l)(}- 1 04. Nonaka , I . and Takeuch i , H. ( l lJlJ5) The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Inno vation . New York: Oxford U nivcrsity Press. Norma n , D . A . ( l lJRlJ) The Design of Everyday Things. New Yor k : Doubleday. Orr, J . E. ( l lJlJO) 'Sharing knowledge . celebrating identity'. in D . S . Middleton and O . Edwards (eds). Collective Remembering. Newbury Park . C A : Sage. p p . 1 0lJ-I RlJ. Polanyi . M. ( 1 %2 ) Personal Knowledge: Towards a Post- Critical Philosophy. corrected edn . Chicago. I L : U niversity of Chicago Press. Popper. K. R. ( l lJ73) Objective Knowledge: An Evolutionary Approach. revised edn . Oxford: Clarendon Press. Prahalad. C . K . and Hame l . G. ( l lJlJO) 'The core competence of the corporation' , Harvard Bllsiness Review. oR( 3 ) : 7lJ-lJ l . Rumelt, R . P . ( l lJR7) 'Theory, strategy and entrepreneurship'. i n O J . Teece (cd . ) , The Competitive Challenge: Strategies For Industrial Innovation and Renewal. Cambridge . M A : Ballinger. pp. 1 37- I SR. Rumelt, R . P . . Schend e l . O . and Tecce. D J . ( l lJlJ l ) 'Strategic management and economics'. Strategic Management Journal. 1 2 : 5-2lJ. Sch(in, O . A . ( l lJR3) The Rejlective Practitioner: How Professionals Think in A ction . New York : Basic Books. Scribner. S . , Di Bello, L . . Kindre d . 1. and Zazanis, E. ( l lJlJ I ) Coordinating Two Knowledge Systems: A Case Stlldy. New York : Laboratory for Cognitive Studies of Work , CUNY. Selznick , P. ( l lJ57) teadership i n A dministration: A Sociological Interpretation. New York : Harper and Row. Senker. J. ( l lJlJS) 'Tacit k nowledge and models of i n novation ' , Industrial and Corporate Change, 4 : 42S-447. Simon, H . A . ( l lJR7) ' Making management decisions: The role of intui tion and emotion' . A cademy of Management Executive. I : 57-64. Teece, D . J . ( l lJR7) 'Profiting from technological innovation' , in D . J . Teece (cd . ) , The Competitive Challenge. Cambridge . M A : B a l linger. pp. I RS-2 I lJ . Thompson. 1.D. ( l lJ07) Organizations i n A ction: Social Science Bases uf A dministrative Theory. New Yor k : McGraw - H i l I . Trajtenberg, M . ( l lJlJO) Economic A nalysis of Product Innovation: The Case of C T Scanning. Cambridge. M A : Harvard U n i versity Press. Tush m a n . M . L. and Anderson . P. ( l lJR6) 'Technological discontinuities and organizational environments ' . A dministrative Science Qllarterly. 3 1 : 43lJ-465. Van de Ven . A . H . and Policy. D. ( l lJ<)2) ' Learni ng w h i le innovating'. Organization Sciellce. 3: lJ2- l l o. Vince n t i , W . G . ( l lJlJO) What Engineers Know and How They Know It: A n(/Iytical Sill dies from A eronautical History . Baltimore. M D : 10hns Hopkins University Press. Vygotsk y . L . S . ( l lJ02) Thought lind Language. Cambridge. M A : M I T Press. Webb. S. ( l lJlJO) From the Watching of Shadows: The Origins of Radiological Tomography. New Yor k : Adam H ilger. Weick. K . E . ( l lJR7) 'Organizational culture as a source of high reliabil i t y ' . California Management Revie w , 2lJ: 1 1 2- 1 27 . Wernerfe l t , B. ( l lJR4) ' A resource-based v i e w o f the firm ' . Strategic Management Journal. 5 : 171-IRI. Wertsch . J . V . ( l lJR5) Vygotsky alld the Social Formation of Milld. Cambridge, M A : Harvard University Press. W i l l iamson , O. E. ( l lJ75) Markets and Hierarchies: A nalysis lind A n titrust Implications. New York : Free Press. Winter. S . G . ( l lJR7) ' Knowledge and competence as strategic assets', i n D . J . Teece (cd . ) . The Competitive Challenge. Cambridge, M A : Bal l inger. pp. 1 5lJ- I R4 .

4 Organizations in the Fog : An I nvestigation into the Dynamics of Knowl edge Philippe Baumard

The idea that today's competi tive organizations are those that can be described as in novative , intellige n t . or flexible is increasingly widespread. However, what is meant by these words is not completely straightforward . This chapter focuses on organ izations that derive their competitive advant­ age from their ' e ffectiven ess i n ambigu ity' . borrowing an expression used by H e rzbe rg ( 1 987) to defi ne intel ligence . Thus the focus of this chapter is on o rganizations that remain com petitive in the worst condi tions. This chapter examines situations in which firms lose t heir way , and executives' vision becomes fogged . The st rategic task is then to restore clarity as opposed to amhiguity by generating new knowledge or by transforming the existing know ledge to 'get out o f the fog'. T his chapter discusses the dialect ics between ambiguity a nd k nowl edge . The conventional view is that relevant knowledge i n organ izations comes from explicit situational analysis. and is t h us objective knowledge . I n contrast to a positivist notion that views knowledge merely a s 'information e n riched with meaning and experience ' . we argue that cognitive and o rganizat ional issues should not be approached separately. By identifying the roles pl ayed by particular types of knowledge in resolving am biguous situations, we shall t ry to i l luminate the role pl ayed by richness, density and versatility of knowledge . To analyze the d iffe re n t ways k nowledge can shift within organizations facing an ambiguous situatio n , a two-by-two matrix inspi red by Spender (in t his volume) and Nonaka ( 1 99 1 , 1 994) is elaborated . Two distinctions are made . One is explicit versus tacit, from Polanyi's work ( 1 958, 1 966) , and the other is individual ve rsus social from Durkheimian sociology . To avoid misinterpretatio n , we use instead an individual versus co//ective dimension ( following Nonaka. 1 99 1 ) . I n see king the basis of a 'grounded theory' (G laser and Strauss , 1 967) of o rganizational knowledge dynamics . we investigated managers' behaviors and knowledge mutations facing ambiguous and unpredictable situations. Case study research was conducted in France , Australia and in the U ni ted States. In this chapter, we unpack the role played by four types of -

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Organizations in the Fog

7S

knowledge (expl icit/i ndividual ; explici t/col lective ; tacitli ndividual ; tacit/ collective) as orga n izations t ry to deal with ambiguous situations. In so doing, tacit knowledge is discovered as a sou rce of competit ive advantage . Defining Ambiguity

Ambiguity is a concept that is frequently used i naccurate ly in the management literature ; it is often confused with uncertainty, from which it differs in important ways. The word's etymology comes from the Latin ambo (two ) . I t expresses the inability to see one definite meaning of a situat ion , sente nce , word , though t , actio n , or person . Oracles, for ex­ ample, are t raditionally ambiguous. They offer many interpretations , and cannot be trapped in one defi n i te meaning. U ncertainty is a different concept . While ambiguity is concerned with meaning, uncertainty is defined as the cha racteristics of an event that cannot be determi ned. U ncertainty can apply to a situation that is known , clear and identifiable . In contrast, an am biguous situation requires dealing with a reality in which nothing is permanent, or definitely t rue or definitely false . This was the si tuation of the organ izations we studied ; it was not possible to determine the actual degree of uncertai nty of the choices they faced. Struggling with Ambiguity

Organizations are neither systemat ical ly deterministic, nor spontaneously voluntaristic, but work under sets of minima ( m i n imal consistency, minimal faith, minimal contentment , etc. ) , such that they are typically 'weathering the storm ' , and 'un learn ing yesterday' to con ti nue to 'fly wi thout flying apart' ( Hedberg et £II. , 1 976) . I n maintaining these minima, managers try to make sense of the stimuli they perceive. Subsequentl y , 'those i nterpretations are generated within t h e organization in t h e face o f considerable perceptual ambiguity' (March a n d Olse n , 1 976: 1 9 ) . First , managers do not notice everything. Moreove r , they must st ruggle with contradictory stimuli , which carry many antithetical meanings . This is a permanent struggle with ambiguity. Freaking Out in the Fog: A mbiguity as an Obstacle to Decision Making 'Struggling with ambiguity' ( A lvesso n , 1 993) can determ ine the fate of an organization . For example, tolerance for ambiguity has been identified as a critical factor of success when dea l i ng with foreign cou ntries and cultures ( Marquardt and Enge l , 1 993) . While decision theorists idealize and rationalize the 'human thin king system ' , in actuali t y , 'people do not know all of the sources of sti mul i , nor do they necessarily k now how to d isti nguish relevant from i rrelevant i nformatio n' (Starbuck and Milike n ,

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1 988: 4 1 ) . People act according to 'criteria' that they view as important , sometimes quite unable t o define why these criteria are importan t , for they tend 'to deal with a li mited set of problems and a lim ited set of goals' ( Cyert and March , 1 963 : 1 1 7) . ' Bounded rationality' i n which actors search for answers close to the problem represents another struggle with ambigu­ it y. 'Perceptual filtering' (Starbuck and Miliken , 1 988) is a cogni tive ' mechanism' by which people cope with ambiguity. B ecause we have 'to live with complexity' (Starbuck and Miliken , 1 988: 58) , we must learn and ' u nlearn' ( Hedberg, 1 98 1 ) . However, organizational scholars are pessi m­ istic about the ability of organizations to ' un learn old behaviors and world views' i n facing new situations (Hedberg, 1 98 1 ) . Thriving in the Fog: The Tactical Use of A mbiguity The preceding section reviewed how am biguity is viewed as an obstacle to decision making i n the current literature . This section shows that ambiguity can be actively sought and en acted for tactical purposes. One of the domains where am biguity might be sought is l anguage . To protect their personal space , managers are often imprecise about their objectives i n bureaucratic environ ments. B y using loose role defi n i tions or avoiding di rect confrontation , they maintain a ' b l ur zone' ( Crozier and Hedberg, 1 977) . I mprecise role defin ition , using ambiguous language , serves a tactical purpose when role conflicts arise (Shenkar and Zeira, 1 992) . Thus, am biguous language can be a means of gain i ng competitive advantage . Detienne and Vernant ( 1 974) , in their study of cunning intel ligence i n ancien t G reece , show how politicians used 'oblique k now­ ledge' to deal with 'am biguous, shifting and disconcerting situations'. Today, ambi guous language can be used to manipulate voters ( Dacey, 1 976) . Research Method

The goal of our empi rical research was to identify the existence of specific modes of knowing in 'ambiguous, mutable and unpredictable' situations in the workplace , and thus to answer the fol lowing questions: As organiza­ tions struggle with ambigui t y , is there a type of k nowledge from the 2 x 2 matrix which is dominant at particular times? I f so , how can moving a round the matrix help o rganizations to succeed in their struggle with a mbiguity? Can organizations derive a competitive advantage from such a dynamic handling of their organ izational knowledge ? Revelatory Situations and Purposeful Sampling We used m ul t iple case study research ( Glaser and Strauss, 1 967 ; Lincoln and G ub a , 1 985) to in vestigate the phenomenon of organizational ambigu­ ity within its real con tex t . To j ustify mul tiple case study research, we fi rst n eeded to produce evidence that the different cases involved the same

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syndrome (Yin , 1 984) . Each case had to be carefully selected to be certain that the organization was real l y facing an ambiguous, unpredictable and mutable situatio n . Organizations were selected on the basis of situations they faced ( i nvolving unexpected ruptures in the course of events, such as sudden pol itical turbulence ) . With such criteri a , four organ izations were selected for their com monal­ ity in certain attributes of interest (task complexi ty, situation ambiguity) and divergence i n other attributes (different count ries, differe nt products and services. different purpose s ). The four organizations are Pechiney ( France , Guinea) , I n dosuez ( US A ) , Qantas ( A ustralia) and I ndigo ( France ) . Two of t hese organ izations ( Pech iney and I ndigo) will be described below, as case studies i l l ustrating different ways firms deal with ambiguity. Engaging Interviewees in 'Reflective Practice' ' Reflective practice' is thinking about and critically an alyzing one's actions with the goal of i mproving one's professional practice (Osterman , 1 990 ; Peters, 1 99 1 ; Scho n , 1 988) . Reflective practice involves taking on the perspective of an external observe r i n considering one's own work ; and to identify underlying assumptions and feeli ngs that may affect one's practice ( f mel , 1 992) . This tradition finds i ts roots in the works of Dewe y , Lewin and Piage t , 'each of whom advocated that learning is dependent upon the i ntegration of expe rience with reflection and of theory with practice' (fmel , 1 992: 1 ) . We were i n terested in reflective practice as a research method because it fits with a naturalistic and empirical inquiry of tacit k nowledge as a competit ive advantage in ambiguous situations. First , 're fl ective practice' is a process of making sense of one's own practice , during or after the act ion has taken place ( Osterman , 1 990) . This is a cen t ral activity of a person or group facing ambiguity. Second , reflective practice is one's own investigation into h is or her own 'k nowledge syste m ' . Thus, reflective practice is an exce l lent tool to identify which part is tacit or explici t , and individual or col lective . Lastl y , ' reflective practice' provides a research tool that is versatile, allowing in-process analysis along with ad-hoc and post­ data gathering an alysis ( , reflection in action' versus ' reflection on action' ) . To conduct interviews and play the role of 'catal yst' , w e followed the rules that Peters ( 1 99 1 ) proposed , using a process called D ATA : 'describe, analyze , t heorize and act' . Completing ' Reflective Practice' with Direct Observation However , as Schon j udiciously noticed, 'skil lful action reveals a knowing more than we can say' ( 1 983: 5 1 ) , or a ' knowing more than we can tel l' ( Polany i , 1 966 ) . Thus, we cannot entire ly rely on what managers have to tell us about their 'way' of managing knowledge . For t his reason , we also use a second meth od , direct observation . This, howeve r, implies that the researcher must be presen t when ( I ) the person discovers the ambiguous

7'8.

Org({lIiz{{{ioll(/1 L e{{millg (llId COIl1{Je{iti l ' e Advallt(lge

situation (eme rgence ) . ( 2 ) when this pe rson deals with ambiguity by using diffe re nt types of k nowl edge ( explicit. taci t . in dividual . coll ective ) and. finally. ( 3 ) when this person escapes. avoi ds. or thrives i n this ambiguity to achieve his or her purpose , Re{{ching ' Triallgu latioll ' by usillg Ditycrell{ Sources of D(lra

Mul tiple sou rces of evidence were gathered to triangulate observation methods and to create a chain of evidence ( Y i n . 1 984 ) . Letters. memor­ anda. agendas. an n ounce ments. admin istrative docu ments (proposals. mission reports). news cl ippings an d articles from t he mass m edia were major sources of secondary data. I n the Pech iney case - the studied events having occurred i n the late 1 920s and 1 950s complementary archival records were used (orga nizational records . organization notes. CEOs' diaries ) . Direct oiJserv(I{ioll was in tensively used with an average visit of six months i n e ach organization . Di rect obse rvations were made throughout the field visit , 'i ncluding those occasions dur i n g which other evide nce. such as that of interviews. was be ing collected' ( Y i n . 1 984: 9 1 ) . In-depth interviews were used to obtain 'the facts of a matter as well as . . . the respondents' opi nions about the events' ( Yi n . 1 9'8.4: 8 9 ) . I n terviews were open-elided. with considerable opportun ity for feedback from respondents. I nterviews were conducted with people both involved and not i nvolved in the studied processes. to measure the awareness of these processes in the orga nization and to understand the articulation of the differe n t types of k nowledge . The research involved seve nty interviews (with ten to twenty­ f'ive per organ ization . based on size ) . -

Data Analysis

Reliability of theory construction is depende n t on a 'process that must be designed to highl ight relationships. con n ections. and interdependencies in the phenomenon of interest' because 'researchers cannot make deductions from concepts alone' (Weic k . 1 9'8.9 : 5 1 7 ) . Unlike positivistic research . i nductive research ' l acks a generally accepted model for its central creative process' ( E isenhardt and Bourgeo is. 1 98'8.) . Lacki ng a mode l . data analysis for this research focused on the chronology of events. trying to identify for e ach ph ase what k i n d of k nowledge plays what ro le (that is. i ndividual! col lective and explicit/taci t ) . based on a categorizat ion inspired by previous fi ndings ( Nonaka and Hedlund. 1 99 1 ) . The purpose was to iden tify and to test the validity of a particular knowledge process which handles mutability and un predictability. Case descriptions were developed by combining the accounts of each respondent and by d irect obse rvation of events whenever possi ble (except for Pechiney ) . Opinions about actions and events that were not obse rvable were included in data sets for further investigation . We used cross-case a n alysis and continuous feedback to respondents to improve both const ruct validity and adj ustments ( E isenhardt . 1 989) . All data ( from reflective

Organizations ill the Fog

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practice , interviews , direct observations and arch ives) were com piled for analysis in tables ( as suggested by Mi les and Huberman , 1 984) . The goal was to identify , for each step of the organ izational st ruggle with ambiguity, what type of knowl edge ( for instance , tacit/col lective ) was most often used . The outputs were tables re lating the frequencies and the purposes of the use of one speci fic type of knowledge at one particular time . What emerged we re propositions shedding l ight on the conditions surrounding the use of diffe rent types/modes of knowledge in the various steps of the organ iza­ tions' struggles with ambiguity. Elaboration of the Matrix

Explicit and Collective Kno wledge Expl icit and collective knowledge is the knowledge a community can explain . Spender (this volume) uses the term 'objectified knowledge' to suggest that this knowledge is considered 'objective' by the com munity that shares i t . In an organization, patents, written rules and procedures, organizational chart s , and management decisions that are known by the whole organ ization ( such as those disse minated through formal memor­ anda) are all part of the explicit and col lective body of knowledge . Patents, for i nstance , are the written articulation of the technical know-how of the firm (Teece , 1 98 7 ) . The purpose of making knowl edge explicit and collective can be to disseminate this knowledge to others, to i n form people about recent ma nagement decisions , to implement new programs and procedures within the organ ization , or to signal to the 'external environ­ ment" the organ izational purpose and positions. For example , prices are signals to the com petitors and part ners of the organization . All explicit and collective knowledge is not systematical l y explicit or collective in the first place . Rules that are informal and ephemeral can becomc permanent and explicit through ' i nstitutionalization' ( Di Maggio and Powel l , 1 983 ) . Explicit and Individual Kno wledge We can approach individua l , explicit knowl edge from two perspcctives, the sociological and the technologi ca l . From an e lementary sociological view, everything that becomes conscious to us , becomes part of our individual expl icit knowledge . The other side of individual explicit knowledge is what we w i l l call our 'known-expertise' , which does not cont radict previous fi ndings on expertise which state that the essence of expertise lies in the tacit u nderstanding of rules that are unk nown to the beginner or non­ expert . The example of the chess masters used by de G root ( 1 965) or Newe l l and Simon ( 1 972) i l l ustrates this poi n t . Tacit a n d Collective Kno wledge We all have some 'truths' that we hold col l ectively but do not state. The secret location for 'D-Day' was tacitly known by thousands of people

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Organizational Learning and Competitive A dvantage

without being expressed explicitly Ctacit' being understood as 'to know more than one is willing to te W ) . Th us, people knew tacitly that D-Day was planned . The tacit circulation of knowledge helps organizations to solve p roblems that they ca nnot make explici t . Managers elaborate informal task forces that work on cri tical issues in parallel with - not exclusive of - formal structures . People gather to deal with a specific problem , and gather again when a similar problem arises. This 'web of complicities' allows organiza­ tions to deal 'obliquely' with del icate tasks when formal and explicit processes seem to fail ( B aumard , 1 994) . K nowledge i s socially constructed ( Berger and Luckman n , 1 966) . I n life , w e learn t o assimi late and articulate the stimuli around u s t o formulate l anguage . I n organizations, people belong to 'commu nities of practice ' ( Lave a n d Wenge r, 1 99 1 : Vygotsky, 1 962) where they share a practical k nowledge that is both a 'signature' of their belonging to this community and a source of change for this community. Similarly, many t rades are learned tacitly and collective l y . Tacit and collective k nowledge can also b e a guarantee of organizational operational safety . The 'collective mind' of flight deck operators ( Weick and Roberts, 1 993) permits highly complex organizational tasks to be achieved with very few accidents. This 'organizational mentality' or 'organization mind' ( Sandelands and Stablei n , 1 987) re lies upon a tacit u nderstanding that does not necessitate explication . Thus, technical k nowledge is often acqui red through repetitive tasks, for which know-how is difficult t o com m un icat e . Scribner ( 1 986) explains how tacit knowledge is held collectively by workers i n a com mercial dairy (the warehouse order packers , delivery drivers, and inven tory takers) . This tacit and collective k now-how is difficult to imi tate , and can procure a valuable technological ren t , allowing the firm to deve lop an 'appropriability regime' (Teece , 1 987 ; Winter, 1 987) . Tacit and Individual Kno wledge As Polanyi ( 1 966) put i t . ' We know more than we can tel l ' . First , t here are many stimuli that we notice without being aware of noticing the m . We learn without awareness of what is being learned (Thorndike and Rock , 1 934) . We cannot co mmunicate what we lear n , thus, we are the only ones to be the receivers of this 'k nowledge ' . Second , we do not always learn syste matically or i n tentionally. There are many things t hat we have learned 'incidentally' (Jenkins, 1 933) because we had the l uck to encounter an unexpected learning experience , or because we were focusing on another task , and something 'else' was to be learned in this task that we did not expect . I n the routine of repetitive tasks, we may also acquire a tacit k nowledge concerning the im provement of our task . Th is 'procedural knowledge' ( A nderson , 1 976 ; Scribner, 1 986) is difficult to share , and when somebody replaces us at our task , the 'know-how' is difficult to transmit. Implementing TO M i n the U nited States has been seen as dif ficult because of difference in attitudes towards learning and knowledge

81

Organizations in the Fog Tacit

Tacit

Social izat i o n

Articu lation

Explicit

Tacit

I n itialization

C o m bination

Explicit

� --P----------L-----------P----� EX liCit EX IiCit

Figure

1 990)

4. 1

Transitions from Iaeit to explicit and vice versa (Nollaka,

between the U n ited States and J apan ( N onaka and Hedlund, 1 99 1 ) . As termed by Spender (this volume ) , a l arge part of our knowledge is 'automatic knowledge ' . We do not know where it comes from , and we cannot tell that we know, though 'it's here' and 'it works'. We encode without awareness of encoding ( Hasher and Zacks, 1 984) . We act mind­ lessly ( Langer, 1 978) , and i nstinctive l y , relying on 'animal knowledge ' , based on feeli ngs, smells, guts , l i k e animals do (G riffi n , 1 982 ; Mori n , 1 986) . W e often rely on 'practical knowledge' ( Nyfri and Smith , 1 988) , that we are not able to isolate , define or describe , for we acquired i t through mindless and automatic practice . This heterogeneous, and often myster­ ious , body of k nowledge is our ' tacit and individual knowledge ' . Moving Around the Matrix

It would be misleading to state that the above four types of knowledge are independent of each other and constitute separate and idiosyncratic bodies of knowledge . The dynamics of knowledge involve continuous movements, exch anges and transformations of one t ype of knowledge into another, whether delibe rate or not. We know that these transformations and shifts are fast and effortless; however, we k now little about how the human brain processes t hese four types of knowledge . Researching the epistemological and ontological dimensions of know­ ledge , Nonaka ( 1 990) synthesized the four kinds of t ransitions between explicit and tacit dimensions of knowledge (see Figure 4. 1 ) . A specific mode of transition exists for each t ransformatio n . For instance , tacit knowledge circulates through socialization , that is, we learn tacit behav­ iors , or rules, by i nteracting and observing other people. This tacit knowledge can be articulated i n more explicit rules ( that is, by using different sets of measures i n all various conditions of the process in order to identify the rules that are used tacitly by the baker) , and then becomes

�2

Organizatiollal Lcarning and Compctitive A dvantage Individual

II

Collective

Exten si o n

Explicit

Tacit

II

Appropriation Consciousness

Artic u l ation

Ass i m i lation

Inte r n a l i zation I m plicit learn i n g

Figure 4 . 2 A ll illlcgmlil'c .Ilwlle,,·o,-k kllO lF/edge Iypes

10

IIlIlIll'::e 1/"{/IISilioll.\" of

explicit knowledge . This expl icit knowledge can then be combined with other elements of explicit knowl edge . Fo r example , two software programs can be me rged toget her. The new set of instructions is a combination of formerly separate sets of instructions. When we face an explicit set o f knowledge , w e then have to integrate it into o u r behavior a n d practice . We ach ieve this task thro ugh practice of the explicit rules , techniques, scientifi c fi ndings, etc. We internalize these elements of expl icit knowledge in our t acit knowledge and make them ours. Using previous findi n gs ( N onaka . 1 99 1 . 1 994 ; Polanyi , 1 966; Spender, this volume ; Teece , 1 987; Winter, 1 987) . the above matrix was developed by i ntegrating the individual and col lective dimensions. Eight forms of transitions were thus identified in this integrative framework to analyze the di fferent shifts between knowledge types (see Figure 4 . 2 ) . These eight transitions are com piled in analytic tables ( M iles and Huberman , 1 984) to identify , describe and explain when and how they occur in the organiza­ tions studie d . Case Studies

Pechiney: A Collective Tacit Agreement Organizations simul taneously generate processes that tend to change their characteristics and antithetical processes that affect these characteristics in the opposite direction (Starbuc k , 1 988 ) . At Pechiney, three major 'dis­ concerting and ambiguous' situation s, respectively in 1 93 1 , in the early 1 950s , and between 1 955 and 1 960 . we re investigated through archival data ( l etters, i n ternal memos, ge neral and specialized press, agendas) and in­ depth interviews with key witnesses ( former CEOs and managers ) .

Organizations in the Fog

83

Persistent rumors ( 1 931-1932) T n a letter from Gabriel Cordier to the president, on 24 November 1 93 1 , events unfold as follows: Dear President, si nce yestcrday , cvents precipitate : wc have been hastily attacked on Lyon stock cxchange . Attacks wcre based on followi ng facts: I ) We lost 6()() millions in Russia. 2 ) We lost I ( )() millions with the B . N . C . . 3) We still havc considerable amounts held in Italy. 4) To pay thc succcssion rights (due on April 1 5 . 1 932). the Gillet family. completely drained of ready money. sells all its shares. 5) We harass our subsidiaries to such an extent that we appear as a disordered cavalry. ( Pechiney. Historical Archives) In response , speculators spread rumors about the possibility of a bank­ ruptcy . These rumors stated that two administrators of the com pany were silent because of their recen t suicides, and four others resigned . None of this was true , and so Pech iney brought the case to Court . T n an internal memo, a senior executive acknowledged: 'We didn't deny and didn't publicly refute any rumors . . . Such a commun ique wou ld probably give consistency to noises . ' Ambiguity thus remained, and the company's stock price lost twen ty-five percen t in ten days . A second conventional attempt to run down rumors was then made . The President of the Executive Board w rote a letter to shareholders to reassure them about the company fi nances. Here , the changeable situation was finally handled by changeable means. This i l l ustrates how executives can build up clandestine and informal networks to counter rumors on a local basis (stock exchange traders , bankers, key share holders, i n fl uential personalities of the business comm unity) . Adopt ing the same mutable form as the disturbing rumors, these com munication st rategies act as antithetical processes. The 3ei process ( / 950s) Tn the early 1 950s, Vachet and Lamourdedieu visited the Saint-Gobain glass factory , and came to the following conclu­ sion : 'Why don't we flow our aluminum l i ke Saint Gobain is flowing its gl ass?' ( Lamourdedieu , 1 990 : 60) . This suggestion was easier said than done. U nder the name of ' flowing process 3C1 ' , a fi rst , unsatisfactory , sketch is draw n . There was , however , an i nventor by the name of H azelett who successfully developed a similar process in Cleveland . The factory was soon visited by Lamourdedie u , but not m uch was learnt from unsuccessful trials presented that day. No viable technical answer was foreseen by Lamourdedieu. The choice was then to come back to Paris empty-handed , or to fi nd an oblique way through the enigma. A dinner at Lamourdedieu's hotel followed the visit to the factory . H azelett and four engineers were invited. ' Reservi ng a seat for myself near the flower pot , I profited from the opportunity of getting rid of my whisky as my colleagues' attention was becoming more and more fuzzy' ( Lamourdedieu, 1 990: 83) . The day after, Lamourdedieu was welcomed as the hero who resisted this memorable drunken meal . The distrustful atmosphere faded away, and Lamourdedieu came back with valuable i nsights on the 3C1 process cooling system . With few improvements, the i nsights were adopted into the final flowing process. As Lamourdedieu later noted ( Lamourdedieu , 1 990) , official and organ-

84

Organizational Learning and Competitive A dvantage

izational memories provided a diffe rent rationale for the discovery of the 3C' process ( Barrand and Gadeau, 1 964) . The Guinean Revolution ( /955-/960) Pechiney's presence i n Guinea followed the discovery of i mport ant bauxite deposits 200 miles from Konakry : 'The latter has a mediocre quality and has to be t ransformed on site , which is feasible thanks to the Koukoure river, that would provide energy' (G ignoux , 1 95 5 : 226) . Such restricted geological conditions would later play a critical rol e , as there would be no other technical solution to transform the bauxite on site . The Koukoure river, however , was unpre­ dictable , known to run at 1000 cubic meters in the rainy season and at ten cubic meters in the dry season . As there were no maps of Guinea and Pechiney , geologists were assigned to that task from 1 942 to 1 945 . Pechi ney was trapped i n a technical escalade of com mitments, and the engineers' agenda remained in the background of events until the final reso lution . The geological and technical study was completed in 1 95 1 , and Pechiney management was 'seduced by the outcome' ( Marchandise , 1 990: 84) . In 1 95 7 , the aluminum product ion si te was almost operational , and the Company of Fria was founded . However , i n September 1 95 8 , the government of Guinea declared i ndepende nce . A transien t , shifting, disconcerting and ambiguous situation followe d : ' A l l happened j ust as if the whole operation would have escaped the hands of its i n i tiators, leaving people "on the ground" with the difficult task of reconciling the business imperative with the unpredictability of the G uinea government and society be ing in permanent revolution' ( Larrue , 1 990 : 37) . The n , an inte resting tacit handling of the situation was initiated by Pie rre J o uven , representing Paris managemen t , Raoul de Vitry, President of the Com pany of Fria on site , and a few others. ( Raoul de Vitry had obtained a tacit agreement from the new ' Revolutionary' government of Guinea related to the company's pursuit of the technical agenda . ) Pierre Jouve n 's role was crit ical. In comparing all memos and i n ternal lette rs of the company dur i n g the period , Jouven's reporting style stands apart . He carefully described all the relationships and connections of people he met , using a rich, vivid and detailed style. Every si ngle personality was analyzed : 'Th is person was obliging, but I n oticed an embarrassed meddling' , ·the two Parliamentarians were most active i n our discussions. They congratul ated our position and our proj ect' ( Pechiney, Historical A rchives ) . The gap between J ouve n 's 'soft' knowledge of subtleties and the tech nical reports about the i ndustrial agenda is tremend­ ous. The result was that Pechiney avoided the worst i n the Guinea case , and kept the aluminum production running. Process analysis A process analysis on the Guinean case unfolds as follows: A disconcert ing, ambiguous and unpredictable situation emerged when the G u i nean gove rnment decided to nationalize plants and energy sources. Engineers stuck to the technical agenda and t ried to tolerate the

Organizations in the Fog Individual

85 Collective

Geological i nvesti gations ( 1 930- 1 9 5 1 )

Explicit

Tec h n ical agenda ( 1 952-1958)

Pierre J ouven's

rich u n de rsta nding

a n d p u rposefu l l y tacit a p p roach

Tacit

Figure

( 1 955-1960)

4.3

�

Political a g e n d a : Revolution ( 1 957-1965)

C o l l ective tacit ag reement ( 1 9 58-present)

DominaJ1l knowledge lI10des ill Pechilley's struggle with

ambiguity

ambiguity of the situati o n . But ambiguity persisted , and so manage ment from both Paris headquarters and Konakry decided to take action . Pierre Jouve n , along with others , played the role of mediator. Pierre Jouve n's rich understanding served as a basis to develop a tacit understanding between different parties. A tacit collective agreement was finally reached . When compili ng data tables, the kinds of knowledge used show three successive shifts around the matrix (see Figure 4 . 3 ) . From 1 930 to 1 95 1 , the dominant mode of knowledge was one of engineers searching for energy sources and technical possibilities. When the technical agenda was set up, and operations first started ( 1 952- 1 958) , t hey were sti l l in a col lective and explicit knowledge mode . With the Guinean revo lution , a new situation arose in which the worst outcome sudde n ly became possible . At this poin t , t h e positions of diffe re nt parties became ambiguous, al though there was a n e ffort ( 0 clarify intentions a n d com mitments. Here , the tacit a n d individual knowledge of a few key managers of Pechiney, especially Pierre Jouve n , played a major role i n i m provi ng understanding of t h e situation and creating dialogue . Thus, managers learned implicitly a way for dealing with a new ambiguous si tuat ion . A final shift to a collective and tacit knowledge mode occurred , as a tacit agreement on the continuity of Pechiney's operations in Guinea was reached. Indigo: Thriving in the Fog Founded in 1 98 1 , I ndigo, I ncorporated is a small publishing company specializing in the editing and pri nting of confidential letters. Publications i nclude Africa Energy and Mining, The Indian Ocean Newsletter, East A sian Affairs, Maghreb Confidential. Access to publications is exclusively through di rect subscriptions , and clients include governments and multi­ nationals on five continents. I nd igo has experienced rapid growth in its activities, and its publ ications a re high l y regarded by executives and

86

Orgallizaliolla/ Learning and Compelilive A dvan lage

govern ment officials. This case was selected due to the assumption that accessing se nsitive i n formation req uires abili ties particular to handling disconcerting and ambiguous situations, as part o f unve iling hidden realities to reade rs . Atten tion was focused on the work of the small staff of twelve who produce the letters and thus gain access to valuable insights. I ndigo's current mode of operations in volves constantly shifting from 'an exhaustive and rational approach of events to a more intuitive approach' ( CEO , interview ) . The fi rst phase - made the shortest - consists in reading what is publicly known on the eve n t : It gives u s directions t o search for the unpuhlished . W e k now the editorial habits , ideologies, and policies of the press that we sca n . For exampl e , in certain African countries , ethnic issues arc never addressed directly. I nstead , to suggest the role played hy an ethnic group, journalists arc mentioning the villages involved in the event. The A frican reader is aware of which ethnic group is involved. I ndigo edi tors neve r assume facts im mediately: 'Results are lying in wait' , the editor says . Th us, d i rect obse rvation reveals 'a state of vigilant premeditat ion , of conti nuous con centration on activity that is i n progress' ( Detienne and Vern a n t , 1 974 : 1 4 ) . As the I ndigo founder put it in an interview with the author, 'Our job is to read the impl icit like an open boo k , to n avigate in the unsaid, eve ntually preparing the grou nd for the unsaid to be unveiled'. U n fortunate l y , the implicit is never revealed in any obj ective forms. The C E O continues, 'We man euver in a tacit fiel d , eventua l l y reachi ng steadily a grip that w e won't release u n t i l t h e si tuation m akes sense ' . All edi tors a re bound ary-spanners ( Daft and Weick , 1 984) . Problems are tackled a t their source , involving i n tense t rave ling: 'We constantly n avigate backward and forward from the background to the fo reground o f knowledge' ( founder, i n terview ) . When a Fre nch Deputy is k nown to be on a n o fficial visit i n Africa ( foreground ) , edi tors search for informal and tacit li n k s between this deputy and a corporation that m ight be i nvolved in a contract negotiation in the area (background ) : 'We i m agi ne a ration ale that would fit the events, and keep the succession of events i n memory. And we wait for the i l lumination , helping it out by accessing i n formed source s . ' Thus , knowledge is never exhaustively formal ized until fi nal publication . ' We i ncubate ' , as the CEO put it. That was I ndigo's consistent routine until a day in which events did not turn out as expected . That day , one of the edi tors discovered the picture of a new ambassador of M a l te in the Seychelles: 'I found the whole thing awkward . Why is there a Malte O rder i n the Seyche l les?' This started the process of navigating between the i mplicit and the explici t ; as one of the edi tors explains, 'We avoid being too straightforward i n our understanding of events'. The first search was disconcerting. Apparent ambiguity led to nothing m ore than further ambiguity. N ot h i ng seemed rational or sustainable for publ ication . The e n igma unfolded as fo l lows: ' A n ambassador who was not an am bassado r, did and d i d n ' t own hotel s , had and hadn't a questionable past ' . Finally, creative induction provided a way out , and accurate meaning

Organizations in the Fog Individual

87 Collective

Th e Seych e l l es case i s ma d e p u b l i c

Explicit

The tea m becomes aware

of the d iffi c u l ty of transition

M a u rice Botbol's reflective

The team works

approach t o his envir onment

I n vestigators ' n a v i g ate'

practice on his tacit

Tacit

Figure

4.4

the same way

collectively i n a m b i g u ity

Dominant kno wledge modes i n Indigo 's srrtlggle wirh

ambiguiry

could be given to the dispersed and am biguous events. Editors deliberately made their search highly mutabl e , letting their investigation be even more twisted than the reality i t has to handle . 'There were no awaited immediate returns. The only thing awaited was the precise moment when an interesting line to pull would show up' , the editor recalls. One editor summarized their conclusions fol lowing the Seychelles case in an inte rview, maintaining that I ndigo relies on 'tight resources' and 'artisanal means'. Yet , even at this small scale , the company 'manages to achieve tasks that foste r e nvy i n larger and more organized institutions' . The editor concluded that I ndigo is 'dependent upon its ability to foresee interesting situations in advance' and then to follow them through . Process analysis The chronology of events unfolds as follows : With a pred ilection to taci tness, Maurice Botbol unde rtakes the routine of investigating the envi ronment for rare knowledge for his newsletters. Through serendipi ty , he discovers un usual l i n ks between a few elements of knowledge . Through creative induction , he builds a scenario t hat makes sense on the basis of the tacit knowledge he possesses of various involved e lements. A disconcerting, am biguous and unpredictable situation emerges in the Seychelles case as events go faster that he expected and unveil connections he did not suspect . Ambiguity persists, and Botbol t ries to imagine a path that would fit the situation . With the help of others, trying to articulate their knowledge , I ndigo members steadily grasp the situation , and make e xplicit what they believe to be an accurate under­ standing of it . T n compiling data tables, three successive shifts around the matrix are revealed (see Figure 4 . 4 ) . With the dominant knowledge mode being tacit individual, Maurice Botbol detects i ncongruities in a sequence of events ( for examp l e , the Seychel les case) through means of serendipity and creative induction . H e then tries to make sense of the contradictory stimu l i , but ambiguity persists. Shifting to col lective and tacit k nowledge ,

88

Organizatiollal Learning und Competitive A dvantage

I ndigo 'navigates' within ambiguity by soci alizing and exchanging undeter­ mined. m utable elements of knowledge . Indigo finally has to formulate an explicit vision of the events for the newsletter, a difficult t ransit ion . Findings

When trying to escape ambiguity, senior man agers often neglect local and conjectural knowledge . Th is neglect seems stronger in large fi rms ( Pechiney ) . When t rying to escape ambigui ty. senior managers tend to over-manage . Success in escapi ng ambiguity depends on an abi lity to switch prompt ly between appropriate modes of knowledge . However . these shifts are pain fu l . They req uire organizational flexibility a n d a certain reflective thinking on the organizational knowledge . Tacit knowledge plays a critical role in developing a rich understanding of ambiguous situations. Organizations ( I ndigo ) or people ( Maurice Botbol . Jean Claude Gruffat . Pierre Jouve n ) with greater skill in handling tacit knowledge show greater efficiency in handling such situations. Thus, tacit knowledge . when managed adequately, can constitute a source of competitive advantage for organizations or people . Tacit ness (unsaid, i ncom mun icable , t ransitory . mutable knowledge) leaves more margin for maneuvering. Fina lly, the I ndigo case shows that organizations can even create ambiguity for the purpose of exploiting it. as Indigo's managers tended to create fog to thrive ill the fog . Conclusion

Specific recom mendations for enhancing and systematIZIng a way of managing k nowledge that would give tacit knowledge its deserved place in management have yet to be revealed. However. results of the research described i n this chapter show that organizations often neglect the tacit dimension of knowledge both i n their day-to-day operations and in their long-term thinking. Large organizations are more institutionalized , hierarchical and resistant to change, and show a lower performance in developi ng competitive advantage from tacit knowl edge . A smaller organization like I ndigo , which is more democratic and tlexi ble. can show better performance both in struggling with am biguity and i n adapting to ambiguous situations. Thus, one d i rection for further exploration is whether downsizing may facilitate better management of knowledge . More generally. these research results show that there is more to knowledge than the conventional . posi tivistic perception of k nowledge-as­ information . Studying organizational k nowledge creation not only il lumin­ ates many t raditional organizational issues such as organizational learning and crisis management. i t also ope ns the door for a new interpretation of organ izations as interrelated dynamic systems of knowledge and issues .

Organizations In the Fog

89

Acknowledgments

Many thanks to the members of my dissertation committee , Professors Gerard Kcrnig and Raymond- A lain Thietart , U niversity of Paris­ Dauphine, and Professor William H. Starbuck , New York U n i ve rsity, for contributing hel pful com ments and suggestions. I am also grateful to Professor J . e . Spender, Rutgers U nive rsity, for challenging discussions and useful insights. References A l vesson . Mats ( 1 993 ) ' Organizations as rhetoric: Knowledge-intensive firms and the struggle with ambiguity' . Journal of Mallagemel1t SlI/dies. 30( 6 ) : 997- 1 0 1 5 . Anderson. J . R. ( 1 976) Lallguage, Memory and Thought. H i l lsdale. N J : Erlbau m . Barrand . P . , Gadeau, R . et al . ( 1 964 ) L ' A lumil1ium. vols I and 2 . Paris: Eyrolles. Baumard . P. ( 1 994) 'Ob l i y ue knowledge: The clandesti ne work of organizations'. Cahiers de Recherche DMSP 228.

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Starbuck. W . H . ( l lJXX) 'Surmounting our human limitations'. i n R . Quinn and K . Cameron (cds ) . Pamdox allil TrallsfiJrlllalioll: Toward
W.:ick. Karl. E . and Roberts. Karlenc H . ( l lJlJ:1 ) 'Collective mind in organizations: H.:edful interrelating on flight decks' . A dlllillislra/ir'e Sciellce Qllarlerlr. :JX( :J ) : :J57-:JX I . Wint.:r. Sydney G . ( l lJX7) ' Knowledge and competence as strategic assets' . i n D .J . Teece ( cd . ) . The Compe/ilil'e Chal/ellge. Cambridge . M A : B a l l i nger. pp. I SlJ- I X4 . Y i n . Robert ( 1 9X4) Applied Soci
Part 2 O RGANIZATI ONA L LEARNING AND STRATE GIC CAPAB ILITY What an organization is capable o f doing in its various markets determines i ts success in attracting and maintaining customers . Organizational cap­ abilities that are both valued by customers and d i fficult for other organiza­ tions t o imi tate are thus cri tical sources of competitive advantage . The next t h ree chapters argue that such capabilities a re products of learning processes. This section examines the emerging role of resources, capabil­ ities and competencies i n strategic management . as well as the resulting im pl ications for organizational learning. Nanda reviews core concepts and definitions from the resource-based view of the firm , and discusses the in terrelationsh ips among these con­ cepts . He then characterizes siralegic resources and draws implications for business practice (and for organizational learning) . The next chapter, by A ndreu and Ci borra , focuses sq uarely on the learning aspects of capabi l i ty development , and explores how i n formation technology ( IT) contributes to developing an organization's capabi lities. Specific organizational ex­ amples i l lustrate how IT can be embedded in an organization's core capabilities and can function as .l/ralegic in/ormalion systems. Guidelines for how IT can con tribute to improving the effectiveness of an organiza­ tion's learning processes are also offered . The final chapter i n this section synt hesizes the economic theory of com m itment with the newer resource-based perspective in strategic management . Collis shows that organ ization capability, defined as a firm's dynamic routines that con tin uously and locally advance the production frontier, can be a source of economic profi t . To do this, he outlines a theory o f profi t , in which profit accrues to a firm that possesses a si ngular product market position immune to the threats of imitation , substitution , appropriation and dissipation . He shows how these conditions relate to the t acit col lective knowledge that underlies organizational capability.

5 Resources , Capabilities and Competencies Ashish Nanda

A review of current resource-based literature suggests that , while consider­ able work has been done towards lin king firm resources with competitive strategy , the field is in a state of considerable flux and confusion . Mutually con tradictory defi n itions abou n d , researchers draw widely divergent norm­ ative prescription s , and there is a paucity of work linking the resource paradigm with intraorganizational processes . This chapter attempts to address these needs, by defining resources, capabil ities and competencies, and discussing how these concepts are i nterrelated. It then proceeds to characterize strategic resources, and draws implications for strategy . The Resource-based View of the Firm

The last few years have seen an outpouring of l i te rature on the res()urce­ based view of the firm , coming from several directions. A common basic concern of these approaches has been to unde rstand how organ izations configure and manage their resources , especially human resources. Dif­ ferent disciplines have tried to describe this phenomenon from their perspectives. Economics I n looking at the firm , economists have addressed three rel ated issues: why do firms exist, I what determines optimal firm size , and what determines firm growth rate? Organizational economists hypothesized that certain fixed factors of production are organized within the firm , rather than transacted for i n the market, since these factors are specific to the transaction, susceptible to moral hazard and adverse selection risks. A market solution involving a transaction-specific asset involves the risk of ex­ post opportunism t hrough holdup o r slack (Wil liamson , 1 975) . Besides, if the value of an asset is verifiable only through experie nce , there is a risk of adverse selection i n the asset-market ( Akerlof, 1 970) . To overcome such problems, the parties to a t ransaction can resort ex-ante to a long-term contract with severe penalties for breach of contract . The firm may be viewed as a nexus of such contracts (Williamso n , 1 975 ) .

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A related argument is that high trans({ction costs (Coase , 1 952; Wil liam­ son , 1 975) may necessitate that a long-term contract remain incomplete . " Given bounded rationality of economic agents (Simon , 1 945 ) , they have lim ited ability to account for all possible fut ure states of nature , and incur increasing cost of writing a more complete , more complex con tract which takes m ore contingencies i n to accou nt . Hence , the con tracting parties choose to leave the contract i ncomplete. Arrangi ng such incomplete long­ term contracts i n ternally within an organ ization may reduce t ransaction costs i n comparison with market con tracts ( G rossman and Hart , 1 986 ; Williamso n , 1 975 ) . I n o rder t o explain firm size , economists, who ident ify fi rm resources with factors of product ion , maintain that a fi rm initially faces increasing returns to scale owing to scale and scope economies, and hence , efficiency dictates that firm size is not too small ( Baumol et aI . , 1 982 ) . However , optimal firm size may b e limited b y eventual ly decreasing returns t o scale, since fixed factors may not be dupl icable as the firm expands (Prescott and Visscher, 1 980) . Another perspective has concen trated on the nature of the growth of a fi rm . Pen rose described the firm as 'a collection of the productive resources it employs' ( 1 98 1 : 24) . Rubin ( 1 973) remarked that at any point in time, a fi rm possesses a set of resources and carries out a group of activities. The firm expands in order to utilize available resource capacity . Resource capacit y is released over time as a firm's activities get routinized and it uses its resources more efficiently ( Penrose ) , or existing resources may be used by the firm to create new resources ( Rubi n ) . Labor economists have also studied t h e impact of firm-specific human capital , although their focus has been on the operation of the labor market rather than the fi nn . ( See Parsons ( 1 986) for a surve y . ) The ir stylized results are: •

•

Quit-rate from a firm will decline over time, due to job-shopping and screening out of highly mobile workers at the initial stage of employ­ m e n t , and by i ncreasing valuation of the job as human capital grows (Jovanovic, 1 979) . Optimal compensation mechanism in such a ci rcumstance may involve fi xed wages and a separation bond to cover relationshi p-specific investme n t , or sharing of the relationship-specific investment ( Becker, 1 975).

The economists have offe red rigorous and ge neralized conclusions, but they have been tentative i n moving i n to studying i n t raorgan izational phenomena. Besides , their focus has been descriptive rather than prescripti ve . Sociology Sociologists have also long been concerned with the development and uti lization of human capital resources th rough organizational learning

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and institutionalizatio n . Selznick ( 1 957) studied the conversion of an organ ization - an expendable tool , a rat ional instrument engineered to do a job - into an i n stitution - a l ong-l ived , responsive , adaptive organism . A rgyris ( 1 985) inquired into organizational inertia which resists new learning. A rgyris and Schon ( 1 978) disti nguished single loop learning in wh ich behavior is adj usted to fixed goals, norms , and assumptions, from double looped learning in which goals , norms, and assu mptions are also changeabl e . Research focusing on knowledge-intensive organizations a n d pro­ fessionals observed that these individuals bring un ique and heterogeneous skills to their firms, and a major task of the organizations is developing, sustai ning, coordinating and leveraging these skills. Freidson ( 1 986) studied the role of professionals within orga nizations and the worki ngs of professional o rganizations. Eccles and Crane ( 1 988) explored the opera­ tion of investment banks as flexible , self-designi ng network organizations. In the last few years , studies of traditional manufacturing organizations have also been stressing the importance of managing these strategic capabilities . Nohria and Eccles ( 1 99 1 ) described corporate capabilities of five conglomerates, and asserted that corporate capability underlies super­ ior performance . Nohria and Garcia-Pont ( 1 99 1 ) studied interorganiza­ tional links i n the global automobile i nd ustry during the 1 980s as attempts to share capabi l ities. Overa l l , sociologists have offe red rich descriptions of complex organiza­ tions, but their i nsights have usual l y l acked genera1izability and performance-hypotheses. Organizational Theory In organizational theory , the tendency has been to look either at the vertical structure or at the l ateral interactions within the fi rm . The vertical­ re lations perspective has a long history dating back to the scientific management schoo l , which attempted to provide managers with time and motion study methods to opti mally allocate tasks to workers (Taylor, 1 9 1 1 ) , and the administrative theorists, who attempted to determine general admin istrative principles (such as span of control , line and staff distinction, and bala nce between responsibility and authority) underlying the optimal st ructuring of organ izations ( Fayo l , 1 949 ; Gulick and U rwick , 1 937) . 1 n their current manifestation , vertical-rel ations theorists look on the fi rm as a sequence of principal-agent relationships (Jensen and Meckling, 1 976 ; Pratt and Zeckhauser, 1 985) . Their focus has been on the moral-hazard issue : how the principal can achieve his or her goals, given lack of com plete observabi lity of the agent's actions. An alternate approach , a lso with old intellectual roots , has been to look at an organization as a cooperative system with a collective purpose binding it together ( Barnard , 1 938). The Carnegie tradition , which evolved on the interface between economics and behavioral science , focused on organizational decision processes and lateral intraorganizational linkages.

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Simon ( 1 945) , the progen i tor of the Carnegie school , asserted that since human bei ngs are boundedly rational, economic action is satisficing rather than opt i m izing i n nat ure . B ased on Simon's behavioral assumptions, Cyert and March ( 1 963) developed t he ir model of a fi rm a s comprising coalitions of disparate i nterests, taking satisficing decisions to achieve q uasi-resolutions of conflicts , within the context of bounded rationality. The evolutionary view of the firm was also rooted in the Carnegie tradition . I t described an organization as possessing a repertoire of organizational routines, which evolve through organizational learning ( Nelson and Winter, 1 982) . Organizational t heorists have offered an attractive m ixture of sparse theory and rich descriptions, general rules and specific circumstances, but they are divided between the competing paradigms of agency theory and the Carnegie perspective . General Management Viewpoint B ui ld i ng on these discipline-bases, the applied field of general manage­ ment h as been trying to develop a resource-based perspective , which i n forms the practitioners . Its principal goal has been to develop a business­ n ormative t heory. It has moved along t wo related directions - the business policy and the strategy perspectives. The business policy perspective Busi ness policy case studies of successful A merican organizations, J apanese busin esses and multinational enter­ prises recogn ized that successful strategies i nvolved not only environ­ m e n tal analysis, but also preservation and development of fi rm resources. Itami ( 1 987) remarked that successful strategy i nvolves optimally utilizing the firm's in visible assets its ' information-based resources' . B artlett and G hosha l ( 1 988) recognized that the challenge for converting a multi­ n ational i nto a successful transnational is to i nstitute multidirectional flow of capabilities within the organization. Prahalad and Hamel ( 1 990) high­ l ighted the importance of core competencies collective organizational learning - for fi rm performance . Essentia lly , these researchers were revisiting the t raditional business policy prescription of an i ntegrated analysis of environmental opportunities and i nternal resources ( A ndrews, 1 97 1 ) . A rel ated stream of empirical research i n technology m anagement has also stressed the i m portance of harnessing organizational resources. Research on quality (G arv i n , 1 988) , speed (Stalk , 1 988) , flexible manu­ facturi n g (J aikumar, 1 989) , technological changes - both i ncremental and radical ( H ayes and G arvin , 1 982; Henderson and Clark , 1 990 ; Jaikumar, 1 990) , and new product development ( Leonard-Barton , 1 992) have all directly or implicitly traced the source of competitive advantage to organizational capabilities . B usiness policy researchers have tried to be simultaneously descriptive of practices among the outlier companies they have studied i n tensively, -

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and normative in projecting their practices as what best practices ought to be . Si nce most of their analysis is case-study driven and deductive , their insights have tended to be rich , but they have been challenged as being nonrobust, nongene ralizable , subject to sampling and observer biases, and not grou nded i n theory. Strategy perspective The resource-based view emerged i n the ] 980s partly in reaction to the perceived external environment-bias of the dominant competitive strategy paradigm . Porter's ( 1 980) work was the standard­ bearer for this paradigm . Drawn from i ndustrial organ izatio n, this approach offered an elegant and robust framework for competitive strategy analysis . I n subsequent work , Porter ( 1 985) related corporate resources with the external environment by linking the value-chain in the production process with the competitive strategy of the firm. However, the external environment remained the driver of corporate strategy i n Porter's framework . This approach was criticized as being oriented to the product-market to an extent that it ignores the strategic relevance of firm resources (Barney, 1 986c ; Teece et a! . , 1 990) . Bui lding on Penrose's ( 1 98 1 ) seminal contribu­ tio n , theorists began to look i nward again at organ izational resou rces as a basis of competitive advantage . Wernerfelt and Rumelt were among the first to explicitly focus o n strategic management of fi rm resources. While Wernerfelt ( 1 984) looked at multi-use resources as the drivers of successful diversifications, Rumelt ( 1 984) proposed that a si ngle-business strategy be formulated by first looking at firm-resources, and then see king the suitable product-market where they could be applied. Considerable theoretical work has since been done to develop the resource-based view ( Barney, 1 986c, 1 99 1 ; Dierickx and Coo l , 1 989 ; Peteraf, 1 993) . Empirical studies h ave comparatively l agged behind. One of the few such inquiries was Collis' ( 1 99 1 ) case study of the global strategies of three international bearings manufacture rs from a resource perspect ive . Thus, strategy researchers have been almost entirely normative i n their attempts to develop theoretical i nsights into the lin kage between resources and strategy . While the analysis has been sophist icated at macrotheoretic level , it stands re latively unsupported by microtheoretic foundations on the one side and empirical verifications on the other. It seems there is scope in the general management field to in tegrate the admin istrative focus of business policy with the busi ness-normative focus of strategy . It may be useful for the theory to proceed apace with empirical validation, which may further offer theory-bui lding i nsights. The theory­ building stage may be too primitive to allow definitive large-sample validations, and the appropriate empirical vehicle at this stage may be careful case analyses . But the two - case studies and theory building should proceed together. Armchair theorizi ng is conjectural fantasy at best , case studies which are not grounded in theory may not aggregate beyond interesting stories.

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Distinguishing Features of the Resource-based View

Learning Organization The resource perspective views finns as learning organizations , improving their existing capabili ties through experience. A firm is viewed as a social i nstitution w hose knowledge is stored in its behavior rules, which are constantly being shaped, preserved and modified (Ne lson and Winter , 1 982) . Knowledge-based competencies are en hanced even as they are applied ( Prahalad and Hamel , 1 990 ) , since they are firm-specific assets, w hich are subject to learning and change through their very application to actual problem-solving ( Dosi and Marengo, 1 992) . Path-dependence There is an i rreversibility in organizational decisions , and firm resources evolve in a path-dependent manner - past resource acquisitions determine and constrain fut ure opportunities. A firm has only a limited range of repertoires, and these i ngrained repertoi res limit its future choices (Nelson and Winter, 1 982) . Hence , history mailers (Teece , 1 984) , and a firm's strategy is shaped by its administrative heritage (Bartlett and Ghoshal , 1 989) . 3 Thus, t h e resource perspective stresses the bidirectional linkage between strategy and struct ure ; not only may a strategic change lead to the need for a change in organizational structure (Chandler, 1 962) , but t he past , e mbedded i n the cu rre nt organizational st ructure and syste ms, itself determines the strategic opportun ities of the present (Bower, 1 970 ; Burgelm a n , 1 983, 1 99 1 ) . Causal ambiguity The resource view acknowledges that the entire process of resource acq uisition may be so complex that even the firm , which comes to possess the resource eventual l y , may not know the exact process by which it came to be acquired . Causal ambiguity may arise because of tech nological u ncertainty ( Lippman and Rumelt, 1 982) or because the entire process of resource acquisition is a socially complex phenomenon (B arney, 1 989; Dierickx and Coo l , 1 989) . -1 As a result , the resource-acquisition process may be i n imitabl e , across fi rms, and even within the same firm , over time . Sustainable Competitive A dvantage Once acquired, durable firm specific resources gene rate rent-streams. However, competitive im itation , substitution and resource mobi lity, impe rfect though they are , slowly reduce these rents. In addition , the

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assets generating the ren t-streams depreciate over time , and the techno­ logy and the market change (Barney, 1 986c ) . 5 Characteristics of Strategic Resources The general management field has been deeply in volved with identifying those resources which yield sustainable competitive advantage. This concern is understandable from the practitioners' perspective , si nce , if a manager knows which of the several organizational resources are strategic, he or she can focus attention on them . Prahalad and Hamel ( 1 990) determi ned that core competencies are multi­ use, valuable and inimitable. Barney ( 1 986b , 1 99 1 ) identified the conditions for a resource to offer sustained competitive advantage as value, rarity , inimitability and non-substitutability. I n a practitioner-oriented articl e , Grant ( 1 99 1 ) recognized that for a profit-generating sustainable capability to emerge , it m ust be durable, non-transparent (inimitabl e ) , non­ tram/erable (im mobi le ) , nonreplicable and appropriable. Peteraf ( 1 993) described the conditions underlying sustainable competitive advantage as resource heterogeneity , ex-post limits to competition , imperfect resource mobililY , and ex-ante limits to competition . Some of these factors are not i ndepende n t ; the value of a resource will decl ine if it becomes less scarce ; a resource is less valuable and less scarce if it is easily imitabl e . Similarly, a transparent resource is replicable ; non transferability leads to appropriabi lity. Theorists other than Peteraf also don't address the issue of ex-ante raci ng for the assets. Some of the stated conditions help drive rents up, but they are not necessary conditions for rent generation . Peteraf's resource heterogeneity condition is essentially the dual of t he product market assumption of asymmetric product differentiation (Tirole , 1 988) . The resources may be asymmetrically horizontally differentiated, leading to diffe rential rents. Altern atel y , the resources are vertically differen tiated with asymmetric expectations about their benefits. As a result , access to superior resources will yield Ricardian rents to firms ( Rumelt, 1 987) . However, what drives superior rents is not resource heterogeneity per se , but the scarcity of the superior resources. Heterogeneity does help raise rents, since substitutabil­ ity becomes cost l y . But it is not a necessary condi tion ; it is possible to contemplate homogeneous resources yielding rents, because t hey are scarce ( for instance , control over oil reserves, or diamond mines) . Hence , the various strategic resource characteristics listed above do not seem to be mutually exclusive and collectively exhaustive . An Appraisal

Prom ising though the possi bilities of the resource-based approach are , it is in a state of considerable fl ux. There are three broad areas in which confusion curre ntly exists.

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Definition The confusion begin s with defin i tions. There is an embarrassing profusion of riches - phrases such as firm resources, organizational capabilities and core competencies have been used loosely and interchangeably. B egi n n ing with distinctive competence ( A n drews, 1 97 1 ; Hofer and Schendel , 1 978; Selznick , 1 957) , several competing terms have arise n : strategic firm resources ( B arne y , 1 986a) , in visible assets (Itami , 1 987) , strategic firm­ specific assets (Dierickx and Cool, 1 989) , core competencies ( Dosi et aI. , 1 99 1 ; Prahalad and Hamel, 1990 ) , corporate culture (Cremer, 1 989) , corporate capabilities ( Nohria and Eccles, 1 99 1 ) , organizational capabilities ( B aldwin and Clark, 1 99 1 ) , dynamic capabilities (Teece et aI . , 1990) , and so o n . The definitions are sometimes tautological ; resources are defined a s fi rm strengths, and fi rm strengths are then defined as strategic resources; capability i s defined i n terms of competence , and competence is then defined i n terms of capability. Moreover , the definitions range from extreme ly broad i nterpretations to very specific descriptions. Selznick ( 1 957) i ntroduced the term distinctive competence, but he did not formally define it. He described it as a constituent element of organizational character. A ndrews identified distinctive competence very broadl y with 'what it [an organization] can do particularly well' ( 1 971 : 4647) . I n the same spiri t , Hofer and Schendel defined competencies broadly as 'the pattern of . . . resource and skill deployment that will help it [the firm] achieve its goals and obj ectives' ( 1 978 : 25-26) . Snow and H rebiniak described distinctive competence as 'those things that an organization does especially well in con nection to its competitors' ( 1 980: 3 1 7 ) . Dosi et al. ( 199 1 ) also defined core competencies i nclusively as a set of differentiated skills, complementary assets, and the organ izational routines and capaci­ ties that provide the basis for a firm's competitive capacities in a particular b usiness. Prahalad and Hamel ( 1 990) i nterpreted core competencies more n arrow l y , principally i n human resource terms. In these characterizations , competencies are , by definition, those resources which yield competi ti ve advantage to the firm . Once they are so defi n e d , it becomes tautological to then search for those competencies which will yield competitive advantage to the firm. I n a manner similar to the above traditio n , Wernerfelt identified resources as 'anything which could be thought of as a strength or weakness of a given firm' ( 1984: 1 72) . Barney ( 1 991 : 1 0 1 ) q uoted Daft ( 1 983) i n stating that firm resources ' i nclude all assets, capabilities, organizational processes, firm attributes, i n formation , knowledge , etc. control led by a firm that enable the firm to conceive of and implement strategies that improve i ts efficiency and effectiveness ' , and referred to Learned et al. ( 1969) in describing 'firm resources are strengths that firms can use to conceive and implement their strategies ' . B ut then , what are firm strengths but such resources as will yield competitive advantage to the firm?

Resources, Capabilities and Competencies

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While Wernerfe l t ( 1 984) and Barney ( 1 991 ) relied on broad i n terpreta­ tions of resources , Itami ( 1 987) focused on in visible assets as the basis of competitive advantage , and Cremer ( 1 989) concentrated on corporate culture. Nohria and Eccles defi ned corporate capability as 'an activity performed by a company in which it has a distinctive competence relative to its competi tors' ( 1 99 1 : 2). This defi n ition of corporate capability basically passed the question on to the n eed to define 'distinctive competence ' , but elsewhere they equated the two terms: 'The scie nce of switch able molecules and the technology for performing this activity, which involves producing media based o n the l ayering of these molecules, are a distinctive competence of Polaroid or what we call Polaroid's "corporate capability " (Nohria and Eccles, 1 99 1 : ] ; emphasis added) . Once again , we face a circu larity i n these defi n i tions. It seems that the problem arises from the choice of most researchers to defi ne these concepts as productive services that are supplied ('a distinctive competence is that which yields a competitive advantage ' ) . Once so defined , it becomes impossible then to analyze why they are productive . If resources are defined in te rms of what they do rather than what they are, it becomes impossible to disti nguish among t hem the strategic and the nonstrategic resources. An alternate route could be to start with a general defi n ition of resources as i nputs to the organizational production function , and then to analyze the circumstances under which these resources are usefu l . 6 ,

Application The resource-based perspective posi ts that if all firms are symmetric ex­ ante , rents will emerge only due to l uck (Barney, 1 986a ) . As Peteraf ( 1 993) explai ned, insights from resource-based models, freely available to a ll comers, would l ead to ex-ante races for t he resources , which would eliminate potential rewards from superior k nowledge . Thus, given ex-ante symmetry , the resource-based view offers a perspective o n organizations ; it does not offer strategic insights per se . Where this approach may be useful i n form ulating strategy is that , given ex-ante asymmetry , fi rms may be in a position to take strategic actions i n acquisition and util ization o f resources. Given asymmetry, strategy formulation in the factor-market becomes the dual of product-market strategy . Wernerfe lt e xposed this duality by stating that firms should aspire for 'fi rst-mover advantage in att ractive resources' using the Porter-five forces model for analyzing resource-markets ( 1 984: 1 75 ) . The resource-based approach i s sought t o simultaneously address issues of both diversification and si ngle business unit strategy . There is a stream of empirical research done by Wernerfelt and his colleagues to test Penrose's ( 1 98 1 ) and Rubin's ( 1 973) theoretical assertion that multi market expansion is triggered by the avai lable (excess) capacity of a firm-specific

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multi-use resource . Mon tgomery and Wernerfe lt ( 1 988) , Wernerfelt and Mon tgomery ( 1 988) , Montgomery and Hariharan ( 1 989) , and Chatterjee and Wernerfelt ( 1 99 1 ) related successful product-market diversification to the effective utilization of multi-use assets. Prahalad and Hamel ( 1 990) posited that core com petence should be applicable to multiple markets. Nohria and Eccles ( 1 99 1 ) ascribed sustained superior performance of conglomerates to the possession of corporate capability. Essentially, the attempt i s to l i n k characteristics of an intrinsically m ul ti-use resource with s uccessfu l product-market diversificatio n. On t he other hand , R um e l t ( 1 984) a nd Barney ( 1 99 1 ) , for instance , used the resource-based perspective in studying sustainable competitive advant­ age within a single product market as an alternate paradigm to the Porter perspective on corporate strategy - strategy within a single business unit may be driven by the analysis of available resources rather than environ­ mental opportunities. The two approaches are related . but are subtly differen t . The resource underlying multimarket expansion need must be a multi-use resource , but the strategic resource for a single market need not possess this multi-use propert y . Ghemawat ( 1 99 1 b) addressed this difference, perhaps too strongly , since he asserted that mul ti-use assets are generic, and hence , cannot be st rategi c . A n asset is strategic if investment in the asset is i rreversible. Only a durable , i diosyncratic asset represents a sunk cost . Since a generic factor can shift costlessly to alternate uses, it doesn 't represent a sunk cost . While the distinction between multi-use and single­ use resources is worthwhile , it is not necessary that an immobi l e , multi-use resource will always be generic. There may be non-ge neric multi-use assets, i n vestment in which is sunk for a limited number of product markets, and which can move only inefficiently from one industry to another (Col lis, this volume ) . As Montgomery and Wernerfelt ( 1 988) theorized and verified , the wider a firm diversifies, t he less specific its asset base is and/or the more its asset base will tend to lose value in transferring across markets, and hence, the lower the rents gene rated . Proponents of the resource-based perspective also claim that the basis of sustai n ed competi tive advantage is e fficiency advan tages, and hence , strategic m anagement concerns at the firm-level are consistent with social welfa re concerns at the economy-leve l . This is really a throwback to the traditional debate between the Chicago and the Cambridge schools. While the Cambridge school attributed rents to market power (Bain , 1 956) , the Chicago school attributed them to superior efficiency ( Demsetz, 1 974) . Neither of the two schools has been proven entirely correct or been enti rely discredited (although , i t is interesting to note that the U S Department o f J ustice merger guidelines sti ll pay considerable attention to the potential effects of market power, in the Cambridge tradition ) . Peteraf ( 1 993) , B arney ( 1 99 1 ) and Con ner ( 1 99 1 ) referred to the Chicago argu­ ment i n asserting that firm-rent maxim ization is consonant with social welfa re optimization . The resource-based perspective by itself does not

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provide any new evidence to show that efficiency benefits outweigh , or replace , pecunia ry benefits 7 Further, while ex-post efficiency rents may not cause allocative in­ efficiency , ex-ante raci ng for superior resources may lead to socially wasteful rent-seek i ng behavior ( Posner, 1 975 ) . Peteraf ( 1 993) and Barney ( 1 99 1 ) ignore the wel fare consequences of this racing for resources. Thus, the social welfare implications of the resource perspective a re rathe r l i mited. A n error of omission that the resource-based perspective seems to be making is the obverse of some of the same mistakes it accuses the competitive strategy approach of making - it seems to be ascribing preeminence to the i nside-out perspect ive of strategy. Barney ( 1 986c ) , for i nstance , asserted that the an alysis of a fi rm's skills and capabilities will be of greater strategic value than the analysis of its competitive environmen t . However, a s Wernerfelt ( 1 984) , Col li s ( 1 99 1 ) a n d Ghemawat ( 1 99 I b) pointed out, strategic an alysis must recognize the duality between the resource-based and the product-based perspectives of the firm . Level of analysis Some proponents of the resource-based view claim that the paradigm implies that strategy i nsights are most feasi ble if the unit of analysis is the firm rather than t he i ndustry . � However, the resource-based theory also predicts that rents can be generated from asymmetries in the resource market. If asym metries have to be generated , and exploited , a broader, industry-level analysis is necessary . ') On the other hand , a simple model ling of the firm as a production function , as industry-level studies are wont to do, risks m issing out on firm-specific variables such as invisible assets and firm-specific human capital . Thus, what is needed is a careful m ulti-level analysis, both at the level of the i nd ustry , to understand asymmetries, and at the level of the firm , to catch firm-specific capabi lities. Perhaps, what really li es at t he core of some of the existi ng confusion is that while the focus of the resource-based view has been on developing the paradigm at a macro-level ( Barney, 1 99 1 ; Peteraf, 1 993) , and on trans­ lating its implications into a practitioner-oriented framework to i mplement corporate strategy (G ran t , 1 99 1 ; Wernerfe l t , 1 984) , the approach has not studied the issue of e ffectively configuring resources in any significant detail . Besides, very little work has been done on establishing micro­ foundations of tractable model s , which carefully explore the interlinkages among various variables and parameters . Defining Resources, Capabilities and Competencies

Resources These are the fixed, firm-specific i nput factors of production . Our defini­ tion of resources fol lows Rubin ( 1 973) who distinguished fixed inputs from

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variable inputs, and Caves who defi ned resources as the tangible and i ntangible assets 'semi-permanently tied to the firm' ( 1 980 : 65) . The definition is in the spirit of Di erickx and Cool's ( 1 989) diffe rentiation between stocks and fl ows. H owever, we differ from Amit and Schoemaker ( 1 993) , who defined resources as transferable i nput factors of production , and capabil ities as the fixed firm-speci fic input factors of production . Thei r capabilities are our resources, and their resources are our factor-in puts . Resources may be physical or intangible . Intangible resources are iden tical to Itami's ( 1 987) in visible assets 'information based resources' such as consumer t rust , brand i mage , distribution control , corporate culture , and manage ment ski l l . An intangible asset is durable , contributes as a production input , and depreciates over time ( Dierickx and Coo l , 1 989) . A n i ntangible asset differs from a physical asset i n two ways: -

• •

It has no physical existe nce . It is the accumulation of a by-product of the firm-production process.

Examples of i n tangible assets include : •

•

B y-product flow: I I I employee learning; product qualit y ; organizational learning; and societal spi ll-overs. I n ta ngible asse t : worker human capital ; brand capital ; organizational knowledge ; and public goodwil l .

A firm m ay e rroneously look o n several o f these flows a s externalities. However , these fl ows accumulate as intangible assets, which cont ribute to the production function. I ntangible resources may further be classified into two groups : organiza­ tional knowledge and boundary resources. Organizational kno wledge This is an intraorganizational intangible resource , which is accumulated from organizational learning, a by-product of the production process. I I A plethora of terms have been used to describe organizational know­ ledge , which is internally generated , and evol ves through the process of learning: Nelson and Winter's ( 1 982) description of organizational routines which evolve through learning, Prahalad and Hamel's interpretation of core competencies as 'the collective learning in the organization' ( 1 990: 82) , Dosi and Marengo's ( 1 992) description of organizational knowledge as a property of the learn i ng system and of competency as subject to learning and ch ange , and Leonard-Barton 's ( 1 992 ) description of core capability as the k nowledge-set that disti nguishes and provides a competitive advant­ age . Orga n izational knowledge differs from knowledge resident in physical memory (files, computer, etc. ) , and in individual human capital (know­ ledge and skill reside n t with i n di viduals within the organization ) . It is the team-knowledge which transcends individual members and exists in the

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Inputs

I Variable inputs

Resources

Physical assets

Intangible assets

Organizational knowledge

Figure 5 . 1

Boundary assets

Classification of production inputs

form of organizational routi nes (Nelson and Winter, 1 982) . 1 2 Generally, organ izational knowledge is more tacit (Pol anyi, 1 962) and firm-specific than physical memory and i ndividual human capital . Barney ( 1 986b) , Cremer ( 1 989) and Fiol ( 1 99 1 ) characterized this resource as organizational culture. For i nstance , Cremer ( 1 989) defined corporate culture as the stock of k nowledge which is common to a substantial portion of the employees of the fi rm, but not to the general population from which they are drawn . The concept of organizational knowledge also helps us make an admittedl y simplistic fi rst-level differentiation within the data­ information-knowledge-wisdom continuum proposed by Bartlett. While data exist i n the available state of nature , information is perceived data , kno wledge is assi mi lated inform ation, and wisdom is knowledge integrated into a world-view . Boundary resources These are the relationship-specific i n tangible assets which link the firm with external constituencies. Some examples would be consumer loyalty, worker human capital , public trust , and so o n. Boundary assets have the i n teresting characte ristic t ha t while t he flows wh ich accumulate these assets are provided by the fi rm and the assets themse lves are i nputs to t he firm production function , the asset-stocks are 'owned by' the external constituencies (since they vest with the external constituency ) . For i nstance , worker human capital resides with the worker, public goodwill belongs to the publ ic, consumer trust is e m bedded in the consumers . These assets can be li kened to bridges spanning organizational boundar­ ies. In Scott's ( 1 98 1 ) terminology , while organizational knowledge lies at the core of an organization, boundary resources are the boundary-spanning assets. Th us, we cl assify production inputs as shown in Figure 5 . 1 . Capabilities These are the potential applications of resources. Resources and capabil­ ities are closel y rel ated terms - access to a resource leads to a capability , a

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capability arises from the possession of a resource . While resource is a fixed asset, capability is the potential input from the resource stock to the production function . Our definition m atches Grant's definition of capabil­ ity - 'the capacity for a team of resources to perform some task or activity' ( 1 99 1 : 1 1 9) . Hence , a m u l ti-use resource is a multi-capability resource . Further, a capabi l ity may d raw upon several of a firm's resources. If a fi rm wishes to develop a particular capability, it may be n ecessary for it to simultaneously develop the multiple resources which all contribute to the capability. One asset m ay need another cospecialized asset (Teece , 1 982) in order that a capabil i ty they jointly contribute to develops. The circum­ stance of assets being cospeci alized is a special case of multi-resource capabil i ty when the resources are complementary. We can also consider positive scope-effects (the asset interaction effect mentioned by D ie rickx and Coo l , 1 989) - there is a positive synergy among the resources, so that the capability generated by their being jointly presen t is greater than the sum of capabi l i ty they would h ave generated separately. On the other h a n d , we can also contemplate substitute resources (one resource may be able to offer the same capability as another) , and negative scope effects ( there may be n egative synergies among resources) . Competencies These are higher-order routines which develop and configure organ iza­ tional resources. Given its resources, an organ ization has to optimize on available capabi lities. However , being a social system , an organization has the abi l i t y to change its resource m i x , and even 'self-design' this change (Boulding, 1 956) . Competencies are the guidelines and bl ueprints used in this process of organizational self-design . Competencies are higher-order routi nes - search routines in Nelson and Winte r's ( 1 982) termi n ology - si nce they operate on resources, which include o rganizational knowledge stored i n t he form of first-order rout i nes. Further, the definition is recursive, since competencies i nclude not only the search-routines but also the meta-routines which help develop and mold these routines, and the meta-meta-routines, and so on . The competencies concept is a throwback to the Lippman and Rumelt ( 1 982) discussion of the choice among production functions, and the creation of new production functions, and captures some flavor of the Teece et al. discussion of dynamic capabilities and core competencies - 'the m echanisms by which firms accumulate and dissipate new skills and capab i lities' ( 1 990: 1 9) . However, our definitions are a t variance with Collis' ( 1 99 1 ) termi nology . He defined core competence as 't he vector of irreversible assets along which the firm is uniquely advantaged' (Collis, 1 99 1 : 5 1 ) , and described organiza­ tional capability as the dynamic rout ines acquired by the organization . Col lis' core competence is organizational resource according to us , and his description of organizational capability is competence i n our grammar.

Resources, Capabilities and Competencies

1 07

Broadly , competencies operate on resources in two ways - refinement and renewal : 1 � • •

Refi nement: This is i ncremental accumulation of the resource . Renewal: This is the discovery of new, more efficient production fu nctions. The timing for such discovery is stochastically unpredictable , and it depreciates existing resources .

This dichotomization is rooted in the distinction drawn by Kuhn ( 1 970) between normal science and scientific revolution . Subsequently , this polarity surfaced in the study of i ntangible assets, specifically R and 0 research - product versus process i n novations, cost reduction versus radical patent race ( Dosi , 1 982). Tushman and Anderson ( 1 986) dis­ tinguished incremental technological advances from technological break­ th roughs, which could be knowledge-enhancing or knowledge-destroying. Henderson and Clark ( 1 990) also remarked that incremental innovation feeds on and reinforces the existing problem-solving capabilities of existing organizations, while radical i n novation forces them to ask a new set of questions and employ new problem-solving approaches. Dosi and Marengo ( 1 992) generalized this polarity beyond technology to organiza­ tion by referring to two kinds of competencies , when they described routines for exploitation and exploration . Refinement competency , for instance , helps accumulate organizational knowledge incrementally through learning by doing. E m pirica lly , Rubin ( 1 973) quoted a dated , but still relevant , study of thi rty-two Wisconsin company executives by McLennan ( 1 967) , which found that informal on­ the-j ob training was considered the most effective method of skill and knowledge development . However, if an organization focuses only on refinement, its abi lity to flexibly adapt to changing circumstances becomes li mited , since organizational resources become too specific. Strategic resources may become constraints if ci rcumstances change - core capabil­ ities m ay become core rigidities ( Leonard-Barton , 1 992) . Renewal competency , on the other hand, leads to the spawn ing of unan ticipated products ( Prahalad and Hamel , 1 990) and the Schumpeter­ ian revolutions h ypothesized by Barney ( 1 986c ) . However, this com­ petency may lead to the undermining of existing assets, especially embedded knowledge ( Henderson and Clark , 1 990) . Nonaka ( 1 988) described organizational selFrenewal as a process of dissolving an existing organ izational order and creati ng a new one . Thus, renewal involves creative destruction ( Schumpeter, 1 950) - m oving to a more productive organizational transformation function , but at the cost of depreciating existing resources. To borrow the term i nology of evolution ary ecologists , intraorganiza­ tionally ( H annan and Freeman , 1 977) , 1 4 a firm experiments with a set of resources. The ecological (competitive) environ ment signals which capabil­ ities are useful for the organization a nd which are not. Based on environmental stimul i , the firm selects strategic resources a nd prunes out

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ineffectual resources . The firm then retai ns effect ive resources over a nontransi tory i n terval of t i me . In this entire cycle of experimentation­ selection-retention , selection is forced by the environm en t , retention ability is akin to refinement competency . and experi mentation abi lity is akin to renewal competency . Relevance of the Resource Perspective to General Management

Strategic Resource Resources yield sustainable competitive advantage if they meet the fol low­ ing conditions: • • •

The resource is scarce . The resource has restricted mobility . The re is ex-ante asymmetry among the fi rms with respect to the resource .

Scarcity and imperfect mobility Rents arise from ex-post asymmetry among (potentially) competing fi rms. The cause of this asym metry i s unequal access t o or i n formation about a fixed resource . A scarce resource w i l l generate rents if it offers returns greater than i ts cost in the factor market. A scarce resource must have restricted mobility, since , if the resource were perfectly mobile , its factor m arket value would reflect i ts scarcity value, and the fi rm would get zero rent from appropriating the resource . A resource is re n dered i m mobile due to asset specificity ( W i l l i am­ son , 1 975) . In a revisit to this argument , Rumelt ( 1 984) poi n ted out that a l tern ate use of the resource may i nvolve h igh t ransaction costs. Teece ( 1 982) offe red a sim i lar argument in positing that cospecialized assets tend to be t ransaction specific in nature , and hence , may not be contracted for in the mark e t . I � Conner ( 1 99 1 ) stressed that the linkage of an i nput to the fi rm's existing asset base was central to rent creation . Rumelt ( 1 984) , Teece ( 1 986) , and Dierickx and Cool ( 1 989) also mentioned that a factor may be untran sfe rable because the market for an asset may not even exist , si nce property rights on the asse t may not be inalienable. I n order to retain scarcity , a resource m ust he inimitahle ( Rumelt, 1 984) and nonsubstitutable ( D ierickx and Cool , 1 989) . In order to restrict i mitability and subst itutabi lity of its scarce resources , a firm may use isolating mechanisms ( Rumelt, 1 (84) , also called mobility barriers (Caves and Porter , 1 977) . Hence , a scarce asset with restricted t radabil i ty generates rents - what fraction of t hese are appropriated by the fi rm's owner and what fraction accrue to the asset supplier has to be bargained (Collis, this volume ; G hemawat, 1 99 I b) . Repeated bargaining may be less efficient than ex-ante long-term con tracting between the firm owner and the asset supplier. Thus, we may witness long-term relations between the asset supplier and the firm

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owner. Essentially, the more a party has sun k in re lationsh ip-specific investment, the less its relative bargaining power is and the less its share of the rents. Some first level observations would be : •

•

•

•

The more fi rm-specific t he asse t , t h e more t he fi rm owner can appropriate re nts from its use . The more the asset is supraindividua l , belonging to a team rather than to a specific individual , the more the firm owner can appropriate re nts from asset-use . The more the i ncumbency advantage of an asset supplier compared with a potential supplier outside the firm , t he more the rent the incumbent asset suppl ier can extract . The more the ambiguity about who specifically supplies the asset, the more the rent the fi rm-owner can extract .

Ex-ante asymmetry I f access to a particular resource were definitely goi ng to yield positive rents to all comers, the race among firms wishing to appropriate the resource would dissipate the rents. Li ppman and Rumelt ( 1 982) showed t hat causal ambiguity - ex-ante uncertainty about fi rm efficiency - leads to ex-post stable i n terfirm profitability diffe rences and above normal i ndustry returns . The reason for this is that uncertainty leads to an asymmetry - the firms come to possess heterogeneous reservation prices for the resource . If the competing firms are asymmetricall y placed in terms of initial endowments, first-mo ver advantage may yield posi tive rents (Tirole, 1 988) . Thus , i n o rder for positi ve ren ts to emerge , the firms have to be asymmetrical l y positioned ex-ante , either in terms of expectations or in terms of resource accessibility. To summarize , i f a resource is freely available it will not generate rents. If there is competitive symmetry i n access to a scarce resource , one firm cannot expect ex-ante to necessari l y gain any competitive advantage from access to the resource . However, if a firm has advantageous access to (or information about) a scarce resource , rents will accrue to the firm . If the resource is mobile across firms, the resource provider will appropriate all such ren ts in t he factor market . However, if the resource is firm-specific, the rents will be shared between the firm owner and the resource provider. Thus, in order for a resource to yield rents to a firm own er, it m ust be scarce , it m ust have restricted mobility, and t he fi rm m ust have advantage­ ous access to the resource . Source of Rents G hemawat ( 1 99 I b) referred to Arrow ( 1 968) in high lighting that a factor would command marginal rents equal to its m arginal contribution to the firm , unless the factor market were i mpe rfect . Only in such a case can a wedge be drawn between the returns a firm gets from the factor, and the rents the factor can command i n t he factor market. Thus, in order for a resource to be strategic, its factor market m ust be im pe rfect .

1 10

Orgalliz({tioll({1 Learning ({nd Competitive A dvantage

For a fi rm to generate rents from such a resource , i t must acquire the resource at a cost lower than the returns it yields. This is possible only if the firm is either lucky or leverages on an ex-ante asymmetry. Barney ( 1 986a) poi nted out that for symmetrical ly-placed firms, positive rents will be ge nerated by fi rm resources acqui red from the environ ment only if a firm is fortunate, or if it has better information . I f> He defined strategic factor markets as imperfect ly competitive ma rkets in which some firms have systematically better expect ations about the value of a resource , and drew on the resource-dependency argument ( Pfeffer and Salanci k , 1 978) to claim that the st rategic task for an organization was to acquire resources from the e nvironment through better i n formation . H owever, possessing better expectations is as much an asymmetry as possessing unequal initial endowments. Hence, only chance can lead resources to yield di fferential rents i f t he firms are perfectly symmetric ex-an te . If the cause of superior returns is luck , there is very l i ttle strategic i nsight possible ( except , perhaps , in development of procedures for encouragi ng experimen tation and reducing risk-aversio n ) . On the other hand, i f there is an ex-ante asymmetry in a resource which trades imperfect ly , firms can contemplate strategic actions. The issue of strategic interact ions given asymmetry i n i n formation about or access to sun k resources has been extensively studied i n the industrial organ ization literature . As a sampling, witness t heoretical works by Fuden berg and Tirole ( 1 984) on strategic interactions, Dixit ( 1 980) on capacity as a strategic variable, Milgrom and Robe rts ( 1 982) on using information asymmetry for lim it pricing, and Dasgupta and Stiglitz ( 1 980) on R and D . Dierickx a n d Cool ( 1 989 ) identified asset-stocks, which h a d t o b e developed within a firm due t o market failure , a s strategic resources. The underly i ng assumption is that the problem of market failure is m uch more acute for stock in puts than variable inputs. 1 7 Variable in puts may face market fai l ur e at one instan t , but at another, if the cause of the market fai lure (small numbers, for instance) disappears , market failure in the factor market also vanishes i nstantaneously. I X However, si nce resources are developed over time , ma rket fai lure at one instant can deleteriously affect the resource m arket i n tertempora l l y . In the extreme, if the asset property rights are not i n al ienable , this may prevent a resource market from even existing. Furt hermore , since resources develop only over time , while variable inputs can be traded at any instant , resources tend to involve longer and greater commitment from the firm than do variable inputs. As Dierickx and Cool ( 1 989) discusse d , fi nn-speci fic assets which h ave developed over time can not be i n stantaneously imitated, and i nvolve an element of intertemporal sunken ness, owing to time-compression diseconomies convex adj ustment costs. Within the general cl ass of resources, intangible assets are even more susceptible to market failure , owing to the intensely firm-specific nature of t hese assets - not only in application , but also in generation . These -

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resources tend to be more tacit , involving sign ificant ti me-compression diseconom y , l <) and generated by more socially complex and ambiguous phenomena than physical assets, making them less susceptible to im itation and substitutio n . Owing t o their graver degree of market fai l ure a n d greater degree o f sunken ness , i n general , intangible assets are more strategic than other resources, especially physical assets . 21 1 This conclusion is at variance with Barney's ( 1 986a) assertion that potential rents would accrue from 'strategic factor m arkets' , and is more in the spirit of Dierickx and Cool ( 1 989) , who focused on internally developed asset-stocks as strategic resources. The l i n kaging of sunken ness with the strategic importance of the input fol lows a time-honored industrial organization t radition - the more that a fi rm can commit to an action , by sinking fu nds i rreversibly to accomplish i t , the m ore strategic the action becomes (Caves, 1 984) . Since entry barriers are also exit barriers . once an i n tangible asset is acquired, a firm can credibly claim that i t cannot reversibly divest itse l f of this asse t . Within t h e class of in tangible assets, w h i l e organizational knowledge is 'owned' by the firm , boundary assets are not. Since boundary assets are built and used by the firm , but stored in the external constituency , they are susceptible to opportunism - the consti tuency may extract rents by threatening to withhold the asset from the fi rm. A worker may demand higher wages as his or her human capital grows through job learning; the local public may not part with its entire valuation for a goodwill-generating public service provided by the firm ; consumers m ay not pay their entire reservation valuation for a high-q uality product. To ove rcom e the risk of opportunism and repeated ex-post bargaining, the firm owner may enter into a long-term con tract with the external constituency detailing re nt apportionment and ensuring asset deve lopment and availability. Since the firm i nvests in the asset and the external consti tuency has cont rol over it, at the first leve l , i t appears that the firm owner is in a weaker bargaining position and most of the rents generated by the asset will accrue to the external const ituency . This resu lt is diluted if the asset is intensely fi rm­ specific . On the other hand, rents generated by organi zational knowledge directly accrue to the firm owne r. Si nce it is relatively less susceptible to bargaining losses , less mobile and more tacit (being m ore in the 'core' of the organ ization ) , we would expect organ izational knowledge to be even more strategic than boundary assets. Short Run vs Long Run Strategy: The Role of Competencies Caves ( 1 984) recognized that competitive strategy focuses on short run optim ization. He suggested that the fi rm operates in the short run and is con tractually encum bered with a variety of fixed facilities. Strategic choice then expresses the top coordinator's attempt to maxim ize the rents to these fixed factors over the planning horizo n . The pursuit of competitive

1 12

Organizational Learning and Competitive A dvantage

advantage can be characterized as a sequence of long-lived and i rreversible resource com mitments. Ghemawat ( 1 99 1 b) used this perspective to rel ate product-m arket competitive strategy with the resource-based perspective . I n his formula­ tion , product market decisions are taken i n the short run , given fixed factors, w h i le factor-market decisions are taken with a longer horizon . The m apping m ay not be exactly one-to-one , since there may be long-run product market variables such as advertising brand name, and there may be short-run factor market variables, for instance , traded inputs. However , at a coarse-grai n ed leve l , i t seems generally correct t o look on resource com m itments as longer-run decisions, and product m arket moves as comparatively short run. However , there is another tem poral aspect to strategy . I f we were to disti nguish among the short run (when most inputs are fi xed) , the medium run (when com m i tted resources are fixed ) , and the long run (when there is no fixed factor and there is no strategic resource) , product-market decisions tend to be strategic only in the short run ; resource-driven decisions are strategic only in the medium ter m ; and the crucial long-term decisions concern competencies. I n the short term , the firm optimizes on available resources. However , in the medium term , these resources are themse lves being al tered by the com petency meta-routines, as the organ ization shapes its choice-se t . While capab i lities are resources i n the short term , they tend to become con­ straints in the medium run . Competenci es themselves change , but they tend to evolve very slowly. Organ i zational ecologists (Hannan and Freeman , 1 984) argue that the process of organ izational selection favors fi rms with high performance rel iability and accountability, which requires highly reproducible organ iza­ tional structures ( 'routines' in evolutionary term inology ) , and this con­ dition of reproduci bility generates inertial processes. Hence , ecological­ evolutionary selection process favors organizations with inertial com­ petencies. Hence , while resources are fixed in the short run , competencies are fixed in the medium term . Thus , in the short run , t he issue is opt i mization given fixed resources; in the medium term , t he issue is the evolution of these resources, given that the organization has chosen to develop t he m ; and in the long term , the issue is how competencies themselves should evolve so as to yield optimal decision rules on resource­ developme n t . I t is i n contemplating t h i s temporal aspect o f strategy that t h e role o f h istory becomes cruci a l . The past constrains t h e firm along a particular traj ectory , but at every point on this trajectory, t he firm has the flexibility to shape its future . A t any given time , a firm faces a real m of possibilit y , and a real m of t he i mpossi ble . Whatever a firm may do, i t cannot e nt e r the realm of i m possi b i li t y . However, within the realm of possibility lie a variety of alternatives. The action taken at each i nstant opens a new realm of possibility and offers choices for the future . The action of the firm may

Resources, Capabilities and Competencies

1 13

affect which possible future the flow of events indeed fol lows. I nsofar as the firm is able to influence the flow of events within the rea lm of possibility, not only is the firm constrai ned by history , but it a lso shapes its future .2 1 Thus , while we concur with Teece ( 1 984) that 'history matters' , we assert that within the constraints of history, a firm m akes strategic choices which shape i ts future . While history is an invariant given in the short term , i t is moldable in the long term . It is in choosing among al ternatives and charting the trajectory for the future that competencies become crucial , for not only do they help accumulate organ izational resources, but they also change the nature of these resources. An organization with a rich repertoire of competencies is a learninR orRaniza­ tion ( Senge , 1 990) adaptive in coping with changing circumst ances and generative in creating new situations and circumstances. The long­ term issue , therefore , is how to deve lop an optimal repertoire of competencies.22 -

The Strategic Relevance of Resource-based Frameworks If superior returns are to be had from better informatio n, practitioners m ust be able to identify and leverage strategic resources , especially intangible assets. Toward this purpose , a framework to help practitioners apply the resource-based perspective m ust be deve loped . Stevenson ( 1 976) discovered that it may be non-trivial for the organizational coalition to develop a shared view on what the strategic resources are , and shared understanding may be a major goal for working with a framework . Wernerfelt ( 1 984 and 1 989) , Amit and Schoemaker ( 1 993) , Grant ( 1 99 1 ) and Stalk et a l . ( 1 992) have offered frameworks to help practitioners apply the resource-based perspective . However, once the framework is widely applied , it will lose its st rategic edge , unless ex-ante asymmetries exist ( Schoemaker, 1 990) . Moreover, as discussed earlier, t he quest for generic success factors ( management ski l l , corporate culture , organizational system s, etc . ) is bou nd to fai l , since generic factors cannot be the source of competitive advantage . Since strategic assets are idiosyncratic, the contingency of a situation will dictate which resources are strategic in the given circum­ stance ( Lawrence and Lorsch, 1 967) . Organizational Form and Systems Rigorous and robust predictions are possible only if they are backed by the m icrofoundations of tractable models. How intangible assets develop, and what parameters i nfl ue nce this developmen t , is an i mportant question which has received comparatively little attention in the resource-based fram ework . Within organization theory , agency theorists, who have looked at the vertical structure of the firm as a sequence of principal-age nt relations, have begun explicitly considering molding organizational structure , incent-

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Organizational Learning and Competitive A dvantage

Ives and control to optimally manage organizational k nowledge . For instance, J ensen and Meckl i ng ( 1 990) addressed the need to collocate authority with organ izational k nowledge . I n the Carnegie t radition , Aoki ( 1 980) described an organization with more horizontal and l ess vertical l i nkages than a hierarchical organization as being a configuration which helps the fi rm util ize its knowledge more effectivel y . I n comparing the l-form organization (Japanese organizations with a preponderance of horizontal linkages) with the H-form organization ( U S hierarchical organ izations with mainly vertical linkages) , he stated that the operating unit of a J -form organization has the ability of ex-post adaptation the ability to learn rapidly from current circumstances and change according to them . Prahalad and Hamel ( 1 990) rem arked that a firm should be organized not as a col lection of Strategic B usiness U nits (SBUs) , but as a col lection of competencies, and such a focus i n organizing will help develop and flexibly leverage core competencies. They also remarked that such a focus will prevent 'hollowing o ut ' of corporation s, and may provide a rationale for building alliances to share capabilities. A n other i ntriguing issue is whether organizational forms and systems p romoting refinement are very different from those supporting renewal . B urns and Stalker ( 1 96 1 ) i n dicated that such was i n deed the case several years ago . While mechanistic organizational systems provided stability and efficiency, organic system s encouraged innovatio n . Wilson ( 1 966) sug­ gested that organi zational forces which generate innovation proposals conflict with forces which secu re their adaption and implemen tatio n. It would be useful to enquire whether this mutual exclusivity of competencies still exists, or whether organ izations can simultaneously promote both competencies. However, considerable work still needs to be done to develop a theory of the firm con sonant with the resource-based view, such that it may underpi n a resource-based view of strategy . -

Notes I am grateful to Professors C A . Bartlett . R . E . Caves. P. Ghemawat. C A . Montgomery, and H . H . Stevenson for their com ments and suggestions. I Con n e r ( 1 99 1 ) classified the economists' perspectives on the role of a firm i n to five streams - the neoclassical perfect compelition theory, w hich looks at firms as combiners of inputs; the structure--conduct-performance paradigm w hich looks at firms as output­ restraining oligopolies; the Schumpeterian view of firms as contributing to creative destruc­ tion ; the Chicago view of firms as efficiency-seeking; and the transaction cost view of firms as alternative institutional structures to markets. 2 This a rgument derives from Simon's ( 1 945) behavioral assumption of bounded rational­ ity. G iven l i m i ted ability to account for all possible future states of nature (and the increasing cost of writing a more complete , more complex contract which takes more contingencies i n to account ) , the contracting parties may choose to leave the cont ract i ncomplete.

Resources. Capabilities and Competencies

l iS

� I n a similar vei n . G h emawat defined commitlllent as ·the tendency of strategies to persist over time' ( 1 99 I a : Ch . 2 ) . 4 Reed a n d DeFi l l i ppi ( 1 990) classified the features underlying causal ambiguity a s filcitlless ( noncodifiable accumulation of skills resulting from learning by doi n g ) . complexitr ( resulting from m ultiple interdependent skills and assets ) . and specijicitv ( transaction-specitic assets ) . 5 These changes - i mitation a n d substitution . resource mobi lity. depreciation . technology and market changes - may be evolutionary or revolutionary. However. Barney ( 1 9R6c) asserted that the rent-streams from strategic assets would con t i n ue unless 'a structural revolution in the industry" occurred. He referred back to an older tradition i n calling such structural revol utions Scliumpeterian shocks. 6 I am grateful to Professor Caves for this insight . 7 However. t h e traditional debate - whether asymmetry leads t o market power which leads to deadweight losses. or whether uncljual efficiency leads to the efficient firms getting higher returns and becoming bigger - has large l y been entirely sidestepped i n the more recent empirical i ndustrial organ ization . The favored approach of the 'new economic industrial organization' h as become conducting intensive longitudinal studies of one industry at a time. focusing not only on i ndustry structure. but on conduct also. ( Sec Bresnahan ( 1 9R9) for a revicw . ) R Sec Peteraf ( 1 99�) and Barney ( 1 99 I ) for one side of the vielV. and Ghemawat ( 1 99 I a ) . for t h e other. Empirica l l y . Schmalensee ( 1 9R5) discovered that profit differences are attributable mostly to industry effects. and firm effects arc insign ifica n t . Hansen and Wernerfelt ( 1 9R9) found that industry effects and organizational effects were both significant. and roughly independe n t . Scott and Pascoe ( 1 91'6) . Wernerfelt and Montgomery ( 1 9KI') and Kessides ( 1 990) discovered significant firm-specific e ffects. alt hough they all found that industry effect strongly dominated firm effect. 9 As Caves remarked. 'We can 't have a differential without something to differ from'. J() The Hows arc by-products since they arc not the primary revenue-generating products of the firm . I I Fol lowing the Fiol and Lyles ( 1 9S5) distinction between lower-level and h igher-level learning. which is akin to the Argyris and Schiin ( 1 97R) distinction between single loop and double loop learn i ng , we arc referring here to lower-level learn i ng only. 12 Leonard-Barton ( 1 992) further finc-grains knowledge residing i n teams into t h ree types - technical systems. managerial systems. and norms and values. D The terms refinement and renewal were first used by Bartlett. 14 This is i n the tradition of Burgelman ( l lJlJ l ) . who borrowed the ecology perspective to study the process of strategy making within an organizatio n . 1 5 Defining assets as cospecialized is an alternate characterization of asset specificity. since asset specificity arises hecause an asset gets lin ked with other firm resources i n an idiosyncratic manner. 1 6 This was essentially a revisit to Demsetz' ( 1 973 ) comment that superior performance may arise from a combination of uncertainty and l uck or atypical insigh t . 1 7 Dicriekx a n d Coo!"s ( 1 9S9) assertion that traded assets cannot y i e l d rents since their value can be realized i n the relevant factor markets rests on the assumption that factor markets arc perfect . Hence. while they restricted their framework to only the circumstance when the asset is nontradable. a weaker assumption of an i m perfect factor market is sufficient to ljualify the asset as strategic. II' Williamson ( 1 975 ) identified the c n vironmental factors of uncertainty and small n u m bers. and the h uman factors of bounded rationality and opport un ism as combining to cause market fail urc. 19 In the study quoted by Rubin ( 1 97�) . more than half the managers who were surveyed i ndicated that it had taken them more t han three years to acquire job knowledge from their organizations ( McLennan, 1 967). 20 Among t he various i ntangible assets which have been hypothesized as underlying sustained competitive advantage arc organizational clIltlire ( Barney. I YR6b: FioL 1 9Y I ) and lOp-management skill (Castanias and Helfat. 1 (9 1 ) .

1 16 2 1 The

Organizalional Learning and Competitive Advantage argu ment

in

this

paragraph

is

derived

from

N a n da

( 1 '18'1 ) .

In

subse q u e n t

discussions w i t h M al n i gh t a n d Stey·c nso n . we h a d coined the phrase rhe c o n e of possihiliry t o describe a n d deve lop t h i s conce p t . 2 2 Stevenson a t t e m pted to address t hese h i gh e r l e v e l s o f a n a l y s i s - h o w d o c s a firm decide which competencics to deve l o p . and to what p urpose - with t h e concept o f the value-m a t r i x : a firm has to not o n l y create va l u e . but also define and distrib ute i t . The process of creat i n g v a l u e re la tes to leveraging resources. h u t t h e process o f defi n i n g v a l u e s relates to m o l d i ng competencies.

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6 Core Capabilities a n d I nform ation Tech nology : An Organizati o n a l Learning Approach Rafael A ndreu and Claudio Ciborra

One of the fundamental learning processes taking place in organizations is that leading to the development of core competence . Adopting the perspective of t he resource-based view of the firm ( RBYF ) , which focuses on the firm's resources and capabilities to unde rstand business strategy and to provide direction to strategy formulatio n , this chapter emphasizes the learning aspects of capabi lity development and explo res how I n formation Technology ( IT) can contribute to i t . As a standardized resource widely avai lable , I T c a n participate in the fu ndamental process that t ransforms resources into capabilities and even­ tually into core capabilities - through the development and implementa­ tion of appropriate IT-based Information Systems ( IS) . In this way , IT/IS can become - embedded in core capabilities - an active com ponent of the firm's competitive advantages. The process by which resources end up being components of core capabiliti es in fi rms is a learning process that can be described and understood usi n g RBYF concepts. Furthermore , the development of IT strategic applications (also-called 'strategic information systems', or SIS) fol lows patterns that close ly parallel the struct ure of that learning process. For this reason we propose an organizational learning model based on the RBYF, and use it to describe and better understand how IT can contribute to core capabilities development. The chapter is o rgan ized as fol lows: The second section summarizes the RBYF framework, i ncluding the concepts of capabilities and core capabil­ ities and th e organ izational processes that l ead to the m . The third section presents an organ izational learning model : an interpretation of capability deve lopment that emphasizes situated learning and knowledge accumu­ lation. The fourth section describes and explains a few well-known ITIIS applications that have con t ri buted to core capability formation in different firms using the proposed mode l , thus showing its appropriateness . The fifth section suggests guidelines about how IT/IS can be used to con tribute to the effectiveness of the learning processes i nvolved. Short conclusions fol low .

1 22

Organizational Learning alld Competitive A dvantage

The Resource-based View of the Firm ( R BVF) Framework: An Overview

The RBYF conceives a firm as seeking to acquire hard to imitate , valuable resources and capabili ties, such that man agers must identify , develop and deploy resources and capabilities that provides sustainable competitive advantage a n d , thus, superior profits for the firm (Amit and Schoemaker, 1 993) . The firm 's quest for differentiation is a process that develops distin ctive capabi lities, also-called core capabilities . Core capabilities are those that benefici ally di fferent iate a company from competitive fi rms ( Leonard-Barto n , 1 992 ) . A capability has strategic potential, and thus becomes core , with potential for competit ive advantage , when it is: ( 1 ) valuable it exploits opportunities and/or neutralizes threats in a firm's e nvironme n t (Barney, 1 99 1 ) ; (2) rare the num ber of fi rms that possess a particular capability is l ess than the n umber needed to generate perfect competition in an industry ( H i rshleifer, 1 980) ; (3) imperfectly imitable - for inst ance , because of unique conditions in its acquisition process , because the l i n k between the capabi lity and sustainable advantage is causal l y ambiguous ( Lippman a n d Rumelt , 1 982) , o r because it is socially complex ; and (4) with no strategically equivalent substitutes that is, with no alternative ways of achieving the same results. Core capabilities develop in organi zations through a fundamental t ransformation process by which standard resources, available in open m arkets (whe re all firms can acquire t he m ) , are used and combined , within the organizational context of each firm , with organizational routines to produce capabilities , which i n turn can become core and the source of competitive advantages if the above conditions are met. Since this transformation process takes pl ace within an organizational context and uses specific organizational routines, the resulting (core) capabilities are highly dependent on them . As the process unfolds, the path- or acquisition­ dependency degree increases, making the results more and more idiosyn­ cratic to the firm i n which they develop. Hence , the transformation is a path-dependent learning process. We consider now , in more detail , i ts m ajor phases . Although iterative and evolving, the process starts with a set of existi ng resources . A resource is any available factor owned or controlled by a firm ( A m i t and Schoemaker, 1 993 ) . Alternatively, resources are those tangible and i ntangible assets w hich are tied sem ipermanently to the firm ( We rner­ fe l t , 1 984) . We may add that resources are assets available i n the firm without specific organizational effort . IT is understood as a resource in this sense . Capabilities are developed by combining and using resources (and/or other capabil ities) with the aid of organizational routines. An organization ­ al routine is a particular way of doing that an organization has developed and learned, and in the util ization of which that organization is very efficient and effective , to the point of becoming almost automatic, a -

-

-

Core Capabilities and Information Technology

1 23

'natura l ' reflection of its ' way of bei ng ' . These routi nes a re depositories of organizational knowledge acquired through learning ( Dosi et a ! . , 1 990; G ran t , 1 992; Nelson and Winter, 1 982) ; consequently they have a strong tacit dime nsion which makes them difficult to i m itate and change . J Capabi lities are seen in the R BVF literature from many different perspectives. Teece et a!. ( 1 990) defines capabilities as a set of differen­ tiated skills, complemen tary assets, and routines that allow success in a particular business . Others define capabilities vis-a-vis resou rces, such that capabilities refer to a fi rm's capacity to deploy combinations of resources, through organizational processes to produce a desired outcome (Amit and Schoemaker, 1 993) . U n like resources, capabilities in volve a fi rm ' s human capital developi ng, carrying and exchanging informatio n . Consequently , deve lopi ng capabilities i nvolves organizational learning: learning how to combine and use resources, and also the learning already em bedded in the organizational routines employed . 2 The i nterplay among resources organ­ izational routines, and capabi lities is very rich : existing capabilities can be made more sophisticated by combin i ng some of them into new ones with the aid of organ izational routines; new organ izational routines may also deve lop by combining old ones with avai l able capabilities. A t a given point in time an organ ization is characterized by specific a nd interrelated sets or 'stocks' of resources , capabilities, and organizational routines. Since learning takes place within a fi rm's organizational context , core capabilities are path-dependent their specificity degree is high . This is crucial for making them difficult to i mitate and hence resulting in advantages sustai nable and durabl e . Path-dependency means that the way a firm owns an asset (a capability) depends on the process through which it acq uired it ( Collis , 1 99 1 ; Dierickx and Coo l , 1 989; Dosi et a ! . , 1 990) . The concept of specificity degree relates to the idea of 'specia l purpose' . As capabilities develop through a process that uses idiosyncratic routines and takes p lace in a specific organizational context , the results become less and less 'general purpose' , that is, less and less efficient/effective if they are taken away from where they originated ( Montgome ry and Wernerfe l t , 1 988) . Figure 6 . 1 summarizes the process. I t is complex and not necessarily planned for ; many times it 'just happens' . Planning and making it happe n , howeve r, are genuine managemen t activities, a s discussed below . I n general , the degree o f specificity a n d path dependency increases from bottom to top in Figure 6. 1 , as more learning and selection are involved. -

The Capability Development Process

The transformation process that produces core capabilities from standard resources involves learning. Learn i ng is i mportant because ( 1 ) it implies path-dependency and speci ficity i n the resulting core capabil ities, and (2) consequentl y , it is one of the causes of their inim itabi lity, which is crucial for competitive advan tage . By analyzing in detail the learning processes

1 24

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involved we will de rive practical suggestions on how to harness IT/IS as a key component of a firm 's core capabi lities. The first transformation step develops capabi lities from standard resource s . Two different types of learning take place at this step. The first aims at mastering the use of standard resources , and produces what we call efficient work practices . I ndividuals and groups in the firm learn how to use resources to solve problems in the con text of a given organizational situation . The quest for better work practices may even trigger a search for new resources, more appropriate for the practices being developed. Or, the appearance of new resources (say technological innovations) may moti vate individuals and groups to 'take advantage of them' by developing

Core Capabilities and Information Technology

1 25

new work practices . Thus , the re is in fact a learning loop between resources and work practices. We cal l it the routinization learning loop . The environment in which learning occurs is an organizational context , which influences the learning process and is in turn influenced by its result ; that is, new working practices become part of the context , thus increasi ng the knowledge base of the organization and enhancing its learning abilities (Giddens, 1 984 ; Mutloz-Seca and Riverola , 1 994; Orlikowski , 1 992 ) . Such an organizational con text has the characteristics of a formative context ( Ciborra and Lanzara, 1 990) . 3 Work practices are 'formed' within i t , and receive their meaning and scope from it. Work practices resulting from this learning loop are concrete, detai led, specific and operative, close to the concept of skills ; they are i nstances of what have been cal led modus operandi ( Bourdieu, 1 977) - in fact, they tend to lose their value when taken away from the specifi c situation in which they were developed and are afterwards used . From a d i fferent perspective , work practices are the first step in the firm's 'inte rnalization' of resources. Mastering the usage of a spreadsheet by an i ndividual or a team in a specific department , to solve a concrete proble m , is an example of this type of learning. The second type of learning creates capabil ities from existing work practices . Several characteristics of this learning are important: ( I ) it involves combi n ing work practices a n d organizational routines; ( 2) the result has a strong potential con notatio n , as capabil ities convey what an organization is capable of doing if properly triggered - that is, capabilities involve generalizing work practices and putting them in a wider context that defines how they work , so that they are instances of opus operatum ( Bourdieu , 1 977 ) ; (3) the result - capabili ties - is easi l y described in terms of what they do and how they do it, but for what they do it is taken for granted, not necessarily well defined and rarely challenged ; and (4) since needs for new routines or work practices can be detected during the process, it also becomes a learning loop which we call the capability learning loop. The obj ectives of the learning in volved in both these loops are close to the concept of static efficiency ( Ashby , 1 956; Ghem awat and Ricart , 1 993 ; Klei n , 1 977) . To sum marize , learning a t this basic level results i n a con tinuously improving set of capabili ties - special ized and idiosyncratic ways of using resources for given purposes (to solve given problems) . These purposes are functionally well defined and stable over time, although how they are attained may change even d rastica l l y , for example with the emergence of a radical l y new technology ( resource) or a revol utionary new use of an old resource (Pen rose , 1 959) . The driving force for continuous capability improvement is static efficie ncy , and the change agents are individuals and groups in the o rganizatio n , who become the repositories of the resulting capabilities. The learning processes often occur spon taneousl y , although the organizational cli mate and context, and the incentives, power and motivational systems are ultimately responsible for differences in the quality of the process from one organization to another. A lthough they are

1 26

Organizational Learning and Competitive A dvantage ORGANIZATIONAL (FORMATIVE) LOOP CORE CAPABILITIES

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efficie n t , a sense of why capabilit ies exist is lacking, or at least the reasons for their e xistence are seldom challenged at this leve l . This sense develops as they evolve i n to core capabil i ties through yet another learning loop (see Figure 6 . 2 ) . I n t h e n e x t learning process capabil i ties evolve i n to core capabilities, those that differentiate a company strategical l y , fostering beneficial behav­ i ors not observed i n competi tors ( Leonard-Barto n , 1 992) . There are two m ain reference points against which capabili ties can be calibrated to check their potential to become core : the competitive en vironment and the firm 's mission . When faced with its competitive environ me n t , indi viduals and groups i n a firm l earn why some capabi lities have strategic potential (they are rare , valuable , etc . ) - i n other words , they solve the problem of developing distinctive capabilities by using available capabilities i n order to take advantage of opportuni ties i n the environment, to avoid threats , etc. A converse influe nce , from core capabilities to capabilities also exists

Core Capabilities and Information Technology

1 27

through the competitive environ ment , as ( 1 ) core capabilities of different fi rms competing i n a given environment ( i ndustry) define the 'standards of excel lence' in that environ ment, and so they poi nt out what capabilities each firm should develop i n order to compete effectively ; and (2) it is when confronting the competitive environment that a sense of why capabili ties are important is acquired , thus clarifying their role and scope . In addition , capabilities are difficult to im itate in part because of the learning involved in the routinization and capability loops : to develop similar capabili ties, competi tors must go through those learning loops. A firm's mission is also re levant for iden tifying core capabilities. In its con text capabili ties acquire meaning, as some of them emerge as funda­ mental for carrying it out. Capabil i ties fundamental in this sense are candidates to become core . Agai n , there is a converse influence . Core capabilities can enable new missions which , if accepted as such , trigge r new capabilities-to-core capabilities transformations. All these interrelation­ ships give rise to another learning loop linking capabilities and core capabilities; we call it the strategic learning loop ( Figure 6 . 2 ) . Some of the dynamics in this loop are close to what has been called 'renewing a firm's capabil ities' , and described as fundamental for long-term competitive strength ( Haspeslagh and J e miso n , 1 99 1 ) . The strategic learning loop also takes place within the firm 's organiza­ tional ( formative) context, and so it is influenced by the context . Further­ more , its outcome - core capabi lities - in turn reshapes the context itself. At this level capabil ities can be described and understood not only in terms of what they do and how they do i t , but also in terms of why , beyond the static efficiency criterion that dominates the other two learning loops . In a context where it is clear which capabilities are core and why , these loops are given added motivation and direction ( for example , in t he search for new organizational routines or resources) ; we are in the realm of dynamic efficiency. For example , competitive environment changes can render a highly efficient ( i n the static sense) capability worthless because it becomes irrelevant to the competition under the new conditions. Continuously checking the interrelationships among capabi lities, core capabilities, com­ petitive environ men t , the mission of the firm , and organizational context , and responding to the chal lenges that arise as the firm and its environment evolve over time, are the essence of the strategic learning loop. Final l y , it must be noted that i nertia belongs to the very nature of organizational contexts , as a consequence of the learning involved in their contin uous development and updating ( Ki m , 1 993) . Consequently, drastic­ ally changing t he context is difficul t , al though sometimes necessary (for example , to respond to radical environment or m ission sh ift s) . However, drastic changes i n the mission of the firm are not likely to happen , as its evolution also occurs within t he organizational context . Hence , revolution­ ary changes i n the organ izational context or the mission of t he firm require radical learning - becoming aware of what the context is and explicitly stepping out i n order to i n novate i n a radical manner. As core capabil ities

1 28

Organizational Learning and Competitive A dvantage ORGANIZATIONAL (FORMATIVE) CONTEXT

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are components of the organizational context, radical learning m eans learning how to do radicall y new things (in the bottom learning loop of Figure 6 . 2 ) that are important in radically new ways (which implies activity in the top learning loops) ( A rgyris and Schon , 1 978) . Figure 6 . 3 i s a summary of Figure 6 . 2 . We conceptualize the RBVF fram ework as i nvolving three learning loops , which deve lop firm's capabil ­ ities a n d core capabi lities starting with resources, using organizational routines, and taking into account the firm 's competitive environment and its m ission . One basic loop routi n izes work practices using resources; a second one com bines work practices and organizational routines to form capabil ities; and the third gives meaning to capabilities in the context of the firm's competitive environ ment and m issio n , thus identifying core capabili­ ties. The knowledge of which capabilities are both distinctive and funda­ m e ntal to competing in a given ma rket is strategic in nature , and becomes part of the organ izational (formative ) context in which all firm's activities ­ including learning - occur. Those learning loops tend to unfold spontan­ eously, and they depend strongly on the in dividuals' and groups' percep-

Core Capabilities and Information Technology

1 29

tions of the environment, the mission of the finn , and their own learning abi lities. Management actions aim at giving to the learning processes the appropriate direction at a given poi n t i n time ( A rgyris, 1 993) .

The Case of

IT liS

We now turn to ITI I S . By IT we mean all computer and telecommunica­ tions technologies available i n open markets , where firms can acquire the m . IT is an enabling technology , although it m ay also play the role of a constrai n t , in the sense of 'not being enabling enough' (Scott Morton , 1 99 1 ) . I n this section we use the learning model j ust introduced to explain how IT and its applications - information systems - can help develop core capabilities in firms. The topic relates to Strategic I nformation Systems (SI S ) , since these help to shape core capabilities in the companies that develop them . The goal is to show that the ful l cycle , from resources to a firm's core capabili ties, when one of the resources em ployed is IT, follows the pattern suggested by the model . One wel l k nown S I S is ASAP, launched by AHS Corporation ( now Baxter H ealthcare ) . ASAP started as an operational , localized response to a customer n eed (Short and Venkatraman , 1 992) . Because of difficulties in servi ng a hospital effective l y , a manager of a local AHS office started to give prepunched cards to the hospital's purchasing departmen t , so that ordering clerks could t ransfer orders expeditiously through a phone terminal . This loca l , ad hoc solution gradually led to linking more customer hospitals in the same way, eve ntually through PCs. AHS management realized the posit ive im pacts on profits of such an e lectronic link with customers, and allocated resources for its further development ( Ciborra , 1 992, 1 994) . The parallel of this process with the basic structure of Figure 6 . 2 is clear. In itial l y , IT was a resource used in a new work practice to solve a localized client's problem . It was an unsophisticated response to a specific operative problem . Generalizing the solution and making it available to more clients is a clear example of what in the learning model is the development of capabilities. The pOlential characteristic is presen t , and organizational routines used i n the relationships with clients are not only brought into play, but also refined as the second learning loop of the model wou ld predict . Furt hermore , the capability had strategic potenti a l , as it was valuable and difficult to imitate , i n particular by some of the AHS's competitors. I t was valuable because ASAP effectively cont ributed to the positioning of A H S as the 'prime ve ndor' (Short and Ven katraman , 1 992) for hospitals in an environment where ve ry i mportant competitors ( for example Johnson and Johnson ) couldn't play the same game , at least in the short run , because they were organized i n too many decentral ized divisions to respond quickly e nough . Thus, ASAP actively contributed to the competitive positioning of the fi rm by exploiting an environ mental oppor-

1 30

Organizational Learning (lnd Competitive A dvantage

tunity - the so-ca l led ' i ncumbent's ine rtia' ( Lieberman and Montgomery , 1 988) of a maior competi tor. A valuable organizational and competitive posi tioning fit was built i n the syste m , which became a major ingredient in the core capabili ties' arsenal of AHS. Fur thermore , the system evolution led to a shift i n 'distinctive busi ness competence' ( Short and Venkatram a n , 1 992) t h a t helped t o sustain competitive advan tage . A diffe rent i l l ustration of ITIIS impact on core capabilit ies is Mrs . Fields' Cookies ( Richman , 1 987 ) . -1 Mrs. Fields' business started to com mercialize the cookies that Mrs . Fields had prepared at home for years . The first store was under tight personal control of Mrs. Fields herself, who designed not only the cookie recipes, but also a definite approach to sales , promotion , store styl e , and even personnel recruitment and management. As the n umber of stores grew, a computerized information system was developed using com modity technology . The system was a bread-and-butter applica­ tion, that recorded operations data from the stores and reported them to h eadquarters for centralized contro l . Although it allowed the company to run the operation with a remarkably low number of staff workers, i t evolved i n to a system w i t h a fundamentally different k i n d o f m a i n i mpact : i t turned i n to a way to con vey to all stores the 'Mrs. Fields way of doing things', i n dependently of the ( typica lly highly mobi le and not well trained) perso n n e l , and a lso a means by which all personnel could communicate as often as they l i ked and on a person-to-person basis - with Mrs. Fields herself. The case again i l lustrates how work practices - initially developed with the aid of commodity IT - were followed by a period of generaliza­ tion , in which the organ izational routines used by Mrs. Fields in the first stores were 'encapsulated' and transm itted to a few other stores, and finally were spread the ' M rs . Fields way' throughout more than a thousand stores. It also i l l ustrates an interesting and fundamental characteristic of IT/IS . To the extent that the com munications infrastructure and systems put i n place were a ce ntral i ngredient of the company's core capabi lities (beca use of their i mpact i n replicating the Mrs. Fields way throughout the organizatio n ) , they were an i m portant part of the organ izational contex t ; furthermore they contributed i n effectively transmitting the context t o the whole organization . Thus , IT/IS can be i nstrumental not only in shaping up the fi rm's core capabilities, but also in effectively incorporating them i n to the firm 's organ izational context , thereby making them apparent to a l l organ i zational levels and givi n g mean ing t o all learning processes which otherwise would operate more 'in a l i m bo' (Ciborra and Lanzara , 1 990) . Another i nteresting case deals with changing the organizational contex t . IT/IS , consistently w i t h t h e st ructure o f t h e above learning model , can effectively contribute to make the shift actually happen i n organization s . Consider what a Spanish Savings B a n k d i d recently. I n order t o make branch managers responsible for a ll their activities , as dictated by a decen tralization m ove that top management wan ted quickly i mplemented, they used an existing IS that permitted each branch m anager to check , as often as he or she wan ted , his or her performance against objectives.

Core Capabilities and Information Technology

131

Under the appl ication's new use , any branch manager can now check , i n real time , how any other branch i s doing agai nst its obj ectives. Strong competition among branches developed , t hereby contributing to the emergence of a new 'way of doing thi ngs' at the branches, consistent with what management wan ted to implement. The existing IS was a basic one developed for con trol purposes. Once a fun damental shift in the firm's organizational structure was decided upo n , it became central for a completely di ffe rent purpose , similar to t hat with Mrs. Fields, but different in a fundamental aspect : the organizational con text to be communi­ cated was radical l y new. Thus, IT/IS can also play an active role in the difficult task of making the slowly evolving organizational contexts change faster. All the examples show that the proposed organizational learning model is useful for describing how IT/IS can contribute to core capabilities development and thereby become part (even a fundamental one) of the resulting core capabilities of a fir m . Although more field research is needed to support this claim , the model he lps us to understand how IT/IS can contribute effectively to fi rms' learning and competitiveness. This, together with the management actions needed to govern the learning processes, set a basis for consistently analyzing how IT/I S can be used to actually contribute to the unfolding of the learning processes themselves, a perspective rarely employed i n ITIIS analysis but which can significantly enrich i t , as discussed in the fol lowing sectio n. The Role o f IT/IS in the Learning Processes

The most obvious role of ITIIS i n the processes of Figure 6 . 2 is as a component of capabilities. I n fac t , many of the organizational routines employed for coordination purposes in the formation of capabilities are nothing more than information handling routines (for example, the organ­ izational routines needed to implement j ust-in-time (J IT) techniques) . Other IT/IS roles have to do with the learning processes discussed in the preceding section. Below we syste matica ll y e xplore and discuss these roles, and i l l ustrate them with examples . I TiIS as Ingredients of Capabilities Conceivably, ITIIS can be part of capabil ities in the following ways: •

•

In the form of data and information manipulation procedures (IT-based or not) : An y useful procedure learned by the organization is an example: data gathering in transactions, i n formation preparation for control purposes, database design and access, and so o n . As part of well coordinated 'primary value chain activities-information subsystems' ( Porter, 1 985) combinations that are part of a capability : A ny support to primary activities through I S/IT is a good example of what we mean: CAD/CAM systems that help in design activities,

1 32

•

Organizational Learning and Competitive A dvantage production planning and programming systems, systems to support J IT production , and so o n . As part of well coordinated 'support value chain activities-information subsystems' combinations: An y support through IS/IT of support activities of the value chain would be a good example, for i nstance , I S support t o t h e firm's control syste m , all kinds o f Decision Support Systems ( D SS ) used in m anagement activities, and E l ectronic I n forma­ tion Systems (EIS) (see Rockart and de Long, 1 988) . A documented example is that of Phi llips' 66 (Applegate and Osborn , 1 989) , where an EIS was used to enable new capabil ities i n oil trading to develop at lower levels i n the organization than had been the case previously .

IT!I S in the Routinization an d Capability Learning Loops IT/IS can contribute to the routin ization and capab i lity l earning l oops i n several ways , facilitating the learning that takes place and spreading i t to all the i n di vi duals and groups i nvolved . For example it can do the fol lowing: Support the firm's capability creation process Although few I S specifically designed for this purpose seem to exist today, the i dea is not an unfeasible dream ; data gathered during the continuously ongoing process of capabi­ l i ty development can conceivably be stored and m ade available to future p rocesses of the same sort , with the goal of making future learning more effective. 5 Tools such as k nowledge-based procedures and similar artificial intelligence techn iq ues (in particular the so-called case based reasoning, or CB R ) can be used for this purpose , as can other less sophisticated approaches (such as documenting experiences in a way similar to the lab notebooks typical of experimenta l scientific research) . A nother way is through I S that facilitate experimentation with new resources, i n particular with new sources of i n formation (for instance , by making information relevant to the capab i lities' objectives available) and with IT (for example , by allowing the use of new technologies i n pilot proj ects , etc . ) ; see Tyre and Orlikowski ( 1 993) . Still an additional way may come about through the so-called ' e lectronic brainstormi ng' processes (Gallupe and Coope r, 1 993) . Share work practices and facilitate communication within groups and among groups An ' individual ' capability effectively shared among the i ndividuals of a group is often a new capability in itself. At the same time, a good com munication base facilitates the creation of more efficient capabil­ ities in a way directly relevant to the goal of the routinization l earning loop as u n de rstood in this chapter. Also, a way of effectively sharing work practices and capabilities has to do with the train i ng of i n dividuals and groups in order to m ake them effective as users. Finally, the sharing of capabil ities not only contributes to the creation of new ones , but also to the goal o f spreading them i n the organization , thus effectively helping to com m u nicate and share the organizational context to the extent that those capabilities are relevant to it (see below ) . 6 Groupware is a technology

Core Capabilities and Information Technology

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directly relevant for all these purposes , in all its forms. Even straightfor­ ward applications based on simple electronic mail infrastructures may be very effective in facilitating work practice sharing, and in putti ng different capabilities, 'owned' by different i ndividuals or groups even geographically dispersed, to work effective ly together in ways not feasible before . Facilitate reflection, experimentation, and training on routines and work practices Work practices, routines and basic capabi lities must not only be shared and spread in order to become effectively available to a l l individuals and groups in the firm that can benefi t from the m , but they m ust also be understood by them - that is, to be effectivel y learned , it m ust be understood why they work and what the basic fundamentals behind their reasons for being applied are ; the disti nction is close to the difference between the so-cal led operational learn ing and conceptual learning ( K i m , 1 993) . SIS can contribute t o this goa l , b e it by faci litating expe rimentation through the use of simulations, or making expert systems available that permit their users to check their sol utions or intuitions against those inspi red in capabilities a l ready developed, or, more direct ly in training, th rough computer assisted inst ruction (CAl) systems that can even be based on the real systems used i n actual capabilities or routi nes support systems ( for instance , transactional procedures used in clerk training in banks, etc . ) . All k i n d s o f DSS are good examples of the kind o f IS support meant in this subsection . Support and enable capability dijj�lsion It is a m atter of what Boynton ( 1 993) calls 'systems of scope' , that is, system s that help in the 'sharing of global k nowledge' in the firm , that in this sense take advantage of economies of scope . For exampl e , J . c . Pe nney, the large department store firm in the U n ited States has put in place a video link infrastructure that permits the store managers (more than 1 500 across the U nited States) to be actively involved in the purchasing decision-making process without losing the know-how of the experienced central purchasers who used to make all the decisions centrally and then ship the materials they had purchased to the stores for sal e . With the new system in place better decisions can be m ade by tak ing explicitly i nto account the local knowledge that store managers have about their markets, without renouncing the economies of scale inherent i n a cent ral l y organized purchasi ng department and the experience and k nowledge of the central purchasing functio n . Eventually, as store managers learn about purchasing, they can take at least part of the involved responsibility on themselves, thus leading the organizational structure to a new, more dece ntral ized form that is l i kely to be more effective than the old one . In effect the n , not only avai lable and relevant know-how is made accessible to whoever can take advantage of it, but new capabilities develop i n the stores that enable the decentralization of decision making. Another example would be usi ng expert systems to make expertise , knowledge , and know-how available in all relevant pl aces in the

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Organizational Lcarning and Compctitive Advantage

o rgan ization . We believe that seeing a ll these IT/IS-based actions as cont ributing to the learning processes of Figure 6 . 2 gives a completely new perspective on where to look at, understand, and consequently plan , design and implement I S . IT/IS i n the Strategic Loop: Helping Capabilities t o Become Core IT/IS can be instrumental i n making capabi lit ies become core (that is, making them rare , valuable . difficult to imitate , and with no strategically equivalent substitutes ) . Some guidelines to achieve this purpose are as fol lows ( Feeny and I ves . 1 989) : Look out for IT/IS applications that help to makc capabilities rare A t the begi n n i ng of the compute rized reservation systems i n the airline industry, such systems were rare as only a few of the competitors , who took the lead i n deciding to develop the m . had t he m . I n the Savings Banks industry i n Spai n , for quite some time only one offe red twenty-four hour debit card service because its telecommun ications and IT base we re rare , the resu lt of a bold i n vestment decision made well ahead of its competitors. Concentrate on IT/IS applicatiol1s that make capabilities valuable The A S AP-AHS example is a case in poi n t ; that application contributed to the competitive positioning of the firm while exploiting an environmental opportunity (the 'i ncumbent's inertia' of a major competitor) . Similar com m e nts can be made of the Federal Express COSM OS system (Smith, 1 99 1 ) . Several procedures have been proposed for precise ly the identifica­ tion of this type of I T/IS applications (A ndreu et at . , 1 9<)2 ; Gongla et at . , 1 989) . Identify IT/IS contributions that make capabilities difjicult to imitate Core capabilities can be d i Hicult to i mitate for several reasons (in A H S, for i nstance , organizational i mpediments on the competitors' side m ade their responses slow) . The ITII S-based part of core capabilities can also contribute to their inimitability. Reservation systems pioneers i n the airline indust ry couldn't be easily copied simply because at the time those systems were complex - they requi red advanced software tech n iques not available to every player in the i ndustry ( a nd even if they had bee n , they sti l l would have had to be learned, through the two bottom loops in Figure 6 . 2 ) . More rece n t l y , a Savings Ba n k in Spain developed a system that allows one to use its debit cards and A TM network to make ticket rese rvations for theater or opera shows, sporting events. concerts, and so on . For this purpose it developed , in a join vent ure with a computer man ufacture r , a special pu rpose A TM that displays complete theater l ayouts to choose seats and so on . Owning part of the special purpose ATM design , this bank was able to impose delays i n the machine becoming available to competit­ ors , thus making its approach to the entertainment business distribution channel more difficult to i mitate than it would had been othe rwise .

Core Capabilities and Information Technology

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Concentrate on IT/IS applications with no clear strategically equivalent substitutes To the extent that the functionality of applications cannot be achieved by other means, IT contributes to the lack of subst itutio n . One of the competitors of the bank j ust men tioned t ried to achieve the same functionality and also sel l t ickets at its branches, using its telecommunica­ tions network for seat reservation purposes. However, instead of basing it on ATMs, customers must go to the counter, ask the clerk and wait for a layout of the theater to be printed out before being able to make their choices; they must then tell the clerk , who m akes the reservations and the corresponding payment - while other customers wait in line probably to make more mundane banking t ransactions (and while maybe another customer at a different branch just took the tickets in the meantime ) . It is unclear that this bank is competing effective l y ; som e say that its approach is j eopardizing its banking business. I T/IS Supporting and Communicating the Organizational Context We have a l ready men tioned above , in passi ng, that IT/IS can play an active role in the diffusion of knowledge and know-how re levant for capabil ities throughout the organization. For example: I T/IS applications that support the organizational context These are applications that actually shape the organ izational context. A good example is the systems put in pl ace by Mrs. Fields' Cookies, as discussed above. Communicating the organizational context to all levels in the organization The organ izational con text m ust not only be supported in the sense of making it exist, but it also m ust be effectively com m unicated and disseminated to the whole organ ization , so that it works as a t rue context in the sen se of this chapter. We have a l ready m entioned above systems of scope in this regard . The same J . e . Pe nney example described there is relevant here , to the extent that the newly organ ized purchasing function forms part of the (new) organ izational context of the company. There are many other i l l ustrative examples, for i nstance , Bank One , a successful banking organization in the U nited States that has put in place video l i n ks between headquarters and the branches for the purpose, among others , of facilitating the rapid and effective dissemin ation of the bank's competitive approach to all em ployees in the branches, as well as to customers. I n a diffe rent setting, American Crown (Vitale, 1 988) also used IS to make i ts salesforce well aware , i n an operational way , of what is important in its competitive outlook that should consequently be emphas­ ized in the day-to-day operations of the company . Systems that help shift organizational contexts From time t o time i t becomes necessary i n companies to change t he current context , in order to make a new competitive posi tioning effective . IT/IS applications can

1 36

Organizational Learning and Competitive A dvantage

e ffective ly con t ri bute to make the shift happen in the organization. One example is the Spanish Savings Bank me ntioned above. Another example is that of Otis E l evator ( McFarlan and Stoddard , 1 986) , a subsidiary of U n i ted Technologies Corporatio n , which implemented a centralized I S for customer se rvice called Otisline - the information access patterns available under the new system set the basis for signi ficant changes i n both the assignment of responsibili ties and the associated control syste m . 7 Conclusions

We have drawn upon a stream of diffe rent research programs to address in a new way the by now classic problem of how to make a better use of IT i n business organizations . First , the resource-based view of the firm has been i nvoked to indicate that whatever we do using a commodi ty resource such as IT to i ncrease a fi rm's competitiveness, we must aim at t ransforming a standard resource into a fi rm's core capability. Second , a due consideration of the li terature on organizational learning has helped us to build a structured model of this strategic transformation process. We have identi­ fied diffe rent learn ing loops which range from the concreteness of learni ng­ by-doing to t he strategic , and at times radical . reflection on the firm's capabilities, m issio n , and environ mental opportunities. Thi rd , the recent sociological theories of structuration (Giddens, 1 984) have helped us in showing n o t only t he continuous i n te rplay between transformation , learn­ ing, context , but also where these processes take place , and how to exploit their strategic relevance . The studies and cases of Strategic Information Systems have shown how our learn ing-based model can actually be used to recount the spon taneous emergence of strategic applications of IT/IS and discuss the l im i ts of their sustainability . We a re fi rmly convinced that further research can lead to a new approach toward design and development of IT/IS applications geared to the dynamics and varied nature of organi zational learning processes that take p lace within and across the firm's bou ndaries . Notes I Other definitions of the organizational routine concept have been proposed in the l i terature . G rant ( 1 992 ) . for exampl e . defines them as regular, predictable patterns of activity made up of a sequence of coordinated actions by individuals. Furthermore . they are conceived as dynamic entities t hat continuouslv evolve : Collis. for example. describes the m anagerial capability of i m proving and upgrading fi rm efficiency and effectiveness as dynamic routines ( 1 99 1 ) . ( Sec also Kogut and Zander. 1 992: Lado et al . . 1 992 . ) 2 A s discussed i n the fol lowing section . learning. as understood i n this chapter. i s the result of problem solving. I n other words. it is t h rough problem solving that people i n organizations create mental models useful to solve a fam i l y of problems. Furthermore. such models enhance the learning capabil ities of the people and organization involved. t hus potentiating future \earning. ( Sec Munoz-Seca and Riverola. 1 99'+. ) :l A formative context is defined as the set of preexisting i nsti tutional arrangements. cognitive frames and imageries that actors bring and routinely enact in a situation of action

Core Capabilities and Information Technology

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(Ciborra and Lanzara, 1 993) . That groups arc i n tluenccd by thcir organ izational entourage is widely recognized - the parts of an organization's memory that arc relevant for organizational learning are those that constitute active memory - t hat is, what an organization pays attcntion to, how it acts, and what i t remcmbers from its experiences ( K i m , 1 993). 4 The fact that this company has had trouble after its first very successful years is irrelevant for thc argument that fol lows. 5 Thc following would prevent 'situational learning': An individual cncounters a problem, i m provises on thc spot , and moves on to the next task , forgetting to codify the learning for later use ( K i m , 1 993) . 6 This helps t o avoid 'fragmented learning' ( K im . 1 993 ) . which happens whcn knowledge is only retained by individuals, and not the organ ization as such , in which case, loss of the individuals means loss of the Icarning as well - see also note I . 7 This is a direct consequence of the I S being one of the management systems in the finn . in such a way that i t must remain in equi l i brium with the rest of t hem (the control and incentives systems. the organizational structure, etc . ) - breaking the equilibrium by drasticall y changing t he I S is a way of provoking changes in the rest : to t he extent that this is done with the goal of shifting the organizational conte x t . i t is clear that the IS is contributing to that purpose.

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G iddens. A . ( I YS.J) The colIslillllioll IIf .llIcict\" Ol lllille of 1/1(' Ihellrr IIf SlrtlClllrrllioll . Berkeley. C A : U n iversity of California Press. Gongla . P . . Sakamoto. G . . Black-Hoc k . A . Gold\\·cic. P . . Ramos. L. . Sprowls. R.C. and K i m . C K . ( 1 9K9 ) ' S P A R K : A knowledge-based system for identi fying competitive uses of i n formation technology ' . I R M .\'1'1 11'111.1 jllllmal. 2K( .J ) : 62S-6.J6. G rant . R . M . ( 1 <)92 ) CIIIIIClI/pOrlll'." SI/'{/le!;.l· A llall'sis: CIIIICCpIS. Tcchlliqlles. A pplicaliolls. Cambridge . M A : Basil Black\\ e l l . Haspeslagh . P . C ,md Jemison . D . B . ( 1 1)9 I ) ,\;f{/llilgillg A Ullli.liliolls: Crcalillg Vaillc Throllgh Corpo/'{/Ic RellClI·lIl. Oxford : Politv Press. H irshlcifer. J. ( I <)SO) Price Thelll'." alld 11pplicllliollS. Englewood Cliffs. NJ: Prentice H a l l . K i m . D . H . ( 1 9<)3 ) ' The l i n k bet\\'Cen i ndividual a n d organizational icarning·. Sioall Manllge­ IIICIII RCI'iell·. Yi ( I ) : 37-:; 1 J .

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Leonard-Barton . D . ( I <)Y2 ) 'Core cap,lbilities and core rigidities: A paradox in managing new product development' . SI/'{/Iegic M({IlIIgOII('l/1 jOllmlll. Special I ssue . 1 3 : 1 1 1 - 1 26 . Lieberman . M . a n d Montgomer\ . D . ( 1 9KS) 'First mm'er advantages' . Slralegic MlIIlIIgelllenl jOllmlll. <) : .J I -:;K

Lippman . S . and Rume l t . R . ( I <)K2 ) ' U ncertain i m itability: An analysis of interfirm difference in efficiency under competition ' . Bel/ jOllrtlll1 of I:.conoillics. 1 3 : .J I K-43K. McFarlan . F . W . and Stoddard. D . I3 . ( I <)K6 ) ·Otisline · . Harvard Business School Case No. <)­ I K6-30.j .

Montgomery. C A . and Werncrklt. B . ( I '!KK ) · D i l ersil'ication . Ricardian rents. and Tobin's ' q . RA ND jOllmll1 of I:.CIIIIOlllics . I '! ( .J ) : 623-632 .

M ufioz-Seea . B . and Rivcro l a . J . ( I YY.J) 'Tbe i mpflll'cll1ent dynamics: Knowledge and knowledge generation ' . l ESE Technical Note No. 0 -6'!.J--O.J.J. Nelso n . R . R . and Wi nter. S . G ( 1 IJK2 ) A ll 1:. ,·o/l Ifilllllll'." Til ellI'." of I:.COlllllllic Chllllge. Cambridge . M A : Belknap. O rl i kows k i . W . 1 . ( I <)Y2 ) 'The dualitv of teehnologl : Reth ink ing the concept of technology in organizations' . Orgllnizlllilill Scimce . 3( 2 ) : 3YS-.J27 . Penrose . E. ( 1 < ):;<) The TiI(,()I'." III lhe Groll'lh of 1/1(' Fil'lli . London : Basil Blackwe l l . Porter. M . ( I <)K:; ) COlllp1'lili" e A t/l'lllIfIlge. Nell York : Free Prcss. Rich m a n . T. ( I <)S7 ) ·M rs. Ficlds' secret ingredient ' . INC. MllglIZille. Rockart . J. and de Long. D . W . ( I '!SK ) l:..\'eC/lli,·e SIII'I'Or( S,·slellls. Homewood . IL: Dow­ Jones-I rwin . Scott Morton . M . S . (cd . ) ( l lJ9 1 ) TilL' COIPOl'lllioll of Ille 1 1)1)()s: IIIj(Jrlllalioll Tecl/l/Olog" (/lIt! Orgl/llizl/tiolll/l Tral/.\j(JrllIl/lilill Oxfor d : Oxford U nivcrsity Press. Shor t . J . E . and Venbtraman . N. ( I '!<) � ) ' Bel ond business process redesign: Redefining Baxter's business networ k ' . SIIiI/II Ml/l1l/gelllel/l R('I'ie\\·. 3 .J ( I ) : 7-2 1 . S m i t h . F . ( 1 <)<) 1 ) 'The distribution revolut ion : Time H ies at federal express'. in J . Blackburn ( cd . ) . Tillle-BI/sed ( '1I1I1/)('lilion . Burr Ridge : B usiness One I rw i n . Teece . D . . Pisano. G . a n d Shuen . A ( I <)'!O ) ' Firm capabilities. resources a n d the concept o f corporate strategy ' . Consortium ( I n Competi t iveness a n d Cooperation Working Paper N o . 90-<) . U . o f California at Berkeley. Center for Research in Management . Tyrc . M. and Ori ikows k i . W . 1 . ( I <)Y3 ) ' Exploiting opportunities for technological i mprove­ ment in organ ization ' . Sioall Ml/lIl/gmlml !?('\'ie\\·. 35( I ) : 1 3-26 . V i t a l e . M . R . ( I <)KK ) ' A mcrican crown ' . Harvard Business School Case No. <)- 1 Kk--052 . Werne rfe l t . B . ( I '!N .J ) ' A resource-based l ie\\' of t h e firm ' . Slralegic Ml/l'll/gellll'11l jOllrnal. 5 ( 2 ) : 1 7 1 - I KO .

7 Organizational Capability as a Source of Profit David Collis

A com mon theme of many business texts for practitioners is the need to build an effective organization . While the precise type of effectiveness has been variously identified as 'organizational capabil ity' (Stalk et a! . , 1 992 ; U lrich and Lak e , 1 990) , 'corporate renewal' (Beer et a ! . , 1 990) , 'the fifth discipline' (Senge , 1 990) , and 'con tinuous improve ment' (Pascale, 1 990) , the implicit assumption o f these texts i s that possessing some sort of organizational capability can be a source of economic profi t . Even t h e corporate strategy li terature is n o w moving t o embrace this assumption , as demonstrated by its recent identification of intangible firm 'capabilities' (Baldwin and Clark , 1 990 ; B arney , 1 986 ; Teece et a! . , 1 994) as a subset of the ' core competences' (Prahalad and Hamel , 1 990 , 1 994) or 'resources' (Amit and Schoemaker, 1 993 ; B arne y , 1 992 ; Peteraf, 1 993 ; Wernerfelt , 1 984) that are the source of sustai nable competitive advantage ( the strategy term for durable intra-industry differences in pe rformance ) . Such a proposition i s alien t o many economists, not in the least because of economics' historical rel uctance to t reat the firm as a nything but a black box . Traditional l y , economists have not recogn ized organization - the process by which the technical production function is translated into physical output - as an i n dependent source of profit , because it does not enter into either the formulation of the fi rm's maxi mization problem or the determination of equi l ibrium market outcomes (see Vari a n , 1 978, for the standard microeconomic treatmen t ) . As economists have shifted their attention i nside t h e firm in recognition of the deficiencies of their previous t reatment (see , for exampl e , Tirole , 1 988 ; Milgrom a n d Roberts, 1 992) , t h e managerial literature raises for them the fun damental question of whether or not there is theoretical validity to 'organizational capability' ( however defined) as a source of economic profit . I t i s this issue o f theoretical validity that i s addressed in this chapter. The fi rst section draws on the theory of profit and recent treatments of sustainable competitive advantage to identify the necessary conditions for the existence of economic profit. The next section defines organizational capability in a way that fulfills those conditions. The normative implications

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Organizational Learning and Competitive A dvantage

of this analysis are drawn out i n the t hird section . The fourth section concl udes.

A Theory of Profit

Prior to outl i n i ng the con ditions which must hold for profit to exist , it is n ecessary to dispen se with two defi n itional preliminaries. The fi rst is to identify the time period and the range of future states of nature over which supranormal returns m ust extend for them to be considered profits rather than temporary disequi librium quasi-rents. (Or, in the language of busi­ n ess strategy , for h ow long and under what circum stances m ust a competitive advantage endure for it to be termed sustainable?) Clearly , we do not wish to include only those profits that l ast until infinity and are robust e nough to endure in any future state of nature . Conversely, we would not want to include any and all instantaneous quasi-rents. The former is too restrictive as no profits are l i kely to endure in a l l feasible fut ure states of nature , for i nstance , after a nuclear war . The l atter is not sufficiently restrictive and renders the disti nction between profit and quasi­ rent meaningless. Profit i nstead should be of i n termediate robustness and durabi l i t y . T h e definition adopted here , w h i c h captures the two important exogen­ ous dimensions that threaten to dissipate profit streams (unce rtainty and time ) , is that profit exists when supranormal returns can be maintained by competent management against rational competitors i n all states of nature w ith probabi lity > E of occurring. I I ncreasing E , which m ight be on the order of one perce n t , implies a l ess 'sustainable' competi tive advan tage . Second , it is necessary to distinguish profit from rent since both will generate durable supranormal returns. Economics ha s long wrestled with t he attempt to make this d isti nction (se e , for exampl e , the entry on profit in the New Palgra ve, Eatwel l et aI . , 1 987 ) . The distinction m ade here lies i n t h e source of t h e heterogeneity that produces superior economic return . The classical Ricardian theory of ren t , derived from the paradigm of the return to la n d , defined rent as a return to an i nframargi nal factor i n fixed supply ( Ri cardo, 1 95 1 ) . This requi res the factor of production earning rent to be in exogenously fixed suppl y . and to be of heterogeneous quality so t h at an i n framargi nal asset exists . While land clearly meets both t hese criteri a , most factors of production which are essentially homogeneous and in elastic supply do not. I nstead , such fungible factors e arn profits (quasi­ rents) when the return i n their current application is higher than the opportunity cost of their use in other applications ( Marsh al l , 1 920) . This requires product market heterogeneity, because only a differen tiated product market position can generate such a return , and a temporary inelasticity in the supply of the factor. Thus, the distinction is between rents which arise from intri nsical ly heterogeneous factors, and profits

Organizational Capability as a Source of Profit

141

which accrue to hete rogeneous product market positions built from homogeneous factors of productio n . 2 This distinction is important if w e are t o move beyond t h e simple assertion that a fi rm's organ izational capabi lity is, like land , a unique, intri nsically superior resource that earns ren t . Instead , we must be able to demonstrate t hat organizational capabi lity is a source of profi t . Conditions for the Existence of Profit There are five conditions which must hold for a profit to exist . The first (and most studied) condition relates to t he product marke t , and requires that the firm possess a valuable and unique (what I will ca l l singular) product market position (see Porter, 1 980, 1 985 , for a more complete analysis) . More recently, scholars have identified four factor market conditions that threaten either the singular product market position itself, or the stream of profits to be earned from that posi tio n : im itation and substi tution affect the former, appropriation and dissipation the latter (see Barney, 1 992 ; Dierickx and Coo l , 1 989 ; Peteraf, 1 993) . More specifically, the singular product market position must not be subject to imitation by other firms acquiring the equivalent resources from the factor marke t ; the singular product market position must not be able to be substituted by the employment of alternative factors of production ; the stream of profits must not be appropriated by the factors of production themselves; and the ex­ post profits which accrue to the singular product market position must not have been dissipated i n the ex-ante competition to acquire the resources needed to achieve that position . Importantly, both the product and the factor market conditions must hold for a profit to exist (see , for example, Day and Wensley, 1 988). Profits are a flow measure of competi tive differences in the performance of product market act i v i t i e s . But flows a re by definition t ra n s i tory , and so any such differences must be attributable to underlying asset stock asymmetries (asymmetries with respect to the factor market) if they are to be durable . Conversely, any asset stock asymmetries among competitors must t ranslate into differences between competitors i n the performance of product market activities (a singular product market position ) , if they are to generate a flow of profi ts . .1 Product market The first condition for the existence of profit is that a firm occupies a singular product market positio n , so that the return to a factor of production it employs is greater than the return that factor can earn in any other use . Asymmetric product market posi tions resu lt from exploiting phenomena such as scale economies or experience that give rise to nonconvex production functions , or from offering a preferred combination of product characteristics, whether vertically or horizon tally differentiated from competitors . In the corporate strategy literature , these are equivalent to the successful pursuit of the low cost , diffe rentiation and focus strategies, respect ively ( Porter, 1 980, 1 985) . 4

1 42

Organizational Learning a/ld Competitive A dvantage

Imitatio/l Inim itability is the requi rement that an essentially homo­ ge neous factor of production be temporarily in inelastic supply . Most of the previous resea rch on the factor market con ditions for the existe nce of profit have focused here , and six possible const ra ints on im itation have been ident ified - physica l . lega l . time , economic, reputation , and uncertain im itability. These correspond to 'isolating factors' ( Rumelt, 1 984) or 'frict ion forces' (Schoemaker, 1 990) , and function as 'phenomena that limit the ex post equilibrium of rents among individual firms, that make competitive positions stable and defensible' ( Rumel t , 1 984: 367) . Table 7 . 1 lists these si x constrai nts, along with an illust ration of the assets whose supply they can l i m i t , and a comparison with the lists offered by previous authors. � The fi rst two constraints on imitation give rise to re nts. Assets of inh e rently varied quality that are bounded in supply by a physical const rai n t , l i ke natural resources and location, 6 are heteroge neous factors that earn R icardian re nts. Similarly, if legal institutions (for example patents and regu lations) prohibit imitation , the n , barri ng i l l icit behavior (which certainly does occur) , the supply of factors to that particular product market is e ffectively con strained and monopoly rents accrue to the singular product market posi tion . The thi rd cause of nonimitability time compression diseconomies ( D i e rickx and Coo l . 1 989) - bridges rent and profi t . As Dierickx and Cool i l lustrate, growing a beautiful lawn is possi ble , it is j ust that such imitation takes a long time. Thus , while an asset subject to time compression diseconom ies that has to be accumulated i n ternally rather than acquired on a tradable factor marke t , is not ultimately unique , it can be in fixed supply at a poi n t in time . The fourth cause of nonimitabi lit y , and a cause that does give rise to profit from t raded factor inputs, is the economic notion of 'commitment opportunities' (Caves, 1 984 ) , or ' i rreversible in vestments' (Collis, 1 986) . It is derived from the theory of entry barriers that attributes entry deterrence to the sunk cost investments that com mit an incumbent to a market ( Schel ling, 1 960; the summary of theoretical work i n Tirol e , 1 988, and Schmale nsee and Willig, 1 989) . While the e xistence and extent of sunk costs is an empirical matter (Shepherd, 1 984 ; Spence , 1 983 ) , the t heory of contestabi lity has demon­ strated that their existence is critical to the endurance of abnormal returns because it is only sunk costs that deter profit equalizing hit-and-run e nt ry ( Baumol et aI . , 1 982 ) 7 Ironica l ly , it is the commitment to stay in an indust ry because the assets are worthless (or worth less) elsewhere which prevents others enteri ng and so gene rates profit for the incumbent . K A l though t h e analysis o f sunk costs i s typica lly applied to e nt ry deterrence , it is also relevant to the explanation of the inimitability of a position of competitive advant age . The work of Caves and Porter ( 1 977) extends the notion of e n t ry ba rriers to mobility barriers between different strategic groups within a single indust ry . By exploiting different commit-

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Economic

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Resource asymmetries

Public policy

( A ) Markets (S) Experience

Asset specihcity Production economics Sun k cost Transaction costs

I n formation assymctries

( A ) Know-how Organizational culture

Reputation and i mage

( 0 ) Defense

Causal a m higuity

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1 44

Organizational Learning and Competitive A dvantage

ment opportunities, each strategic group creates barriers against im itation by industry incumbents in other groups . This reasoning, extended to a market leader competing against fi rms within its own strategic group , can explain the existence of a susta inable competitive advantage . A firm that builds a si ngular product market position through superior investment relative to a ll competi tors in a valuable i rreversible asset (including other i ncumbents that have a positive level of invest ment in the asse t ) , has made a com mitment to the market which establishes a barrier to imitation by rendering the expected return to duplication of its investment negative . As in the case of entry deterrence , this constrai nt on imitation requires the advantaged fi rm to have made sufficient investment in the relevant irreversible asse t , relative to the market size , to effectively deter imitatio n . I t is, therefore , ultimately t h e l i m i t o n t h e size o f a n y market at a poin t in time tha t deters i m i tation by creating a limit t o t he demand for t he factor of product ion . The two conditions that in turn make investment sun k , or irreversible , a re specialization and durability (Ghemawat , 1 99 1 ) . Specia lization is required because i t is only firm or industry specific assets, such as paper machines that cost several hundred mil lion doll ars and make limited grades of pape r, that represen t a sunk cost . By cont rast , general purpose assets such as buildings, standard machine tools and computers, can be instantan­ eously and costlessly redeployed to other markets. which places us back in the world o f contestability w i t h t he concomitant absence o f profi t . 'I I f an asset h a s only partial liquidation value(s) w h e n used elsewhere i t can , therefore , be a source o f profit a s it provides a positive ( 1 -5) degree of specificity or commitment. This is analogous to the durabil i ty of the asset - the second req uirement for the existence of sunk costs. As E aton and Lipsey ( 1 980) observed, there must be some durability to an asset to distinguish i t from transitory expenditures which are not sunk . While depreciation rates (0) of assets clearly vary (as does s) , provided both are fractional there is some i rreversi bility to investment in an asset and it can function as a barrier to i m itation . The fifth cause of factor supply inelasticity or inimitabi lity is reputation . Examples from the t heory of repeated games demonstrate that in the prese nce of unce rtai nty, a reputation for aggressive retaliatio n by a market leader, for example, can limit competitive investment (Milgrom and Roberts, 1 982) . Therefore this dynamic reputational effect , as opposed to the previous static prepositioning argument , can also explain how firms earn profits. The l ast pote ntial cause of inimitabi l ity , lin certain imitability (or causal ambiguity) , has figured prominently in most t reatments of profit since Lipmann and Rumelt's origi nal discussion of the concept (Barney, 1 985 ; Lipmann and Rume l t , 1 982 ; Reed and DeFil l ippi , 1 990) . The basic premise of causal ambiguity is that the source of the singular product market positions is either impossi ble to disentangle, or impossible to k now how to recreate , and so is impossible to im itate .

Organizational Capability as a Source of Profit

1 45

However, the notion of causal ambiguity as an explanation of durable intra-industry performance is flawed because it implies that no one in the firm itself understands the causes of its success - otherwise , they could trade this information to potential i m itators. Given that the firm itself 'knows not what it does right ', any adaptation undertaken to accom modate change in the external envi ronment is as likely to destroy , as it is to sustain its advan tage . Thus the fi rm's ignorance con tains the seeds of its destruc­ tion . l o Moreover, experi mentation by imitators w i l l ultimately repl icate or surpass the fi rm's advantage i n a Sch umpeterian gale of creative destruc­ tion ( Schumpeter, 1 934) , simply because the firm does not know how to adapt its behavior to this particular experiment. Thus uncertain imitability by itse lf can only be a temporary source of inelastic factor supply - it cannot explain profi t . I f , instead, t h e source of profit is tacit knowl edge ( which cannot be articulated or w ritten dow n , Polanyi , 1 962), then even if it is known that this tacit k nowledge is the source of profi t , it can still be inimitable. Tacit k nowledge , by defi n ition , can only be acq uired through the same process of i nvestment as t he origi nal firm undertook ( to use the common analogy , everyone must practice in order to ride a bike ) . It cannot be instantan­ eously acquired on a traded factor m arket . Thus if investment in the tacit k nowledge itself is specialized and durable , that is, it is irreversible or subject to time compression diseconomies, it can be subj ect to the same constraint on its supply as other i rreversible investments, and so can be a source of profi t . Substitution The second factor market condition for t h e existence of profit is the absence of substitute assets capable of replicating the singular product market position . Instances of substitution abound . For example , a steel firm supplying beer cans, having built a profitable market position immune to imitation by other steel compan ies , wou ld neve rtheless have seen that position substituted by aluminum can man ufacturers , whose investment was u ndeterred by the existing assets of the steel fi rms. The threat of substi tution is omn iprese n t , and suggests that firms should invest in mul tiple assets i f they are to preserve their future profit stream. I t also ident i fies t h e exploitation o f alternative assets a s a strategic prescrip­ tion for disadvan taged fi rms which , by defin ition , cannot simply imitate profitable market positions. How to generate creative insights, such as the introduction of branding to an industry ( Perdue chicke n) or the reconfig­ u ration of an i ndustry's value chain ( Federal Express, Iowa Beef Packers) through conceiving new a lternatives, superior framing, etc . , remains far more problematic (Collis, 1 988 ; Schoemaker, 1 (90) than it is sometimes made to appear ( Prahalad and Ham e l , 1 994) . Appropriation For a fi rm to benefit from a sustainable competitive advan tage , suppliers of the factors of production must not be able to

1 46

Organizational Learning and Competitive A dvantage

appropriate the profit st ream that accrues to its singular product market position . U n fortunate l y . the distribution of any profit stream is the result of a bargaining process w i t h suppliers of all t he factors of production , which has no general o r simple outcome. Profit accrues to the collection of all factors of production as an ongoing system , and can not readily be attributed either to a particular factor of production or to the firm itself. It is, therefore , bargaining that plays a cent ral role i n the distribution of profi t . The outcome of this process depends o n the relative power o f the involved parties ( Raiffa . 1 982) and is affected by a number of variables. including the inherent t radabi lity of the factor (the more tradable a factor, the closer the value it ext racts will be to the opportunity cost in its next best use ) ; the potential for collective action to form exclusionary coalitions with other factors (si nce the bargaining process is essentially a search within the core of the coope rative game . Moul i n . 1 988) ; the credible strategic comm itments that a factor can make ; and other structural characteristics ( noted by Porter. 1 980) . Additiona l l y . bargaining positions are affected by any prior assignment of property rights. Indeed , the bargaining process is really about the assignment of the property rights to the firm's stream of profits, not about payments to factors. and so raises the issue of power re lations i nside the organ ization (Aok i , 1 988; Marx , 1 9(6) . Previous authors have argued that appropriation i s determined b y the i nherent t radability of the asset that generates the singular product market position . Thus nontradabi li t y . stickiness . or immobility feature promin­ ently i n their definition of such asse ts ( or resources) ( Dierickx and Cool , 1 989 ; Ghemawat . 1 99 1 ; G i l be rt . 1 989 ; Peteraf. 1 993) . However, t radabil­ ity is unlikely to ful l y govern appropriation for two reason - col lective bargaining and t ransaction costs - even when the abnormal returns are rents to a hete rogeneous factor of production . First , as Robi n son and Eatwell obse rve . even the classical explanation of ren t : requi res complete equality of bargaining power between the parties. and free competition within each group. If the landowners agreed among themse lves to keep rents up. they could force the workers down to a level of income at which they would work j ust as hard for a smaller return. I f the workers had sufficient reserves to l ast out. they could reduce rents. ( 1 973: R7) Second , the factor market t ransaction by itself does not actually realize the above normal returns. These only arise when the related activities of production . marketing, distribution . and so on, are physically performed on a day-to-day basis. These may wel l involve com plementary or cospecial­ ized assets which have i ndependent claims to the profit stream (Teece , 1 987) . Even i f it does not , and all the other activities are performed by perfectly competi tive factors . such as unskilled labor, the physical process of hiring i ncurs t ransaction costs which creates an asymmetry between existing employees and an othe rwise homogeneous pool of labor. Thus, even t radable factors of production . which are sources of rent ( not profi t ) ,

Organizational Capability as a Source of Profit

1 47

are unlikely to ful l y appropriate in a single factor market transaction the superior product market returns they generate . 1 1 Conversel y , those assets which generate singular product market positions but which can not be traded on factor markets - such as firm­ specific learning (which is valueless outside the firm ) , or collective tacit knowledge (which cannot be traded because it is a supra-individual phenomenon) - do not always generate profits that are appropriable by the firm . Those assets are accumulated internally, not purchased on factor markets , but sti ll vest in i ndividua ls. Thus, each individual possesses some bargaining power by virtue of the t hreat to withdraw from the organ ization and reduce the profit stream . The distribution of profits in this case will again resu lt from bargaining between the firm , whose reservation price is the profit it will lose i f an employee quits, and the employee whose reservation price is the value (presumably low) that his knowledge has elsewhere . The need for continual bargaining with l abor to retain its involvement (and he nce the i ntangible assets) maintains the overall threat of appropriatio n , even though the asset i tself cannot be traded . Nontradabili ty of an i rreversible asset does not there fore guarantee fu ll appropriation of the profit stream by the firm. Rather, the factors of product ion bargain ove r the appropriation of a complex set of current and future profits. The outcome of this is both i ndeterminate and fundamental to maintaining the stream of profits because of the need for the continuing involvement of a l l factors of production in the organizatio n . Dissipation The fourth and last factor market condition for the existence of profit is that the ex-ante competition to invest i n the factor of production , which then becomes in inelastic suppl y , does not dissipate the ex-post profits that accrue to the singular product market posi tio n . Profit dissipation will occur as the result of rational behavior in the backwardly ite rative game of preemption - played either in physical factor markets ( Fudenberg and Tirole , 1 985 ) , or in strategic factor markets, such as market share and those that are not acquired, but accumulated internally (Barney, 1 985 , 1 989 ; D ie rickx and Cool , 1 989) . 1 2 The extreme version of this line of reasoning (Powe l l , 1 992; Reed and DeFi llippi, 1 990) holds t hat anything that is common knowledge can not be a source of profits, because investment wil l occur at the instant the profit from any known potential future singular product market position turns positive . I n this vie w , profits only exist because fi rms either possess proprietary i n formation about sources of profit - or e lse luck , animal spirits, or random deviations from past behavior (whether i n tentional or accidental) led one firm to make the appropriate investment before others, and at least on some occasions, after the instant when future profits would be completely dissipated (Barney, 1 985) . I n such a world , profit would be a return to the entrepreneurial function i n the presence of uncertainty ( K nigh t , 1 92 1 ) , and insights, like bolts of lightning, would strike l ucky firms every so often - al lowing them to create

1 48

Organizatio/lal Learning and Competitive A dvantage

a si ngular, profit generating product market position . Predicting which e nt repreneur would win would be i mpossibl e , and no strategic prescrip­ tions would exist beyond locking onese l f in a darkened room and wai ting for the bolt to strike (except perhaps for con tinuous experimentation , see Waterman , 1 987) . This is a nihi listic view, i n which purposeful and calculative behavior is i rrelevant and all firms can be t reated as random actors. Schoemaker, who has gone furthest along this pat h, argues that even superior ana lytical techniques can only be of temporary value , because once superior modes of analysis become common knowledge , they lose their strategic value (Schoemaker. 1 990) . In place of competitive strategic analysis, Schoemaker therefore proposes only general heuri stics to guide decision making in the uncertain world. However, i t is unnecessary to g o t his far to seek an explanation for the existence of profit , because asset stock asymmetries among firms l i m i t profit dissipation , e v e n i n t h e presence o f common knowledge . The prem ise of this argume n t is that firms are a lways strategically asym metrical because , at every poi nt i n t ime, their accumulated stocks of i rreversible assets are differen t . Thus , the first mover advantage i n the factor market, represen ted by a superior curre nt asset stock level , allows an advantaged firm to appropriate future product m arket profits. Ghemawat, for exampl e , demonstrates that even wi thout e fficiency differ­ e nces condi tional on size , an asymmetric asset stock position cumulates ( G hemawat, 1 990) . Mills also shows how i n the presence of any sunk costs, profits a re not dissipated by the pree mptive investment timing game ( M i l l s , 1 988) . A n y underlying asset stock asymmetry is also bolstered by the presence of dynamic nonconvexities in asset accum ulation . Others have identified this as a constrai n t on i m i tation (Dierickx and Coo l, 1 989 ; Ghemawat , 1 99 1 ) , but i t does not by itself deter imi tation . I t allows the firm with the superior asset stock to i nvest to achieve a si ngular product market posi tion without dissipating the resulting profits. Dynamic nonconvexities arise th rough organizational i nerti a , time compression diseconomies (as docu­ mented, for exampl e , in software development ) , or if there are scale economies in the rate of asset accumulation (either with respect to the asset being accumulated, or with respect to stocks of interconnected or cospe­ cialized assets; Dierickx and Coo l , 1 989) . In such i nstances, a firm's current superior stock of a factor e nsures t ha t it c a n preempt i nvestment by others and still earn profits. Competition in the factor market does not, therefore , always dissipate profits i n the product market, even i n the prese nce of common k nowledge about the source of those profits. It is also for this reason that history matters. The history of a firm acquiri ng physical assets and accumulating organizational learni ng deter­ m i nes the idiosyncratic bundle of i rreversi ble tangible and i ntangible assets it i n herits today (Wernerfe l t , 1 984) . Ll Because of their irreversi bility , these assets function as state variables in a fi rm's dynamic optimization problem (Collis, 1 993) . The i r current leve l . there fore , determines the future path of

Organizational Capability as a Source of Profit

1 49

investment. As a consequence, they constitut e a valuable obj ect for strategic analysis. Each firm can , and should, rationally analyze the pattern of investment necessary to exploit its differentiated endowment of specia­ lized , durable assets. Thus, irreversible assets do indeed make a firm's evolution 'path dependent' ( A rthur et a I . , 1 987; Dosi et aI . , 1 990) . 1 4 This analysis suggests a world o f i n finite regress. A firm will capture profits from product market posi tion A because it had a superior stock of durable specialized asset Y at an earlier date. It had that because in the past , it invested to capture profits from a product market position B because it had a superior stock of durabl e , specialized asset Z . . . until, because at the begi nning of time the firm had an advantage in durable specialized asset X, i t is now what it is, and its future (which will include a series of profit generating product market positions) is what it is ordained to be . The difference i n starting posi tions determines a firm's optimal course for ever, and al lows it to successively exploit a series of profit generating market posi tions. This is an overly deterministic view of the world given uncertainty and bounded rationality . Acciden ts of fate dictate that the particular path a firm fol lows is never completely prescribed the moment it comes into being. While i t is true that a first mover's superior stock of valuable irreversible assets allows i t to pursue a reasonably wide range of options that will sustain i ts advantage across a broad range of future states of nature , when either the dispersion of uncertainty (the range of future states of nature) or bounded rationality (the range of possible options) becomes large relative to the size of the asset stock advantage , rational analysis cannot be guaranteed to generate a single evolutionary pat h. Summary The theory of profit described a bove accou nts for the existence of profit when a firm possesses a singular product market position that is imm une to the factor market threats of imitatio n , substitutio n , appropriation and dissipatio n . This is achieved when a firm has a superior investment relative to competitors and the current economic capaci ty of the market in a valuable, speci al ized , durable and prefe rably non tradable asse t . Organizational Capability

The list of i rreversible assets, identified as being potential sources of profits, was divided into physical and i n tangible (or invisible , Itam i , 1 987) assets in Table 7 . 1 . Organizational capabi lity is one of these intangible assets. I t is defined here to be the firm's dynamic routines that enable it to generate conti nuous improvement i n the e fficiency or e ffectiveness of its performance of product market activities (see also Teece et aI . , 1 994) . I t is the firm's collective tacit knowledge of how to i nitiate or respond to change , that is

1 50

Organizational Learning and Competitive A dvantage

built into the organization's processes. procedures and systems, and that is e m bedded i n modes of behavior, informal networks and personal relation­ ships ( for a more detai led account of i n ternal corporate decision making see Cyert and Ma rch , 1 963 ; Simon , 1 95 7 ) . Important l y , such an organizational capabi lity, like a n y tacit ski l l , is not i nstantaneously acquired on a tradable factor market (Oierickx and Cool , 1 989) . Rather, it is acqui red over ye ars of i nvestment ( i n computer and telephone systems, HRM policies, etc . ) , as well as through the accumu­ lation of knowledge gleaned in the performance of day-to-day activities by all the membe rs of the firm . Such an idiosyncratic capability of an organization i n volves the ability to optimally manage the transform ation of i nputs into outputs over time. For this reason , it is the ' m an age rial" factor of production that is needed to alter the mix of other factor i nputs , either on its own initiative or i n response to e xogenous change . In fact, organ izational capability becomes Marshall's fourth factor of production ( M arshal l , 1 920) ; the 'en trepreneurial ' factor in the Schumpeterian dynamic competitive economy ( Schumpeter, 1 934: 1 43 ) ; the mobilizing of resources to exploit an opportunity (Stevenson , 1 985) ; or as Lipmann and Rumelt model i t , the production of new production functions ( Lipmann and Rumelt , 1 982 ; see also N elson and Winter, 1 982) . To demonstrate that organ izational capability defined this way can be a source of profit , rather than merely an asset that is a unique capability that earns a re n t , we must show i t can meet the five conditions for the existence of profit . The product market condition is that organizational capability be valuabl e , that i s , be able to create a singular product market position . To achieve this, organizational capability cannot simply be represented by any unique 'culture ' (of i n formality. collegiality or whatever) . Nor are organ­ izational capabilities that produce static optimality ( for example the appropriate plant layout or the optimal marketing mix) the source of profi t , si nce they can be replicated in a finite period of time (although the e xistence of the corresponding x-inefficiency over long periods of time has often been observed , Leibenste i n . 1 966) . Rather the capabil i ty m ust be dynamic, al lowing the organi zation to continuously improve the pe rform­ ance of its product market activities. continually advancing the production frontier ( Ne lson and Winter . 1 982 ) . Consider, for exampl e , the organizational capabi lity which yielded a fi rm a unique product feature today, such as a new special effect button on a VCR. Such static product market phenomena can be relatively costlessly copied , as the rapid reve rse engineering skills of many fi rms demonstrate. Instead, the valuable capability is the accumulated know-how , embedded in the firm's routines. which a l lows the company to introduce the next product feature more quickly or cheaply than any competitor (as, for exampl e , Sharp has done i n liquid crystal displays ( LCOs ; Col l is, 1 993) . It i s , therefore , such dynamic routines which are the true source of value

Organizational Capability as a Source of Profit

151

( Dosi et aI . , 1 990) , not the static routines, because they enable the firm to possess a singular product market position at every point in time. The inimitability of organ izational capability is not achieved because organizational capabil i ty is causall y ambiguous ( a lthough previous treat­ ments would seem to disagree) . A lthough organizational capability involves supra-in di vidual ' tacit ' k nowledge , and is difficul t for outsiders to observe because of the complexity and detail of the systems, processes, procedures, and so o n , from which it is constructed ( Barney's ( 1 992) socially complex phenomeno n ) , i t must ultimately be 'known' if it is to be sustained in a dynamic environment. As stated earlier, observability does not make organizational capability imitable . Managers cannot move from one firm to another and replicate what they did i n their previous organizatio n . No one i ndividual can know all there is to know about the organization , not only because of bounded rationality, but also because organizational capital is ultimately both tacit and supra-individual ( i n Teece's ( 1982: 44) words 'organ izational memory is not reducible to i ndividual memory ' . Contracts outlining terms and conditions of employment, for example, which a manager might be able to repl icate , only specify the j ob content in general terms. An individual's exact mode of behavior, which lies within a 'zone of indifference' ( Leibenstein , 1 966) , and how he or she i nteracts with others , is critical to the effective function ing of the organ ization . Thus , contracts alone cannot capture all the essential features of an i ndividual's behavior. The intangible organizational capability of a whole unit can not be partially parceled up, sol d , or reproduced elsewhere ( 'the transfer of productive expertise requires the t ransfer of organizational as well as i ndividual k nowledge' ; Teece , 1 982 : 45) . Another organ ization can replicate i t only by going through a process of i nvestment identical to the one undertaken by the original organization . It is this requirement for i m itators to go through a comparable invest­ ment process in order to acquire the desired tacit k nowledge that ultimately leads to i n imitability. First , because accumulating tacit know­ ledge is often subject to time compression diseconomies because attempts to speed up the arrival of a capability built out of network relationships will be met by decreasing return s . Compressing a set of personal experiences, for example, i ncreases stress and w i l l be detrimen tal to the sequential learning process that is an i ntegral part of organizational capability. Second , because when i nvestment i n organ izational capability is i rrever­ sibl e , it can function as a credible deterrent to imitatio n . T o b e i rreversible , organizational capability m ust b e a durable and specialized asse t . I t is durable simply because the network of relationships on which it is based decays slowly . It is specialized because it involves i nvestment in fi rm-specific human capital by every i ndividual in the organization , each of whom has developed a unique expertise by virtue of mem bership in the organizatio n . They have over time learned not only the requisite functional skills - t he optimal way to perform the task - but also

1 52

Organizational Learning (lnd Competitive A dvantage

the inappropriate met hods ( which will be avoided in all future reconfigur­ ations) and, most im portan t , the ability to interact effectively with, and correctl y i n terpret the behavior of the rest of the organization in pursuit of a particular strategy (G hemawat and Cost, 1 993 ) . Because these skil ls are specific to the firm and its strategy. they are valued less if deployed another way . H owever, the requirement that organizational capability be specialized 1 5 also helps refi ne its definition. Organizational capability must be rooted in and developed for the i ndustry in which it is applied . It cannot merely be a fungible general ma nagement sk i l l . Such a gen eric capability can be i nstan taneously and costlessly redeployed to other industries under the t h reat of i m i tation and so , as outlined earlier, cannot function as a deterrent to i m itation . I n deed . most general management capabi lities are essentially static optimization skil ls, such as accounting and tight control of working capital , and therefore are not the all important dynamic adj ust­ ment skills tailored to a particular industry . Fi rms with an organizational capabili ty m ust h ave built it from industry specific knowledge , mastering the detail of, and installing the dynamic routi nes unique to con tinuous i mprove ment in that industry alone . I f, Indeed , t o b e t ruly i rreve rsi ble , organ izational capability must also be speciali zed to a part icular strategy. If organizational capability allows a fi rm to i m prove perfo rmance in multiple directions, the threat of competit­ ive im i tation of its current singular product market position could be met by developing an alternative product market position . Only if the organiza­ tional capability is committed to building a specific product market position , such as the low cost posi tion . is it irreversible and so an effective deterrent to i m i tation . Im portantl y , this suggests that to meet the condition of i nimitability , the valuable dynamic routines captured in organ izational capability must be capable of only loca lly advancing the production frontier (Nelson and Winter, 1 982 ) . Organizational capability must not al low firms to switch costlessly from one location on the frontier to another, or to globally advance t he production frontier. I f it did so, its very flexibility would lead to its dem ise as a sou rce of profi t . T h e threat of dissipation is overcome not only because of asset stock asymmetries, but also because an organizational capability is often en hanced as i t cumulates experience at im proving the firm's static rou­ tines. 17 As a consequence , any initial competitive asymmetry in its level is re info rced by increasing returns to the process of change from asset mass economies and intercon nectedness . These nonconvexities provide strong reasons why a firm that has a superior organizational capability can rationally expect to make the necessary investments to sustain that capabili ty while avoiding the t h reat of profit dissipation . Appropriation by another factor of production is, however , a real threat to the realization of profit from organizational capability. As was described earlier, intangible assets, slich as organization capability, are vulne rable to

Organizational Capability as a Source of Profit

1 53

appropriation by the i ndividuals in whom t he collective skills reside . 1 1> Two factors, however, do limit the t hreat of appropriation of profits that are the result of organ izational capability. The first is the numbe r of individuals i nvolved, and the second is the degree of tacitness to the organizational capability. The lim it to appropriation as the number of individuals i nvolved in organizational capability i ncreases is relatively straightforward . If the capability is specific to a single individua l , it is easy for him or her to appropriate profits. The large sums paid to CEOs such as M ichael Eisner at Disney, or David Geffen of Geffen Records and then MCA , can be attributed to their success at appropriating part of the profits that accrue to their abi lities to build and sustain unique capabilities in the organ izations they run. The fact that these i ndividuals do not appropriate all of the profits they generate confirms that t radability of a profit generating asset does not guarantee ful l appropri ation of its profits. It is also possi ble for a sma l l team to appropriate profits from its organ izational capability. A group of senior executives or a research team can either covertly or explicitly threaten to trade their skills on the factor market if they do not ful l y appropriate the returns their col lective capabi lity generates. However, as the numbe r of individuals involved increases, the like l ihood that bargaining among them will result in their ful l y appropriating the profit stream decreases. This occurs because the size of the 'core' will decrease as subgroups exist that can stil l generate most of the profit (Mou l i n , 1 988) . Similarly, the more tacit the collective capability, the less like ly it is that labor w ill appropriate t he profi t . Fi rst , the ability of employees to trade their capability on factor markets is restricted by the market fai lure surrou nding all i nformation , but tacit knowledge in particular. Second, the tacit ness of the col lective knowledge restricts cooperative bargaining. K nowing individual reservation prices is impossible because individual con tributions cannot be dise n tangled . Moreover , because the capability vests in the col lective organ izatio n , trading or threaten i ng to trade the skill on the factor market must i nvolve the willing consen t of the whole organ izatio n . The irony i s , o f course , that t h e more tacit t h e o rganization a l capability and the greater the numbe r of i ndividuals involved (which makes both appropriation and i m itation l ess likely and profits more secure) , the closer such capability comes to being causall y ambiguous. I ts causal ambiguity, in turn , constitutes the seeds of its own dest ruction . However, it should be clear that within broad bounds the profits to an observable but inimitable organizational capability w i l l not be ful ly appropriated by the membe rs of the organization i n which the unique skill rest s. The fi nal factor market threat to the extraction of profit from organiza­ tion capability is the case of substitution , where new strategies i nvalidate old routines. The best example of this is perhaps Ford and General Motors (see also Henderson and Clark, 1 990) . In the early 1 920s , Ford built an

1 54

Organizational Learning and Competitive A dvantage

i nvulnerable market position around the production of a low cost automo­ bile - the Model T. Th is was achieved not only by enormous preemptive physical i nvestments - the al most completely vertically integrated River Rouge plant - but a lso by building an organization capable of con tinual cost reduction. Estimates of the experience curve between 1 909 and 1 923 show a 15 percent reduction i n price for each doubling of accumulated output , while direct labor hours followed an 80 percent experience curve between 1 9 1 3 and 1 92 1 ( Abernathy and Way ne , 1 974) . The capability to first build such a unique organizatio n, and then to relentlessly improve i ts cost performance , was certainly a source of profit . I t was, however, completely invalidated by General Motors' i ntroduction under A lfred Sloan of product differenti atio n . The physical assets, and equa lly , if not more i mportant , the organ izational capability at Ford , was at a stroke substituted by the need to compete over product developmen t . The difficulty Ford had in adapting its organization to the new era was i l lustrated by the nearly twelve month shutdown at River Rouge to retool in 1 927, and by the permanent loss of market leadership ( from a market share peak over 50 percen t in the early 1 920s to less than 30 percen t by the 1 930s ) . Having built an inimi table organization capable of continual cost reduction , Ford's profi t-generating asset was substituted by General Motors' strategy which required a completely different sort of organiza­ tional capability. This sort of substitution is almost in evitable , and its threat is omnipre­ sen t . I n deed, because organ izational capability can only generate profit to the extent that it is com mi tted to a single strategy , substi tution is al most u navoidabl e . The only way to overcome it would be to build an organiza­ tion capable not only of continuous improveme nt in a single direction , but also adaptable enough to be able to proactively change the direction of i mprovement as well . While this sort of organizational readaptation is observed (Bartlett and G hosha l , 1 989 ; Collis, 1 99 1 ) , i t is relativel y rare , far more demanding, and u l timatel y , as argued earlier, far more likely to invite i m i tation of the original capability. The application of t he t heory of profit laid out earlier demonstrates, therefore , that a superior specialized organizational capabil i ty that gener­ ates continuous i mprovement in the pe rformance of the activities n eeded to support a particular product market position ( i n the dynamic routines that continually advance the local production frontier) can be a source of profit . Implications

The fi rst implication of recognizing organizational capability as a source of profit is that we should have empirical observations of its occurrence . Practical e xamples of organizational capability i n cl ude the abil ity to continually reduce deve lopment cycles for new products ( Hayes et a I . , 1 988) or the more recen t broader approach of 'competing i n time' (Stalk

Organizational Capability as a Source of Profit

1 55

and Hout , 1 990) ; the superior skill in transferring learning from one part of the organization to another (Clark , 1 989) ; superior research and develop­ ment capability ( Henderson and Cockburn , 1 994 ) ; better coordination of multinational activities (Bartlett and Ghoshal , 1 989) ; and more effective management of change ( Kanter, 1 983) . Each of these capabilities enables fi rms with the same or i n fe rior i nputs of capital and l abor to simply outperform their competitors (see the examples i n the steel , automobile and other industries q uoted i n Baldwin and Clark, 1 990) . Perhaps t he best examples have been demonstrated in the tobacco and ready-to-eat cereals i ndustries (Thomas, 1 989a , 1 989b ) , where t he re have been found to be pronounced stable asymmetries in the competence of firms to l aunch new brands. These asym metries have l asted for forty to eighty years and, at least in the case of tobacco, can be shown to be i ndependent of size . Such capabilities have been the source of durable intra-industry differences in performance - notably for Kelloggs and Philip Morris - and so confi rm the existence of durable differential corporate capabilities (in this case of i nitiating and i mproving brand positioning) . Analyticall y , t he theory provides a rationale for treating i nternal organization not merely as the function of an administrative h ierarchy, but as a source of profit i n its own right . I n this it recalls the initial work of Andrews on corporate strategy ( Andrews, 1 97 1 ) . H e outlined the internal and external factors that give rise to a profit-earning 'distinctive com­ petence ' . While much research has since been conducted on the external product m arket conditions, i t is only recently - under the guise of the 'resource-based' view of t he firm - that the internal factor market conditions have been examined. The latter approach highlights the importance of organization and j ustifies both the search for normative prescriptions for building a superior organizational capability, and aca­ demic research i n to the extent, limits and sources of such a capability. More immediately , the theory challe nges the notion that organ ization structure is con tingent on the choice of strategy (Chandler, 1 960) . Rather, organization structure and managerial processes may themselves constitute a viable strategy . If organization a l capability can be an i ndependent source of profit , one strategy is to build a unique organization capable of continuous i mprovement in a particular direction . I ndeed in many busi­ nesses , such as high-technology disk drives, the organizational capability almost becomes the strategy (Wheelwrigh t , 1 994 ) . Succeeding in an environment where the product generations change every few years cannot be achieved without the organ izational capability to continually i nnovate and bring products to m arket rapid l y . In such i ndustries, this capability , rather than positioning the product correctly or controlling a channel of distribution , may well become the source of profit (Collis, 1 994) . A t this stage , the normative prescriptions suggested by the t heory must be derived from the recognition that organizational capability is a complex social phenomenon , that the skills must be industry specific rather than generic, and that continua l i nvestment in the capability is required .

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Organizational Lcarning and Compctitivc A dvantagc

However, we do not real ly know yet how to develop a valuable organiza­ tional capability. A complex web of organ izational phenome na , from the formal organ ization st ructure and management information systems to incentive schemes and personnel evaluation practices, affect behavior inside the organ ization . These phenomena occur in ways that defy our current analytic abilit ies ( a lthough organizational economics is certainly advanci ng our knowledge of the phenome n a ; Barney and Ouch i , 1 988; Mi lgrom and Robert s , 1 9(2 ) . Thus we cannot detail the steps necessary or the organ izational arrangements requi red to create an effective organiza­ tional capability. At a more macro leve l , however, it is possible to speculate on how to build organ izational capability , without being specific as to which organiza­ tional design parameters to alter in order to achieve i t . Organ izational capability i nvolves contin uous improvement. To be able to institutionalize this requi res an organ ization capable of three tasks which map closely into N e l so n and Winter's description of evolution - search , evaluate/choose , routin ize procedures ( N elson and Winter, 1 982) and the TOM approach of plan/do/act/check (Jura n , 1 988 ; see also Garvi n , 1 993) . The first is the abi lity to i n novate; change is essential for improvemen t ; mechan istic repetition of behavior cannot produce im provement beyond the immediate learning effect . Adam Smith's pin factory would rapidly have reached the l i m its of performa nce without some change to the division of labor (Smith , 1 97(1 1 776) . I ndeed , dividing up the task into smaller elements is itself an organizational in novation . The Boston Consulting G roup's experience curve , for example ( Henderso n , 1 972 ) , always recognized the need for explicit managerial inte rvention to change the production process - it was never conceived of as an automatic effect , independent of proactive managerial i n itiative. Thus the first task is to build the insight and creativity that generates new ideas, and an organ izational ethos and incentive scheme that encourages and rewards innovation . The second critical factor in building organizational capability is the ability to learn . If changes are made but the organization fai ls to understand whether the change was beneficial or detrimental , or fails to adopt the superior approach , change , even good change , will be wasted . Thus i ndividuals a n d groups must have sufficient awareness of their environ m e n t , goals and performance to be able to learn the consequences of their actions and so adopt or rej ect whatever i nnovations they make ( Senge, 1 990) . The third factor is the abi lity to transfer learning and information within the organization. While individual learning alone might be of temporary value , most dynamic routines are group-ce ntered. As such , whatever is learned , wherever it is learned , must be transferred to other appropri ate personnel and institutional ized if the organ ization as a whole is to con tinually improve its performance (Walsh and U ngso n , 1 99 1 ) . Organ izational processes, systems and procedures should therefore be set to accom modate these three tasks - in novation , learning, and informa-

Organizational Capability as a Source of Profit

1 57

tion transfer - while at the same time e nsuring that the static administrative routines needed to carry out the curren t activities of the organization are adeq uatel y performed . What levels to set for each of the many organiza­ tional parameters that affect such behaviors remains the unresolved issue , although it is their i mpact on the allocation of decision rights, reward systems, and the d istribution of i nformation within the firm that will ultimately determine t he i r effect (Jensen , 1 983) . As a last and even more speculative suggestion , it might be that only continual tension or conflict ( Pascale, 1 990) within the organization can build the requi red dynamic routines. Continually stretching individuals ( Itam i , 1 987) by underi nvesting i n their numbe rs and the precise specifica­ tion of their tasks , while overinvesting in their firm-specific human capital might maintain the appropriate pressure to perform , while providing the training that en ables them to respond effective ly ( Prahalad and Hamel , 1 994) . Conclusions

This chapter laid out a theory of profit and demonstrated that organization­ al capabi lity, defined as the dynamic routines that produce continual improvement i n the efficiency or effectiveness of t he performance of product market activities, could be an i ndependent source of profi t . Thus its primary con tribution is to the recent work on the resource-based view of the firm in general (Barney, 1 992; Peteraf, 1 993) , and to the research on organizational capability or dynamic capabilities, in particular (Teece et a! . , 1 994) . B y adding to long-establ ished notions of distinctive competence , industrial organization's treatment of commitment and the importance of factor market asym metries as explicators of durable intra-industry differ­ ences in performance , this analysis identifies the characteristics of organ­ izational assets which can generate profits . More genera lly , the chapter represents an integration of industrial econom ics' treatment of com mitment (Ghemawat, 1 99 1 ) with the emerg­ ing strategy lite rature on the resource-based view of the firm . The two approaches are consistent with one another, because u l timately they requi re similar conditions for the existe nce of profi t . I n developing t h e argument that organizational capability, appropriately defined, can be a source of profi t , a numbe r of important precepts were also discussed: •

•

Defi ning economic profit as existing when supranormal returns could be maintained in all states of nature with some specified probabi lity of occurring. Disti nguishing profit from ren t by defining rent as the inframargi nal return to an i n trinsically heterogeneous factor of production , and profit as a return to heteroge neous product market position built from investment in fungible factors of production .

1 58 •

•

•

•

Organizational Learning and Competitive A dvantage Establishing the five cond itions for the existence of profit - that a singular product market position is invulnerable to the factor market thre ats of imi tation , dissipation , appropriation and substitution . Disproving causal ambiguity as a durable source of profit i n the presence of any exogenous change . Observi ng that i rreversi ble assets are the fundamental determinants of strategic position and that . as a consequence , each firm 's evolution is path dependent (hi story matters ) , and normative strategic anal ysis is valuabl e . Suggesting that bargaining over the appropriation of profits is integral to the distribution of any profit stream , regardless of the source of those profits.

This chapter also serves a normative purpose by articulating the set of conditions that determine whether a particular organ izational capabil i ty can create a sustainable competitive advantage . If some fi rms are able to build an organ ization that can locally advance the production frontier more rapidly than competitors, they will indeed earn profits for a period of time. B y suggesti ng that such a capability m ust be i ndustry speci fic , and com m itted to the pursuit of one strategy, this chapter contributes to n ormative prescriptions for building organizational capabil i ty . The next critical step should be to anal yze the specific organ izational structures and policies that e n able firms to build the o rganizational capabilities that both economic principles and the strategic perspective now recognize as a source of profi t . Notes This chapter benefits enormously from many discussions with Pankaj G hemawat , Cynt h i a Montgomery and D a v i d Yoffie. Support from the D ivision of Research at the Harvard Graduate School of Business Administration is also acknowledged. I Barney's equil ibrium notion of sustainability. explicitly excludes the Schumpeterian shocks that overturn competitive advantage ( Barney . 1 99 1 ) . 2 Efficiency rents can t herefore . in principa l . b e distinguished from monopoly profits ( Peteraf. 1 993 ) . 3 This analysis i ndicates that debate over the relative importance o f resources and activities as determinan ts of competitive position is unnecessary ( Porter. 1 99 1 ) . There is an essential duality between 'activity' tlows and ' resource' stocks - one is the income statement. the other the balance sheet ( Dierickx and Coo l . 1 9�9 ) . The flows involved in the performance of activities directly change asset stock levels as they consume and/or generate resources. Advertising expenditures. for instance . build brand loyalty . Conversely. it is the current stock of resources that determines the necessary level of activity by a firm in each period. The appropriate amount of advertising expenditure. for any finn . is determined by its stock of brand loya l t y . Th us. a firm's profit can be attributed e i t her to its lower current advertising expenditures or to its superior brand loyalty. 4 Restrictions on the relationship between the shapes of t h e cost and demand functions are required for profitable product market positions to exist. Not a l l i ndustries w i l l support durable intra-industry differences in finn performance . and some i ndustries w i l l support m ul tiple profitable positions for firms pursuing different strategies. 5 An important distinction that previous authors have confounded has to be made between

Organizational Capability as a Source of Profit

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the constraints themselves and the related assets. While the two are clearly related, they are conceptually distinct. h Location in attribute space is conceptually similar because only one firm can h i re Michael Jackson for advertising purposes and benefit from that. supposedl y superior, positioning. 7 Scale economies per se, for example, are not sufficient to deter entry and sustain profits, as Stigler observed years ago i n his critique of Bain's original conception of entry barriers ( Ba i n , 1 ')56; Stigler, I ,)hl' ) . S i milarly, Dierickx and Cool's ( 1 ')8')) notion of asset mass economics and interconnectedness do not deter i m i tation unless the incumbent's investment is sun k . I' Note t hat there must b e e x i t barriers in an industry if i t i s t o support persistent interfirm differences i n performance . As Eaton and Lipsey ( 1 ')1'0) observed, all entry barriers are exit barriers. ') The important investments in airline computerized reservations systems, for instance (which t he recent sale prices of several h undred m i l lion dollars show have generated large profits), are not the computers, but the idiosyncratic software programs developed over t h i rty years and the external l i n k ages to the travel agent network (Copeland and McKenney , 1 ')81') . Conversely, industries lack ing idiosyncratic fixed assets, such a s dressmaking o r wooden table manufacturing, will be fragmented and characterized by normal economic rates of return and a high turnover of companies (Collis and Ghemawa t . 1 ')')4 ) . 10 Consider, for example, investment fund managemen t . A t a n y point i n t i m e o n e fund has the best twelve-month investment record. I ts advantage is certainly 'uncertainly i m i table' because its reason for success is unknown even to the fund manager, and sure enough i n the next twelve months i t loses its superior performance record. I I In addition , given any uncertainty, capitalizing an unpredictable stream of future returns in a single factor market transaction is unlikely to result in the exact appropria tion of those returns. 12 Seemingly irrational behavior also leads to profit dissipation. Often this happens when finns underestimate the investment costs necessary to attain a desirable product market position. The most cited example is Philip Morris, which invested several b i l l ion doll ars ( i ncluding operating losses) to move Miller Brewing from seventh to second in the US beer i ndustry. A l t hough now profitable, M i l ler never overtook the leader A nheuser-Busch and is u n l i kely ever to recoup its investment. i3 I t is t hese resources which underlie the notion of ' distinctive competence' ( An drews, 1 ')7 1 ) and its recently rediscovered form, ' core competence' ( Prahalad and Hamel , 1 ')')4) . 1 4 This i s a n essent i a l l y Chandlerian view of t h e i m portance o f first-mover investments i n industries characterized by substantial com mitment opportunities (Chandler, I ')')( ) ) . H istori­ cally, because firms could not develop durable advantages if there were no specialized durable and valuable assets to invest i n , the only examples of sustainable superior performance until the mid-nineteenth century were those based on natural resources or government-regulated monopolies, for example, Hudson's Bay Compan y , East I ndia Company. Chandler docu­ mented the changes that led to the development of fixed assets that were product specific and sensitive to scalc economies, rather than general purpose and scale insensitive. Also, mass distribution al lowed for the creation of consumer brand franchises (Chandler, 1 ')77). As a consequence, the establishment of the firms that remain today the pillars of corporate America became feasible. By making initial investments in the irreversible assets of their i n dustries, first movers like General Electric, Exxon and du Pont established durable profit­ generating positions t h at competent managements h ave sustained for about a century t h rough continued investment in the valuable irreversible assets ( Chandler, 1 ')')0). 15 Even with respect to time compression diseconomies, rather than irreversibility, as the source of i n i m i tability , basic organizational requirements for cross-functional consistency support the specialization tendency by suggesting that strategic choices and t heir requisite organizational capabilities are mutually exclusive. As Caves states, ' a firm's managerial cadre may hope to beat its median-ability competition along one dimension , but not along every dimension' ( 1 ')1'4: ')). I h This analysis accords with Montgomery and Wernerfelt's ( 1 ')1'1') findings on the value

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Organizational Learning and Competitive A dvantage

and direction of successful diversification strategies. Narro\\' industry skills earned h i gher ren ts i n diversification t h a n general management skills. 1 7 To t h e extent that organizational capability is both sel f-replicating and responsible for m utations. it can be interpreted as the gene in a finn's evolution. IH Merely observing workers earning rents docs not. however. imply t h at they possess an organizational capabil i t y . A valuable organizational capabil i t y probably does not reside in airline mechanics or newspaper printers. Thei r h igh \\ ages more likely result from having appropriated the profits accruing to the ncar monopoly positions airlines and newspapers created by preemptive investment i n particular locations ( m ajor hub cities. and one­ newspaper cities. respectively ) .

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Part 3 STRATE GIC CHANGE AND O RGANI ZATI ONAL LEARNING The previous parts have shown that learning processes can lead to k nowledge and capabi li ties that provide competitive advantage for organ­ izations. This part focuses on t he practical issues o f organizational change and the implem entation of new strategies. To begi n , Beer, Eisenstat and Biggadike (Chapter 8) introduce a new method for implementing strategic change , called 'st rategic human resources management' ( S H R M ) , and describe an i ntensive action research proj ect in which S H R M was used to create strategic change in a l arge corporation . They suggest that patterns of organization and management cannot be changed without discussion of previously 'undiscussable' issues related to how people and departments work together. Managerial behavior and organizational strategy are thus discovered to be i ne xtricably li nked toge ther. Chapter 9 takes a broad look at organ izational processes, by revisiting Karl Weick's three com ponents of 'organi zing' - enactment, selection and rete ntion . Orton introduces the not ion of 'continu ing structures' to counter what he terms a common misconception among readers of Weick that organ ization me mbers can en act whatever reality they want to enact . This chapter also calls attention to the role of institutional memory in shaping the e n acted e n viron ment i n an orga nizat ion . Th is detailed analysis of Weick's groundbreaking theory of organizing provides a new vocabulary for discussing organizational and strategic change . Chapter 10 focuses on the problem of creating strategic organizational change , i n particular through the use of management consul tants. Phills identifies four 'general analytic activit ies' ( G AAs) in which consultants engage - compariso n , e xplanation . prediction and prescription - and each are discussed as components of organ izational learning. D rawing from the work of Argyris, as well as from recent developm ents in cognitive social psychology , Phills also describes barriers to learning, and then discussses i mplications for practice , for both consultants and managers. The chapter concl udes with a brief consideration of im portant unanswered questions for creating strategic change in organ izations.

8 D eveloping a n Organization Cap able of S trategy Implementation and Refo rmulatio n : A Prelimin ary Test Michael Beer, Russell A . Eisenstat and E. Ralph Biggadike

Despite consensus i n the business policy l iterature that strategy can only be implemented i f t he o rgani zation is a ligned with strategy , very l i ttle knowledge exists about how to bring about such alignment . Employing a framework from business policy that examines the 'fi t ' of organization and management practices with strategy , and knowledge about organization change from the fields of o rganizational behavior and development , a process was developed - St rategic Human Resource Management (SHRM) - through which general managers can implement strategic align ment. This chapter reports preliminary findi ngs from an action research proj ect in one company aimed at evaluating SHRM as a process, and learning from its application about the problem of strategy implemen­ tatio n . Preli m i n ary findings indicate that the SHRM process is very powerfu l . That is because i t combi nes analysis with an exami nation of personal and o rganizational patterns of management. Findings about organizational factors and processes that are i mportant in developing strategic al ign ment through SHRM are discussed. There is little d ispute among business policy scholars that the general manager's job i nvolves the form ulation and impleme ntation of strategy. Research and theory have made i t possible for scholars i n the fie ld of competiti ve strategy to stipulate analytic frameworks that help general managers formulate e ffective strategies (Fahey and Christense n , 1 986 ; Porter, 1 980) . The business policy fie ld has made substantially less progress in formulating a body of k nowledge that is helpfu l to managers i n implementing strategy , t h e other h a l f o f t h e general manager's j ob . I t has been long argued that strategy implementation relies on the general manager's capacity to a l ign organ izational elements such as structure , control systems, incentive systems, management process, corporate culture and leadership style with strategy ( A ndrews, 1 980; Hamermesh, 1 982 ; Uyterhoeven et aI . , 1 977) . B usiness policy scholars, however , have been unable to stipulate exactly how this alignment occurs.

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The li te rature is replete with references to leadership, com mu nication and education , b ut provi des no clear theory to explain why one approach to i mplementation may be better than another. Given i ncreasingly rapid changes in markets and technology , organiza­ tions will have to develop the capacity to learn ( H ayes et aI . , 1 988) . Continuous adaptation will be important , and strategic and organ izational change will become increasingly interdepende n t . Given these develop­ ments, unde rstanding how strategic align ment is to be implemented becomes even more im portan t . T h i s chapter describes preliminary findings from an action research project i n a single company aimed at closi ng this gap in our k nowledge about how to implement strategic align ment. The project has two objec­ tives. The first is to create a new social technology for developing an organization capable of implementing and reformulating business strategy - Strategic Human Resource Management ( S H R M ) - and to evaluate the e fficacy of that technology . An essen tial aspect of the S H R M process involves the use of organizational members as co-investigators in systema­ tically and regularly collecting a range of organizational data. Thus the second obj ective is to use t hese data to develop a complete understanding of the factors that faci litate and hinder organizational alignme n t . Research and Theory o n Strategic Alignment

Two streams of research and theory inform the problem of strategic align m e n t . Below we review briefly the contributions and limitations of organ izational t heory and busi ness policy o n the one hand, and organ iza­ tional behavior and development on the other . We show how S H R M i ntegrates these t w o streams of research , building o n t h e i r strengths and complementing their weaknesses. Organizational Theory and Business Policy A large body of organizational research and theory has established the now well accepted concept of ' fit ' . According to this work the effectiveness of the organ ization - its capaci ty to interact successfully with its e nvironment - is dependent on the alignment of multiple organ izational elements with environment and strategy . Chand ler's ( 1 962) seminal work established the relationship between strategy and structure . Since then , other researchers h ave demo nstrated a relationship between environmental uncertainty and organ izational form (Burns and Stalker, 1 96 1 ; Lawrence and Lorsch, 1 967) , environmental uncertainty and modes of conflict resolution ( Law­ rence and Lorsch , 1 967) , the relationship between the organization's task and membe r predisposition and motivation ( Lorsch and Morse , 1 974) , and the relationship between strategic archetypes, and organizational structure and m an agement style ( Miles and Snow , 1 978) . The business policy literature has used the idea of alignment as its organizing conceptual scheme (Andrews, 1 980; Uyterhoeven et a I . , 1 977) .

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This literature , as noted in the i nt roduction , argues that it is the general manager's task to assure alignment. I t poses this task as an analytic one develop strategy , diagnose organ ization and then change i t . Often this prescription includes examples of archetypal fit patterns general managers m ight consider as guides for their own actions. Implementation is a matter of managerial j udgments about timing, i nvolvement and com mun ication argue academics l i ke Hame rmesh ( 1 982) and Herbiniak ( 1 990) , but the particular shape o f the process is un specified. Recomme ndations of manageme n t consultants such as Steel ( 1 99 1 ) , Wright ( 1 989) and H arker ( 1 99 1 ) , who write about implementation, also provide analytic frameworks for assessing a l ignme n t , but l eave the process completely unspecified. U nderlying the recommendations of the business policy literature are some implicit assumptions about the nature of employees and organiza­ tions. These are : •

•

•

Employees are motivated to change their behavior by rational argu­ ments emanating from the top. E mployees so motivated possess the repertoire of atti tudes , behavior and skills needed to enact the new organizational arrangements. When deficiencies i n attitudes, skills and behavior exist they can be corrected through fol low-up communication and educatio n .

These assumptions have l e d t o an oversi mplified approach t o implemen­ tation, one that emphasizes changes i n structure and systems as the pri nciple agents of change , but ignores many of the elements of organ­ izatio n , particularly the so-cal led 'softe r' or behavioral ones. Typical recommendations found in the literature suggest that strategy be defined, appropriate structure and i ncent ive systems developed , and that reorganization follows. People , m anagement process and culture are either ignored or at best presumed somehow to follow . Substantial manage­ ment experience , as we l l as recent research , suggests that this laissez­ faire approach may preclude alignment of human attitudes, behavior and ski l l , and thus impede the effectiveness of strategic implementation (Beer et aI . , 1 990) . Consider the expe rience of the company under study , which led one of the authors to search for a better way to implement the corporation's globalization strategy ( Biggadike , 1 990) . Having identified rapidly growing markets overseas as a major growth opportunity for existing products and developing technology , the compan y i ntroduced a transnational organiza­ tion (Bartlett, 1 988) . Worldwide teams were introduced, with domestic division managers as presidents and re levant country product managers as members. The structure was appropriate, but experience soon showed that worldwide teams were a long way from ach ieving effective levels of functioning. S taff, skills, style and shared values simply were not aligned (Waterman et a I . , 1 980) . This experience has been repeated many times i n other companies. These difficulties in creating alignment are l i kely to be particularly true as

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the competitive environment causes organizations to move from control to com m itment as the basis for coordinated activity (Beer et aI . , 1 990 ; Walto n , 1 987) . In summ ary , examination of the organizational theory and business policy l i te rature reveals a consensus , one supported by extensive empirical evidence , that all elements of an o rganization m ust 'fit', but it also reveals a gap in our knowledge . That gap is in precisely how a general manager is to go about achieving align ment in attitudes, behavior and skills - the culture of the organ izatio n . Fortunately another stream of resea rch , theory and practice provides some i nsights i nto this problem. Organizational Behavior and Development A substantial body of research and theory in these fields has established that cultural n orms govern attitudes and behavior in organizations. For example, group norms can i n flue nce individual perceptions ( Sherif, 1 936) , as well as levels of productivity (Homans, 1 96 1 ; Rothlisberger and Dickson , 1 939) , and organ izational culture powerfully influences behavior and attitudes (Deal and Kennedy , 1 982 ; Denison , 1 984; Ouch i , 1 98 1 ; Sche i n , 1 985 ) . A l l this suggests that fundamental change in organizations is not possi ble without change in norms. Organizational behavior is difficult to change t hrough rational appeals, incentives and comm unication aimed at persuad i ng i ndividuals, unless these are part of a broader shift in culture . What this research suggests is that the con text for individual behavior, the social system and its norms , must be changed to effect change in attitudes and behavior. How can norms be changed? To use coercive or top down methods would undermine the very objective of the change - an alteration i n e mployee beliefs a n d values t o which they must b e internally committed ( A rgyris, 1 972; Vroom and Yetto n , 1 973 ) . Yet recent research on organizational renewal supports the notion that conceiving of organ ization change as a series of human resource programs aimed at educating and motivating i n dividuals also is flawed ( Beer et aI . , 1 990) . A process that involves employees in exami ning the organization's assumptions, belief system and behavior clearly is called for . U nfortuna­ tel y , research i ndicates that many of the most signi ficant of these are undiscussibl e , and their undiscussibil ity is undiscussi ble ( A rgyris, 1 990) . Organ izations form norms that prevent discussing those aspects of the organization that are essential for a cultural tra nsformation to take place . Organization deve lopmen t ( 0 0 ) , a field concerned with intervention theory and method , has long maintained that organizations cannot be ch anged without altering cultural norms ( Beer, 1 980; Bennis, 1 969; Bennis e t aI . , 1 96 1 ; Burke , 1 982) . A variety of i ntervention methods have e me rged that i nvolve the collection and discussion of previously undiscus­ sible data in meeti ngs specially designed to promote t rust and open dialogue (Beer, 1 975 , 1 980) . The underlying theory is that internal com m itment can only be obtained when the change agent (management)

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and change target (subordi nates) trust each other, valid information is surfaced (not purposefully biased or manipulated ) , and organ izational members are i nvolved in making an i nformed choice about requi red changes in their own behavior ( Argyris, 1 970) . Considerable evidence e xists t hat shows these methods promote internal commitment and learning of new attitudes and behaviors - particul arly in small groups, and when the leader val ues open dialogue . Yet there is also evidence that t hese methods have failed to transform the culture of large organizations (Beer and Walton, 1 987, 1 990) . In large organizations, OD methods are often resisted for two reasons: •

•

They are experienced as overly normative - naively prescribing open ness, partici pation , employee involvement , and team manage­ ment in a l l situations, regardless of the organization's task or strategy . They focus on i nterpersonal behavior and i nternal problems of the organ ization wi thout sufficient connection to strategy, customer and task as the driving forces for change .

It is not surprising that in organizations where results are all important and norms militate against discussing t he undiscussible , these characteristics of OD interventions produce resi stance , and preclude wide sca le applicat ion . Even when top management has stated that cultural transformation toward participation and teamwork is its goa l , lower level managers resist if they do not see the connection to their busi ness goals ( Beer et aI . , 1 990) . Even when organization development has been i ntroduced successfully at a plant or divisio n , culture change has often not spread to other parts of the larger corporation. This generall y has been caused by top manage­ ment's inattention to strategies fo r spreading and institutionalizing change (Beer et aI . , 1 990 ; Walton, 1 987) . SHRM: A n Integration of the Two Research and Theory Traditions

I t seems rather clear that each of the theory and research traditions described above offers an i mportant part of the puzzle for ach ieving strategic alignment. Business policy and organizational theory provide the analytic framework that ties organization to strategy . Organizational behavior and organization development provide a theory of organ izational change based on internal com mitment and intervention methods that have been shown to produce such change . What i s necessary i s a strategy implementation process that both analytically defines the organizational arrangements demanded by the competitive environme n t , and develops internal commitment to these arrangements. The Strategic Human Resource Ma nagement process, developed and researched by the authors, is an e ffort to do this. SHRM uses t he contributions of both research traditions discussed above , and aims to overcome their inhe rent weaknesses. It also builds on

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recen t research findings on how corporations transform their fundamental patterns of m anagement to i ncrease competitiveness (Beer et aI . , 1 990) . The following hypotheses about strategic organizational alignment or change guided the design of S H R M . 1

2

3

4

S

6

Mobilizing e ne rgy for change is the key to successful strategic align­ ment. It is best obtained by focusing organizational m embers on strategy and task , not on the personal and human resource changes that m ust i n evitably fol low (Beer, 1 980; Schaffer, 1 988) . E n e rgy can be mobilized when the top team of the business unit actively engages i n a process of defining strategy , and then collects and jointly d i agnoses data about barriers to enacting the strategy . Orga nization-wide comm i tment to change and learning can only occur when a process connects lower level organ izational members and the top team in an i terative process of col l ecting data , d iagnosing, changing and re-diagnosi ng. This process gives voice , and empowers lower levels to help develop the o rganization 's capability to e nact strategy . I f strategic alignment is to occur, the business unit's top team (general m a n agers and direct reports) m ust be w i l ling to discuss its own behavior - i ncluding the behavior of the general manager - and m ust be capabl e of learning from t h e discussio n . That is because strategic alignment i n evitably requires new patterns of coo rdi n ation throughout the organi­ zatio n , and that is governed by attitudes and behavior at the top . A l ignment of all o rganizational elements (structural and behaviora l ) m ust start with a systemic vision of t h e organizational arrangements required to en act the strategy . Since organizational effectiveness is contingent on m an aging relevant interdependencies, such a vision must articulate the horizontal (across functions) and vertical (management, employees and union) coordi n ation/cooperation requirements imposed by the strategy . It m ust explicitly describe the i nteractions n eeded to achieve requisite coordinatio n , as well as the workforce commitment and competencies n eeded to function in the new arrangements. Sustained organ izational change occurs when a new organizational context is created - one that ' forces' change in organizational members, but which they perceive to be owned by them , and con nected to strategic purpose . Since formal structure and systems changes eman at­ i ng from the top produce resistance , an i n itial con text must be created through a collaborative redefinition of the ad hoc roles , responsibilities and relationships of the individuals. As people struggle to learn how to work in new arrangements they helped to create, they discover the real barrie rs to change - those i n herent in their deepest beliefs about how things ought to be done . I t i s only at this poin t in the change process that m a n agement begins to understand the managerial and professional competence required to align the organizatio n . Their planning for recruitment, selection and succession therefore becomes more relevant for the future state to which the organization is moving. Forma l

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structure and systems changes may b e used later i n the process to 'lock in' patterns of m an agement to which people already are comm itted . There have been other less ambitious efforts to i ntegrate the perspec­ tives of business policy/organizational theory and organizational behavior/ development. Lawrence and Lorsch ( 1 969) developed a diagnostic approach to organ ization development that required m anagers to analyze their environment/task before arriving at decisions about organization . They also recommended a data collection , diagnosis and design process for doing so , but their i ntervention methods were pri m arily analytic, and did not deal extensively with how to change analysis into personal and organizational change and learn ing. Moreover , no empirical data exists on implementation of their i ntervention method. A rgyris ( 1 989) designed an educational experience that i nstructed m anagement teams i n competitive analysis and strategy formu lation , and i n skills for discussing the undiscus­ sible barriers to strategy i mplemen tatio n . While apparently successful in producing discussions of personal a n d organizational barriers to imple­ mentatio n , the effort stopped short of producing a plan for organization development or an e ffort to i n stitutionalize the process in the company . The action research project described below attempts t o incorporate m issi ng e lemen ts in these early efforts to develop a strategicall y a ligned organizatio n . I t also i n volves the col lection of empirical data on the effectiveness of S H R M at the business unit and corporate level . SHRM at Alpha Corporation

Alpha, with two billion dollars in revenues, has two sectors, each with several autonomous divisions. Many of the divisions were acquired in the 1 970s . During the l ate 1 970s and 1 980s, the company rationalized its business through an extensive strategic planning process . Under the leadership of its current C E O , who i n itially came to the company as an external consultant on strategy, the company uses a process-oriented approach to strategy formu lation called Strategic Profiling. A strategic profile of a business is developed by a general manager and his or her staff with the help of a profiler (internal or external consultant) whose role is to e nsure that the group answers a series of questions about its competitors, m arkets, products and custome rs . Acting as a facilitator and resource, not an expert , the profile r moves the group to consensus on strategy. In many ways, this process shares with organ ization behavior/ development assumptions about how commitment is developed , and about the role of consultants as helpers rather than experts (Sche i n , 1 969) . Satisfied with the quality of its strategies , the company became increas­ i ngly concerned about the capab i lity of its business units to implement them . The predictable difficulties met with in the i ntroduction of a global organization , described abov e , convinced the CEO and one of the authors that the company needed to turn to the field of orga nization development

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and human resources for he lp. The authors became i nvolved i n designing the SHRM process, and implementing it i n several divisions of the company, and at the corporate level with top manageme n t . The successful experience of t he company with strategic profiling, and the CEO's understanding of the i m portance of process in developing commitment, m ade Alpha a promising site for assessing S H RM's viability. The S H RM process builds on the strategic profil i ng process. It is only after a business unit's top m anagement team h as conducted its competi tive analysis and defined its strategy that it can begin to examine the organ iza­ tion's capacity to i m plement i t . The stated purpose of S H R M is to 'develop a vital organization capable of implementing and reformulating business strategy' . This i s done by engaging the general manager and his or her team in a n examin ation of the organi zation's strengths and weaknesses, but always in the context of the busi ness strategy defined through the strategic profiling process. S H R M i nvolves the following steps . Orientation and Planning A one day meeting led by two consultant/profilers i ntroduces the top team to S H R M . At this meeting the following occur: •

•

•

The purpose and description of the process is presen ted by the profilers. A case study of a business u n i t whose organization was not aligned with strategy is used to provide a preview of the SHRM process. The top team restates its strategy i n terms of organizational tasks to be performed, and specifies the particular forms of organizational coor­ dinatio n , com m i tment and competence required.

Data Collection The profiler trains membe rs of the employee task force to conduct i nterviews in all functions, as wel l as with represen tatives of other parts of the company with which the busi ness unit is i n te rdependen t . The e mployee t ask force asks i n te rviewees to describe the specific m anagement practices and organizational arrangements that help or hinder the business unit from ach i eving each of the strategic tasks identified earlier. What surfaces are issues about the function i ng of the top team , such as its rol e in prioritizing, resource allocation and promoting needed coordin ation , as is the strategy . The p rofiler also conducts i n te rviews with the top team to obtain members' views of misalignment in the organization , and of problems in the group's functioning - including the general manager's role and styl e . Three-day SHRM Profiling Meeting A na lysis of the organ ization and behavior of the top team, development of a strategical ly aligned organizational vision , and the development of a

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change plan are accompl ished in a three-day SHRM profiling meeting. This meeting is especially designed to promote an open dialogue, and personal and organ izational learning. The first day of the meeti ng is for data feedback . The day begi ns with a presentation of guidelines for communication that will facilitate the clarification and e xploration o f potentially controversial information. The profile rs ask the top management team to agree that they will not blame or otherwise punish the task force for presenting negative findings . Through­ out the meeting, the profilers work to e nsure that participants obey these norms , and avoid defe nsive behavior (Beer, 1 980) . The top management team li stens to com ments from the employee task force . The task force organizes findi ngs around major themes , developed with the assistance of the profi lers the previous day. A fter the task force finishes and departs , the profilers present to the top team a summary of the common themes that arose in the interviews with in dividuals in the top management tea m . If the i nterviews suggest that the role or style of a n individual team member, whether the ge neral manager or functional head , is impeding the group, these issues are discussed as w e l l . U n l ike a more traditional organizational development interve ntion , howeve r, these more behavioral and stylistic issues are addressed o n ly i f the membe rs of the group or the profi lers perceive them to be impeding the e ffectiveness of the ope rating unit to en act its strategy . The second day of the meeting is reserved for analysis. The an alytic model in Figure 8 . 1 is used i n the following manner. The top team lists the key patterns of behavior and skill - at the top and in the organization as a whole - uncovered the previous day as strengths and barriers (Box I ) . An assessment i s made - i n qual itative and i f possible quantitative terms - of the historic e ffects o f t hese organizational be haviors on financial performance and human outcomes . Then there is an evaluation of how these persistent behaviors affect the organization's capacity to perform its strategic tasks and produce requisite coordinat ion , commitment and competence . Next the management team is asked to make an explicit and informed choice as to whether the perfo rmance and/or st rategic consequences of the identified organ izational issues are of sufficient scope to warrant continuing the meeting. Consistent with the theory of internal com mitment outlined above, business i mperatives are regarded as the most viable source of motivation for con fronting d i fficult organizational and human problems, and sustaining change . None o f the profile meetings conducted at Alpha were concluded at this poi n t , however ( Boxes 2 and 3 ) . Then a diagnosis of t h e o rganization a s a system is conducte d, t o identify causal factors for the behaviors identified as barriers. Corporate policies and practices are examined, as is the division's approach to orga nizing and managing its people i n five major policy areas ( Beer et aI . , 1 984) ( Boxes 4 and 5 ) .

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Organizational Learning and Competitive A dvantage

4 Context •

2 Stakeholder satisfaction •

Corporate environment -..

Policies

_ __ _ _ _ __ _ _ _

•

-..

•

Practices •

I I I I I I I I I I

r-----

1 Organizational capabilities •

• •

/

Coordination Commitment Competence Functional Interpersonal

�/

�

5 Organization design and HR policies

•

•

Organization of work Systems I nfluence (horizontal and vertical) Mechanisms

•

3 Strategic tasks (alternatives

Leader and top team effectiveness Structure

•

Employee

Competitive environment

I I

•

Customer

Culture

t�

•

Shareholder

..- - - - -�

• • •

Low cost High quality Excellent service/ delivery I nnovative technology Rapid product extensions

Style People Selection and promotion criteria Career progression

• •

Development Reward systems Management philosophy/values

Figure

R. I

Diagnostic mode! of orgllnizlllionll! effectiveness

The t h i rd day is devoted to the developme nt of the vision and a change plan . The vision is articulated using the same analytic systems framework used to perform the diagnosis. Typica lly , this results in a consensus on how the top team w i l l change its pattern of managemen t ; how critical i n terde­ pendencies will be managed through ad hoc teams (that is, business, product development or quality teams) ; what skills are needed i n key roles, and which existing employees should be pl aced there ; and what structural , m easurement , i n fo rmation , and reward systems m ight ultimately be put i n place to support t h e behaviors speci fied. When t h i s is complete , a philosophy of m anagement - stated i n value terms - emerges naturally and i s articulated. Fin a l l y , a plan is developed for i nvolving the employee task force and

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the organization as a whole in modifyi ng, refining and implementing the visio n . Review with Higher Management Fol lowing the S H R M profil e , the general m anager and his or her team meet with higher managemen t , to review what they learned about themselves and their organization , as well as their vision and change plan for strategic a lignmen t . There is also a review of corporate barriers to division effectiveness identified i n the profiling meeting. The profilers attend to faci litate this exchange of sen si tive i n formation . It is envisioned that higher management wi l l review objectives for o rgan ization develop­ ment that come out of SHRM as part of their routine busi ness reviews. Ongoing Monitoring and Follo w-ups As the organizational changes developed during the three-day meeting are implemented, the top management team monito rs their effectiveness. The employee task force facilitates this process, and is typically empowered to provide the top team with ongoing i n fo rmal com ments on the organiza­ tion's response to the changes . As difficulties arise , the profilers are available for guidance and consultation . Thereafter, on a periodic basis ­ typically every other year - more systematic data is collected and analyzed through a SHRM fol low-up that is essentially a recapitulation of the process described above . Research Strategy

Assessment of S H R M is a difficu lt and complex endeavor that is sti l l underway . W e are using several sources o f d a t a . First , there is a simple practical test of acceptance and uti lizatio n . Is the company continuing to use SHRM over time? While conti nued use does not provide conclusive evidence of effectiveness or applicabi lity to other companies, it at least suggests that i t is possible to employ SHRM under a given set of conditions. A more convincing test for SHRM i s its capacity to cause the organiza­ tion to realign and change in some fundamental way . This question cannot be answered definitive ly , because in action research it is vi rtual l y imposs­ ible to do a controlled experiment with a large sample of divisions and corporations randomly assigned to experi mental and control groups. The very nature of the S H R M process i tself, however , which i nvolves the systematic and periodic coll ection of a range of organ izational data, allows us to bring far more evidence to bear on the question of the efficacy of the process than is typical ly the case in field research. An analysis of this evidence al lows us to use each organization as its own control in assessing the extent to which the S H R M process has al lowed a particular business unit to make progress on previously i ntractable organizational problems.

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I n additio n , comparisons across several divisions can identify conditions and strategies that are more or less conducive to managing strategic realign m e n t . Thus t h e best source of data about t h e efficacy o f S H R M , and the validity of the theory underlying it, comes from the clinical data generated by the process itself. These data al low one to assess the effects of the process on an organization and its managers as perceived by several different actors - including the researchers/consultants, the top managers in the business unit, managers at middle and lower levels who serve on the e mployee task force that collects data and is involved in monitoring change , and managers outside the busi ness unit. By documenting SHRM profil i n g meetings , and iden t ifyi ng key turning points across many meet­ i ngs, there i s much to learn about improving the design of S H R M , and about the skills a profiler m ust possess . B y documenting the struggle of m anage rs to al ign behaviorally and attitudinally in the months and years that fol low the S H R M profi l e , those elem ents in the social systems that pose the most difficult barriers can be identified, and change strategies for dealing with these barriers can be discovered. Preliminary Findings

In a l l S H R M profi les conducted at A lpha Corporatio n , the diagnosis of data surfaced revealed that it was possible to enhance strategy implementa­ tion by realigning the organ ization and its management practices. A l l divisions a n d top management began t o plan organizational change . Below we discuss our fi ndings about the dynamics of strategic align m e n t , and the e fficacy of SHRM as a planned process for negotiating these dynamics. Issues in A ligning Organizatio/l with Strategy The response of several employee task forces and management to S H R M , as well as m a n y o f the findings o f previous researchers in organizational behavior/deve lopme n t cited earlier, provided support for the hypotheses about strategic alignment that guided the design of SHRM discussed above . First , hidden and undiscussi ble data often blocks strategic alignment of the organ izatio n . Al l the profiles, including the corporate profi l e , raised anxiety levels as the e m ployee task force uncovered data they bel ieved was i m portant for strategic alignment. All employee task forces were very anxious about the feedback process, and had to be reassured . The anxiety of top management teams about receiving comments, even when they had selected the task force and understood the data, though revelatory about their own management practices, was relevant to strategy implementation . Second , issues raised by S H R M confirmed that organizational alignment is m uch more than an analytic process that fits structure and systems to strategy . Most of the profiles surfaced issues about the style of the general

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manager, the effectiveness of the top group, interfunctional coordi natio n , a n d raised questions about deeply held be liefs a n d patterns o f manage­ ment. For example, in division Beta, using responses from the employee task force and from profilers' interviews with them , the top team identified numerous problems i n their functioning and in interfunctional coordina­ tion . They estimated that these produced shortfalls in strategic capabil ities, business performance and human outcomes. This was of particular concern because of a growing threat from a foreign com pet itor. The primary causes of the behavioral and skill problems were diagnosed as work system and influence problems - ineffective management meetings and management process at the top , a funct ional organization that lacked cross-functional teams, ineffective project team/management skills, low influence on the part of quality assurance and marketing, a powerful R and D function , and nonexistent cross-functional t ransfers for developing employees capable of team work . U n reasonable demands and close control from sector level management a lso were identified as causally important . Third, S H R M profiles in a ll four divisions and t he corporation resulted in a similar diagnostic pattern , suggesting a hiera rchy of organization and management issues to be emphasized i n diagnosing and tak i ng action . Work systems, the means for processing i n formation and coordinating decision s , were always the first order issues identified as causal to a shortfall i n performance or strategic capabil i ty . Diagnosis i n all divisions profiled showed that ineffectiveness at the top produced organizational behavior that was counterproductive to strategic alignment when cross­ functional teamwork was necessary . The capacity of the bottom and top of the organization to develop mutual i n fluence , and one function's capacity to i nfluence another , were also central causal factors in the diagnosis. Measurement and compensat ion , though mentioned in all profi les, were second order issues. They were not identified as the root c a u s e s of problems in the i n i t ial profile, and generally not even in the fol low-up. This suggests that the y may not be the major cause of misal ign ment typically assumed , nor the powerful force for change assumed by many academics and practi tioners. This is probably particularly true i n situations where an open discussion about causes for behavior can alter top management's behavior, and these changes i n turn can produce change i n the organization without modification of formal systems. Fourth , a similar generic set of yardsticks seem to be helpful i n assessing the effectiveness of an organization - such as the behavior of the leader and top team , the prioritization and resource al location process , interfunc­ tional coordination and team work , and the effect of interfunctional mobi l i ty and coordination on general management dept h . These appear to be useful i n diagnosing a wide variety of busi nesses, at least within Alpha Corporation . Fifth , strategic alignment is an i terative learning process, powered by shared experiences of failure and success . A l l three divisions we fol lowed over time made plans to make changes that we later learned they did not

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truly understand . It was not until they experienced difficulties , and were forced to confron t their causes , that they began to fully understand the words they had spoke n and put to paper in their origi nal plans for change . The shared nature o f this experience seemed to result in the development of a collective unde rstanding so necessary for all parts of the organization to change i n a coordi nated and simultaneous manner. Addi tional findings come from observing differences i n the effectiveness of S H R M i n t hre e divisions , operating in two different sectors, across time. Since the standardization of the SHRM process , differences in response to SHRM itself, as well as di ffe rences in organizational and personal change , suggest two key conditions that govern success in al ignme nt . •

•

T he skills of the leader i n promoting t rust , an open dialogu e , and e m powerme n t while providing un mistakable signals about the kind of busi ness and organization he or she values, certainly makes change much smoother and easi er. N e w l eaders can use S H R M more easily than existing leaders, particu­ larly i f they can quickly develop t rust . The only new ge neral manager who led S H R M used it to begin a process of change that he recognized was n ecessary . J ack Gabarro ( 1 987 ) has shown that in the fi rst three months, managers assess their busi ness and their key managers before taking action . S H R M provided the vehicle to do this for new general managers .

EffeCliveness of SHRM If acceptance and uti lization are criteria for evaluating S H R M , it m ust be j udged a success . An i ncreasi ng level of commitment to S H R M by corporate and busin ess unit executives is developing. The principal evidence for this is the diffusion of S H R M from two ini tial models to two other business units, top management"s own involvement in profi ling the corporate organization , fol low-up ini tiatives in the three divisions who undertook SHRM i n 1 988- 1 989 , plans to conduct more profiles, and the commitment of substantial time and money resources to further the pro­ cess , including the development of internal profilers. In particular, the corpo ration's vice presidents for human resources and strategic manage­ m e nt have conducted profi les on their own , and are enthusiastic about the value of S H R M in developing the capacity of busi ness units to implement strategy . Utilization in itse l f is a necessary but not a sufficient measure of e ffectiveness as discussed above. The extent to which S H R M promotes successful strategy i m plemen tation is a better measure . Below we discuss our fi ndings at the business unit and corporate leve l . Business unil level S H R M contri buted compete. Con sider one of the business

I n four busi ness units, management perceived that to developing the organ izational capabil ity needed to the following observation from a general manager of units that went through the SHRM process:

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SH RM allowed us to discuss that which could not be discussed before. It allowed us to discuss the undiscussible. It got thi ngs on the table that would have taken me, in a serial sense , years. Getting feedback from the employees as a mechanism is indispensable . Putting it in a strategic context is important. We were there to discuss behaviors that arc conseq uential. The focus on strategy puts it in context . It wasn't persona l . We keep coming back to the strategy. We have discovered things that are going to help us succeed or [ that were 1 preventing us from succeeding as an organization . They arc strategic issues - delivering the goods and services to our customers better than our competitors. Once you decided it was strategic. you had to fix it or suffer the consequences, and no one was willing to suffer the consequences of gradual loss of competitive position . The fol lowing observations by a general m an ager from another division capture the difficulty and benefits of the S H R M process . Recalling his organization's first round of S H R M some two years earlier, he described the profilers as 'going for the j ugular', asking people to rea lly get their feeli ngs on the tabl e . ' It was a pretty scary day . . . when we left we didn't feel very good about ourselves'. Yet this man ager also suggested that: We arc pleased with the process. We interact differently now. Our level of achievement is higher. We have more responsibility worldwide . We are now able to focus on the task at hand. . . We have been successful in warding off f a foreign competitor] . We arc pleased with results, although it has been a long process. It is a cultural process, which takes time. Since S H R M , we have implemented many changes based on the team concept , and have delegated more to mid-level managers . We see ourselves as getting better. The case of division Beta , discussed above , also provides support for the effectiveness of the S H R M process. The division created a n umber of cross-functional teams to manage quality , product improvements and a response to its competitors. A n S H RM profiling meeting about three years l ater revealed signi ficant i mprovements in cross-functional team work . Th e y were managing quality more effectivel y , and the organization had successful l y responded to the threat by its foreign competitor . Corporate level There is a growing conviction among corporate execu­ tives that SHRM is a powerful process, capabl e of unearthing aspects of organ izing and managing people that are at the core of the company's capacity to implement its strategies. The fi rsthand experience with S H R M of the C E O a n d k e y executives at corporate headquarters substantially strengthened this conviction. Executives who participated in the corporate profi ling perceive that it has:

2 3 4

caused the CEO to delegate strategic decisions to the sector level , where the consensus diagnosis suggested i t should res t ; al tered the man agement process at the top ; modified the manner i n which a key staff executive is managing his responsibili ties for cross-divisional se l ling; and begun to form a con sensus on the m anagerial competencies the company needs/values , and stimulated examination of the process and policies that will govern their development.

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Organizational Learning and Competitive A dvantage

Consider the following com ments by three corporate executives with very different roles in the corporate S H R M profi le . First , the CEO of the company: The concept of SH RM is very important to us because it allows us, as an organization . to examine the way we function , and decide what we have to change in order to become more effective . Second , the corporate staff executive with cross-divisional se lling respons­ ibility, whose approach to e n acting his responsibilities came under scrutiny as a result of the SHRM profi l e : T h e S H R M process was very good . It really got ou t a l ot of thi ngs that ha d to be addressed . Substantive changes have bcen made , for example, in the role of the Strategy Review Committee ( S RC ). I don 't know how I would have managed going to twenty strategy reviews through this period. Delegating that to the sector presidents , with the S RC reviewi ng the summary reports by the sector presidents, was a very important tangible difference . I think I have gained a lot of insights by slowing down , and getting more people involved, and helping think through what we need to do. Third, a strategic planner and profiler, who served as a member of the employee task force that collected data for referral to top management : One of the key implementation problems we have had, which I became sensitive to goi ng through the S H R M process, is that we do all this strategy development work , and we do a lot of financial planning, but so often the u nk nown factor is the people and the system and all of the HR aspeets that are needed to implement strategy. This process has convinced me that, j ust as we need to reduce our planning to specifics in marketing, manufacturing, and technology, so we also need to reduce it to specifics in what we're going to do with regard to people development and staffing and all the H R ki nds of issues, or our plans are not goi ng to get implemented. Until going through this process [ S H R M ] . I would not have been convinced that so m uch of the stuff we write on paper and so many of our plans are j ust nonsense without taking stock of where we are in terms of our people capabilities. Despite the power of the SHRM profiling meeti ng, and the immediate energy for change i t releases, there is some evidence that follow-up and sustained activity will be a struggle . Consider the com ments of the staff e xecutive with cross-divisional selling responsibility: I n retrospect. J think we were and are on the brink of some thi ngs that are very , very important . I'm disappointed that we haven't seen more come out . Why isn't there more happeni ng') I really think we're onto the capability of trying to make change. J j ust don't see enough movement. Problems with fol low-up to the corporate SHRM process were also evident among divisional personne l . Most individuals i nterviewed noted that substantial im provements were occurring in t he overall effectiveness of the corporation i n implementing its business strategies. Many, however, did not make the l i n k between these changes and the SHRM process. This came about partly due to the long delay in top m an agement's comments about decisions and actions they took as a result of S H R M .

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This problem also occurred at the divisional leve l , where changes were noted in divisional m an agement by lower levels in the organization , but not n ecessaril y attributed to S H R M . It appears to be difficult to communicate the connection between decisions taken through the S H R M process and improvements i n effectiveness . I t is essential that this problem be solved if they are to sustain energy among employers for contin uous organizational learning through S H R M . Assessing Causality Might the positive changes we described at both the corporate and the divisional levels have occurred without the S H R M process? As we pointed out earlier, in action research i t is difficult to answer this question definitive l y . The case of one division whose general manager attributed some of the changes in his division to the early retirement of an autocratic and controlling sector president i l lustrates the problem of attributing causality. A closer a nalysis of our fi ndings, however, suggests that a causal relationship between S H R M and the changes we have described probably exists: •

•

•

•

There was consensus among a ll respondents that changes i n business outcomes occurred following the S H R M process . The consultant/profil ers were able to trace a series of events that directly l inked the changes in business performance to the S H R M process . For example , committees that universally were seen a s central in addressing particular business problems, explicitly were created during the S H RM meetings. T n many cases, changes i nvolved problems recognized by i ndividuals prior to the S H R M process. These i ndividuals, however , were unable to mobilize the n ecessary forces to surface issues and create change until the S H R M process bega n . The fact that a new division manager, who had correctl y analyzed misa lignments in his divisio n, found S H RM very helpful in compressing the time it m ight otherwise have taken to al ign the division 's organ ization with strategy, suggests that SHRM enables and empowers even those at the top to implement strategic alignment. The more closel y i nvolved i ndividuals were with the described changes, the more l i kely they were to make the l i n k between the changes and the S H R M process.

Conclusions

We opened this chapter with the premise that the fields of business policy and organizational theory have failed to produce knowledge about exactl y how a general manager can implement strategic alignme nt. Much o f past research and theory provides insights into various a lign ment patterns that

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managers ought to consider. It assumes that a proper analysis of strategy and current organizational a rrangements, together with knowledge about organ izational alignment patterns that are effect ive , is sufficient as long as commun ication and education follow. Our research suggests that this prescription for implementing alignment is i nadequate . Our appli cation of SH RM at the business unit and corporate level i n dicates that in every instance patterns of organ ization and man age­ ment could not be changed without discussing what previously had been undiscussible - how people at the top managed and worked as a group, h ow various departments and fu nctions worked together, who had the power, and who needed more i f decisions were to be strategically al igned . I n other words , SHRM i s not only a lin ear analytic process, though appropriate analysis and knowledge of effective patterns of alignment are clearly i mportant . It is a process that iterates between progress and regression as individuals and groups struggle to learn new attitudes , skills and behaviors. S H R M appears , at this stage i n the action research project , to be a powerful tool for motivating, guiding and furthering the individual and orga nizational learning needed for strategic alignment to take pl ace . Its value li es i n that i t puts process ahead of conte n t . We do not argue that knowledge of typical alignment patterns is not helpful . What is more im portant , howeve r, is that the top management tea m , i n formed by data from lower levels , goes through a process that puts them in touch with the reality of their own behavior and that of the organization . When examined i n the context of a jointly defined strategy and requisite coordi nation , com mitment and competence , awareness is followed by internal com mit­ ment, which in turn is fol lowed by the struggle to change . Setting up the conditions for change to which people are commi tted - open dialogue across l evels about valid data in an atmosphere of trust - is the key. By requiring all general managers in the company to go through a process of self-examination and learning l i ke S H R M , top m an agement can hold managers accountable for deve loping an organization capable of strategy implementation and reformulatio n , without i mposing their organ­ izational solution - somet h i ng that surely would be resisted . If they develop a supportive climate, top manageme n t can engage i n an open dialogue about personal and organ izational alignment with general managers , thus ensuring a continued struggle to i n te rnal ize new patterns of management. We be l ieve that the major barriers to the utilization of a process like SHRM lie i n the problems of institutionalizing. We are sti l l i nvestigat i ng these problems at Alpha Corporat ion . I t is only with institutional ization that general managers can receive the help they need i n learning, and top ma nagement can have access to the information i t needs to fulfi l l its role as a steward of the corporation's most im portant asset - the organization and people that will implement strategy.

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Lawrence. P . R . and Lorsch . l . W . ( 1 ()6<)) Developing Organizations: Diagnosis and Action. Reading. M A : Addison-Wesley. Lorsc h . l . W . and Morse . l . J . ( 1 <)74) Organizations and Their Members: A Contingency Approach . New York : H a rper and Row. M i les. R . E . and Snow, C. ( 1 978) Organization. Strategy. Structure and Process . New York: McGraw-H i l I . Ouch i , W . G . ( 1 <)8 1 ) Theory Z. Reading. M A : Addison-Wesley. Porter . M. ( 1 980) Competitive Strategy: Techniques for A nalyzing Industries and Competitors. New Yor k : Free Press. Porter. M. ( I <)85) Competitive A d\'{/ntage: Creating and Sustaining Superior Performance. New Yor k : Free Press. Rothlisberger, F . J . and Dickson . W . J . ( 1 <)3<)) Management and the Worker. Boston , M A : H arvard U n i versity Press. Schaffer, R. ( 1 <)88) The Breakthrough Strategy: Using Short-term Success to Build the High Performance Organization . Cambridge . M A : B a l l i nger. Sch e i n . E . H . ( 1 96<)) Process Consultation: Its Role in Organization Development. Reading, M A : Addison-Wesley. Sche i n . E . H. ( 1 <)85) Organization Culture and Leadership . San Francisco, CA : lossey-Bass. Sherif. M . ( 1 936) The Psychology of Social Norms. New York : Harper. Stee l , Roy ( 1 99 1 ) 'From paper to practice: I mplementing the corporate strategic plan' , Business Quarterly , 5 5 : 1 1 <)- 1 24. Uyterhoevc n . H . E . R . , Ackerman . R . W . and Rosenblum , l . W . ( 1 977) Strategy and Organ­ ization . revised edn. Homewood, I L : Richard D. I rw i n . Vroom . V . and Yelton , P . W . ( 1 <)73) Leadership and Decision Making. Pittsburgh . P A : U n i versity of Pittsburgh Press. Walto n , R. ( I <)87) Innovating to Compete. San Francisco. CA: lossey-Bass. Waterman , R . . Peters. T. and P h i l l i ps . l. R. ( 1 <)80) 'Organization is not structure', Business Horizons, 2 3 ( 3 ) : 1 4-2<). Wright . N . B . ( 1 989) The driving force: An action-oriented solution to strategy i mplementa­ tion ' . Business Quarterly . 54: 5 1 -54.

9 Reorganizational Learning : Some Conceptual Tools fro m Wei c k ' s Model of Organizing 1 . D ouglas Orton

Managers are finding it helpful to focus attention on organizational processes. Numerous small process changes can interact to increase quality, reduce costs, i ncrease speed and generate profits. In strategy terms, organizations with process competence - an u nderstanding of the complex processes which occur within organizations - have a competitive advantage over organizations with underdeveloped process compete nce . Consequently, organization theorists and strategy researchers are starting to look more closel y at processes such as organizational change , decision making, sensemaking, strategy form ulatio n , strategy implementation , organizational learning and reorganizing. The process this chapter focuses on is the organizational learning which takes place before an organization can an nounce a decision to reorganize . This process is referred to here as 'reorganizational learning'. In a detailed study of a single reorgan ization (Orto n , 1 994) , it was helpful to conduct a review of the meta-process which Weick ( 1 979) labeled 'organizing'. Weick's model of organizing can be described in its simplest formulation as three stages - enactment, se lection and retention connected by feedback l oops. I n this review, Weick's model of organizing was defined more broadl y to i nclude other ideas presented in Weick's 1 979 book , other statements by Weick related to the theory of organizing ( Weick , 1 969 , 1 976, 1 977, 1 980, 1 984, 1 988, 1 989a, 1 989b , 1 993a and 1 993b ; Daft and Weick , 1 984; Orton and Weic k , 1 990; Webb and Weick, 1 979; Weick and B rowning, 1 986; Weick and G i l fi l l a n , 1 97 1 ; Weick et aI . , 1 973) , and adaptations of Weick's ideas by others (for example, Abolafia and K ilduff, 1 988 ; Porac et aI . , ] 989 ; Smircich and Stubbart , 1 985) . A s a result o f t hese anal yses, each o f the three components o f Weick's theory of organizing was reframed as two components. 'Enactment' became 'enacted environments' and 'bracketed enactments' . 'Selection' became 'cause maps' and 'workable realities'. ' Retention' became 'reorga­ nizing packages' and ' residual structures' . Within each of these six stages, there are several conceptual tools which are grounded in Weick's work. The text of th i s chapter is a n attempt to i ntroduce concisel y a nd catalog the

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conceptual tools which proved to be helpful in a study of reorganizational learning. Enacted Environments

' E nacted en vironmen ts' are t he limit less influx, repertoi re , or frontier of actions, statements, i nfl uences and ideas which can shape an eventual reorga niza tion . Continuing Structures Weick's ( 1 979) theory of organizing emphasizes, through a feedback loop from retention to enactme n t . that past structures constrain current actions. Thus, one of the things which organization members might pay attention to if they scan the environment to figure out an appropri ate organization design , is the fact that a large part of that environ ment is a con tinuing structure which has been shaped by their own previous actions. Kimberly ( 1 9R4) observed that organization design is better conceptualized as organization redesign , because there is always some previous structure m in i m al or e laborate - which constrains future possi bilities. Th is is the first half of Giddens' ( 1 984) structuration dialectic: yesterday's structures constrain today's actions and today's actions shape tomorrow's structures. Porac et a l . ( 1 989) demonstrated , in a study of the Scottish fi ne wool ind ustry , the processes by which i ndustry members have gradually enacted a continuing structu re - i n the form of industry norms and practices - which constrain the i ndustry members' actions today. One frequent misreading of the theory of organizing - faci li tated by the mode l's original emphasis on enactment and de-emphasis on the feedback loop from retention to enactment - is that the organ ization members can enact whatever reality they want to enact . The notion of continuing structures helps correct that misinterpretation of organizing by emphasizing that structures and momentum a re inhe rited . Fluid Ecological Change Weick's ( 1 979) theory of organizing occasionally cited ecological change or e nviron mental influences as a fourth component of the theory of organ iz­ ing; the environment could produce or trigger certain actions. Further­ more , Weick's ( 1 979) theory of organizing proposes that the environment is a l ways evolving, con tinually changing and emerge n t . Tn an extended gloss of a section from Stei nbeck , Weick argued that a living fish possesses a more dynamic reality than a dead fish , and living environments and organ i zations possess a more dynamic reality than can be communicated through quanti tative variables . Weick ( 1 993a ) also argued that enactments occur i n continual ly changing flows or streams, that organizations generate nume rous actions, and that the stream of consciousness in organizations takes the form of streams of people , solutions and problems (see also

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Cohen et a I . , 1 972) . To describe an e nacted environment as fluid is to state that there is a continually changing stream of inputs. Loose Coupling between Organizations and En vironments Another phenomenon observed in organizing processes is that environ­ ments can be loosel y coupled to organ izations (G lassman , 1 973; Weick , 1 976) . Loose coupling between an environment and an organization does not mean that the two e ntities are decouple d , but means that the two e ntities are coupled on some dimen sions and decoupled on other dimen­ sions ( Orton and Weick , 1 990) . Manning's ( 1 982) research provides a detailed example of loose coupling between environments and organ iza­ tions . Manning ( 1 982) studied semiotic loose coupling between a pol ice com munication system and an environment of people making emergency phone calls. He reported that d ramatic phone calls a re 'con ventionalized' and frozen i n to rigid ly defined crime codes by police operators, and he defined the telephone operators' task as one o f processing, decoding, classifyi ng, e ncod ing and transforming the calls i nto the code , language , or perspective of the organization . Therefo re , by changing the information as it crosses the boundaries i nto the organization , police com munication systems ( I ) maintain the i n tegrity , consistency and autonomy of their organizations, and (2) loose n the couplings between the orga nization and its environ ment . As G l assman ( 1 973) and Weick ( 1 976) theorized, and Manning ( 1 982) i ll ustrated, the l i n k between enacted environments and organ izations is not i m mediate and direct . Complex En vironments The theory of organizing emphasized that e n vironments are fragmented , particularistic and detailed, and that organization members and organ iza­ tional researchers can only understand a small part of the barrage of information which environments produce . The more complex the environ­ ment, the more fragmen ted the stimuli the organ ization receives. Com­ plexity is not seen here as an environmental variable which is corre lated with a structural variable such as decen t ralization or specia lization . To say that an environment becomes more complex is to use a shorthand to represent a variety of more specific changes which are t ransl ated through environment me mbers to organization members. Institutional Memory A n important part of Weick's ( 1 979) theory of organIZIng IS often ove rlooke d. I n the theory of organizing, there is a feedback loop from retention to e nactme n t , meaning that the retained learning from previous e nactments has an i nfl ue nce on cu rrent e nactme nts. Another way to make the same poin t is to defi n e i nstitutional me mory as part of the enacted environment. I n stitutional me mory , acq uired wisdom and past experience all connote organ izational learning from past actions. To define institution-

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al memory as part of the en acted environment is to reframe the environ­ ment from a n arrow defi n i tion as something outside the organ ization to a broader defi nition of something which can be i nside the organization. Enactment An environment is not a distinct, discrete, or exogenous entity acting on organ ization s , but can be i nfluenced , controlled and created by the voluntaristic strategic choices of organization members and managers. Weick's ( 1 979) descriptions of 'enactment' have been i n terpreted in three different ways, each of which will be analyzed here . The first interpretation of enactment is that it is similar to perception - there is some environment out there which organization members register, interpre t , or perceive . The second i n terpretation of enactment is that it is similar to action organ ization members perform actions which trigger subsequent sense­ making. The t hi rd , and most accurate , i nterpretation is lodged in between the first and second i n te rpretation - the actions of organization members create an envi ronment to which they must then respond.

Bracketed Enactments

' B racketed e n actments' are actions, statements, influences, and ideas selected from enacted environments by organization members for further attention - which lead to eventual reorganizations. Equivocality Weick ( 1 979) used an example from Heider ( 1 958) to demonstrate how meaning can be equi voca l . If a Russian spy escapes from an English priso n , how c a n observers determine whether t h e spy is an escaped Russian age n t , a freed British double age n t , or a freed Russian agent who h a s been 'turned' i n to a British agent? D aft and Macintosh ( 1 98 1 ) described equivocality as a condition i n which the underlying meaning of a signal is not clear to a receiver because the signal has two or more possible meanings. To state that b racketed enactments are equivocal is to suggest that any given bracketed enactmen t can be interpreted in different ways by organization members. Bracketing B racketed enactments are created when organ ization members select an action , statemen t , perception , or influence for further attention (Weick , 1 979) . Organization members have no direct experience with overarching 'environments' - they have d i rect experience only with the pieces of the environment that they have selected for further attention .

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Raw Materials of Cause Maps Organization members make sense of variations by incorporating n umer­ ous causal attributions i nto a cause map (Weick , 1 979) . Researchers find that people generate causal attributions between events and causes which accumulate in to patterns of cogni tive associations, cognitive maps , or cause maps. Ford ( 1 985) studied the creation of causal attributions and their effects on decision making. He argued that questions such as 'Why are profits down?' and 'Why are costs i ncreasing?' initiate sensemaking. As people find answers to these questions, they construct causal attributions. Bracketed enactments are essential i nputs to the creation of causal assertions. A significant, unexplained bracketed enactment is like a vacuum which must be fi l led by either fact or speculatio n . The Map is not the Territory To bracket part of an enacted e nvironment is to not bracket a much larger part of the environment . The problem of inaccurate mapping is emphas­ ized in Weick's discussions of the aphorism, 'the map is not the territory' . Because the m a p is n o t t h e territory , a n d different people make different maps of what they believe to be t he same territory , organization members spend a fair amount of time believing that other organization members are using inaccurate maps. Enactments In the organizing model , ' enactment' is most frequently described as actio n . The theory of organ izing proposes that organization membe rs create variations through behaviors and experiments; organization members can enact variations which define and create constraints on subsequent action . Weick ( 1 979) quoted a Lou Pondy statement that if e nactment were i n te nded to refer to nonactions it would be enthin kment . Daft and Weick ( 1 984) listed some of these 'enactment behaviors ' : experimentatio n , testing, coe rcio n , invention o f environments, learning b y doing. The emphasis i n enactment is clearly on action , b u t t h e door i s open for other types of e n actments. Weick's descriptions of the organizing model include four general types of e nactments: action (interacts, double interacts and strings of actio n ) , statements (speech , documents, proposals, ideas and initiatives ) , i n fluences (environmental , i nterpersonal , technolo­ gical and bureaucratic) and ideas (about situations, about desires and about norms) . A nother source of diversity in bracketed enactments is along the continuum of unintentional to intentional enactments. In an extended analysis of a single enactment process, Abolafia and Kilduff ( 1 988) studied the i n tentional e nactment of a speculative bubble in the silver futures marke t . Their study hel ped clarify the wide range of meaning in the term 'enactment' - from evolutionary biology's nonintentional

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'variation ' to the 'purposi ve action' of coal itions of i nvestors who create a speculative bubbl e . Variation Systems seem to benefit from numerous and varied bracketed enactments. One of the most articul ate advocates of variation has been March ( 1 98 1 ) , who offered a series of provocative footnotes to traditional models of organ i zational change . He argued that because there are lim its on coordi nation , attention and con trol . it is i mprobable that rationality can be implemented in organ i zations . Given the combinat ion of enacted environ­ m e nts and bounded rationality, March concl uded that ' [o]rganizations need to maintain a balance . . . between explicitly sensible processes of ch ange (problem-solving, learning, planning) and certain elements of foolishness that are difficult to j ustify locally but are important to the broader system' ( 1 98 1 : 570 ) . Foolishness. variation and other producers of bracketed e nactments provide i n formation which can be used by organiza­ tions in the creation of reorgan izations. Behavioral Commitment and A voided Tests The complement ary concepts of avoided tests and behavioral commitment help explain why bracketed enactments are important i n reorganizing processes. First , bracketed enactments are given impetus through pro­ cesses of behavioral com mitment. Salanci k ( 1 977) identified three vari­ ables which , if present , i ncrease com mitment to decisions: vol itionality, visibility and i rreversibility. Behavioral com mitment recei ved only a brief discussion i n Weick's ( 1 979) book, but has since become a more explicit component of the t heory of organ izing (Weick, 1 993a ) . Behavioral com m it m e n t suggests that some bracketed enactm ents shoul d be more i n fl ue n tial than other bracketed enactments, depending on the degree of behavioral commitment which is ge nerated through the conditions identi­ fied by Salanci k. Because bracketed enactments trigger processes of behavioral com m itment , and com mitment can lead to learning, it follows that people can avoid learning by not creating bracketed enactments. This avoidance of action is described by Weick as an avoided test . An avoided test occurs when people assume that there are dange rs , costs, or l i m itations on their ability to act (Weick , 1 979) . One way to slow down reorganizing processes i s to actively avoid actions which can trigger behavioral commit­ ment and organ i zational learning. Small Wins One of the common assu mptions people make about causality (Ei nhorn and Hogart h , 1 986) is that small causes should lead to small effects and large causes should lead to large effects. This assumption is built around two variables - the size , e ffort and cost of the cause ('sm al l ' or ' large ' ) , and the size , i m portance and impact ('sma l l ' or ' large ' ) of the effect . 'Small

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wins are cases i n which small causes lead t o disproport ionately large effects. The mechan ics of these 'small wins' i nclude the notion of deviation-amplifying loops, also referred to as vicious circles and virtuous circles (Weick , 1 979) . The continuing development of the idea of small wins (Weick , 1 984) is built on the prem ise of small enactments which can develop into larger benefits through organ izational processes. Cause Maps

'Cause maps' are local-level sets of explanatory causal attributions which make sense of bracketed enactments. Retrospective Rationality Organ ization members use retrospective rationality to make sense of bracketed enactments. Weick ( 1 979) explained that organization members retrospectively or retroactively i n terpret experiments, explain events, generate accounts, ascribe intention and discover goals. In an extended el aboration of the notion of re trospective rationality, Perrow described the concept as 'disturbing' , 'unnerving' and 'unsettli ng' because it defies people's sense of order, rationality and intelligent behavior ( 1 979 : 1 351 36 ) . Retrospective rationality can come i n a variety of degrees of accuracy. I n a mild form of retrospective rationality , the actor rediscovers his or her reasons for action . In a harsher form of retrospective rationality, the actor manufactures j ustifications for action . Bracketed enactments serve as triggers for retrospective rational ity . Micro-macro There is a subtle shift in which individuals participate in groups for personal i nterests but then become committed to the creation and attainment of group goals; organ izing moves from i ndividual/psychological to organizational/sociological levels. Weick ( 1 993a) emphasized the micro­ macro qualities of t he t heory of organizing in a recent chapter entitled , 'Sensemaking i n organizations: Small structures with large consequences' . In the chapter, he organ izes diverse research to demonstrate how ( I ) individual actions create commi tment to social relationsh ips , (2) social relationships generate more com mitment, (3) j ustifications are based on social relationships , (4) reifications of j ustifications create self-fu l fi l l ing prophecies, and (5) efforts to validate j ustification diffuse to others. The net effect of these l i n ked processes is that m icro-level actions can have macro-level consequences . Discrediting Weick ( 1 979) wrote that cause maps can be bui lt up from past experience and that these historical cause m aps are i mposed on equivocal situations.

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Weick ( 1 979) also noted that cause maps should be discredited and questioned occasional l y . When old cause m aps are retained and reapplied to new situations , there is little change , but when old cause m aps are q uestioned and discredi ted , there should be greater change . Interpretive Schemes Cause m aps are not manufactured from scratch . Each organization membe r brings an accumu lated i nterpretive scheme to bracketed e nact­ m e n ts . I nterpretive schemes ( Bartune k , 1 984) are used here as an overarching term to capture related ideas of assembly rules , assumptions, beliefs , cognitive consensuality, cogn itive l ogic , cognitive m aps , the 'con­ ventional poi n t of view ' , cultures, dominant reality, frames of reference, i deologies, logics , mental models, myths, n orms, prototypes, schemata, scri pts , shared meani ngs, shared paradigms and worldviews. Different groups of people operate under different i nterpretive schemes. Weick's ( 1 979) discussion of the N askapi I ndians provides a useful i l l ustration of i n te rpretive schemes. The N askapi heated and cracked the shoulderblades of a caribou to decide which d i rection t hey should go hunting. The modern corporate equivalent of caribou bones might be m arket rese arch . The N askapi i n terpretive schemes would fi lter out market research , and modern corporate i nterpretive schemes would fi l ter out shoulderblade­ cracking. A s used here , an i nterpretive scheme held by an individual o r an o rganization provides a background from which a more specific cause m ap is created. Complicated Managers Weick w rote that the prescription , ' Complicate yourself!' ( 1 979: 273) ' lies at the heart of the organizing formulation as the overall prescription for adaptation' ( 1 979 : 26 ] ) . Complicated organization members contribute requisite variety to reorganizing processes. A system has requisite variety for inte rpreting a specific system if it can adequately register or sense another system t hrough the accurate internal modeling - t hrough multiple, i ndepen de n t , weak ly constrained elements - of the dive rsity of the other system . Bartunek et al . ( 1 983) traced the development of the proposition that complicated understanding is valuabl e . In their revie w, they found that complicated m an agers outperform less complicated managers because they are capable of registering more organizational complexity and crafting better i n te rpretations of that complexity. Minority Influence As people try to make sense of bracketed enactments, some people may construct cause maps which differ from a dominant cause map which may be held by others . Nemeth ( 1 986) demonstrated that the presence of an alternative poi n t of view i ncreased the cogn itive effort of other decision makers . A similar argument has been made by J anis ( 1 972) , who argued that alternative points of view are a potential anti dote against groupthink.

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Loosely Coupled Systems I n a review of research on loosel y coupled systems, Orton and Weick ( 1 990) argued that a system is loosel y coupled if its elements are simultaneously distinctive (decoupled) and responsive (coupled ) . Orton and Weick argued that loose coupling can produce three direct effects modularity, requisite variety and discretion - a ll of which are helpful tools i n the creation and maintenance of diverse cause maps. ' Modularity' emphasizes the ability o f components i n loosely coupled systems to operate without constan t i nterference from other components in the system . ' Requisite variety' emphasizes the ability o f the system to accurately register the complexity of environments. ' Discretion' emphasizes the ability of components i n the system to act and think autonomousl y . Workable Realities

'Workable realities' are temporary perceived correspondences of multiple agendas and i nterpretations. Workable realities are products of organiza­ tional sensemaking which transform i n dividual-leve l cause maps into organizational-level foundations for col l ective action i n the form of reorganizing packages; a workable reality is not an agreement or a consensus , but is a temporary perceived corresponde nce of multiple agendas and i nterpretations which a llows a reorganizi ng package to be created. Equivocality Reduction Organization members make sense of the variations they are confronted with through the application of ration ality, i ntentionality and causality. People perceive, i nterpret , organize , and make sense out of events, opportunities, past expe riences and i l l -structured problems. D aft and Weick described ways that organizations engage i n t he activity of sense­ making or interpretation, which is also referred to as scanning, monitoring, understanding, learning and equivocali ty-reduction . They emphasized the importance of i n te rpretation to organizations: ' I n formation about the external world m ust be obtained, filte re d , and processed into a central nervous system of sorts, in which choices a re made . The organization must find ways to know the environment' ( 1 984: 285 ) . Compromise Workable realities are built through comprom ise . Weick ( 1 979) observed that organizi ng occurs in a social context. The cause m aps which are created to explain proposed actions must be palatable to constituencies which are expected to approve those actions. E nactment and organizing processes cannot escape the constraints i mposed by other people, who are also in the process of e n acting and organizing.

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Specific Tasks Workable rea li ties and organizational learning are not created in the abst ract . I n stead , they are created around specific tasks (Weick and Orton , 1 986) . Organi zations which are able to break down a complex stream of events, decisions and actions i n to discrete learning episodes are more l ikely to le arn than organ izations which stay at abstract levels. Time-lagged Sensemaking The creation of workable real ities is complicated by time-lagged sense­ m a k i ng . Weick a rgued that organizations enact environments, rather than m e re l y perceive e nvironments, and consequently their 'en acted environ­ ment is a sensi ble rendering of previous events' ( 1 979: 1 66) which the organizations have shape d . Because the interpretations which are built from these previous events are based on 'anachronistic, dated, belated' stimuli ( 1 979 : 1 66 ) , there is a 'defin ite time l ag and a definite tinge of retrospect to the definitions of the situation' ( 1 979: 1 66) . Feldman ( 1 989) found a manifestation of time-lagged sensemaking in her study of reports by gove rnment analysts : policy makers would ask for reports to inform their decisions on a specific problem , but the decisions were oft en made before the reports were compl eted . Stability and Flexibility Weick ( 1 979) proposed three responses to organizations' need for both stabili ty and flexibility: simultaneity, alternation and compromise. In simultaneity, an organ ization simultaneously trusts and doubts its retained method of operation . In alternation , an organization alternates between trusting and doubting its retained met hods. In compromise , an organiza­ tion m i xes t ru st and doubt i n to acceptable compromises. En vironmental Jolts Workable realities are shaped by environmental jolts. Meyer ( 1 982) described the responses of three hospitals to the environmental jolt of an anesthesiologists' stri k e . While contingency theories of organizational structure suggested that environ mental j olts should lead to similar struc­ tural changes, Meyer i nstead found that the three hospitals developed different responses . One explanation for these diffe re nces is that each of the hospitals' diffe re n t workable realities were reshaped i n different ways by the environmental jolt. Reorganizing Packages

' Reorganizing packages' are sets of reorganizing initiatives - proposals to change formal relationships between individuals, groups, or organizations - w h ich are presented together as deliberate organizational redesigns.

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Complex Constructions Weick ( 1 993b) has recently developed the image of the bricoleur as a person able to piece together a variety of materials. The improvization of the bricoleur is described by Weick as a better explanation of change in organ izations than the more architect-l ike activities implied by the phrase 'organ ization design ' . An organization which creates a reorganizing pack­ age acts like a bricoleur and cobbles together a complex construction from a variety of change archetypes. A study of 953 reorganizing initiatives in the Ford White House (Orton , 1 994) identified twenty-one change arche­ types which could be combined to create a reorganizing package : establish, extend , or term inate ; reorganize ; grow or shri n k ; consol idate or fragmen t ; create a liaison or break off a liaison ; assert organization ; absorb or spin off; upgrade a unit or downgrade a unit ; transform ; study ; impose a syste m ; reestablish ; rearrange ; and formalize . Reorganizing packages are not single actions, such as 'downsize ' , but are more complex com binations of several archetypes . Presentation Pressures Many of the themes in Weick's approach to orgalllzlllg emphasize the importance of how actions are i n terpreted by others . The approach is not j ust psychological , it is soci al psychological . There are not j ust actions, but there are double i n te racts. Self-fulfilling prophecies in social contexts depend on one person's actions being i nterpreted by another. Behavioral com mitment is premised on the assu mption that observers will require a person to j ustify his or her actions. As D utton and Dukerich ( 1 99 1 ) explained, organization members' act ions are affected by their understand­ ing of organizational i mage and identity. Multiple Purposes The creation of a formal reorganIZIng package can have a variety of organizational outcomes which extend beyond the technical rationales which are usually used to justify a reorganizing package . Weick ( 1 979) cited Cohen and March's four alternative purposes for plans in organiza­ tions: symbols, games, excuses for interaction and advertisements. First, plans are symbols which can substitute for substan tive actio n . Second, plans are 'games' or tournaments which fi lter out ideas which have little support . Third , plans are 'excuses for i nteraction' which provide a platform for ongoing discussions of current issues. Fourt h , plans a re 'advertise­ ments' which can be used to attract resources and support . Forceful Presentation Reorganizing packages a re presen ted with certainty . There are two forces which work together to create the certainty present in the announcement of reorgan izing packages: hierarchy and retrospection . Reorgan izing pack-

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ages come at t he end o f periods of analysis and are usuall y announced by people at high hierarchical levels. Retrospection and hierarchy thus i n teract to fi lter the uncertai nty out of the reorganizing package . Retro­ spection exaggerates the i n tentional and rational n ature of design because over time people forget about the false starts, discarded options, i n ade­ quate i n formation and probabilistic j udgments which are used to create the reorganizing package . Hierarchy has a similar effect t hrough a different mechanism . As the reorganizing package is passed up the hierarchy from people who have a lot of time to devote to the creation of the reorganizing package to people who have l i ttle time to devote to the creation of the reorganizing package , the messiness of t he package is fi lte red out by communication constrai nts. Residual Structures

' Residual structu res' are the l i ngeri ng accumulated effects of a stream of previous reorganizing packages. Brief Moment of Order There is a brief moment i n a reorganization when the reorganizing package is presented and starts to become a residual structure . Reorganizations are sensible to organization members for only a fleeting mome nt . At that one mome n t , the map becomes the territory - through accurate i n formation­ processing o r through self-fulfilling prophecy (Weick , 1 979) - and the o rgan ization pauses i n i ts swing from t he com plexities of strategy formula­ tion to the complexities of strategy implementation . Reshaping The theory of organ izing's summary question is ' How do I know what I think until I see what I say?' (Weick, 1 979: 1 33) . Thus the announcement of a reorganizing package is not the fi nal word on the manner in which the reorgan ization will be implemented. Reorgan izations are reshaped as they are commun icated, i nterpreted and evaluated. Nested Reorganizations How long can a reorganizing package stay ' fresh' before it is bumped off the organizational agenda by a subsequent reorganizing package? The i m plementation of a reorganizing package does not occur i nstan­ t an eously , but organizations seem to produce a steady flow of reorganizing packages. This creates a condition in which reorganizing processes overlap: yesterday's reorganizing package is not implemented before today's reorganizing package is announce d, and today's reorganizing package w i l l be announced even though tomorrow's reorganizing package is in preparation .

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Presumption of Logic Weick et a l . ( 1 973) found that j azz m usicians expended more e ffort on a composition i f they were told that the m usic was composed by a serious composer. When m usicians act under this presumption of logic, they exert more e ffort , and the composition sounds better than i t would if the musician doubted the logic behind the m usic and exerted l ess effort . The preservation of this presumption of logic is important to the process of reorgan izing. A fter the announcement of a reorganizing package , t here are efforts to reinforce the hard work , the i n te ll igent conclusions, and the unquestionable rationality of the reorganizing process. Memory Weick wrote , ' I f an organization is to learn anything, then the distribution of memory , the accuracy of that memory , and the conditions under which that memory is treated as a constrain t become crucia l characteristics of organizing' ( 1 979: 206) . Walsh and U ngson ( 199 1 ) built o n the theory of organ izing to explain i n great detai l how memory is created and retained in organizations: ecological changes or problems serve as equivocal decision stimu l i ; the stimuli are filtered and encoded and the equivocality is reduced ; and i nformation is stored in i n d ividuals' cause maps or other cognitive structures, standard operating procedures, and information technologies. Reorganizational Histories Reorganizing packages are portrayed here as the condensation of a series of bracketed enactments, but reorganizing packages can also be seen as a series of bracketed e nactments which shape a l arger pattern which might be cal led a reorganizational h istory . For example , from 1 908 to 1 983, General Motors conducted fifteen m ajor downsizings. One conclusion which can be drawn from a study of this history of downsizing is that General Motors accumulated learning from each of the fi fteen downsizings which constrained their approach to the sixteent h downsizi ng. Organizations do not approach reorgan izations with a blank slate of options. I nstead, from each previous reorganizing package , they accumu­ late an overarching reorganizing history which w i l l shape subsequent reorganizations . Puzzles Weick ( 1 979) began his book on the theory of organizing with frequent references to the metaphor of puzzles. Because reorganizing packages are shaped from complex environments, loosel y coupled enactments and diverse cause m aps, they may contain internal contradictions. Because

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reorganizing packages accumulate and are absorbed into structures, i t is l i kely that structures contain numerous inconsistencies, which can be framed by organizational participants as puzzles. Reorganizing packages can thus trigger consequences, unintended consequences and complicated u n i ntended consequences, or puzzles, within organization structures. Unintended Consequences A theme running through the theory of organIzing is that although i n dividuals may attempt to act ration ally, that does not guarantee that they w i l l be able to predict the eventual outcomes of complex , poorly­ understood relationshi ps (Weick , 1 979). A reorganization can reorgan ize components of the organizational structure that were not i n tended to be reorganized . Faded Complexity Residual structures are faded memories. Weick ( 1 979) wrote that there are good memory surfaces in organizations, and bad memory surfaces. Mem ory surfaces w i l l be i nfluenced by the continuing streams of influences which shape e n actments, sensemaking and reorganizing packages. In addition , people attempt to manage memories to serve their own self­ i n terests. Persistence Residual structures can persist through generations of organization members ( Weick and G i l fil lan , 1 97 1 ) . One of the reasons for persistence is that cause maps get built up which j ustify the e xistence of residual structural entities and residual structural relationships. A structural entity cannot be turned off like a l ight switch because i t remains con n ected to other structural entities which have grown accustomed to the existence of the entity. A better metaphor than light switches is that of a family heirloom i n which rose petals are placed , after each e ve nt which merits roses , and left to slowly disintegrate throughout the decades. Residual structures are n ever deleted from organizations - they simply remain in i ncreasingly m uted forms .

Conclusions: Organizing and Reorganizing

What does this catalogue of conceptual tools from a study of reorganiza­ tional learning contribute to organ ization theory? First , it is a helpful e laboration of Weick's ( 1 979) theory of organizing. Most researchers who have built on Weick's work have sliced off a portion of the larger set - for i n stance , double interacts, e nacted environments,

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loosely coupled systems and small wins. A few researchers have tried to use all three components of the organizing model - enactme n t , selection and retention ( A bolafia and Kilduff, 1 990 ; Porac et aI . , 1 989 ; Smircich and Stubbart , 1 985 ) . What T have tried to accomplish in this chapter is to create a highly detailed model which in tegrates the diverse components of Weick ian theory . I think that this restatement of a variety of Weickian concepts can provide a good foundation for the subsequent analysis of addi tional research on reorganizational learning. Second , this chapter can serve as a foundation for the analysis of research by micro-sociologists, especial l y the writing of Giddens and Bourdieu. Weick is more explicitly focused on organizations than Giddens and Bourdieu. Giddens positions himself as a grand social theorist trying to explain the emergence of societies. Consequently, his work does not directly address the dynamics of organ izations , which are smaller and more likely to be consciously managed by leaders. Bourdieu is a sociologist­ anthropologist trying to explain how economic practices are produced and maintained by societies. Consequently , he has much to say about organiza­ tional processes, but his philosophical and cultural roots make it difficult for business school researchers to interpret his work . Many of the organizational researchers who have started to study Giddens and Bourdieu are building upon a base gradually constructed by Weick since 1 969. This chapter, then, can serve as a foundation for interpretation of Giddens , Bourdie u , and other sociologists who focus - directl y and indirectly - on organizing processes. Fi nally, this detailed map of reorganizing processes serves as a proxy for the higher-level root process of 'organizing'. As attention continues to shift from the logic of causality to the logic of processes , researchers are finding 'organ izing' to be a more practical focus for attention than 'organizations' . Researchers working on topics such as strategy rormulatio n , organization decision making, reengineering, organizational change and organ izational learning are all tapping into the root process of organizing from different van tage points. By offering a model derived from a focus on reorganizing, I hope to contri bute to - and solicit the assistance of - organ izational researchers studying organizing processes from a variety of perspectives. The study of organizing processes - such as learning, reorganizing and reorganizational learning - deserves a school of researchers as dedicated to their paradigm as population ecologists, institutional theorists and organi­ zational economists are to the irs . References Abolafia. M . Y . and Kilduff. M . ( 1 988) 'Enacting market crisis: The social construction of a speculative bubble' . Administrative Science Qllarterly . 33: 1 77- 1 93. Bartune k . Jean M . ( 1 984) 'Changing i nterpretive schemes and organizational restructuring: The example of a religious orde r ' . A dmini.l'tratil'e Science Qllarterly . 29: 355-372. Bartunek . Jean M . . Gordon . .J udith R. and Weathersby. Rita Preszler ( 1 983) ' Developing

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" complicated'" understanding in admi nistrators " . A Clldelll.l" of Mllnllgemem Review. S: 2732�4.

Coh e n . M ichael D . . March . James G. and Olse n . Juhan P. ( 1 97 2 ) A garbage can model of organizational choice ' . A dlllilliSlrlIlil'c Scicllce Qllllrlcriy . 1 7 : 1 -25. Daft . Rich a rd L. and Macintos h . Norman B. ( 1 l)� I ) ' A tentative exploration into the amount and equivocality of i n form;ltion processing i n organizational work units'. A dminislralive '

Scicllce Qllllrlcriy. 2t): 207-224.

Daft . Richard L. and Weick . Karl E. ( 1 l)1-(4) 'Toward a model of organizations as interpretation systems" . A Clldell l. \· of Mllllag('l//('11/ RfI'iew. l): 21-(4-2l)5 . D utton. Jane E . and D u kerich . Janet M . ( 1 l)l)I ) 'Keeping an eye on the mirror: I mage and identity i n organizational adaptation' . A Clldelll. \· of Mallllgemenl jOllrnlll, 34: 5 1 7-554. E i n h o rn , H ..l . and Hogart h . R . M . ( 1 l)�6) 'Judging probable cause ' , Psychological Bllllelin , l)l) : 3- 1 l) .

Feldman . Martha S. ( 1 l)1-(l) Order lI'ilholll Desigll : III,trmlllllion Prodllction lind Policy M([killg. Stanford. C A : Stanford U niversity Press. Ford . Jeffrey D. ( 1 l)� 5 ) 'The e ffects of causal attributions on decision makers ' responses to performance downturns' . A c([dell1.1" of M([/1([g(,III(,1I1 Rel·iew. 10: nO-7St). G iddens, A. ( 1 l)1-(4) Till! COllslillllioll of Socien': Oll/lille of Ihe Theorv of Slruclllration. Berkeley. CA: U n iversity of Californ ia. G l assman . Robert B . ( 1 l)73 ) 'Persistence and loose coupling i n l iving systems' . Behavioral Sci('//ce. 1 8 : 83-l)�.

Heider. F. ( 1 l)5 � ) The PS .I'cholog.l' of IlI/erpersoll([l ReI([/iolls. New York : Wiley. J a n i s . I . L. ( 1 l)72) ViClilll.1 of Grollplhillk: A PsychologiclIl S/luly of Foreign Policy Decisions lind Fillscoes. Boston . M A : Houghton Miffl i n . Ki mberly, J o h n R . ( 1 l)�4 ) . Anatomy o f organ izational design' . jOllrnal of Mllnagement. 10 : I Ol)- 1 26 .

M a n n i n g . Peter K . ( 1 l)82 ) 'Producing dr;II11;\ Symbolic com m unication a n d the police ' , Symbolic Illlemclioll . S : 223-24 1

M a rch . James G . ( I l)� I ) ' Footnotes to organizational change ' . A dminislralil'e Science Quar/crll' . 2t): 561,-5n .

M c y e r . A . D . ( I l)S2 ) 'Adapting to environ mental jolts' . A dlllinistralive Science Quarlerlv. 27: 5 1 5-53 7 .

Nemeth . c.J. ( I l)�t) ' D i fferential contributions of majority and m inority influence ' , Psycho­ logica/ Review. <)3: 23-3 2 .

Orton . . T . Douglas ( 1 l)l)4) ' Reorganizing: A n analysis of the 1 l)7t) reorganization o f the U . S . intell igence community'. U n publ ished Ph D dissertation , U niversity o f M ichiga n . Orto n , J . Douglas a n d W e i c k . Karl E . ( 1 l)l)O) ' Loosely coupled systems: A reconceptualiza­ tion · . A c([deml' of Mallagelllclll RCI·i!.'II· . 1 5 : 203-22:l . Perrow. Charles ( 1 l)7l) COlllplex Orgalli:i!liolls: A Crilical T:ssay . 2nd edn . Glenview, I L : Scott . Foresman. Porac. Joseph F., Thomas, Howard and Baden-Fuller. Charles ( I l)�l) 'Competitive groups as cognitive com munities: The case of Scottish kn itwear manufacturers ' , journal of Mallage­ /I1f1l1 Sllidies , 2t): 3l)7--l 1 6 .

Salanc i k . Gerald R . ( I l) n ) 'Commitment and t h e control o f organizational behavior and bel ief . i n B . M . Staw and G R. Salancik ( cds ) . !Veil' DireCliolls ill Organizalional Behavior. Chicago, I L: SI. Clair. pp. I -54. Smircich , Linda and Stubbart . Charles ( 1 l)�5 ) 'Strategic management in an enacted world' , A cadelH I' of M{//wgeillelll R('I'iell·. 1 0 : 724-7:16.

Walsh , James P. and U ngson . Gerardo Ri\'Cra ( 1 l)'J I ) 'Organizational memory ' . A cademy of Mallagelllent Reviell', 1 6( 1 ) : :i7-l) 1 .

Webb . Eugene and Weick . Karl E . ( 1 l)7l) ) ' Unobtrusive measures in organizational theory: A rem i nder'. A dlllillislrIllil'" Sciellce QI/(/rlcrIL 24: 651 1-65l). Weick , Karl E. ( I l)()l) The Soci([l Psrc/tologl' of Orgallizing. Reading, M A : Addison-Wesley. Weick . Karl E. ( 1 l)7t) ' Educational organ izations as loosely coupled systems'. A dminislrative Science Quarlerir . 2 1 : I - I l) .

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Weick, Karl E. ( I Y77) ' Enactment processes in organizations' , in Barry Staw and Gerald Salancik (eds) , New Directions i n Organizational Behavior. Malabar, FL: Robert Krieger. pp. 267-300. Weick, Karl E. ( I Y7Y) The Social Psychology of Organizing, 2nd edn . Reading, M A : Addison-Wesley. Weick , Karl E. ( I Y80) ' Psychology as gloss', in R. Kachau and C N . Cofer (cds ) , Psychology's Second Century. New York : Praeger. pp. 1 1 0 - 1 32. Weick, Karl E . ( I YS4) 'Small wins: Redefining the scale of social problems', A merican Psychologist, 3Y: 40-4Y. Weick , Karl E . ( I YSS) ' Enacted sensemaking i n crisis situations', jOllrnal of Management Stlldies , 2 5 : 305-3 1 7. Weick , Karl E. ( I YSYa) 'Organized improvisatio n : 20 years of organizing', Communication Stlldies , 40: 24 1 -248. Weick , Karl E. ( I YSYb) 'Theory construction as disciplined i m agination ' , A cademy of Management Review, 1 4 : 532-550. Weick, Karl E. ( I YY3a) 'Sensemaking in organizations: Small structures with large conse­ quences', in J. K. M urnighan ( ed . ) , Social Psychology in Organizations: A dvances in Theory and Research . Englewood Cliffs, NJ : Prentice H a l l . pp. 1 0-37. Weick, Karl E. ( I YY3b) 'Organizational redesign as improvisation ' , i n G . P . H uber and W. H . G lick (cds) , Organizational Change and Redesign: Ideas ami Insights for Improving Performance. New York: Oxford U n i versity Press. pp. 346--3 7Y. Weic k , Karl E. and Browning, L. D. ( I Y86) ' Argument and narration i n organizational communication' , i n J . G . H un t and J . D . B lair (cds), 1 986 Yearly Review of Management, journal of Management, 1 2: 243-2SY. Weick, Karl E. and G i l fi l l a n , D . P. ( 1 Y7 1 ) ' Fate of arbitrary tradi tions in a laboratory microcul ture ' , journal of Personality and Social Psychology, 1 7: 1 7Y- I Y I . Weick , Karl E . and Orton . J . Douglas ( I YS6) ' Academic journals i n t he classroom' , Organizational Behavior Teaching Review, I I : 27-42. Weick, Karl E . , G i l fi l l a n , D . P. and Keith, T. ( I Y7J) The effect of composer credibi l i ty on orchestra performance' , Socioll1etry . 36: 435-462.

10 The Epistemology of Strategic Consultin g : Generic An alytica l Activities and O rganizatio n a l Learn i n g James A . Ph ills Jr

I n the last twenty years a great deal of concern and research has been directed toward the problem of strategic change in organizations (Boeker, 1 989 ; Fombru n , ] 992; Gersick , 1 994 ; Hini ngs and Greenwood , 1 988; Johnson , 1 987 ; Lorsc h , 1 986 ; M i l ler and Chen , 1 994 ; Pennings, 1 985 ; Pettigre w , 1 985 , 1 988; Pettigrew and Whipp, 1 99 1 ; Qui n n , 1 978; Starkey and McKinlay, 1 988; Tichy, 1 983 ) . The impetus for much of this work appears to be the difficulty and the importance of getti ng orga nizations to adapt their strategic postures to changes in their competitive environment. For exampl e , research on st rategic change often begi ns with observations of firms who have fai led to adapt their strategies in response to market signals or changes i n the nature of competition in their industry. Some authors cite the fa i lu res of the A merican automobile industry in the 1 980s ( Lawre nce and Dyer, 1 983 ; M i troff and Mohrm a n , 1 987 ; Tich y , 1 983) and , more recently, the difficulties of giants such as I B M and Sears ( Loomis and Mendes, 1 993 ; Solomon and U nderwood , 1 993 ) . Reflecting o n t hi s d ifficulty, some writers have described t h e problem i n terms o f t h e inertial tendencies o f organizational strategies , structures, configurations and m i n dsets ( Bonoma, 1 98 1 ; Burgelman , ] 99 1 ; Fredrick­ son and Iaqui nto , 1 989 ; Haveman , 1 992 ; M i l le r and Chen , 1 994) . While there i s com pel ling evide nce that at the organizational level inertia is partly due to economic forces ( G hemawa t , 1 99 1 ; Oster, 1 982) , most management scholars and practitioners appear to view it as a human and organizational problem . I n addition , although some schol ars argue that ine rtia is adaptive because of its link to stabi lity and reproduci bility (Hannan and Freeman , 1 984) , far more attention appears to be directed toward the challe nge of creati ng strategic change rather than maintaining strategic stabi lity. As troub li ng as t hese accounts may be, frequently embedded in discussions of i nertia is a more disturbing phenomenon. Even when faced with explici t , empi rically grounded challenges to their strategic direction , organizations frequently Slill fail to adapt - at least to the degree that

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outsiders think they shou ld. To the extent that this secondary form of inertia is both prevalent and problematic, it suggests important limitations to technical prescriptions for strategic flexibi lity that focus on more vigi lant environmental monitoring, better competitive analysis , or more robust models of strategy. Consulting and Competitive Beliefs

Tn attempting to understand the roots of the prim ary and secondary forms of inertia, one culprit suggested by research on strategic change is the competitive beliefs ( i ncluding assumptions and val ues) that guide strategic choice and action ( Harrigan , 1 985 ; Lorsch , 1 986 ; Mitroff and Mohrma n, 1 987 ; Porter, 1 980; Waddock a n d Isabe l l a , 1 989) . Moreover , t he process of influencing such be liefs i n developing a n d implementing strategies is a task that has an i mportant behaviora l , as well as technical analytical , com­ pon ent. Indeed, this task is often difficult for management consultants who are often quite sophisticated in using applied economic frameworks (see Caves , 1 984; Oster , 1 994; Porte r , 1 980, 1 985) to diagnose competitive problems, but who sti l l frequently encounter sign i ficant difficulty in using such diagnoses to faci litate strategic change in organizations (Argyri s , 1 985 ; Mart i n , 1 993) . Yet , consultants are typically hired specifical l y t o help produce change , and thus are deeply i nvolved in influencing competitive beliefs in organizations. On a technical leve l , consultants conduct formal economic or competit­ ive analyses of critical strategic problems and opportunities. These analyses entail a systematic examination of critical competitive beliefs. On a behavioral leve l , consultants undertake activities intended to ensure the implementation of recommendations emerging from a proj ect (in other words, change ) . These activities necessarily include attempts to influence clients' competitive be liefs and behavior based on t he technical analyses. Thus, the role and activities of strategy consultants create an ideal setting in which to study the phenomenon of interest because the consulting process involves : ( I ) explicit empirical examination of the validity of key competitive be liefs ; and (2) systematic attempts to i nfluence managers' competitive beliefs and assumptions as part of the implementation process. From this perspective , consultants' abil ities to help clients reexamine the validity of their competitive beliefs and revise them appropriately - in effect to learn - are critical to their effectiveness. One senior consultant described her expe rience on a maj o r e ngagement : We had to prove [ that our recommendation ] was right many times before they believed us. Six months ago they thought we were dead wrong. We proved it fourteen different ways and they finally bought in , but it was an incredibly uphill battle . . . they have a lot of pat arguments which they kept bringing up until we fi nally put together enough [data and analysis] . . . after a while it is j ust having an answer to every argument. Here , we see outside consul tants hired at great expense to help a client organization that was i n considerable financial difficulty - yet when the

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consultants challenged fun damental aspects of the client's conventional strategic wisdo m , they e ncountered t remendous resistance from the m anagers they were hi red to help. This puzzle is t he practical impetus behind this research , which focuses on the secondary , more active form of i n e rtia . Specifica l l y , i t examines explicit attempts by consultants to i n fl uen ce the competitive strategies and beliefs of managers i n client organizations. The goal is to i l l um inate some of the mechanisms u nderlying the tendency for the beliefs and assumptions that shape strategic choices and actions to resist change . 1 This phenomenon was studied over a t hree­ year period in a n aturalistic context of consultant-facil itated strategy formulatio n and implemen tation efforts (Phil l s , 1 994) . Below , I outline a general fram ework for understanding the process of strategic consulting. While there are both empirical and t heoretical e l em e n ts to this research , because of space l i mitation s , I presen t only the theoretical component. The central elements of the framework are Generic A nalytical A ctivities ( G AAs) . These activities were derived i nductivel y from observations i n a global strategy consulting firm which I w i l l call S trategic Technology Associates (STA ) . A lthough this firm has a particular m odel of competitive strategy that is grounded in i ndustrial economics, I believe G AAs are equally applicable to other consul ti ng fi rms and models of strategy . Thus G AAs represent a kind of meta-model or epistemology of practice w hich i s concerned with methods and standards for generating knowledge and determi n i ng its validity. This represents a fundamental concern i n the phi losophy of science (Kuhn, 1 970; Popper, 1 968) as well as i n research methods i n the behavioral sciences (Campbel l and Stanle y , 1 966; Cook a n d Campbell , 1 979 ; Kaplan , 1 963 ; Rosenthal and Rosnow, 1 984) . Consulting and Strategic Knowledge

Knowledge i n the dom ain of strategy deals with the nature of competition in i ndustries. This knowledge m ust fi rst define the parameters and concepts that can be used to describe i n dustries in general . Second, it must be specific in that its elements m ust be connectable to the particul a rs of an individual fi rm or i ndustry. I n addition , such knowledge must be normative and prescriptive ( Be l l et a I . , 1 988) since it must be connectable to actio n , and be sufficiently comprehensive t o deal with t h e effectiveness o f actio n , where effectiveness derives from achieving desired outcomes a t the organizational level ( A rgyris and Schon , 1 978) - or, i n the language of economics, at the l evel of the 'firm ' , where the primary desideratum is sustained above-average profitability or rents (Caves, 1 984; Oster, 1 994 ; Porter, 1 980, 1 985) . Consultants are brought i n when there i s some identifiable problem or opportunity that presents the client organ ization with a question of what action (s) to take . Typica l l y , answering this question requires some under-

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standing of causality in the client's business environme nt . This might involve determi n i ng why particular patterns of competitive or economic outcomes are observed in the i ndustry (especiall y firm-level performance outcomes) . There may also be issues of process, such as how the causal forces ide n tifi ed produced the outcomes observed . Often , t here may be questions of extrapolation , such as what the industry will look like in the future . U ltimately , there will be questions about action such as: G iven these competitive forces and trends , what should the company do? There may also be a series of more specific questions about how to concretize the general actions. For example , if a key action is to reduce costs, this presents managers with choices about which costs to reduce , what time frame to adopt , and how to assign responsibil i ty for subtasks. Norma l l y , such choices are considered p a r t o f t h e process o f strategy implementation ( A n drews, 1 987 ; G albrai th and Kazanj ian , 1 986 ; H rebiniak and Joyce , 1 984) . Col lective l y , t hese questions sketch the i nquiry and problem-solving process that guides strategic consu l ti ng i n terventions. To reiterate, the focus here is on understanding: ( I ) When and why are clients likely to accept or rej ect consultants' assertions? and ( 2) What leads to the difficulty that consultants and clients encounter in resolving differences productive l y , in the context of strategy formulation and implementation efforts (that is, what i s it about the problems themselves, the consultants' diagnosis or advice , or the clients, that l eads to differences in view and difficulty i n resolving such differences) ?2 These questions represent an i nstance of the general problem of organizational learning ( A rgyris and Schon , 1 978) , where ' le arning' involves reconcil i ng confl ict­ ing competitive beliefs (or i ncreasing consensus) while also increasing their validity and accuracy . This framing a l lows for the possibi lity that consult­ ants as well as clients may revise their beliefs. Moreover, it shifts the focus from clients' acquiescence in the face of consultants' expertise and analyses (that is , the problem of persuasion) to the quality of the reason i ng and action of both the clients and the consultants. As I will argu e , the answer to the questions posed above lies partly in an unde rstanding of the epistemol­ ogy of consulting, particularly with respect to t he G A A s that are outlined below and their attendant barriers to learn ing. Generic Analytical Activities

GA As Defined As strategy consultants work with clients, they engage in four interrelated Generic Analytical Activities ( G A As) : comparison , explanatio n , pre­ diction and prescription . These G AAs are 'generic' in the sense that they can be observed across a broad range of strategic consulting e ngagements. G A As are 'analytical' i n the sense that they involve the systematic use of deductive or inductive reason i ng to make inferences about competitive phenomen a. 3 The notion of an 'activity' is broad ; it encompasses every-

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thing from col lecting data and performing analyses and experi ments to com municating the conclusions of such i nvestigations. The GAAs, in essence , represent t he basic epistemic building blocks o f competitive analysis. They are defined below i n more det ail : •

•

•

•

Comparison i n volves anal yses that con trast two or more strategically relevant entities along one or more dimensions. For example , com­ parison would include: competitive cost analyses, analyses of customer perceptions, or evaluations of a com pany's products/services relative to a competitor's (diffe rent iatio n ) . Explanation i nvolves di agnoses of competi tive phenomena (usually problems) that specify causal relationships among strategically import­ ant variables. For example. expl anations would include assertions l i ke 'profitability has decli ned because of i ncreases in i ndustry capacity and price cutting by new entran ts' . Prediction in volves forecasts and estimates of future events, quantities, relationships , or consequences of current actions. For example, pre­ dictions would include asse rtions like ' i ndustry prices will decline' or 'i ndustry sales will reach $3 billion within two years' . Prescription i nvol ves recommendations that a client implement specific decisions, i n i tiatives, or policies i n tended to address a problem or an opportunity . For example. prescriptions would incl ude assertions l i ke 'you should consol idate your product line by thirty per cent' or 'capaci ty at Plant A should be expanded to 300 million pounds/year' .

Most of the competitive beliefs expressed or examined during a strategic consulting project are embedded within the context of one or more of these activities. Although I have separated G A As for the conceptual purpose of identifying their disti nctive features, i n practice they are closel y connected. I ndeed , they typically occur as part of an integrated sequence of infer­ ences , as I w i ll i l l ust rate short l y . General Features of GAAs Addressing strategic problems and opportulll t Jes necessarily involves all four GAAs. Each is essential to the process of strategic thinking and advisin g , and each is critical to the diagnostic and prescriptive reasoning that lies at the core of st rategic consu ltation . In any particular consulting engagement , the elements of each GAA are de rived from an overarching model of competi tion in industries and an understanding of the historical pattern of events con n ected with the particular client organizatio n , its industry , and the strategic issue in question . In addition , there may be a k ind of m icro-causal model held by the client that can be characterized as the company's 'vision ' (Collins and Porras, 1 99 1 ; Senge , 1 990) , 'model of competitive advantage' (Martin , 1 993) , or 'organizational theory of action' ( A rgyris and Schon , 1 978) . This model will general l y specify both a p roduct-market concept and some type of organizational and managerial architecture for delivering the concept . Together, the overarching theory

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of competition and the organ ization specific information identify relevant variables and constructs, contain proposi tions about causal relationships among these variables, and detail a methodology for operationalizing these constructs. Consultants and clients draw on their respective models to assess the client organ ization's situation with respect to key variables (through analytic comparisons) . They then explain the organization's past experience and current performance or i ndustry outcomes, predict future outcomes resulting from current choices, and prescribe recomme nded strategic actions. Thus G A As are ordinarily manifested as sequential steps in a line of reasoning that is similar to the series of inferences in A rgyris and Schon 's ( 1 978) 'ladder of inference ' . Such sequences appear within a single presen tation as well as over the course of an engagement in the form of interrelated modules of work or anal ysis. A ll four GAAs occur as part of attempts to structure and solve problems that are inherently very complex ( Bower and Doz, 1 979 ; Duncan, 1 972 ; Schweiger et a I . , 1 985 ) . For example, st rategic decisions are generally characterized by features such as uncertain outcomes, limited information and scarce resources . Competitive information is often difficult and cost ly to collect. Moreover, decision make rs need to formulate model i ng assump­ tions, estimate important parameters , and sample rather than collect data on entire populations of i n te rest . Due to these sources of complexity and ambiguity, clients and consultants can develop conflicting beliefs for reasons that are primari l y technical or cognitive . That is, these differences are based on i n formational or i n ferential factors and are thus rooted in the subst ance of the analysis. A secondary feature of G A As is that their impl ications often trigger emotional and motivational i nflue nces on behavior. This happens because G A As diagnose problems and provide a guide for action . However, strategic choices and actions often entail shifts in allocation of power, resources and rewards. Because i ndividuals have personal stakes and preferences around particular strategic choices and outcomes, G AAs can create a motivational basis for disagreement around competitive beliefs. I will expand on specific cognitive and motivational influences on learning in th e discussion of each GAA . G AAs and Barriers to Learning

When consultants and clients develop conflicting be liefs about st rategic issues, these are situated in the context of GA A s. Each G A A is in turn associated with characteristic patterns of reasoning. Embedded in these patterns are predictable barriers to learning . The behavioral features of G A As that are of i n terest here are those factors that contribute to initial differe nces i n be liefs between consultants and clients , and make such differences more difficult to reconcile productively. These barriers to learning can be divided into two basic categories: cognitive and motiva­ tional. This distinction between cognitive and motivational influences

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corresponds closel y to Abelson's ( 1 963) seminal distinction between 'hot' and 'cold' cognition. I n the domain of strategic decision making, there has been e xtensive treatment of the role of colder cognitive processes ( Bazer­ m a n , 1 986; Schwen k , 1 988 ; Sims et aI . , 1 986) as wel l as analyses that focus on motivational factors (Janis and M an n , 1 977 ; Kets de Vries and Miller, 1 984) . I n the orga nizational development literature , resistance to change has long been explained in terms of motivational mechanisms. These explanations reflect a broad set of inferred or i mputed psychological motives such as maintaining contro l , reducing uncertain t y , protecting self­ esteem/impression management , minimizing effort or work demands ; preventing disruption of socia l relationships ( Ashforth and Lee , 1 990; Kanter, 1985) A l t hough it i s often difficult to distinguish between motivational and cognitive mechanisms, I use the distinction because of its heuristic value for u nderstanding the challenge of learning in the context of GAAs and because i t i s pervasive in the literature . I n sum , e ach G A A is associated with identifiable barriers to learning. Some are unique to one , while others are applicable to m u l tiple G A As . T h e l i s t o f barriers discussed for each G A A is only partial . N everthel ess , it i ll ustrates the connection between the cognitive and motivational features of G A A s and the difficulties consultants and clients have in reconciling divergen t beliefs. I n combination , t hese difficulties frequently act as a significant barrier to the implementation of major strategic changes . The challenge is to better understand how to enhance strategic adaptation i n organizations, particularly b y i ncreasing t h e effectiveness o f external consultants hired to i n tervene i n these large social and economic systems. Comparison

The thing that was really hard . . . is we showed the clients their own inefficiencies . . . . You basicall y indict them by saying, ' I've been looking at five years of your costs, and I 've cut them all these different ways, and I've run regression analyses. I 've compared things, and talked to all of your managers; all of these graphs and q uotes and implications that I've drawn out of this that say, this whole thing is not being managed very wel l ' . That's a very hard thing for a manager to take. ( A senior STA consultant) S trategic analyses n ecessarily i n volve comparisons. They are critical to the reason i ng process and weltanschauung of a strategic perspective . I ndeed , a n umber of theoretical constructs central to strategic thinking, such as competitive advantage , differentiation , cost position (Porter, 1980, 1 985) , distinct ive competence (An d rews , 1 987) and core competence ( Prahalad and Hamel , 1 990) are relative and, t herefore , have comparisons embedded in them . Furthermore , comparisons are an explicit part of many types of formal strategic a nalyses such as cost, customer positioning, and assess­ m e n ts of the sustainabi l i ty or i m i tability of strategy ( G hemawat , 1 99 1 ; Oster, 1 994 ; Porter, 1 985 ) . The variables typically used i n comparisons

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consist of various measures and determ inants of performance such as product or business unit costs, product profitability, m arket share, cus­ tomer satisfact io n , custome r profitabil i ty , product l i n e or divisional profit­ ability, growth , etc. As strategic analysts and advisors, consultants make extensive use of comparisons (see Zelazny, 1 979) . I n the real world of strategic decision making, comparisons contain inherent sources of complexity and uncertainty . They i nvolve multiple, often i nterdependent , assumptions which are sensitive to implicit and explicit choices about sampling, reference points, m easurement i nstru­ ments and the operationa lization of variables . In additio n , clients and consultants typically bring different direct experiences (data) to bear on comparative analyses. Moreover, they often operate using different models of strategy, as well as styles and abil i ties. These potential sources of disagreement are primarily cognitive. Multi-dimensional Reasoning One of the primary cognitive barriers arises from the m u lti-dimensional nature of compariso n . A critical feature of a comparison between two or more entities i s the dimension(s) on which they are compared . In principle , entities have an i n fin i te numbe r of attributes and can be com pared on m ultiple dimensions. Generally, they will be similar o n some dimensions and dissi m ila r o n others . For examp l e , consider the proverbial injunction against comparing apples and oranges. Are they , or are t hey not , comparable? The a nswer depends on what dimensions are used. The two fruits might meaningfully be compared on dimensions such as caloric content, price , freshness , ease of consumption , fi be r content and so o n. Other dimensions such a s 'peelabil i ty' or use for baking a pie, might be considered l ess meaningful because they are less relevant to one of the two. One could certainly argue that apples and oranges are 'different' . Never­ theless, if the purpose of the comparison was to decide which fruit to have for lunch, few woul d see the comparison as meaningless or somehow unfair. Yet , this appears to be precisely the reaction that managers often have to comparisons m ade for the purpose of evaluating and formulating strategy. On one leve l , this i s not surprising given that the terms 'diffe rent' and 'similar' are abstractions that can refer to a range of concrete attributes. I n t h e case o f strategic comparisons, people display a tendency to focus o n whichever dimensions are most salient to t h e m given their concerns , yet this selection occurs tacit l y . D isagreement occurs over whether the entities are similar or differen t . I t is u n usual for explicit discussions to occur about which dimensions to consider and what inferences to make o n the basis of the chosen dimensions. Evaluation Com parisons frequently contain implicit or explicit evaluations of past , presen t , and future competitive choices and performance. These evalua-

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tions are central to strategic thinking and necessary for decision making. A lthough o n the surface most evaluations pertain to the fi rm, individuals are i n evitably associated with strategic decisions and actions. This may be the resul t of formal responsib i li ty or of informal roles in a particular strategic t hrust . Consequent l y , any eval uation of competitive performance is frequent l y extrapolated to an evaluation of specific individuals. When n egative or m ixed, these can become (or appear to become) a threat to the material and/or psychological i nterests of those i mplicate d . This i n t roduces a motivational dimension that can exacerbate the difficulties and barriers consultants and clients already face as a result of the cognitive issues. I ndeed , one feature of strategic comparisons that remains relatively consistent is the t hreat created by the public examination of such data. Thus, com parison is an activity fraught with a ll the perils and threats of performance evaluation i n o rganization (cf. Beer, 1 99 1 ) . N evertheless, while the task of performance evaluation is generally recognized as a behavioral and i n te rpersonal task , comparison i n the context of strategy formulation and implementation i s primarily viewed as a technical chal­ l enge ( A rgyris, 1 985 ) . Explanation

I nitially, the study was focused on the new Apollo product. We spent a month, and it became clear that [Apollo and the core] businesses were inextricably tied to one another. You make [both] products with the same capital . So the tremendous excess capacity was a problem for both. Second, there were dramatic changes in the i ndustry that were attacking both businesses. Apollo was unique in that it had m arketing problems - [the targeted] customers don't want it. But the i ndustry forces were the same . The distinction in the clients' mind between this dog of a business and this cash cow was going to have to be broken dow n . (A senior STA consultant) A ddressi ng strategic problems and oppo rtunities necessarily involves the developmen t of explanations. They are critical to the diagnostic and prescriptive reasoning that l i es at the core of strategic consultatio n . Drawing on t h e i r respective models o f competition , consultants and clients assess the organ ization's situation and explain its past events, outcomes and especially performance . If the consultant's m ission is to enhance their clients' performance , they m ust evaluate and identify the causes of poor or l i mited perform ance. As a result , the competence and decisions of m an agers responsible for the activities d riving perform ance outcome can com e into question . These explan ations , and the models from which they stem , form the basis for future choices and actions. Explanations share many sources of complexity common to all G A A s , but more i mportantly, t h e y e n tail difficulties associated w i t h m a k i n g causal i nferences about complex systems when it is impossible to conduct con trolled experi m ents (Campbell and Stan ley, 1 966; Rosenthal and Rosnow , 1 984) and especially when such systems are composed of human beings ( L i ncol n and Guba, 1 985 ) . In most i nstances , the strategic problems

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faced by clients i nvolve a large number of variables and complex relation­ ships (or 'in teraction effects' i n the language of multivariate statistics ) . Furthermore , both t h e value o f variables a n d their relationship t o one another are often changing i n ways that are difficult to detect because they are not directly observable, or i nvolve stochastic processes , or occur very gradual l y . These are conditions under which there is volumi nous evidence of the fallibility of human j udgment (Hogarth , 1 980 ; Kahneman et aI . , 1 982) . Especially prone to e rror are i nferential processes involved in j udgments about correlation and causality t ha t a re at t he heart of explanation (Jennings et aI . , 1 982) . As a result of these difficulties, conflicting interpretations of the causes of important outcomes can develop for reasons that are largely cogn itive . Comprehension and A bstraction One of the major barriers to learn i ng in the context of explanations lies in th e constructs used as part o f t hi s G AA . The problem stems from the conceptually and an alytically elaborate constructs used as part of explana­ tions. These are frequently abstract and characterized by m ultiple attri­ butes and nested (for example , Porter's ( 1 980 , 1 985) notions of industry structure or the value chai n ) . Si nce the constructs are second nature to the consultants, it may not occur to them that ine rtia may resul t from the different understandings of these constructs or a lack of com prehension .4 Ironically, the very skil lfulness and famil iarity that consultants have with the constructs can blind them to clients' confusion . This difficulty can be understood i n terms of the highly e laborate but tacit cognitive structures or 'schemata' (Bartlett , 1 932; Bougon et aI . , 1 977; Weick, 1 979) that are i nvoked in solving difficult problems. The problem of comprehension and abstraction is exacerbated by the impact of stress, threat and embarrass­ ment on human reasoning and action . Argyris ( 1 99 1 ) has described how people tend: ( 1 ) to state their conclusions and beliefs at relatively high levels of i nference , that is, without the data or the reason i ng behind them ; (2) to see these conclusions as concrete and obvious ; and (3) to form assum ptions about other actors' reactions which prevents them from inquiring in to the reason i ng behind these reactions. In the face of conflicting views , these tendencies lead to the escalation or polarization of disagreements. Finally, the sheer number of constructs and the volume of data associated with efforts to demonstrate re lationships among them often preclude the detailed explicit reasoning required to resolve con flicting conclusions. Control: The Retrospective Bias Strategic explanations identify the key causal factors behind organizational performance . Two characteristics of these factors a re the degree to which ( I ) they are (or were) con trol labl e ; and (2) they are (or were) foreseeable by managers. These are i mportant because , like comparisons , explanations

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produce evaluations of past and present competit ive decisions and actions - and the refore of individuals. Even though expl anations may appear to be simple descriptions of a com petitive situation , they can become a threat to i ndividual clients when they imply a causal relationship between manager­ ial action and negative performance outcom es. This introduces a motiva­ tional dim ension that ex acerbates the cognitive difficulties a lready inherent in the task of explaining compet itive problems and opportunities. Control is at the heart of what it means to manage . The Ame rican Heritage Dictionary ( 1 992) defines 'manage' as to 'exert con t rol over' . Explanation as an analytical activity is, in turn , inti mately con nected to control . The problem with learning i n the context of explanation occurs because retrospectivel y , managers responsible for choices leading to negative outcomes often resist explanations focusi ng on con trollable (or foreseeable ) causes of these outcomes . In contrast to predictions, explana­ tions deal with the causes of past (versus future) outcomes. This tendency is con sistent with empi rical evidence of bias in individual ( Kunda, 1 987 ; Riess and Taylor, 1 984) and organ izational ( Bettman and Wei tz, 1 983; Staw et aI . , 1 983) attributions about perform ance . However, controversy exists over t he relat ive importance of cognitive versus motivational mechanisms i n producing this bias ( Tet lock and Levi , 1 982 ; Zuckerman , 1 979) . The retrospective attributional bias has been descri bed in terms of i ndividuals' propensity for self-j ustification and ego-de fe nsiveness, which are in turn related to the drive to preserve self-esteem and the favorable impressions of others ( H uber et aI . , 1 986: Staw et aI . , 1 983) . I ndeed , in actual consu lting engagements, defen sive behavior is particularly likely t o occur i n threatening or embarrassing situations (Argyris, 1 985 ) , a s is often the case with explanations of poor performance . This often leads consult­ ants to be concerned about offering explanations of negative outcomes that h ighlight con t rol lable or foreseeable causes of these outcomes . The core motivational dynamic around the retrospective bias is that explanations con tain asse rtions about the causes of outcomes . When these are negative , attributing causal significance to variables that are control­ lable ( for i nstance , actions, decisions, or i naction) or foreseeable produces an eva luatio n . In effect , explanations surface mistakes by providing direct e mpirical data on the effectiveness and logic of managerial choices. As with comparison , eval uations can threaten clients' reputations, careers, compe nsation and other interests . Prediction

The [client ] had a report from an indepe ndent consultant that had predicted billions of dol lars by I liliS . We didn't think the market was anywhere ncar [ that ] . . . We came back and said. The market is really smal l . very profitable, with lots of inefficient prici ng right now. As it grows. producers arc going to .

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become more efficient . [At larger] quantities they are going t o be able to make it cheaper and the price is going to fall . . . . Then we built a cost model of plants and figured out what the costs actually were. We figured they had to be making ridiculously high margins - thirty percent. And that is j ust not sustainable . . . . We did a lot of buyer analysis to figure out how much [buyers] would use and to what price it would have to fall . . . . The clients would agree , but when it came to the bottom line which was , This market is going to be $500 million , not $2 billion', all of a sudde n , they did not want to hear anything any more . [Even though they agreed with all the pieces] they j ust didn't want to listen . It seemed irrational . (A senior STA consultant) Predictions i nvolve forecasts or estimates of future , events , quantities, or relationships . 5 Part of their significance arises from the fact that strategic problems and opportunities exist i n a dynamic context, meaning decision makers must consider changes in rel evant variables and relationships over time. In fact , competitive problems often stem from changes in the structure and nature of competition i n an i ndustry , such as the shift between rapid growth of emerging i ndustries and the slow or negative growth and increasing competition that typically characterizes mature i ndustries ( Harrigan , 1 985 ; Porter, 1 985 ) . Hence , strategy necessarily involves assumptions and beliefs about events that may occur in the future , what the industry w i ll look like in the future , and the consequences that will resul t from an organization's actions . Predictions about competitive phenome na , such a s proj ections about industry demand or the behavior of competitors can be empirically based . For example, they might be direct or adj usted extrapolations of historical trends such as in conven tional forecasting. A lternative l y , predictions may be theoretically grounded. They might be derived from explicit models of competition such as game theoretic approaches to strategy (see Dixit and Nalebuff, 1 99 1 ) or models of systematic and stochastic processes such as in scenario analysis (see Wack , 1 985) . Regardless of the mix of theoretieal and empirical methods, the logic by which consultants or clients form predictions can be explicit or implicit. When the derivation is explici t , the prediction tends to be framed i n the l anguage of analysis and formal models. When the derivation is implici t , the prediction tends to be framed in the l anguage of experience , j udgment, or in tuition . Either way, predictions are inherently complex because they must take into account many variables , relationships , and sources of uncertainty. Again , clients and consultants often reach confl icting conclusions about the future and have difficulty resolving these differences for reasons that are primarily cogn itive . Risk and Uncertainty Predictions i nvolve risk . Moreover, clients and consultants are affected differently by the range of possible outcomes of strategic actions and, therefore , have different i nterests, preferences and postures toward such uncertainty . Clients have to manage t he future about which predictions are

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m ade . More i mportantly, they will be held accountable for the conse­ quences of their strategic choices in the face of these predictions. A common point of contention between clients and consultants i nvolves differences over esti mates of the likelihood of (or preferences for) undesired outcomes 6 Sometimes conflict stems from the fact that they see the risks di fferently. Certain risks may be more sal ient for clients, and, therefore , clients may j udge them as being more likely (Tversky and Kahneman , 1 974) . I n instances where conflict is related to preferences for outcomes (rather than esti m ates of their probabi l i ty ) , this is usually due to the imp lications such outcomes have for clients. Often , the real and perceived personal costs of negative outcomes carry a greater weight with the clients than does the probabil istic likelihood of such an outcome , especially when it concerns their accountability for future financial or operational results. This pattern is especially pronounced when clients view the outcomes as uncertai n , and therefore risky . Consultants frame this behavior in terms of risk aversion (although there are different manifestations of risk aversio n ; see H il ton , 1 989) or defensiveness. N evertheless, i n many circumstances, clients' fears may be quite reason­ able , particularly in organizations where the culture and i ncentive systems punish fai lure to deliver predicted results. For their part , clients see consultants as overcon fiden t . even cavalier, about predictions that they won't h ave to ' l ive with' . These differences may reflect a more general difference between consultants and clients with respect to their exposure to formal theoretical models and frameworks for analyzing uncertainty related to business decisions. Some evidence on decision-making suggests that risk aversion is attenuated through the application of form al models ( Hammond, 1 967 ) . Control: The Prospective Bias Prediction is prey to a second bias around the issue of control t hat becomes apparent when the focus is on competitive beliefs about the future . More specifica l l y , there is a peculiar duality to the way managers view their ability to control organi zational outcomes. On one hand, retrospectively , managers responsible for choices leading to negative outcomes often resist explanations focusing on con trollable (or foreseeable ) causes of these outcomes. On the other hand, prospectively , they appear to have a bias toward believing they can con trol important outcomes. I n the context of prediction this bias is manifested when predictions focus on t he uncontrol­ lable determinants of performance outcomes. This bias is consisten t with evidence of the aversive nature of uncontrol lability (Seligm a n , 1 975) and the tendency for people to prefer and benefit from situations where they can (or believe they can) exert control ( Langer, 1 983) . One senior consultant noted the two sides of the control issue : I f their business is doi ng wel l , clients want to bel ieve it is because of their own brilliance . If they are doing poorly. they want to bel ieve it is due to circum­ stances outside of their control. . These [biases 1 tend to be enduring because

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they create a culture that either says, 'No matter what we do it is not goi ng to help. So why should I change')' or swashbuckling like, 'Anything we try is great' . This quotation aptly captures the classic ego-defensive or self-serving attribution bias postulated by Heider ( 1 958) and observed in organ iza­ tional attributions about performance (Bettman and Weitz, 1 983 ; Staw et a! . , 1 983) . The duality between retrospective v s prospective postures toward control could a lso be framed in terms of optimistic vs pessimistic explanat­ ory style (Seligman and Schulman, 1 986) . In this line of research , the bias toward cont rol is manifested i n much the same way , although the beneficial aspects of attributional d istortion for performance outcomes are empha­ sized . Notably, however , notions such as 'learning' and 'valid information' ( A rgyris and Schon , 1 978) are not among the outcomes selected .

Prescription

We were talking about taking four or five million dollars out of this plant. . That's two hundred people that Joe [the plant manager] knows personally. For Joe , that's his life . Those are his neighbors. If they lose their jobs, then they still l ive next door to him. So he's wild about [the recommendations] . . . . Joe can be very nice and pleasant most of the time . But now he j ust goes n uts . . . . He agrees that the numbers arc right , but then he says, 'We're talking about two h undred people who work at this plant today, who are going to be out of work if we do this. Have you ever had to lay off two hundred people') Okay, fi ne. The analysis is right . The Japanese are coming. We've got all that . But I can't do this. You can't ask me to kill my children. You can't do that. Have you ever had to kill your children Peter? I bet you haven't . ' (A senior STA consultant) A prescription is a recomme ndation that cl ients implement a specific decision , initiative, or policy designed to address a strategic problem or opportunity. I t is based on a conviction that the recommended action will either produce desired outcomes ( for i nstance , reduced costs) or ame lior­ ate undesired outcomes (such as poor product quality ) , As noted earlier, this is a particular type of prediction - one t hat deals with causal relationships between current actions and future outcomes. Correcting strategic problems or taking advantage of opportunities requi res concrete choices and action s . Thus, consultants can only help clients improve their fi rm's competitive position and performance through the implementation of specific strategic and operational recom mendations. Prescriptions also represen t attempts to design action while taking into account a complex array of economic and behavioral variables, the interrelationships among the m , and the impe rfect information and un­ certainty associ ated with strategic problems and opportunities. Thus, prescriptions are n ecessarily i ncomplete . These sources of ambiguity and potential e rror constitute fertile soil for disagreements based primarily on cognitive or technical factors.

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Risk and Feasibility I n the context of prescription , contention sometime arises between clients and consultants, not because clients doubt the underlying causal rel ation­ ships or e fficacy of recommendations, but because they see obstacles that could prevent them from implementing the recommendations derived from the analysis. The issue is not so much one of validity as it is one of feasibility . The risks con n ected with concerns about feasibility may i nvolve the fail ure to produce desired consequences , or the occurrence of un­ desired consequences. I n either case , risk stems from barriers that could prevent timely and/or effective implementation of strategic recommenda­ tions. In additio n , differences can arise ( 1 ) over clients' and consultants' esti m ates of the l i kelihood of desired outcomes, (2) over their preferences for these outcomes, or ( 3 ) over their risk profi l e or preferences for various probability distributions for these outcomes. These divergences should not be surprising given that the implications of the range of possible outcomes for the two parties may be quite different i ndee d . Common examples i nclude the personal costs associated with the different types of errors : what are commonly distinguished as Type I versus Type II e rrors (cf. Kaplan , 1 963) or 'e rrors of comm ission' versus 'errors of omissi o n ' ( G hemawat, 1 99 1 : 1 47-1 5 1 ) . These distinctions correspond to strategic i ni ti atives that are pursued and fai l as opposed to those that would u l ti m ately succeed, but are not pursued. Clients' j udgments and prefer­ ences m a y lead them to be less willing to adopt changes in strategy that consultants see as beneficial , but which clients see as risky or infeasible . Vested Interests and Organizational Politics Because of their con crete l i n ks to change , prescnptlOns trigger motiva­ tional forces that exacerbate the barriers to learning consultants and clients already face as a resul t of cognitive factors. Prescriptions ( if implemented) a lm ost a lways lead to changes that affect the m aterial and psychological i nterests of individuals and subgroups within the organizatio n . In this sense , they present the most direct l y identifiable threats and opportunities to m an agers and employees of the client organizatio n . Agai n , these threats and opportunities are usua lly a direct result of managers' preferences for, or vested i nterest i n , particular strategic alternatives ( Bower, 1 970; Donaldson and Lorsch , 1 983; Ghemawat , 1 99 1 ) . The interests and the behaviors manifested in pursuit of them are often characterized as organizational politics ( Bower and Doz, 1 979; Pettigrew, 1 973 ; Pfeffer , 1 992) , a l though researchers' use o f t h e term 'politics' varies w i t h respect to whether i t encompasses functional as well as dysfunctional processes and behavior ( D rory and Rom m , 1 990 ; Mayes and Allen , 1 977) . Perhaps the most frequently offered explanations of i ne rtia h ave t o do with 'client politics ' . Consultan ts, in particular, use this term to refer to situations in which they believe clients' reasoning and actions are designed to protect vested interests or pursue hidden agendas. At the group leve l ,

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clients may be seen a s protecting o r furthering l ocal function a l , departmen­ tal , o r geographic i n te rests . Often t hese involve deflecting responsibility for problems or gai ning or preserving access to financi a l , material , or human resources. At the individual leve l , 'politics' is usua lly used to characterize behavior designed to protect or further personal i nterests such as job security, career advancement , rewards, power or to protect the interests of an organ izational subu n i t , such as access to scarce resources. These concerns are characteristic or i ll ustrative of more general work­ related motives or classes of outcomes w hich managers prefer and actively pursue in organizational settings (Vroom , 1 964/ 1 995 ) . Structura l l y , they resemble and are probably closely related to more basic human motiva­ tions such as the needs for achievement , power and affi liation ( McClelland and Stee l e , 1 973) or self-efficacy ( Bandura , 1 977) . Often political motives and actions are covert , meani ng that managers cannot l egitimately pursue them publicly ( Mayes and A l l e n , 1 977) because they are l i kely to be seen as i nconsisten t with (or orthogonal to) the best interests of t he organization . This is especia lly true for i ndividuals' attempts to pursue self-interests (as opposed to parochial subgroup politica l behavior) . This occurs because local organizational concerns are viewed as more l egitimate , or at least as inevitable . Pursuit of individual goals (at the expense of organizational goals) is less likely to be organiza­ tiona l l y sanctioned. Despite the pervasiveness of clandestine behavior and motives in d iscussions of politics, some treatments of the term frame the const ruct in neutra l terms of power and i nfluence (see Pfeffer , 1 992 ) . T o review, consultants' political i nterpretations o f inertia hold that clients cling to pre-existing competi tive beliefs about their business ( 1 ) to cover-up or deny past m istakes and poor decisions, (2) to conceal or minimize curren t performance deficiencies, (3) to protect their personal career opportun ities or the careers of their subordinates, or (4) to j ustify opportunities that they want to pursue . Nevertheless, despite the ease with which political explanations are i n voked, consultants appear to recognize the difficu lty of validating them or ruli ng out a l te rnative explanations of client behavior. Yet the domain ( i nterpersonal and organizational be­ havior) is one in which their conventional epistemology fails. The consult­ ant cannot measu re objectively, cannot quantify , cannot conduct public tests without an epistemology and model of behavioral inte rvention to complement their applied economic theory. Conclusions and Implications

The framework presented in this chapter has both theoretical and practical implications. Theoretical l y , the notion of GA A s provides a more detailed view of the epistemological foundations for strategy devel opment efforts, particularly as conducted by management consultants. The act ivities of comparison , explanation , prediction and prescription capture the patterns of reasoning and i nference observed in actual strategy development

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efforts . Conceptual l y , the process of formulating and modifying corporate and competitive strategies, particularly the initial stage of reexamining and reform u lating the premises (bel iefs) , represents a critical form of organiza­ tion learning. Closely l i n ked to G AAs are barriers to learning or t raps that can arise in the context of these activities . Clearly , t he list a nd descriptions o f barriers outl i n ed here a re pre li mi n ary . Neverthe less, they begin to i l l ustrate the cognitive and motivational mechanisms that can i nhibit learn ing. Hence, these barriers are central to understanding the im pact of consultants' i n te rve ntions. The theoretical contributions of this work lead directly to its implications for pract ice . G AAs can be li nked to fundamental epistemological con­ structs , and hence poi n t to new ways of reflecting on and talking more explicitly about the validity of strategic k nowledge , the analyses that gen e rate it, and the effectiveness of strategic actio n . Furthermore , by i ncreasi ng their awareness of the source of potential barriers, consultants should be able to an ticipate and i ntervene more effective ly to facil i tate learning in the face of inertia. This awareness m ight even inform the design of technical analyses and the structure of whole consulting engagements. For example, comparisons could include more exhaustive l ists of the range of dime n sions (qualitative and quantitative) of entities. They m ight also deal more explicitly with the control lability of such dimensions. This would begin to reduce the problematic aspects of multi-dimensional reasoning in compa rison . S i mi la rly , consultants m ight incorporate more education a round critical concepts and tools i nto their engagements and also design ways of testing more explicitly the adequacy of both their own and their clients' understandi ng. These steps would begin to address the barrier of comprehension i n the context of explanatio n. Despite t he potential u t i li t y of t his framework, there a re a number o f i m portant caveats . Fi rst , t he i n te rventions that de a l wit h t he motivational barriers to learning are more complex because of the interpersonal competence required ( A rgyris , 1 989) . While t here are a variety of models for dealing with the behavioral aspects of strategic change (see A rgyris and Schon , 1 978 ; Beer et aI . , 1 990 ; Floyd and Woolridge , 1 992; Qui n n , 1 980; Tichy, 1 983) , the skills and organization al capabilities requi red tend to be difficult to learn and i nstitutionalize. Second, there are a numbe r of gaps in this framework that need to be addressed by future research . For example , i t i s i mportant t o explore the applicabi lity o f the framework i n light of models of strategy other than that of ST A. Additional GA A s may be n ecessary to encompass a broader range of anal ytical models of strategy . Another key area for exploration is that of expanding the list of barriers to learning for the four G A As . These caveats notwithstanding, t h e framework represents an i mportant step i n expandi ng know ledge about strategic change that integrates economic/strategic variables with behavioral/organizational constructs. More specifical l y , i t begins t o provide a more detailed understanding o f the

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micro-processes that underlie the phenomenon o f inertia that economicall y-oriented strategists have found so frustrating and bewi lder­ i ng (Harrigan , 1 985 ; Porter, 1 980) . Moreover, the framework suggests ways to enhance learning that go beyond t he 'great deal of convincing data and evidence ' suggested by Porter ( 1 980: xix) and i llustrates the funda­ mental connection between organizational learni ng and competitive advantage - the theme of the current volume. In this regard , it builds on existing efforts to develop i ntegrative and i nterdisciplinary perspectives on strategic change (see A rgyris, 1 985 ; Donaldson and Lorsch , 1 983 ; Hin ings and G reenwood, 1 988 ; Kanter, 1 989 ; M arti n , 1 993; M iller, 1 990; Petti­ grew , 1 988; Porter, 1 99 1 ; Starkey and McKinlay, 1 988) . Hopefu l l y , future work w ill further advance our understanding of the relationships between technical management disciplines of economics , finance , accounting and strategy , and approaches to management grounded in the behavioral sciences such as organizational learning. Notes This research was supported in part by the Harvard Business School . Yale School of Management , and the consulting firm in which the field research was conducted. I am grateful for the helpful comments made on earlier drafts by Chris Argyris and Richard Hackman . and for the assistance of Tolan Steele and M i ke Toffe ! . I I n t h i s chapter I set aside t h e normative question o f whether consultants' advice i s valid or usable. Admittedly , it is sometimes neither. The ability of researchers to resolve this question awaits a more robust and comprehensive model of strategy. 2 Following Nickerson ( 1 986) . the term 'assertion' is used to refer to the explicit expression of a belief as well as a basic element of an argument or line of reasoning. 3 Similar accounts of basic i n ferential tasks appear i n the fields of cognitive and social psychology ( Kahneman and Tversky. 1 973; Kaplan, 1 963; Nisbett and Ross, 1 980) . econ­ omics (Coats. 1 989; Secord. 1 986) . organization thcory (Cycrt and Grunberg. 1 963) and more general treatises on epistemology and methodology (Campbe l l and Stan ley. 1 966; Cook and Campbell , 1 979; K u h n , 1 962/1 970; Popper. 1 968; Stinchcombe, 1 968) . 4 Again , I set aside the q uestion o f whether lack o f comprehension i s a function o f the clients' or the consultants' attributes. These are instances where clients appear not to understand a construct. 5 Predictions can also i nvolve the consequences of particular actions such as the assertion that building a new plant w i l l reduce costs and/or increase productivity. When such consequences represent dcsired end-statcs or intended outcomes, these actions and predic­ tions form the basis for prescriptions, which I w i l l discuss in the next section . For the purposes of this discussion , predictions about consequences of actions that have clear normative implications will be treated as prescriptions. 6 In addition to concerns about outcomes that might occur ( risk ) , t here may be circumstanccs where consultants or clients are relatively certain about outcomes that will/wi l l not occur. The problem is then one o f feasibility , which is most relevant to t h e G A A of prescription and is discussed in the next section .

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I ndex 3C' process ( Pechiney). 1l3-R4 Abelson . R . P . . 201l Abolatia. M . Y . . I llY action theory ( A rgyris). 1 -6. 24-26 activity t heory ( Vygotsk y ) . 5Y. 62 agency theory . Y5. 1 1 3- 1 1 4 A H S Corporation. 1 2Y-1 30, 1 34 A l pha Corporation , S H R M at, 1 7 1 - 1 1l2 ambiguit y : and tacit knowledge . 1 6. 74-Y I ; causa l . YR. l OY. 1 44- 1 45 , 1 5 1 . 1 53 , I SR A merican Crown . 1 35 A m i t . R . . 1 04 Anderson . Bruce. 2 1 A nderson. P . . 1 07 Andreu. Rafael . 5 , 6, 1 2 . 1 3. R2. 1 2 1 - 1 31l Andrews. K . R . , 1 00. 1 55 Aok i . M . . 1 1 4 appropriation . 1 4 1 . 1 45- 1 47 . 1 52-1 53 Argyris. Chris. 1 -6. R, 1 0 . 1 2. 20. 25-26, 27. 3 1 -32. 32-34. 45. 4Y. Y5. 1 7 1 . 207, 21 1 Arrow. K . J . , l OY ASAP. 1 2Y- 1 30. 1 34 automatic k nowledge. R I ; vs. conscious, 60-6 1 avoided tests, I YO Baldridge Award . 30. 43 Bank One, 1 35 bargaining. I I I , 1 46- 1 47. 1 51l Bargh , 1 . A . , 6 1 Barley. S . R . , 6R Barney . J . B . . Y. YY. 1 00. 1 02 . 1 m . 1 05 , 1 07. 1 1 0 . 1 1 1 Bartlett . C A 96. l OS Bartunek . 1 . M . . I Y2 Bateson. G . . 26 Baumard. P h i l i ppe . 1 3 . 1 6 . 74-Y I Beer. Michae l . 5 . 6. 1 1 - 1 2 . 1 3 . 1 64. 1 65- 1 1l4 behavior. and cultural change . 1 61l- 1 6Y behavioral commitment. I YO behavioral V S. technical elements. 4-5 . 203 . •

Biggadike, Ralph. 5 . 6. 1 1 - 1 2 . 1 3. 1 64 . 1 65-I R4 Bij ker. W . E . . 66 Blume. S . S . , 66. 67 Bolton . M . K . . 3R. 41l Boston Consul ting Group ( B CG ) . 20. 2 1 . 1 56 Botbol . Maurice. 117 boundary resources. l OS . I I I Bourdieu. Pierre. 10. 2Y. I YY Bourgeois. L.l . , 71l Boynton. A . C . . 1 33 bracketed enactments. I Illl- I Y I brief moments of order. I Y6 B rown . 1 . S . . 20. 22. 4Y Burns, T. . 1 1 4 business policy perspective : and ·fi t · . 1 66-1 6R; on resources. Y6-Y7 Cambridge school . \02 capabi lity. 92; definitions. 1 00- 1 0 1 . 1 05-1 06. 1 23 . 1 4Y- 1 50; and information technology. 92. 1 2 I - I 3R; learning as. 22. 2Y-35; learning style as core. 3R-55; managing strategic. 'IS ; as source of profit. Y2 . 1 3Y-1 63 capabi lity learning loop. 1 25 ; IT/IS i n . 1 32- 1 34 Carnegie tradition . Y5-96. 1 1 4 causal ambigu ity. Yll. l OY. 1 44- 1 45 , 1 5 1 . 1 53 . 1 5R cause maps. l iN. 1 '1 1 - 1 '13 Caves. R. E . 1 04 . I I I . 1 42 Chandler. A . D . . 1 66 Chicago school . 1 02 Ciborra. Claudio. S . 6. 1 2 . 1 3. 20. 23. 92. 1 2 1 - 1 31l Clark . K . B . , 1 07 cognition. and organizat ional complexity. 24 cognitive barriers to learning. 207-201l; in GAAs. 20'1, 2 1 1 . 2 1 3 . 2 1 5 cognitive theories. 2Y Cohe n . M . D . . 1 '15 collective knowledge : and CT scanning .

226

Organizaliollal Learning and Compelilive A dvantage

collective knowledge. CO/l!. 66-69; vs. individua l . 62-6· L 79-X2: as source of profit . 1 �5 . 1 �9- 1 5� Col l is. David. 6. 9 . 1 0 . 1 3 . 2 9 . 9 2 . 97. 1 m . 1 0 6 . 1 39- 1 63

comm unal learning style. 5 I . 52-53 communities of practice . �9. 59. 62-6.1. XO: and CT scanning. 66-69 Company of Fri a . �q compariso n . strategic. 21l6. 2 1lX-2 1 1 l competence: defini tions of. 1 00- 1 0 1 . 1 0 6- I OX : role in short run vs. long run strategy. 1 1 1 - 1 1 3 see a/so core competence : distinctive competcncc competency t raps. 1 9 competitive beliefs. 2m-21l� complementarit y . 65 complex i t y : constructions. 1 95 : environments. I X7 complicated managers. 1 92 comprehension and abstraction. 2 1 1 compromise . 1 93 Conner. K . R . . 1 1 l 2 . lOX conscious vs. automatic knowled�e . 60-6 1 consulting. strategic. 1 6� . 2m-22�' contin uous education. �3. �5-46 contro l : prospective bias. 2 1 �-2 1 -' : retrospective bias. 2 1 1 -2 1 2 Coo l . K . . 1 04 . l O X . 1 1 0 . I I I . 1 42 Copy Exactl y . 3 1 core competence. JX. -'0. 65 . 96. 99 . 100. 1 02 . 1 04 . 1 06 . 1 1 4 Crane. D . . 95 Cremer. J . . J ( ) I . 1 0 5

CT (computed tomography) scan developm c n t . 65-7 1 culture , corporate/organizationa l : 23-2-+. 40. 62. 1 0 1 . l O S : changing norms. 1 6R- 1 69

Cyert . R . M . . 1 9 . 20. 76. l)6 Daft . R . 20. 22. 1 00 . I XX . I �ll) . 1 93 dc Vitry. Raou l . R� defensive reasoning . .:I. 5. 25-26 Detienne, M . 76, R6 D i Be l l a . A n t hony L 6, 1 2 . 1 6 . 39-55 Dieric k x . I . . 1 0 4 . l OX . 1 1 0 . I I I . 1 42 discrediting. 1 9 1 - 1 92 disse m ination modc . 47, 49 dissipation . 1 09 . 1 4 1 . 1 47- 1 49 , 1 52 distinctive competence , 9, 100, 1 0 1 . 1 55 diversification . 9 7 . 1 0 1 - 1 0 2 documentation mode. 4 7 , 4X-49 Dosi . G . , 100, 1 04 . 1 0 7 D uguid, P . , 20, 2 2 . � 9 .

.

Dukerich .I . M . . 1 95 Dunca n . R . . 20. 22 Dutton . J . E . . 1 95 .

Eaton . B . . 1 44 Eatwell . J . 1 46 Eccles. R . . 95 . 1 0 1 . 1 0 2 ecological change. I X6-1 X7 economics: capability and profi t . 1 39- 1 63 : view of resources. 93-94 Edmondson . A m y . 5, 6. 7- 1 5 . 1 6 , 1 7-:1 7 Eisenhardt . K.M .. 7X Eisenstat . Russell A . . 5 , 6 . 1 1 - 1 2 , 1 3 . 1 M . 1 65- I X�

Elcctricitc de France ( E D F ) . learning style. 39-54

E M L and CT scan developmen t . 65-7 1 enacted environments. I X6- I HX enactment ( s ) . I XX. I H9- 1 90 cnvironmental jolts. 1 94 environments. 9. 97 . 1 07- I O X . 1 26- 1 27 . 1 66 : enacted. I X6- l xX Epple. D . . 1 9 . 20 equivocality. I RR ; reduction , 1 93 L'spoused theories. 2 : vs. theories-in-use, 5 , 25

evalu;ltion . strategic, 209-2 1 0 evangelical learning style. 5 1 . 53 eHllutionary view. l)6 , 1 56 ex-ante asymmetry. 99, 1 0 1 . 1 09 . 1 10 . 1 �7- 1 �9 . 1 52

experience curves. 2 1 . 1 56 experimental mindse t . 43, 45 explanation . strategic, 206. 2 1 0--2 1 2 explicit vs. tacit knowledge. 79-x l faci litat ing factors for learning, .:1 1 -47 factor market: conditions for profi t . 1 4 1 , 1 �2- 1 �9 . 1 5 1 - 1 54 : and long run strategy. I 1 2 : and source of rents. I ()9- 1 1 1 Feldman . M . S . . 1 94 Ferguson. E . S . . 63 FIA T. learning style, 39-54 FiJih Discipline. The ( Senge ) . 1 1 . 24 Fiol . c . . J ()5 · fi t ' . 1 66- 1 6X f1exibi l i ty and stability, 1 94 Ford ( motl'r company) . 1 0 . 1 53-1 54 Ford . J . D . . I X,) Forrester, Jay. 24 Freidso n . E . . 95 Gabarro , J ack , 1 7x Galvi n . Bob. 46 Garcia-Pont . c . . 95 General Motors, 5 3 . 1 53- 1 54 , 1 97

Index Generic Analytical Activities ( G A A s ) , 1 64, 204, 205-2 1 <)

Ghcmawat. P . . 1 0 2 , 1 03 , 1 0<) , 1 1 2 , 1 41l G hoshaL S . . % Giddens, A . , 1 1l6, 1 <)1l , 1 <)<) Gignou x , C J . , 114 Gould, Janet M . , 6, 1 2 , 1 6 , 3<)-55 Grant . R . M . , <)<) , 1 06 group learning, 50- I ; usc of IT/ I S , 1 32- 1 33 G uinean revolution , effects on Pechiney, 1l4-1l5

Hamel. G . , 31l, 50, %, <)<), 1 00, 1 02 , 104, 1 14

Hayes, R . H . , 20, 2:\ Hedberg, B . 75, 76 Henderson , R . , 1 0 7 H i rschhon , L. , 5 8 history , <) Il , 1 1 2- I L l , 1 41l- 1 4<) , 1 86 ; reorganization a l , 1 <)7 Hofer, C , 100 H rebin i a k , L. G . , 1 00 H uber, G . P. , 2 1 H unter, M . K . , 63 .

I m e l , S . , 77 im itation vs. i nnovation , 47--48 sec also inimitability implementation , 3--4, 13, 1 64 , 1 65- 1 84 ; see also prescription , strategic Indigo, I ncorporated , 77, 85-81l individual knowledge: vs. col lective , 62-64, 7<)-82 ; and i nimitability, 1 5 1 ; and appropriation , 1 53 i ndividual learning, 22-2:\, 24-26; vs. group, 50-5 1 ; vs. organization a l . 1 8- 1 <), 20-2 1 ; use of IT/IS , 1 32- L l3 information technology ( IT/I S ) , 1 2 , L l , <)2 , 1 2 1 , 1 2<)- 1 3 1 ; role i n learning process, 1 3 1 - 1 36

information transfer, 1 56 i n i m i tability, <)<) , 1 08 , 1 22 , 1 34, 1 4 1 , 1 42- 1 45 , 1 5 1 - 1 52

innovation , 1 07 , 1 1 4, 1 5 6 ; vs. imitation, 47-48

i ntangible/invisible assets, <), %, 1 0 1 , 1 04 , 1 07 , 1 1 0- 1 1 1 , 1 43 , 1 4<)

I n tcl Corporation , 30--3 1 , 34 i nterpretation , 2 2 , 1 <)3 interpretive schemes, 1 <)2 Isaacs, W . N . , 20, 24 I t a m i , H . , % , 1 0 1 , 1 04 J . C Penney, 1 33 , 1 35 James, Wi l l i a m , 6 1 Janis, I . L . , 1 <)2

227

Jense n , M , C , 1 1 4 Jensen , Michae l . 4 Jouve n , Pierre , 1l4, 115 Kaplan, Robert , 4 , 1 2 Kilduff. M . , 1 1l<) K i m . D . H . , 27 Kimberley, J . R . , 1 116 knowledge , 57-58, 104- 1 05 ; acquiring and distri buting, 2 1 -22 ; diffusion t h rough IT/ I S , L l5- 1 36 ; documentation mode, 41l--4<) ; source , 47--48; strategic. 204-205 : see a/so tacit knowledge K u h n , T. S . , 1 07 Lamourdedieu , M . 83-84 Larrue, J . , 84 Lave. L 45 Law, J . , 66 Lawrence, P. R . , 1 7 1 leadershi p , involved , 43, 46 Learned , E . P . , 1 00 learning, <)8, 1 56; barriers to, 207-2 1 7 ; and capability developmen t . 1 23- L l I ; how and why, 1 6 , 26-35 ; reorgan izationaL 1 85-20 I ; review of perspec( ives, 1 1l-26; role of IT/ I S , I 3 I - L l6; single and double loop, 5-6, 25, 4<), <)5 lea rn i ng curves, 2 1 -22 learning focus, 47, 4<) learning orientations, 4 1 , 42, 47-5 1 learn i ng style. 1 6 , 38-5 5 ; typology, 5 1 -53 Leonard-Barton , D . , 45, 104 Lev i t t , B . 1 <) , 20 Lippma n , S . A . , 1 06, 1 09 . 1 44, I SO Lipsey, R . , 1 44 logic, 1 <)7 loose coupling, 1 87 , 1 93 Lorsch , .I . W . , 1 7 1 .

Macintos h , N . B . , I IlIl McKee, D . , 1 31l Manning, P. K . , I �7 March , J .G . . 1 <) , 2(), 75, 76, %, 1 <)0 , 1 95 Marengo, L. , 1 04, 1 07 Marshall . A . , I SO Mart i n , M . , 66 Martin , Roger, 1 0 measurement and metrics, 4 1 , 4 3 , 44 Meckling, W . , 1 1 4 memory , organizationa l . 1 �7- 1 �� , 1 <)7; faded, I 9� Meyer. A . D . , 1 <)4 m icro-macro dichotomy, 1 <) 1 Miliken, F.J . , 75, 76 M i l ls, D . E. , 1 41l

228

Organizational Learning and Competitive A dvantage

m inority influence , 1 '12 m ission , 1 26 , 1 27 M IT, 32, 47, 52 mobility, '1'1, 1 08- 1 0'), 1 42- 1 43 Moingeon, Bertrand, S , 6, 7- 1 5 , 1 6 , 1 7-37 Moni tor Company, 1 0 , 1 2 , 32-34 motivational barriers to learning, 207-208 : in G A As , 2 1 0, 2 1 2 , 2 1 6 Motorola Corporation, learning style , 3'1-54 Mrs. Fields' Cookies, 1 30-1 3 1 . 1 35 m u l ti-dimensional reasoning, 20'1 m ul tiple advocates, 43, 46 M utual I nvestment Corporation ( M I C pseudonym ) , learning style , 3'1-54 Nanda, Ashish , 6, 'I, 1 3, 29, '12, 'I3- J ( )(J narra tive , 63 Naskapi I ndians, 1 '12 Nelson , R . , 1 '1 , 20, 62, <)6, 1 04 , 1 06, 1 56 Nemet h , C J . , 1 '12 nested reorganizations, 1 ')6 Nevis, Edwin C , 6, 1 2, 1 6, 3'1-55 Nohria, N . . '15, 1 0 1 . 1 0 2 Nonaka , 1 . , 49, 8 1 . '1 4 , 1 0 7 Norm a n , D . A . 60-6 1 .

objective knowledge, 5X, 7'i Olsen , J . P . . 75 openness, climate of. 43, 45 operational variety, 43, 46 organizational context, I T/IS and, 1 35- 1 36 organizational development ( 0 0 ) , 1 1 - 1 2 ; and cultural change , 1 6X- I 6'I organizational theory, '15-<)6, 1 1 3- 1 1 4 ; and 'fit', 1 66-1 68 Orr, J . E . , 62-63 Orton, J . Douglas, 6, 1 3 , 1 64, I XS-20 1 Otis Elevator, 1 36 path-dependence, 'IX, 1 22 , 1 23, 1 4'1, 1 5X Pechiney, 77, 18, X2-XS Pedler, M . . 20, 22 Penrose, E.T. , 'I, '14 'people first' assumptions, 23 performance gap, 43 , 44 Perrow, C , I ') I persistence of residual structures, I 'IX- I '1'1 personal and interpersonal developmen t . 22-23, 24-26, 3 1 -32; a t Moni tor. 32-34 Peteraf. M . A . . '1'1, 1 0 1 . 1 02 , 1 03 Peters, J . , 77 Pettigrew, A . M . . 20, 22 Pfeffer. J . . I I

Phillips' 66, 1 32 Phills, James A . 5 , 6, 1 3, 1 64, 203-223 plans, m u l tiple purpose , 1 '15 Polanyi, M . . 4'), 58, 5'), 60, 62, 74 , 77, 80, 1 45 pol itics, organization a l , 2 1 6-2 1 7 Pondy , Lou , 1 8') Popper, K . . 5'1 Porac, J . F . 1 86 Porter, M . E . 1 0, <)7, 1 3 1 , 1 42 , 2 1 ') posit ivism , 57 . 58 practical k nowledge , tacit . 58-64, X I Prahalad. C K . . 3X, 50, <)6, '1,), 100, 1 02 , 1 04, 1 1 4 prediction , strategic, 206, 2 1 2-2 1 3 prescription , strategic, 206, 2 1 5-2 1 7 presentation: forceful , 1 '15-1 <)6; pressures, 1 ')5 product market: condition for profit , 1 4 1 , 1 50- 1 5 1 ; and short run strategy. 1 1 2 ; and strategic use of resources, ,)7, 1 0 1 - 1 02 product-process focus, 47 , 48 productive reasoning, 2-3, 1 0 profit . 1 3 , ')2 , 1 39-1 63 puzzles, I <)7-1 'IS .

.

.

rarit y (scarcity), 'I'), I US-I 0'), 1 22 , 1 34 Rebo u l . Olivier. 27 refi nement, 107, 1 1 4 'reflective practice ' , 77 renewa l , 1 07, 1 1 4 rent . 1 0 , 1 3 , 56-57, 'IS-'I,) , 1 0 1 - 1 03 , I OX- I O') , 1 42 , 1 46; distinguished from profit . 1 40- 1 4 1 , 1 57 ; source of, 10'1- 1 1 1 reorganizational learning, 1 85-20 I reorganizing packages, 1 ')4-1 '16 researc h , descriptive vs. i n terve ntion , 1 8-26 reshaping, 1 <)6 residual structures, 1 '16-1 ')') resource-based view of the firm ( RBYF) , ')-1 1 . 1 3 , ')2, ')3- 1 08, 1 2 1 , 1 55 , 1 57 ; learning loops i n , 1 23- I 2 ,) ; overview, 1 22- 1 23 resources, definitions, 1 00-1 0 1 , 1 03-1 05 , 1 22 retrospective rationality, I 'l l ris k : and feasibility, 2 1 6; and uncertainty, 2 1 3-2 1 4 Robinson , J . 1 46 Rockefeller, John 0 . . 65 routines, 1 ')-2 1 . ')6, 1 04, 1 06, 1 22- 1 23 , 1 4,) ; defensive , 5 , 1 0 , 33, 62 routinization learning loop, 1 24- 1 25 ; ITIIS i n , 1 32-1 34 Rubin , P . H . , ,)4, 1 03- 1 04, 1 07 .

Index rugged individual learning style, 5 1 , 5 2 Rume l t . R . P. , 97, 1 0 2 , 1 06 , 1 0il , 10<), 1 42 , 1 44 , 1 50

rumor (at Pechiney ) ,

il3

229

stratcgy: capability as, 1 55 ; and knowledge types, 64-65 ; and learning how and why, 29-30; and resource-based view, Y 7 , 1 0 1 - 1 03 , 1 1 1 - 1 1 3 ; and structure, Y , 98, 1 55 , 1 66

Salancik , G . R . , 1 <)0 Savings Banks (Spanish ) , 1 3t}- 1 3 1 , 1 34 scanning, 4 1 , 42-44, 1 93 scarcity ( rari t y ) , 9Y, 1 0 8- I O Y , 1 22 , 1 34 Sche i n , E . H . , 20, 23-24 Schende l , D . , 1 00 Schneider, L . S . , 20, 23 Schoemaker, P . J . , 1 04 , 1 42 , 1 48 Schon, D . , 2 5 , 4Y, 63, 77, 9 5 , 207 Schumpeter, J . A . , Y5, 1 00 , 1 07 scientific knoWledge, 57-5 il ; vs. practical , 58-60, (,3

Scott . W . R . , l OS Scribner, S . , 5Y-60, 80 Selznick , P . , Y, 9 5 , 100 Senge, Peter, 1 1 , 20, 2 4 , 45 , 47 short vs. long run strategy, 1 1 1 - 1 1 3 Shrivastava, P . , 20, 2 2 , 38 Simon, H . A . , 5Y, 60, 63, Y6 single and double loop learning, 5-6,

single-business strategy, 9 7 , 10 I - I 02 Si tki n, S. B . , 45 s k i l l development, 47, 50-5 I small wins, I YO- I Y I Snow , e . e . , 100 social welfare, 1 02- 1 03 sociological view of resources, <)4-Y5 specific tasks, 1 94 specificity degree, 1 23 Spender, J . e . , 6 , 1 2- 1 3 , 1 6 , 56--7 3, 74,

system dynamics, 24, 3 2 , 'systems of scope' , 1 33

43 , 47

tacit knowledge, 1 2- 1 3 , 1 6 , 2 2 , 56--7 3, \ 0 5 ; and ambigui t y , 1 6 , 74-9 1 ; categories of, 58-64; vs. expliciL 79-il2; as source of profit or ren t , 9, 1 3 , I I I , 1 45 , 1 49- 1 54 technical vs. behavioral elements, 4-5 , 203 techno-analytic learn ing style, 5 1 , 52 Teece , D .J . , (,5, (,6 , 69 , 1 0(', 1 08 , 1 1 3 , 1 23 , theories-in-use, 24, 3 2 ; vs. espoused, 5 , t ime-lagged sensemaking, I Y4 total qual ity management (TQ M ) , 1 7 ,

25

8tf-8 1 , 1 5(,

Ungson, G . R. ,

79,

81

1 76-- 1 78 , 1 8 1 - 1 82

strategic consul t i ng, 1 64 , 203-223 strategic h uman resources managemcnt ( S H R M ) , 1 64 , 1 65 , 1 69- 1 82 strategic information systcms ( S I S ) , 1 2 1 , 1 2Y

I T/ I S i n ,

1 34- 1 3 5

strategic managemcnt , dynamic view, strategic profiling, 1 7 1 - 1 72 strategic resources, Y 2 , Y9, 1 08-109

1 22 ,

1 34- 1 35 , 1 40

traditional learning style, 5 1 , 53 transaction costs, 94, 1 46-- 1 47 Tushman, M . L. , 1 07

stability and flexibility, I Y4 Stalker, G . , 1 1 4 Starbuc k , W . H . , 7 5 , 76 Stata , Ray, I I , 20, 2 2 , 3Y Sterma n , John, 24 Stevenson, H . H . , 1 1 3 strategic align men t . 1 66-- 1 68 ; using SHRM ,

1 26-- 1 27 ;

1 53- 1 54

supersti tious learning, 1 9 sustainabi lity, Y8-99, 108- 1 09 ,

151 25 ,

4Y, 95

strategic learning loop,

structural theories, 28-2Y structure: constraints of, I Y8 ; con ti n uing, 1 86 ; and strategy, 9 , Y8 , 1 55 , 1 6(, subst itution , 1 08 , 1 2 2 , 1 34 , 1 4 1 , 1 4 5 ,

Y-I I

1 1)7

value, <)<) , 1 22 , 1 34 value-chain focus, 4 7 , 49-50 variation , 1 90 Verna n t , J . P . , 7(" 86 vested interests, 2 1 6--2 1 7 Vince n t i , W . G . , 63 Vygotsk y , L . S . , 45 , 5<), (,2 Walsh , J . P . , I Y7 Webb, S . , (,6 Weick, Karl, 1 3 , 20, 2 2 , 78; reframing of concepts, 1 64 , I S5-200 Weiss, A . , 20, 22 Wenger, E . , 45 Wernerfe l t , B . , 9, Y7 , 1 00, 1 0 1 - 10 2 , 1 03 Whipp, R . , 20, 2 2 Wilso n , J . Q . , 1 1 4 W i n ter, S . G . , 1 9 , 20, (, 2 , 96, ] (J4. 1 0(' , 1 56 workable real ities, 1 93- I Y4 Yin, R.,

78