Organisations Transformability And The Dynamics Of Strategy 9781845442378, 9781845440756

Citation preview

md cover (i).qxd

3/9/05

11:56 AM

Page 1

ISBN 1-84544-075-7

ISSN 0025-1747

Volume 43 Number 1 2005

Management Decision incorporating the Journal of Management History

Organisations, transformability and the dynamics of strategy Guest Editors: Kazem Chaharbaghi, Andy Adcroft and Robert Willis

www.emeraldinsight.com

Management Decision

ISSN 0025-1747 Volume 43 Number 1 2005

Organisations, transformability and the dynamics of strategy Guest Editors Kazem Chaharbaghi, Andy Adcroft and Robert Willis

Access this journal online _________________________

3

Editorial advisory board __________________________

4

Editorial _________________________________________

5

Introduction Organisations, transformability and the dynamics of strategy Kazem Chaharbaghi, Andy Adcroft and Robert Willis _________________

6

Firm transformation: advancing a Darwinian perspective Colin Jones ___________________________________________________

13

Competing in times of evolution and revolution: an essay on long-term firm survival Wyn Jenkins __________________________________________________

26

Strategy dynamics in industrial marketing: a business types perspective Klaus Backhaus and Katrin Muehlfeld _____________________________

Access this journal electronically The current and past volumes of this journal are available at:

www.emeraldinsight.com/0025-1747.htm You can also search more than 100 additional Emerald journals in Emerald Fulltext (www.emeraldinsight.com/ft) and Emerald Management Xtra (www.emeraldinsight.com/emx) See page following contents for full details of what your access includes.

38

CONTENTS

CONTENTS continued

Modern project management and the lessons from the study of the transformation of the British Expeditionary Force in the Great War George Bailey _________________________________________________

56

Interpreting the successful transformation of Shell’s advertising activity 1997-2002 Julie Verity____________________________________________________

72

The role of scenarios as prospective sensemaking devices Alex Wright___________________________________________________

86

The paradox of using tacit and explicit knowledge: strategies to face dilemmas Sajjad M. Jasimuddin, Jonathan H. Klein and Con Connell _____________

102

Dealing with the uncertainties of environmental change by adding scenario planning to the strategy reformulation equation Philip R. Walsh ________________________________________________

113

Strategic alliances and models of collaboration Emanuela Todeva and David Knoke _______________________________

123

Note from the publisher ___________________________

149

www.emeraldinsight.com/md.htm As a subscriber to this journal, you can benefit from instant, electronic access to this title via Emerald Fulltext and Emerald Management Xtra. Your access includes a variety of features that increase the value of your journal subscription.

Additional complimentary services available

How to access this journal electronically

E-mail alert services These services allow you to be kept up to date with the latest additions to the journal via e-mail, as soon as new material enters the database. Further information about the services available can be found at www.emeraldinsight.com/alerts

To benefit from electronic access to this journal you first need to register via the internet. Registration is simple and full instructions are available online at www.emeraldinsight.com/admin Once registration is completed, your institution will have instant access to all articles through the journal’s Table of Contents page at www.emeraldinsight.com/0025-1747.htm More information about the journal is also available at www.emeraldinsight.com/md.htm Our liberal institution-wide licence allows everyone within your institution to access your journal electronically, making your subscription more cost-effective. Our web site has been designed to provide you with a comprehensive, simple system that needs only minimum administration. Access is available via IP authentication or username and password.

Key features of Emerald electronic journals Automatic permission to make up to 25 copies of individual articles This facility can be used for training purposes, course notes, seminars etc. This only applies to articles of which Emerald owns copyright. For further details visit www.emeraldinsight.com/ copyright Online publishing and archiving As well as current volumes of the journal, you can also gain access to past volumes on the internet via Emerald Fulltext and Emerald Management Xtra. You can browse or search these databases for relevant articles. Key readings This feature provides abstracts of related articles chosen by the journal editor, selected to provide readers with current awareness of interesting articles from other publications in the field. Reference linking Direct links from the journal article references to abstracts of the most influential articles cited. Where possible, this link is to the full text of the article. E-mail an article Allows users to e-mail links to relevant and interesting articles to another computer for later use, reference or printing purposes. Emerald structured abstracts New for 2005, Emerald structured abstracts provide consistent, clear and informative summaries of the content of the articles, allowing faster evaluation of papers.

Your access includes a variety of features that add to the functionality and value of your journal subscription:

Research register A web-based research forum that provides insider information on research activity world-wide located at www.emeraldinsight.com/researchregister You can also register your research activity here. User services Comprehensive librarian and user toolkits have been created to help you get the most from your journal subscription. For further information about what is available visit www.emeraldinsight.com/usagetoolkit

Choice of access Electronic access to this journal is available via a number of channels. Our web site www.emeraldinsight.com is the recommended means of electronic access, as it provides fully searchable and value added access to the complete content of the journal. However, you can also access and search the article content of this journal through the following journal delivery services: EBSCOHost Electronic Journals Service ejournals.ebsco.com Huber E-Journals e-journals.hanshuber.com/english/index.htm Informatics J-Gate www.j-gate.informindia.co.in Ingenta www.ingenta.com Minerva Electronic Online Services www.minerva.at OCLC FirstSearch www.oclc.org/firstsearch SilverLinker www.ovid.com SwetsWise www.swetswise.com TDnet www.tdnet.com

Emerald Customer Support For customer support and technical help contact: E-mail [email protected] Web www.emeraldinsight.com/customercharter Tel +44 (0) 1274 785278 Fax +44 (0) 1274 785204

MD 43,1

4

EDITORIAL ADVISORY BOARD David Ballantyne Associate Professor of Marketing, University of Otago, New Zealand

Wang ShouQing Deputy Head, Department of Construction Management, School of Civil Engineering, Tsinghua University, Beijing, China

Laurence Barton PhD President and Chief Executive Officer, The American College, Bryn Mawr, PA, USA

Amrik S. Sohal Department of Management, Monash University, Melbourne, Australia

Mike Berrell Head, School of Business, James Cook University, Australia

David Tranfield Professor of Management, Director of Research and Faculty Development, Cranfield School of Management, Cranfield, UK

David M. Boje PhD Department of Management, New Mexico State University, USA Mike Bourne Cranfield School of Management, Centre for Business Performance, Cranfield, UK Catherine Cassell Professor of Organizational Psychology, University of Sheffield Management School, Sheffield, UK Mark Dodgson Director, Technology and Innovation Management Centre, University of Queensland, Brisbane, Australia Mario Emiliani Professor of Management, Rensselaer at Hartford Lally School of Management and Technology, USA Stan Glaser Fred Emery Institute, Melbourne, Australia Christian Gro¨nroos Professor, Swedish School of Economics, Helsinki, Finland John C. Groth Professor of Finance, Texas A&M University, USA Professor Angappa Gunasekaran Department of Management, Charlton College of Business, University of Massachusetts, North Dartmouth, USA William D. Guth Harold Price Professor of Entrepreneurship and Strategic Management, New York University, USA Sam Ho Dean. Hang Seng School of Commerce, Hong Kong

Claus von Campenhausen Accenture, Mu¨nchen, Germany Ingo Walter Charles Simon Professor of Applied Financial Economics, New York University, USA Charlie Weir Aberdeen Business School, Robert Gordon University, Aberdeen, UK Ray Wild Principal, Henley Management College, Henley-on-Thames, UK Richard Wilding Cranfield School of Management, Cranfield, UK Mohamed A. Youssef Eminent Scholar and Chairman, Norfolk State University, Norfolk, Virginia, USA

JOURNAL OF MANAGEMENT HISTORY – EDITORIAL ADVISORY BOARD Bernardo Batiz-Lazo PhD Senior Lecturer in Banking, Accounting and Finance Division, London South Bank University, London, UK Shawn M. Carraher PhD Director, International Family Business Academy, Professor of Management & Global Entrepreneurship, Texas A&M University, USA

Jay Kandampully Ohio State University, Columbus, USA

Kerry David Carson PhD SPHR Professor of Management, University of Louisiana at Lafayette, Lafayette, USA

Magda Elsayed Kandil Senior Economist, International Monetary Fund, Washington DC, USA

Paula Phillips Carson PhD SPHR MBA Director/Associate Dean, University of Louisiana at Lafayette, Lafayette, USA

Aneel Karnani School of Business Administration, University of Michigan at Ann Arbor, USA

Regina A. Greenwood Associate Professor, Industrial and Manufacturing Engineering and Business Department, Kettering University, Flint, MI, USA

Erdener Kaynak Professor of Marketing, Pennsylvania University of Harrisburg, USA

Jonathon R.B. Halbesleben PhD Division of Management, Michael F. Price College of Business, University of Oklahoma, USA

Tauno O. Kekale University of Vaasa, Finland

John Humphreys Eastern New Mexico University, College of Business, USA

Yoshio Kondo Professor Emeritus, Kyoto University, Japan

Satish Mehra PhD CPIM Professor of Production Operations Management, Fogelman College of Business and Economics, The University of Memphis, Memphis, USA

Hao Ma PhD Professor of Management & EMBA Director, Peking University, People’s Republic of China Nigel F. Piercy Cardiff University, UK Michael A. Roberto Assistant Professor, Harvard Business School, Boston, MA, USA Management Decision Vol. 43 No. 1, 2005 p. 4 # Emerald Group Publishing Limited 0025-1747

Joao Vieira da Cunha MIT Sloan School of Management, Cambridge, USA

Jennifer Rowley Head, School of Management and Social Sciences, Edge Hill University College, UK Joseph Sarkis Clark University, Worcester, MA, USA

John-Christopher Spender PhD MA BA FRSA 411 East 57th Street, New York, USA Julia Teahen Professional Development Workshop Chair, Management History Division, Baker College, Flint, MI, USA Daniel A. Wren Curator, Bass Business History Collection, Bizzell Memorial Library, University of Oklahoma, Norman, USA

Editorial

Editorial In 2005 Management Decision enters its 43rd volume. It is one of the longest-running continuously published journals of record in business and management in the world. Management Decision was founded in the early 1960s, when business was starting to bloom as a discipline worthy of study and research. When someone is writing an editorial for, say, the journal’s 60th year in publication, I am sure they will be commenting not only on the role of China’s influence as the world’s major economy, but also on its emergence as a key centre of management scholarship, with many of the world’s top business schools located there. Maybe they will point to the publication in 2005 of a special issue of this journal, devoted to business research from China, edited by Professor Wang ShouQing at Tsinghua University in Beijing, as an important landmark in this growth. Certainly, I see part of our role within this journal, but also more widely within Emerald Group Publishing, as encouraging research and knowledge creation and export from the world’s emergent regions, not merely its import. We are looking to explore, in real terms, how to be true partners in the process, not just suppliers of journals to universities. In 2005 Management Decision will be available online in Emerald Management Xtra, an online collection, not only of Emerald journals, but also of linked resources to assist the work of librarians, students, teachers, researchers, and even graduates of business schools and universities. In increasing measure, it is how this journal, and others, is being consumed by our customers. Many students entering universities this year will find it hard to remember life prior to the online world, and probably would think going into a library and looking through shelves in search of a journal paper was bordering on insanity, when you can look up a keyword on the web. A fascinating by-product of all this for us editors and authors is that we can actually tell how many readers we have nowadays! I can look at our last 12 months’ online access figures and see that nearly half a million people looked at an abstract from Management Decision, and more than 280,000 of them downloaded an article. Which equates to just over 23,000 a month. In the days when a journal meant a paper copy stacked on a library shelf, such figures were beyond the reach of most scholarly research journals. Today it is easy for the student, researcher or practitioner to browse an index or search for a paper on a particular topic, review the abstract, and download (and usually print) the full paper. These are comforting statistics for our authors, for there is nothing an author likes more than to know his or her paper is being read, thought about, talked about, learned from, cited. 280,000 downloads a year from the journal is a powerful statistic. This journal is only ever as strong as its authors and its reviewers. We thank them all for continuing a thread which began 43 years ago, and which continues to thrive and grow.

5

John Peters Management Decision Vol. 43 No. 1, 2005 p. 5 q Emerald Group Publishing Limited 0025-1747

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

MD 43,1

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

INTRODUCTION

Organisations, transformability and the dynamics of strategy

6

Kazem Chaharbaghi University of East London, Dagenham, UK

Andy Adcroft University of Surrey, Guildford, UK, and

Robert Willis Anglia Polytechnic University, Chelmsford, UK Abstract Purpose – The purpose of this paper is to demonstrate the relationship between three concepts: organisations, transformability and the dynamics of strategy. These three concepts together with their interrelationships are central in explaining the life cycle of organisations, their survival and renewal. Design/methodology/approach – The development of this explanation has been based on bringing together a diversity of perspectives. Each perspective provides a horizon of understanding by directing attention in a particular way. The benefits of this approach are that it avoids the pitfalls of one-dimensionalism. This approach more accurately reflects the multi-faceted reality within which organisations operate. Findings – Discusses, compares and contextualises the findings and approaches of the papers in this special issue. Originality/value – The perspectives considered represent a small sample of the diversity that exists. However, this sample as serves a starting-point in developing a wider, more holistic debate that aims to bring theory and practice together. Keywords Organizational change, Corporate strategy, Organizational restructuring Paper type General review

Change alone is unchanging. The same road goes both up and down. The beginning of a circle is also its end. Not I, but the world says it: all is one. And yet everything comes in season. (Heraclitus of Ephesus)

Management Decision Vol. 43 No. 1, 2005 pp. 6-12 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572443

There is a possibly apocryphal story that, in his later years, Pablo Picasso was never allowed to wander around art galleries alone because he had previously been discovered in the act of improving on one of his existing works. For the artist in his dotage, change was not just inevitable but something to be welcomed – not even one of his own priceless masterpieces was beyond enhancement. This recognition of the necessity for constant improvement is paralleled in the practice of management, where there is a realisation that organisations, no matter how successful they may appear to be, need to change constantly. This recognition is also reflected in the management literature, with over 4,000 new articles a year added to the Library of Congress’s collection on change, revolution and transformation in and of organisations. Volume, in

this case at least, suggests diversity and it is with this diversity on transformation that this special issue deals. Here, diversity is treated not as a product of an unstructured and disorganised debate but rather, as Jerome Nathanson argues, “as the essence of a rich and rewarding human experience”. Every generation looks back to previous generations and believes, hardly ever with a sense of irony, that its time is more revolutionary. The present generation is no different. The symbols of the latest revolution, however, are very different. In the twentieth century, the symbol of revolution was the hammer and sickle. Before that it was emancipation and earlier, the guillotine. The present day revolution is symbolised by information and communication technology. The modern day revolutionaries create organisations out of technological advance, make products faster, smaller, more functional, and, in the process, fundamentally disrupt the nature of competition between organisations. In this information rich and time poor world, language has become inflated and disconnected from the activity it is describing. What was once a policy or a tactic becomes a strategy. What used to be an alteration or and adaptation becomes a transformation. Words which used to mean big things become things with big meanings. Where every action is strategic, every change is transformational, every trigger is a revolution, words are used to represent more and more but can ultimately mean less and less. The ethos of this special issue runs counter to this description. The intention behind it is to provide a series of intellectually and scholastically rigorous illustrations of transformation: how it is viewed from diverse perspectives, why it might occur and the constraints faced by organisations who wish to transform or who are forced to transform. The emphasis here is on three concepts that are central to this special issue and the contributions within it: organisations, transformability and the dynamics of strategy. This is based on the recognition that there is a funambulist line to walk between finding hard and fast definitions of a concept, which provide specificity but limit investigation, and opening up a concept to a wider explanation, which creates new avenues for investigation but diminishes the value of the concept. In discussing these concepts, therefore, an attempt is made to walk this tightrope and focus more on discussion of concepts and the relationship between concepts than on presenting a specific lexicographers view of the world. As this special issue focuses on the activity of the strategic dynamics of organisational transformation, its treatment of organisations concentrates on the aspect of something that is done, something that needs to be described and analysed. This raises some interesting ideas that many of the contributions refer to and enlighten. Thought of in this way, the emphasis is on what it means to be an organisation and organised, disorganisation and how this is different and reorganisation as a process that links the two together. In management, as in nature, organisation refers to a tendency of apparently disordered and random behaviour to take a more highly ordered state and disorganisation refers to the opposite. For scholars the interesting questions are how and why. Like much scholarly investigation, the starting point is an assumption: organisations have a life cycle, which cannot be avoided. Success is not a gift for life but is an outcome that has to be worked at and is the result of change over time. When organisations have it, they are organised and when they do not, they are

The dynamics of strategy

7

MD 43,1

8

disorganised. Metaphors often help. Organisation delivers solidity and everything associated with it: comfort, security, familiarity and so on. Fluidity, however, is the outcome of disorganisation and creates a fundamentally different set of outcomes whether the fluidity comes from proactivity or reactivity, prescription or emergence, accident or design. Reorganisation is important because it explains the process through which solids become liquids, and then liquids become solids again. Reorganisation as a fundamental change of state can be considered as transformation. Within the context of reorganisation, it is helpful to consider transformability in terms of two different, yet complementary concepts of resilience and adaptability. This is because resilience and adaptability are central concepts that underpin and are closely related to the process of transformation. In order to explain the complementarities of these concepts a useful metaphor is that of elasticity. To develop this metaphor it is necessary to define the concepts and demonstrate their mutually supportive nature, as it is only through this that the impact on the process and dynamics of strategy and transformational change can be fully appreciated. At its simplest, resilience is a property that allows an organisation to retain its original function, structure and identity despite changing environments. In management terminology, therefore, resilience relates to those capacities and capabilities which are built into an organisation’s design that allows it to survive and thrive, regardless of the adverse external pressures and forces exerted upon it. In the context of elasticity, this implies that resilience is an ability organisations possess where changes can be absorbed, and, as long as the organisation does not reach its elastic limits, it is not required to transform dramatically. Once an organisation achieves an outcome of resilience, the process of adaptability comes to the fore. Adaptability encapsulates a capacity to change or be changed in order to provide fitness to changing circumstances. Thus, whilst resilience is an outcome, it is never a steady-state outcome. When an organisation is stretched towards its elastic limits, a process of incremental adaptation comes to the fore. As in Darwinian biology, those organisations that survive in changing circumstances go through a slow process of adaptation. This process itself is built on the foundation of resilience and is reflected in an innate capacity to alter function, structure and identity, and, whether spontaneous or planned, prepares an organisation for the world they face. As with resilience, adaptability works up to a point. However, when the stresses and strains imposed by highly turbulent, dynamic environments push an organisation beyond its elastic limits, something has to give. In these conditions, transformation becomes the only viable option. Unlike adaptation, which is about changes of degree, transformation represents a metamorphosis, a qualitative change in kind. However, without the precursors of resilience and adaptability being in place, it can be contended that organisations that go for transformational change are unprepared for this and the likelihood of this high-risk strategy working are limited. Thus, unlike the general management literature on transformational change, the contention here is that this is not the first port of call for organisations, but the last stage of a preparatory process that is only likely to succeed if it is mutually supported by the building blocks of resilience and adaptability. Thus, whilst resilience and adaptability relate to the dynamics of an organisation in terms of remaining essentially the same in the light of environmental changes, transformability is concerned with a fundamental change in the nature of the

organisation, in particular the assumptions upon which the organisation is built and run which determine its behaviour, dictate its decisions and define what it considers to be meaningful results. In other words transformability is the capacity to create a new way of organising because those assumptions that once led to growth and success are untenable as they are no longer in harmony with the reality of the changing environment. Thus transformability implies a willingness to be open to new understanding and changing to become a different organisation. When viewed from the perspectives of resilience or adaptability, change is something that can be anticipated and controlled to a predictable outcome where “change management” can apply predetermined, step-by-step, structured methodologies as tools of change. Transformation on the other hand entails a non-linear process that requires a creative as oppose to a designing mind. Transformation, therefore, represents a “metamorphosis” that produces radical change. Transformation is thus different to alteration and adaptation. This special issue is concerned with transformation and the question of whether and how organisations transform. Can they really turn their backs on their history, traditions and culture and become something completely different? If transformation means metamorphosis from one state to another, why can some do it and others cannot? Organisations rarely operate in a black and white world of right and wrong or yes and no. One of the problems is that of quantifying the difference between alteration and adaptation, and, adaptation and transformation. Organisations probably know it when they see it but maybe it is just a matter of strategy. In terms of the connection between strategy and transformation, strategy matters because it provides the context for organisations, what they are to achieve, how they will win in the competitive race. Strategy matters because it notes, defines and drives the process of organisation, disorganisation and reorganisation. Strategy matters because it can make it difficult to transform, after all, no-one wants to dump a winning formula. Strategy is combining both art and science in delivering desired performance. Strategy is dynamic. In discussing and developing these concepts, and the relationship between them, this special issue offers an eclectic mix of contributions. The contributions range from conceptual and theoretical to empirical and scientific, from knowledge to learning, from models to constraints on transformation. The intention is not to create a management toolkit for transformation nor is it to provide a collection of contributions of interest to a limited academic audience. The intention is to contribute to an appreciation and understanding of the nature of strategy and transformation and the relationship between the two, an understanding that is grounded in organisations and not dealt with in an abstract manner. If anything, this special issue is intended to open up space for new debates rather than close existing ones. The selected contributions for this special issue deal with some major issues and some serious debates. Although these issues and debates are hardly new, each contribution has something new to say and their originality is not based on a new sound bite or an original oversimplification but rather aimed at serious, inquisitive and open minded intellectuals. For the social scientist, for example, the contributions offer perspectives from the natural sciences and, in an age where history is supposedly at an end, they offer some historical lessons that may show that whilst the language of management may be a contemporary phenomenon, the activity of management is much less modern. Thus, the contributions have been organised into two broad themes.

The dynamics of strategy

9

MD 43,1

10

The first of these themes is transformation itself where transformation is not treated as a word in search of a definition but as a concept that is open to a number of equally valid perspectives. The second theme moves from concept to illustration, some instalments or episodes in a longer social scientific and management narrative. Within the first theme, two of the key questions that are considered are what does it mean to be in a process of transformation and why does it happen? Drawing on theories of Darwinian and Lamarckian evolutionary processes, the contribution by Colin Jones develops the central argument that, in understanding transformation, it is vital to clarify the identity and role of mechanisms of replication and interaction within firms and their operating environments. Within this context of operating environments, Wyn Jenkins combines elements of traditional micro-economics with market positioning and resource based theories to propose a revolution-evolution framework for understanding the nature of markets during periods of change. On the issue of change, Backhaus and Muehlfield note fundamental changes in market offerings in industries such as automotives, information technology and chemicals and create a systematic framework through which such changes can be mapped and analysed. By drawing on theories of transaction cost economics, they argue for the centrality of asset specificity as a choice variable in understanding this type of market transformation. Having opened up the concept of transformation to discussion and analysis, this special issue then offers a series of illustrations as to what it means to be in a process of transformation and raises some important and interesting issues for management as an activity that is investigated and as an activity that undertaken. Offering a historical insight into transformation, George Bailey draws parallels with modern project management speak and the transformation of the British Expeditionary Force during the First World War. In a much more contemporary context, Julie Verity examines and interprets the successful transformation of the advertising activity of Shell and suggests that success was built on the Shell’s dynamic capabilities. Whilst these offer two specific examples of transformation in action, this special issue also deals with a whole range of other organisational issues. For example, Alex Wright’s contribution suggests that transformational change is more likely to occur at the periphery of organisations and challenges the assumption that change is driven by deductive strategy formulation at the centre of organisations. Jasimuddin et al. discuss the notion of the knowledge strategy of an organisation and contrast tacit and explicit knowledge within the literature on organisations. This paper proposes the concept of symbiosis strategy as a means of developing both understanding and action. This raises the issue of models of transformation and their usefulness. In this context, Phil Walsh considers the role and function of strategy within uncertain environments and proposes that scenario planning can play a useful role, not in predicting the future, but in assessing the possible consequences of future changes in an operating environment. Finally, Todeva and Knocke draw attention to the importance of strategic alliances and other forms of collaboration in the attaining of organisational objectives. Their contribution focuses on the issues of formulation, implementation and performance of strategic alliances. This special issue therefore presents a number of different perspectives on the nature and character of organisational transformation and just as Thomas Jefferson saw differences in opinion as being helpful in religion, so too are they in management

research. The contention is that diversity is a sign of healthy debate and intellectual development, especially when that diversity is built on some common foundations. What is common across all of the contributions is that the perspective on transformation taken is determined by the assumptions made by the contributors whether these assumptions determine the a priori starting point for the research or the variables which are be investigated. The selection of contributions in this special issue suggests that the assumptions made are shaped and determined by two factors. First, the perspective on transformation is determined by the context in which it takes place. For example, practitioners will view the concept differently to academics, industry transformation will differ across different industries and all organisations will have a perspective and perception that is unique to them. The second determinant of what transformation may mean are the constraints faced by the organisation being transformed. For example, in the public sector the constraints may be determined by the imposition of requirements as to which services must be delivered rather than in how they are delivered and this contrasts with other types of organisation where the transformation is constrained by unwillingness to change what seems like a winning formula. If it is this combination of assumptions, contexts and constraints that determine the interpretation and perspective of transformation, then it is probably logical to argue that this combination also impacts on the type of change that takes place. From the contributions in this special issue, two general types of change can be determined. On the one hand is change by degree where change is more evolutionary and gradual and, for example, can be seen in changes to the mode of delivery of existing services or products. On the other hand there is transformation or change by kind where the change is much more dramatic and intense: change that is closely related to the concept of metamorphosis. No assumptions of generalisability are proffered in this special issue but attention is drawn to the fact that, in the majority of cases, change is by degree much more than kind. However, whilst change is characterised in this way, it is worth noting that this is not always reflected in the language used to describe the transformation. There is a close relationship between organisational change and language. Language plays a central role in both the provision of the motivation to change and in the management of that change process. Language and rhetoric matter because they provide and describe the crisis that provokes a process of transformation and can contribute to the development of momentum in pushing through the process of change. This is whether the change is by degree or in kind and, in any case, provided they are sustained over time, changes in degree necessarily deliver changes in kind. The, sometimes, inflated language of change is crucial especially when the reason for transformation is not necessarily apparent; as Alan Cohen argues “it takes a lot of courage to release the familiar and seemingly secure, to embrace the new”. If the existing assumptions, contexts and constraints faced by an organisation deliver success today, it is easy to avoid the need to change the purpose and identity of any organisation. Whilst none of the contributions in this special issue provide a toolkit or magic formula for transformation, many do highlight the central role of people in determining the reason and scope of change. This raises another common theme of the articles: the centrality of people in any understanding of the nature and process of organisational change. In this area, again, more questions than answers are raised. The

The dynamics of strategy

11

MD 43,1

12

reason for this is to open rather than close debates around this issue; as Gloria Steinmen suggests “the first problem for all of us, men and women, is not to learn, but to unlearn”. In her diary, Anne Frank proposed that “we all live with the same objective of being happy; our lives are all different and yet the same”. In management research it is often too easy to lose sight of the common ground that supports the diversity of opinion formed on the basis of intellectual investigation: non-prescriptive; eclectic; rigorous; grounded. These are the characteristics of the contributions in this special issue of Management Decision. The diversity that they represent is a product of different approaches and contexts and, whilst all being different, many share common themes.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Firm transformation: advancing a Darwinian perspective

Firm transformation

Colin Jones University of Tasmania, Hobart, Australia

13

Abstract Purpose – The paper advocates a Darwinian explanation of the process of firm transformation. Existing but generally opposing views related to the selection-adaptation debates are united to consider the dialogic nature of both approaches. It is argued that a Darwinian approach, as opposed to a neo-Darwinian or Lamarckian approach, provides the means to scale the sides of a debate that has for too long divided scholars interested in firm and industry transformation. Design/methodology/approach – The paper addresses three specific issues to develop its Darwinian argument. First, the various works of Geoff Hodgson that have for many years advanced Darwin’s evolutionary ideas are used to argue the nature and application of Darwinism in the socio-economic domain. Second, the nature of what constitutes the elements of firm-environment interaction is considered to establish basic areas of focus through which the process of firm transformation is more understandable. Finally, the construct absorptive capacity is likened to a mechanism of transmission through which the learning processes associated with the acquisition of favoured variations can be reconciled with the generic evolutionary processes of variation, selection, and retention. Findings – To understand the process of firm learning, the role of habits and routines must be outlined in specific detail. They cannot be assumed to perform interacting and replicating roles simultaneously. To do so undermines the fundamental qualities of an evolutionary theory. Originality/value – The preliminary framework advanced takes us beyond the Darwinian-Lamarckian debate and provides elements of focus from which a greater understanding of the process of firm/industry transformation is possible. Keywords Organizational restructuring, Organizational change, Corporate strategy Paper type Conceptual paper

Introduction Focusing upon the organizational change literature dealing with adaptation and selection, this paper explores the relatively unexplored middle ground of this literature. Essentially, this paper seeks to develop a framework for conceptualising an evolutionary theory that explains both the relationship and similarity between neo-Darwinian and Lamarckian evolution. While aspects of this ground have been explored previously (e.g. Levinthal, 1991; Amburgey et al., 1993; Haveman, 1992), this paper proposes that the actual role performed by organizational routines (and habits) does not explicitly include firm/environment interaction. Given that organizational routines are central to the processes that facilitate the development of knowledge through which firms attempt transformation, the question of whether routines actually perform both the role of replicators and interactors is important. In considering this issue, this paper is structured into three parts. First, this paper will consider the nature of the adaptation and selection debate. Second, it will consider the implications for organizational routines that arise from adopting a Darwinian perspective. Third, it will propose that the absorptive capacity construct is a mechanism through which an enhanced explanation of the transmission and infusion of advantageous variations is

Management Decision Vol. 43 No. 1, 2005 pp. 13-25 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572452

MD 43,1

14

possible. The aim of this discussion is to advance the development of an evolutionary framework for considering the process of firm transformation. Since Charles Darwin’s inspiration by the Malthus (1826) spectre that increasing populations must ultimately combat the stinginess of nature, theories of natural selection have gained acceptance in the social sciences. However, the concept of natural selection provides only half of the story. It tends to encourage a focus upon foundings and disbandings (e.g. Hannan and Freeman, 1989) to explain organizational and population change, focusing less upon the adaptation of existing firms (Aldrich, 1999). By contrast, supposedly “non-Darwinian” or Lamarckian theories that seek to explain adaptive behaviours (e.g. Nelson and Winter, 1982) from a process, rather than an event perspective, also have gained acceptance. The difference that lies between Darwinian and Lamarckian explanations can be expressed as follows. For Darwin, the ordering activity of the environment (natural selection) is preceded by variation within a population. The outcome will be the “preservation of favourable variations and the rejection of injurious variation” (Darwin, 1901, p. 58). While for Lamarckism, variation is a function of the environment (Hodgson, 1993) with acceptance of “both the inheritance of acquired characteristics and the timely appearances of variation under the stimulus of adversity” (Nelson and Winter, 1982, p. 11). Importantly, Lamarckism does assume beneficial progress, given that acquired characteristics could prove to be either beneficial or detrimental. Calls for unification That these two main evolutionary approaches[1] should be considered mutually exclusive has been the subject of recent debate (Hodgson, 2001; Knudsen, 2001). Within this debate, it has been argued convincingly by Hodgson (2001 2003a) and Gould (2002) that Darwin was in fact tolerant of Lamarckian evolution. This provides the basis of a unification argument made on two grounds. First, that from a social evolution perspective, it is possible to acquire (i.e. learn) characteristics that may prove to be beneficial (or not as the case may be). Second, little difference exists between the causal structures of Lamarckian and Darwinian selection processes. Because the focus of the discussion is socio-economic evolution, rather than biotic evolution, there is no need to remain bound by the rejection or acceptance of one particular evolutionary viewpoint. Within socio-economic evolution both forms of evolution are acceptable and can be accommodated within a Darwinian approach. The key is the pursuit of a causal explanation that explains how change occurs within a complex system involving mechanisms of variation, selection, and retention (or inheritance) (Hodgson, 2003b). The contributions of Hodgson enable extreme positions within the adaptation and selection debate to be bypassed. As such, a plausible, and unified explanation becomes possible through consideration of the interacting (rather than opposing) characteristics of neo-Darwinian and Lamarckian evolution. Given that this paper aims to consider a purely Darwinian theory, it is perhaps sensible remove any confusion that may exist regarding the terms neo-Darwinian and Darwinian. The term neo-Darwinian has existed since Darwin’s prote´ge´ George Romanes used it to describe those who explicitly rejected the possibility of the inheritance of acquired characteristics as being “more Darwinian than Darwin” (Wilkins, 2001, pp. 161-2). Within the domain of socio-economic evolution, Weismannism is the term used to describe the neo-Darwinist position that denies “the possibility of the (genotypic) inheritance of acquired

(phenotypic) characters” (Hodgson, 2001, p. 95). Essentially, the mechanisms through which organizational structures are created remain unaltered through interaction with the operating environment. This view is more in line with the process of natural selection operating upon firms within a given population. Alternatively, Darwinism is a causal explanation of the evolutionary change occurring within complex systems that involve “the inheritance of genotypic instructions by individual units, a variation of genotypes, and a process of selection of the consequent phenotypes according to their fitness in their environment” (Hodgson, 2001, p. 95). From this perspective, we can move away from the position that Weismannism and Lamarckism are mutually exclusive. We can work towards a more intuitive, and more Darwinian explanation of the processes of firm transformation that embodies both Weismannian and Lamarckian processes. From this perspective, Lamarckian evolution nests within a Darwinian framework that also accommodates the process of natural selection (Hodgson, 2001; Knudsen, 2001). It is not environmental elements (i.e. political, economic, socio-cultural, technological, and international forces) that purely determine fitness, but rather the interplay between the environment and the firm’s activities, products and services, and identity, that are subject to internal change from time to time. Firms with a degree of fit may or may not survive depending upon the origins and preservation of such fit. Alternatively, firms experiencing a degree of maladjustment may indeed survive through their ability to adapt. What is clear from this position is that selection processes occur at multiple levels. Most importantly, they occur both inside and outside the firm. Knudsen (2002) has proposed the existence of a baseline through which adaptive behaviours can be reconciled against the process of natural selection. From this perspective, the process of Lamarckian evolution can be seen as guided by the awareness of external pressures associated with the interaction the firm’s activities, products and services and identity have with the environment. While both the Lamarckian and Weismannian processes share a common Darwinian causal structure, the processes are not of equal strength, given the relative position of any individual typical firm vis-a`-vis its operating environment. Therefore, it is logical that repeated successful adaptive behaviours are able to be reconciled against a baseline that limits the degree of change. A limitation to this idea is the problem of evaluating a changing baseline against a rapidly changing environment. Under such conditions, it is challenging to envisage how a meaningful evaluation of positive or negative outcomes associated with internally driven change could occur. Given that the firms of today represent some form of adaptation to “past circumstances, and are therefore never in full accord with the requirements of the present” (Veblen, 1925, p. 191), the challenge of survival depends upon the minimization of the maladjustment between firm’s phenotype (i.e. its activities, products and services, and identity) and the operating environment. Clearly, the firm’s learning capabilities are critical to enabling continual safe passage through the environment’s corridor of fitness. The “corridor of fitness“ concept refers to the degrees of freedom afforded the firm’s activities, products and services and identity by the operating environment. The proposition being that no desirable equilibrium position exists (or is possible), but rather the relative degree of environmental stability determines the breadth of a buffer zone within which degrees of fitness are achieved. The proposition being that no identifiable equilibrium position exists (or is possible in reality), but rather the relative degree of environmental stability determines the

Firm transformation

15

MD 43,1

16

breadth of a buffer zone within which degrees of fitness are achieved. Bruderer and Singh (1996) suggest that instead of assuming an (either/or) equilibrium position exists, firms are guided by continual feedback through which they adjust their interacting elements to achieve a higher degree of organizational fitness. The task at hand is to explain how a Darwinian theory could unite both Lamarckian (internal) and Weismannian (external) selection pressures and explain the process of evolution across both stable and unstable market conditions. That is, to explore the proposition that internal and external selection processes are indeed “fundamentally interrelated processes of change” (Levinthal, 1991, p. 144). Also, to move away from past assumptions where managers are conceived as rational actors capable of interpreting and controlling their environment. In this paper, adaptive behaviours (related to firm change) are viewed as experimental “trial-and-error” incursions into tomorrow. These behaviours are context specific and the product of interaction between human nature and the environment. The outcomes of such behaviours are unpredictable, but reconcilable through the generic evolutionary processes of variation, selection, and retention. In unstable markets, the role of the human is central to the idea of Darwinian variations being seen as “trial-and-error learning events” in which either positive or negative outcomes are just as probable (McKelvey, 1994, p. 321). The key is to remain within the boundaries of the corridor of fitness. It is suggested that in reality some firms continually conduct behavioural trials, whereas those that don’t may have little ability in this regard to adjust their phenotype, especially during unstable markets. What may be worse is that some firms may also remove themselves from a competitive position within stable markets through an inability to conduct sensible behavioural trials. Before discussing the nature of such learning processes, it is appropriate to now consider other issues that must be considered through proposing a unified Darwinian theory.

The quest for causality A philosophical creed at the centre at the heart of Darwinism focuses upon “the problem of causality” (Hodgson, 2003b, p. 87). Yet, the development of many evolutionary approaches does not enable articulation or appreciation of a process demonstrating cumulative causation. Despite the acknowledged significance of Nelson and Winter’s (1982) seminal work, they proposed[2] routines to be both genotypes (i.e. operating routines) and phenotypes (i.e. manifest behaviours) that act as both behavioural dispositions and actual behaviours. From an evolutionary perspective, this is an unworkable proposition given that routines cannot be both the generative structures (i.e. replicators) and the outcomes of such structures (i.e. interactors) (Hodgson, 2003a). Aldrich (1999) also seeks to make a significant contribution to the development of an evolutionary approach to organization evolution, but importantly, fails to explicitly identify replicators and interactors. As such, the critical relationship between interacting phenotypes and preserved or rejected replicating processes is not clear. Hull (1988) notes that the underlying processes that support replication and interaction are fundamentally different. Clearly it is not possible to develop an evolutionary theory that has explanatory power in the absence of accurately defining these two components.

A Darwinian theory concerns a process of change within which natural selection has a major (but not exclusive) role to play. Darwin himself noted, “that natural selection has been the most important, but not the exclusive, means of modification” (Darwin, 1901, p. 4). Therefore, an evolutionary theory must also address the occurrence of variations associated with adaptive behaviours within evolving systems. A Lamarckian role is accepted on the proviso that “acquired characters are inherited only rarely and weakly” (Gould, 2002, p. 354) relative to the process of natural selection. Gould notes Darwin’s acceptance of such a possible secondary role (to natural selection) for Lamarckism. Further, a unified Darwinian theory that features both Lamarckism and Weismannism must account for Durham’s (1991) five requirements of evolution: the units of transmission; the sources variation; mechanisms of transmission; processes of transmission; and sources of isolation. Finally, in accepting the presence of selection mechanisms acting from within the firm, the entities that are the replicators and interactors must be identified (Knudsen, 2002). The identification of what constitutes replicators and interactors will be dealt with first. In the biotic sense, evolution is determined by the ongoing process of genotypes (i.e. genes) determining the structure of phenotypes (i.e. organisms) that interact, replicate and whose subsequent form is constantly subject to the process of natural selection (Hodgson, 2001). The process of genetic variation is random and therefore not Lamarckian. However, from a socio-economic perspective, routines (Nelson and Winter, 1982; Knudsen, 2002) and/or habits (Hodgson, 2001) are akin to genotypes, with the firm (and all components of its physical form) representative of the phenotype. Variation is introduced as a result of the firm’s interaction (e.g. experience and learning) within the operating environment. Valued characteristics can be acquired by copying and retained through repeated performance. The definition of replicators by Hull (1988, p. 408) as any “entity that passes on its structure largely intact in successive replications” is widely accepted. Hodgson (2003a) stresses that while there is no direct equivalent in the socio-economic domain that corresponds to genes or genotypes, individual habits and organizational routines adequately describe the entities that produce replication. This point of view is anchored by a specific argument that requires habits and routines to be seen as behavioural dispositions that under particular conditions give rise to particular events. Murmann (2003) states that Durham’s (1991) units of transmission and mechanisms of transmission can be viewed as replicators, while the processes of transmission can be viewed as the means of interaction. The definition of interactors by Hull (1988, p. 408) as any “entity that interacts as a cohesive whole with its environment in such a way that this interaction causes replication to be differential” is also widely accepted. However, it is difficult to ascertain from the literature exactly what interacts with the environment. The elements of phenotypic interaction Not surprisingly, the relationship between these two basic models of minimal evolutionary explanations appears incomplete. This section aims to consider the Durham (1991) and Hull (1988) positions by establishing what is acceptable as a replicators and interactors. There appears consensus, or at least convincing arguments[3] within the literature that habits and routines are suitable as units of transmission. Also, we can account for sources of organizational variation through the

Firm transformation

17

MD 43,1

18

means of innovation, copying and new entrants. It would seem reasonable to accept that the process of transmission is related to the interaction of entities within an ecological hierarchy (Baum and Singh, 1994) that consists in descending order of; the ecosystem, communities of practice, populations of firms, individual firms, work groups, and jobs. What appears to be missing is a plausible explanation of the mechanism of transmission that goes beyond mere acceptance of learning and explains the outcomes pertaining to related replicating and interacting entities. Indeed, Knudsen (2002, p. 451) highlights the need “to account for the mechanism of transmission and the infusion of new but not limited variation around the mean of what turned out to provide an advantage”. The challenge that remains for any evolutionary explanation “is to specify how variants are introduced, how selection leaves behind variants that were not as fit according to the prevailing selection criteria (criteria that in turn need to be identified), and how some variants are retained over time to create a historical trajectory or genealogy captured by decent with modification” (Murmann, 2003, p. 11). However, again there appears to be an absence of focus upon what element/s of the firm is interacting with the environment. If the position of Hodgson (2003a) is taken, and habits and routines are taken as replicators, the question remains, what interacts? Firms of all sizes are characterised by the following three dimensions: goal-directed behaviours, Boundary maintenance, and activity systems (Aldrich, 1999). From this perspective, why and where interaction occurs is accounted for respectively by the firm’s goals and boundaries. However, the activity systems of a firm cannot simply be considered as the interactor. Aldrich notes that activity systems are comprised of sets of routines and bundles of activities that facilitate the processing of raw materials, information and people. However, the question now arises, which activities are performed outside the firm and therefore interact with the environment, and which are performed inside and don’t interact with the environment? Within the services marketing literature, Grove and Fisk (1983) have successfully applied Goffman’s (1959) dramaturgy approach to establish interaction boundaries using the frontstage, backstage metaphor. The use of the metaphor encourages exploration of the suggested relationship between two phenomena (i.e. the service provider and their audience). While it is seen that the interaction takes place on the front stage, the outcomes of such interaction is dependent upon the degree of rehearsed planning, design and implementation (completed backstage). The challenge remains to separate front stage from back stage, and to define what was visibly offered for consumption by the firm. Just as important is to establish which backstage processes (despite their invisibility) determined the nature of the performance. During the latter stages of this paper this metaphor will be revisited and relied upon to explain the relationship between replicating and interacting entities. If this challenge is resolved, then we can move beyond assuming the firm’s entire activity system interacts with its operating environment. We can see the proposition that the market selects and removes firms that have insufficient profits (Murmann, 2003), while true, is an after the event description of what has been selected. It is more likely that specific elements of the firm’s performance (rejected on the front stage) have caused insufficient profits. Therefore, a focus on interacting entities must move beyond activity systems, but not extend immediately to entire firms. What must be considered is the actual nature of what is offered for consumption. It is proposed that what

constitutes the firm’s offerings could be considered, a combination of activities that are delivered by humans and technologies, actual products and services, and the identity of the firm. These three elements, while not representing an exhaustive search for all possible offerings provide elements of focus. Through them, we can see how change is enacted within the firm through modification to existing goals, boundaries and activities, and we have material elements whose consumption (i.e. marketplace acceptance) can be measured. The firm’s three interacting elements are now briefly considered in more detail. While a combination of activities that are delivered by humans and technologies seems broad in description, we can be more specific. This first element relates to all contact points through which the firm and its agents interact with all external stakeholder groups. The actual services and products the firm provides should require no further explanation as an element through which firm/stakeholder interaction occurs. The last proposed element is that of identity. Identity has previously been considered an interactor (Knudsen, 2002, p. 461) with regards to “the personal and professional identity of team members”. However, the proposed role of identity considered here is at the higher level of the firm itself. The literature tends to use the phase “corporate identity” (Stuart, 1997) to describe corporate personality, which is based upon corporate strategy. Here, the term “corporate” will be used interchangeably with “firm” to reflect the broad application of the evolutionary ideas expressed. Therefore, the identity of a firm embodies its culture and personality and a function of its interaction with external stakeholders is the firm’s image. This image influences the firm’s fitness within its operating environment. So, in summary, before we move on to the role of learning, lets recap what ideas have so far been considered. The transformation of firms and populations typically results from seemingly different forms of evolution, natural selection and adaptation. Too many these processes have remained mutually exclusive. However, together they can both be explained through application of Darwinian theory. At the heart of Darwinian theory lies a need to establish cause and effect of cumulative change. However, previous evolutionary models do not always allow appreciation of change occurring in systems as a result of processes of transformation. It has been argued that identification of which entities are replicating and which are interacting would advance the explanatory power of evolutionary theories. Through accepting Hodgson’s (2003a) argument that routines cannot be both replicators and interactors, replicators are viewed as habits and routines. Interactors were then considered to be a combination of the activities that are delivered on the front stage by humans and technologies, actual products and services, and the identity of the firm. As illustrated within Figure 1, these three interacting elements of the firm are reconcilable through the introduction of a baseline where the firm’s offerings are favoured or rejected by the operating environment within which its operations occur. What remains unexplained is how the firm’s learning processes relate to existing perceptions and knowledge and market feedback through which such offerings are altered or unaltered. The following section utilizes the construct absorptive capacity to demonstrate a possible mechanism of transmission through which the final composition of such offering can be contemplated from an evolutionary perspective.

Firm transformation

19

MD 43,1

20

Figure 1. Replicating and interacting entities

A mechanism of transmission It will be argued that the construct absorptive capacity, as recently reconceptualized by Zahra and George (2002), provides a mechanism through which the process of replication and its relationship to interacting entities can be explained. Such explanation can be achieved through subsuming the process of learning within and across the generic evolutionary processes of variation, selection, and retention. The major task according to Durham (1991, p. 24) is to identify what “governs the transmission of units [i.e. habits and routines] through space and time and either maintains or erodes variability”. But first, we must consider the nature of absorptive capacity as a construct. Since the seminal contribution of Cohen and Levinthal (1990), absorptive capacity has been associated with the acquisition and use of knowledge to enhance firm performance through increased learning and innovation (e.g. Keller, 1996; Liu and White, 1997; Kim, 1998). Cohen and Levinthal (1990, p. 128) defined absorptive capacity as the “ability to recognize the value of new information, assimilate it, and apply it to commercial ends”. Originally operationalized as a single factor component with three dimensions (i.e. valuing, assimilating, and applying new knowledge), the potential influence of absorptive capacity was understood to be dependent upon the firm’s prior knowledge base and skills. However, in their reconceptualization, Zahra and George (2002, p. 186) define absorptive capacity as having two distinct components that together are operationalized as “a set of organizational routines and processes by which firms acquire, assimilate, transform, and exploit knowledge to produce a dynamic organizational capability”. Within this new definition are two specific components, potential (i.e. acquisition and assimilation) and realized (i.e. transformation and exploitation) absorptive capacity. Potential absorptive capacity is the capability to sense what information is relevant, acquire it, analysis it, comprehend it and internalise it. As such, it provides the firm an appreciation of the exogenous environmental forces that may or may not favour the firm’s existing offerings. Realized absorptive capacity relates to the processes that blend existing knowledge with newly acquired knowledge to gain new insights to opportunities or problems and provide structured pathways to develop new

competencies. In aggregate, the two components potential provide the foundation of “a dynamic capability pertaining to knowledge creation and utilization” (Zahra and George, 2002, p. 185). When viewed from an evolutionary perspective, it is argued that this interpretation of the absorptive capacity construct supports discussion of how, why, and when individual firms learn about environmental change. The construct also appears to fit with Hodgson’s (2003a) habits and routines as replicators approach. The four dimensions of absorptive capacity; acquisition, assimilation, transformation, and exploitation, can be seen to be present as potential behaviours. These potential capabilities are triggered by external or internal events that cause to the firm to respond to the stimuli. That is, the firm’s ability to efficiently acquire and assimilate external knowledge is a function of their past capability to perform such behaviours under the same context and selective pressures. However, this learning potential only influences the firm’s evolutionary potential (Jones, 2003) if all four dimensions coexist as a cohesive whole. Merely increasing awareness of variations does not endow the firm with the ability to maintain or increase the fitness of the interacting phenotype. Thus, the firm is subject to selection at two specific levels. First, the interacting phenotype faces the pressures of natural selection, and second, this interaction results in the differential selection of the habits/routines that support the replicating processes within the firm. Given that firm’s can acquire new characteristics from the marketplace, the firm’s degree of potential absorptive capacity shapes up as critical to the process of adapting to market shocks and exploiting opportunities. Importantly, this capability is mediated by the degree of prior knowledge held across specific domains. Campbell (1965, p. 27) states that if all components of the variation-selectionretention process are present, “a socio-cultural learning process is inevitable”. Clearly, the absorptive capacity construct must illustrate a process dependent upon all three components to effectively act as a mechanism of transmission in an evolutionary sense. Learning is described within an organizational setting as, outcomes related to change via analysis or imitation, or, a process of adaptation dependent upon delicately balancing exploration against exploitation (March, 1991). This suggests that to achieve learning dependent outcomes, both variation and retention processes must relate to each, despite the inherent forces that alienate each from the other. The ability of firms to select new variations (or retain existing variations) clearly shapes the nature of the phenotypic interaction. However, to use an adaptation of Aristotle’s approach to the use of anger, any firm can change – that is easy. But to change the right activity systems, to the right degree, at the right time, for the right purpose, and in the right way – that is not easy. To further explore this issue, first we need to again consider Knudsen’s (2002) baseline idea. The firm’s activity systems represent behaviours that produce products and services, are responsible for the development of a firm’s identity, and facilitate contact between the firm’s systems (be they human of technological) and external stakeholders. In short, they are responsible for what occurs of the front stage. This performance is dependent upon the potential capabilities of the firm to plan, revise, and implement such behaviour. At anytime, the firm is in receipt of feedback from its audience. The market share achieved by products and services, the image present in the marketplace of the firm, and information received during contact between the staff and/or technological interface all represents substantial and ongoing feedback. This feedback

Firm transformation

21

MD 43,1

22

should act to stimulate further planning, revision, and implementation of future performance. This activity is performed on the back stage and guided by the pressures of natural selection that are real and present on the front stage. This pressure should provide guidance to the adaptive intentions of the firm. The process of internal selection, a function of the habits and routines present within the firm, is ultimately judged by the audience on the front stage. What emerges from this discussion is the need for the habits and routines of the firm to have the potential to act in harmony throughout all four behavioural dimensions of the absorptive capacity construct. The efficiency between exploration and exploitation is determined by the nature of the habits and routines that support initially the acquisition and assimilation of external knowledge, and then the transformation and exploitation of knowledge. This continuity of potential behaviours is crucial given that the process of socio-economic evolution is dependent upon the interplay between interacting and replicating entities (Baum and Singh, 1994). Working against this desirable process are internal and external forces that differentially influence the development of potential absorptive capacity and the realized absorptive capacity. Given that the realized absorptive capacity is the primary source of adaptive improvements (Zahra and George, 2002), it is clearly important to consider impediments to the cumulative process that enables exploration and subsequent exploitation. For example, it is possible that habits and routines imprinted into firms (Tucker et al., 1990) at founding will not support optimal learning. Such inadequacies may allow internal selection criteria to acts “as vicarious representatives of past external criteria” (Aldrich, 1999, p. 27). So it is important to identify and isolate the habits and routines associated with the intensity, speed, and direction related to collecting external knowledge. It is also important to understand how existing knowledge bases influence the future development of external knowledge. In the event, that a firm is trying to acquire and assimilate external knowledge that is new and novel, the existing technological paradigm (Dosi, 1984) may limit comprehension of such knowledge. Clearly in both circumstances variation is present, but the selection of favoured variations would seem as dependent upon luck as any other factor. The degree and frequency of change previously undertaken also provides clues as to the existence of habits and routines that have the potential to assist the firm’s baseline deliberations. Behind all manner of decision making within firms lay processes and routines that expose the decision makers to perceptions of their environment, be they flawed or accurate (Smircich and Stubbart, 1985). A challenge exists to balance such perceptions against the feedback related to the interacting phenotype and act in a way that maintains or increases fitness of the firm vis-a`-vis its operating environment. Given that misperceptions related to the activity system and marketplace are common (Langlois, 1997), the trial-and-error approach affords firms a buffer against extreme maladjustment. This is especially so when the nature of change within the operating environment is unpredictable (McKelvey, 1994). Finally, it should be possible to identify the existence of frequently performed behaviours that support the exploitation of favourable learning outcomes. These would provide evidence of the bundled routines contained within the firm’s activity systems that provide structured pathways to sustain the exploitation of knowledge over time. So, the proposed mechanism of transmission, absorptive capacity, provides

a framework through which to identify the presence of habits and routines that will engage the variation-selection-retention process. This in turn would provide insight into the cause and effect relationships between habits and routines, learning processes, changes to the firm’s goals, boundaries, and activity systems, and the phenotype interacting with the operating environment.

Firm transformation

Conclusion This paper has sought to outline the preliminary development of a framework for unifying the two main evolutionary perspectives commonly used in organizational studies. While it is messy to simultaneously work with Lamarckian, neo-Darwinian, Darwinian, and Weismannian terminologies, it is deemed necessary to establish the basic properties of a pure Darwinian theory of socio-economic transformation. Without identifying the cumulative processes of cause and effect, an evolutionary theory remains an incomplete means of analysis, rather than a potential empirical tool. At the heart of this challenge is the need to bring the minimal requirements of an evolutionary theory to account. Here, attention has been given to the works of Campbell (1965), Hull (1988), and Durham (1991) in this regard. The construct absorptive capacity has been utilized to provide a structure within which the evolutionary scaffolding (Hodgson, 2003a) of Darwinism can be constructed. What is required beyond the frameworks further development is to enable the rigorous explanatory power of Darwinism to be placed within an empirical context. For example, an investigation of the processes relating to organizational change. Such research would aim to observe the proposed role of absorptive capacity to coordinate, mediate, and therefore influence the processes of replication and interaction. Within this emerging research agenda is an underlying need to explain the existence of any Lamarckian mechanism of transmission responsible for acquired characteristics being learnt and retransmitted (Baum and Singh, 1994). Given that the presence of natural selection pressures are taken as given, observing the interplay between both selection pressures operating through a baseline would provide justification for increasingly employing a Darwinian, rather than solely a neo-Darwinian or Lamarckian approach.

23

Notes 1. The contributions of Schumpeter and Hayek to evolutionary thought are not ignored, but simply not included due to their incompatibility with pure Darwinism. 2. It is noted by Hodgson (2003a) that both Nelson and Winter (via separate personal correspondence with Hodgson) acknowledge that routines are more like genotypes than phenotypes, or physical behaviours. 3. See Hodgson (2001 2003a) regarding the respective merits of memes, ideas, habits, and routines as replicating entities. References Aldrich, H.E. (1999), Organizations Evolving, Sage Publications, London. Amburgey, T.L., Kelly, D. and Barnett, W.P. (1993), “Resetting the clock: the dynamics of organizational change”, Administrative Science Quarterly, Vol. 38 No. 1. Baum, J.A.C. and Singh, J.V. (1994), “Organizational hierarchies and evolutionary processes: some reflections on a theory of organizational evolution”, in Baum, J.A.C. and Singh, J.V. (Eds), Evolutionary Dynamics of Organizations, Oxford University Press, New York, NY.

MD 43,1

24

Bruderer, E. and Singh, J.T. (1996), “Organizational evolution, learning, and selection: a genetic-algorithm-based model”, Academy of Management Journal, Vol. 39 No. 5. Campbell, D.T. (1965), “Variation and selective retention in socio-cultural evolution”, in Barringer, H.R., Blanksten, G.I. and Mack, R.W. (Eds), Social Change in Developing Areas: A Reinterpretation of Evolutionary Theory, Schenkman Publishing, Cambridge, MA. Cohen, W.M. and Levinthal, D.A. (1990), “Absorptive capacity: a new perspective on learning and innovation”, Administrative Science Quarterly, Vol. 35, March. Darwin, C. (1901), The Origin of Species by Means of Natural Selection, J. Murray, London. Dosi, G. (1984), Technical Change and Industrial Transformation, Macmillan Press, Hong Kong. Durham, W.H. (1991), Coevolution: Genes, Culture, and Human Diversity, Stanford University Press, Stanford, CA. Goffman, E. (1959), The Presentation of Self in Everyday Life, Doubleday, Garden City, NY. Gould, S.J. (2002), The Structure of Evolutionary Theory, Harvard University Press, London. Grove, S.J. and Fisk, R.P. (1983), “The dramaturgy of services exchange: an analytical framework for services marketing”, in Berry, L.L., Shostack, G.L. and Upah, G.D. (Eds), Emerging Perspectives on Services Marketing, American Marketing Association, Chicago, IL. Hannan, M.T. and Freeman, J. (1989), Organizational Ecology, Harvard University Press, Cambridge, MA. Haveman, H.A. (1992), “Between a rock and a hard place: organizational change and performance under conditions of fundamental environmental transformation”, Administrative Science Quarterly, Vol. 37 No. 1. Hodgson, G.M. (1993), Economics and Evolution: Bringing Life Back into Economics, Polity Press, Cambridge. Hodgson, G.M. (2001), “Is social evolution Lamarckian or Darwinian?”, in Nightingale, J. and Laurent, J. (Eds), Darwinism and Evolutionary Economics, Edward Elgar, Cheltenham. Hodgson, G.M. (2003a), “The mystery of the routine: the Darwinian destiny of an evolutionary theory of economic change”, Revue Economique, Vol. 54 No. 2. Hodgson, G.M. (2003b), “Darwinism and institutional economics”, Journal of Economic Issues, Vol. 37 No. 1. Hull, D.L. (1988), Science as a Process: An Evolutionary Account of the Social and Conceptual Development of Science, University of Chicago Press, Chicago, IL. Jones, C. (2003), “Beyond e-commerce: when caterpillars know what butterflies understand”, Journal of New Business Ideas and Trends, Vol. 1 No. 2. Keller, W. (1996), “Absorptive capacity: on the creation and acquisition of technology in development”, Journal of Developmental Economics, Vol. 49 No. 1. Kim, L. (1998), “Crisis construction and organizational learning: capability learning in catching-up at Hyundai Motor”, Organization Science, Vol. 9 No. 4. Knudsen, T. (2001), “Nesting Lamarckism with Darwinian explanations: necessity in economics and possibility in biology”, in Nightingale, J. and Laurent, J. (Eds), Darwinism and Evolutionary Economics, Edward Elgar, Cheltenham. Knudsen, T. (2002), “Economic selection theory”, Journal of Evolutionary Economics, Vol. 12 No. 4. Langlois, R.N. (1997), “Cognition and capabilities: opportunities seized and missed in the history of the computer industry”, in Garud, R., Nayyar, P. and Shapira, Z. (Eds), Technological Innovation, Cambridge University Press, New York, NY.

Levinthal, D.A. (1991), “Organizational adaptation and environmental selection: interrelated processes of change”, Organization Science, Vol. 2 No. 1. Liu, X. and White, R.S. (1997), “The relative contributions of foreign technology and domestic inputs to innovation in Chinese manufacturing industries”, Technovation, Vol. 17 No. 3. McKelvey, B. (1994), “Evolution and organizational science”, in Baum, J.A.C. and Singh, J.V. (Eds), Evolutionary Dynamics of Organizations, Oxford University Press, New York, NY. Malthus, T.R. (1826), An Essay on the Principle of Population, Murray, London. March, J.G. (1991), “Exploration and exploitation in organizational learning”, Organization Science, Vol. 2 No. 1. Murmann, J.P. (2003), Knowledge and Competitive Advantage, Cambridge University Press, New York, NY. Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA. Smircich, L. and Stubbart, C. (1985), “Strategic management in an enacted world”, Academy of Management Review, Vol. 10 No. 4. Stuart, H. (1997), “Exploring the corporate identity/corporate image interface: an empirical study of accountancy firms”, Journal of Communication Management, Vol. 2 No. 4. Tucker, D.J., Singh, J.V. and Meinhard, A.G. (1990), “Founding characteristics, imprinting, and organizational change”, in Singh, J.V. (Ed.), Organizational Evolution: New Directions, Sage Publications, London. Veblen, T. (1925), The Theory of the Leisure Class, George Allen & Unwin, London. Wilkins, J.S. (2001), “The appearance of Lamarckism in the evolution of culture”, in Nightingale, J. and Laurent, J. (Eds), Darwinism and Evolutionary Economics, Edward Elgar, Cheltenham. Zahra, S.A. and George, G. (2002), “Absorptive capacity: a review, reconceptualization, and extension”, Academy of Management Review, Vol. 27 No. 2.

Firm transformation

25

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

MD 43,1

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Competing in times of evolution and revolution An essay on long-term firm survival

26

Wyn Jenkins Staffordshire University Business School, Stoke-on-Trent, UK Abstract Purpose – Ideas from microeconomics, market-positioning theory and resource-based theory have been brought together to develop a framework for discussing firm competitiveness and survival. Design/methodology/approach – Propositions about the nature of scale economies, time, resource imitability and customer-perceived benefits are used to provide a basis for the analysis of firms and their markets. The structures of markets and the impact of innovation and environment on these structures are discussed. Findings – A number of hypotheses are advanced. When movements in consumer perceptions and technology are slow and predictable, leading firms may have developed enough resource capital to remain dominant. When they are not, opportunities for market leadership changes occur. Research limitations/implications – A conclusion is that strategic management should involve the study of firms in the context of their market situation. Market-based case studies should seek to understand how markets evolve over time by tracking changes in key variables. Practical implications – The paper outlines factors that firms’ managers need to take into account in order to evaluate their relationships with their competitors. How these relationships impact on industry structure and the long-term equilibrium that would result if these relationships remain unchanged is discussed. Originality/value – A contribution to thinking about research and practical strategic management longitudinally is proposed. The approach emphasises the importance of relationships between firms and the factors that may dynamically change those relationships. Keywords Competitive advantage, Companies, Strategic management, Market position Paper type Conceptual paper

Management Decision Vol. 43 No. 1, 2005 pp. 26-37 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572461

Introduction Over the last 25 years students of strategic management have debated the relative merits of two major explanations for competitive advantage, marketing positioning (generic strategy) (Porter, 1980, 1985) and resource-based ideas (Barney, 1991; Peteraf, 1993). From both these perspectives competitive advantage and superior performance are linked. Either competitive advantage is the result of market position or it can be better explained by differences in firms’ resource endowments). (In this paper a firm’s resources are broadly defined as the assets, knowledge and skills to which it has access.) Powell (2001) has criticised strategy research in which competitive advantage is measured and explained by superior performance. This tautology has been discussed in the strategy literature (Porter, 1991; Priem and Butler, 2001a, b). Above average performance is itself an elusive variable, above average compared to what and on what indicator? In some The author would like to thank his colleagues, Richard Ledward, David Williamson and John Wyld for the advice given to him while preparing this paper.

growing markets where profits for the major competitors are negative above average performance when measured by profitability indicators could be negative but there can still be managerial and investor confidence that a firm has both a potential to be profitable and have a long-term existence. In this paper I propose that firms be assessed not just with respect to current performance but respect to their long-term survival. This requires that the manager, consultant and researcher take a longitudinal view to firm positioning. As a part of this I emphasise that classifying markets with respect to their similarity/differences to theoretical markets is a useful component of strategic analysis. Markets can be seen as operating either at an equilibrium number of competitors or moving towards one. The long-term equilibrium number of firms and the time for that equilibrium to be achieved is a function of the economies of scale in the market and the rate at which resources are transferred between firms. If a firm has an inimitable resource that allows it an advantage in product value it will gain market share from its competitors. If it can sustain that advantage over all production volumes it will eventually become a monopoly. A viable firm is one that can expect to exist, every thing else being equal, at a long-run equilibrium point. However, in real environments equilibrium positions can change and, to remain or to become long-term viable, firms must change as the factors that change the equilibrium point change. If a market can be defined with reference to its approximation to a theoretical market, a firm’s management can then use this approximation to evaluate options that exploit imperfections between its market and an ideal type and to carry out actions that improve its competitive position, which is related to its projected existence at equilibrium, in its favour. If a market’s equilibrium point is changing so quickly that predictions are impossible then the market can be defined as chaotic. The discussion of performance and competitive advantage is replaced with the discussion of the manifestations of resource imitability: product features and costs and the manifestations of market position: perceived customer benefits and price. This then avoids debates on the tautological relationship between competitive advantage and superior performance. However, the measurement of variables remains problematic. The remaining parts of the paper are structured as follows: . defining variables that characterise a theoretical market; . external environments and market structures; . firm-based factors and the structure of markets; and . strategic management in different circumstances. Defining variables and conditions that characterise a theoretical market For the sake of simplicity in the first instance I define a market in which only one segment and one product exists and customer wants are homogenous (not heterogeneous). I also make assumptions about this market: . The market remains constant in size unless specific actions or events cause instant step changes in its size. It does not grow and develop slowly. This allows a discussion of market share changes under constant market size. . Buyers have equal power. . Buyers’ wants are identical. . All changes are imitative, adaptive and incremental..

Long-term firm survival

27

MD 43,1

28

One other variable determines the nature of the industry’s structure. The ratio of scale economies relative to the size of the industry (range from low, near 0, to greater than 1); this defines whether this market is: . perfectly competitive; . an oligopoly; or . a monopoly. We can discuss how real markets differ from these theoretical markets. Consider how a profit maximising firm operating in a perfectly competitive environment can try to change the nature of the market (move it from being perfectly competitive) and improve its competitive position with respect to its competitors. It can try to make the product in a different way from its competitors so that its production costs are lowered. It can exploit this in two ways offering customers more at the same price or offering customers the current benefits package at a lower price. If everything that the ambitious firm does is rapidly imitated by other firms, there will be a period of evolution as competitors develop more and more efficient methods of production. However, since all these changes are imitable and every advance made by one supplier will be imitated by all others, no long-term advantage will accrue and all gains will be passed to customers (Porter, 1996). The nature of the industry will not alter unless the nature of the relative scale economies changes. In this latter situation each identical output firm would realise this and amalgamation and moves to monopoly or oligopoly would occur. Barney (1991) made this point when he observed that homogeneous resources would lead to all firms implementing the same strategies, and that without differentiation there cannot be competitive advantage. However, in a situation when imitability transfer is not rapid as it is in our ideal economic model case and the innovation allows for initial lower costs combined with scale economies the innovator of the particular resource or skill could elect to try to achieve market share by lowering price. Then by the time competitors have been able to acquire the resources required the originator has had an opportunity to gain an advantage through the development of economies of scale, which must be relatively large compared to the whole market turnover. A first mover advantage is achieved. The first mover firm has now changed the market structure and has been able to guarantee its survival at the equilibrium position of that structure. In this situation the perfectly or monopolistically competitive market will move to oligopoly or monopoly, as laggard firms are unable to achieve economies quickly enough and cease to exist. Similarly, oligopolies may move to monopolies. The reverse is also conceivable new entrants may, through the use of different technology, break a monopoly and destroy oligopolies. These ideas lead to the following propositions: P1a. If imitable technology provides a way of increasing or decreasing relative scale economies in a market there will be a decrease or increase in the long-term equilibrium number of firms in that market, i.e. the market will concentrate or fragment. P1b. If a firm develops a temporarily exclusive technology that reduces product cost and has the potential to lower costs further through scale economies, it will be in a position to achieve market domination if it can maintain inimitability for sufficient time for these economies to be achieved. (Whilst the

technological advantage may be temporary, the economies of scale may act as a more permanent barrier to entry.) P1c. If a firm is able to sustain the supply of greater customer-perceived value to all the market’s customers and at a price that allows it be the only company in the market whose price is greater than cost, then there will be a move to monopoly. P1d. If a small number of firms are able to sustain the supply of greater customer-perceived value to all the market’s customers and at a price that allows them to be the only companies in the market whose price is greater than cost, then there will be move to oligopoly. Note: customer-perceived value is difficult to measure but is understood as a function of customer-perceived benefits in relation to price. Changes in organisation environments can also change the structure of markets. Important factors are the changes in customer perceptions of the product, technological innovation and the nature of government legislation. If changes in the organisation’s environment change the size of the market the equilibrium state of the market can be redefined. If changes in consumer tastes and expectation change markets can change in size and in some conditions cease to exist. These issues are further discussed below. I define changes that can impact on the nature of the long-term structure of the market, equilibrium number of firms, as revolutionary and changes that do not as evolutionary. Thus if the long-term equilibrium number of firms moves from very many (approximate perfect competition) to few (approximate oligopoly), or oligopoly to monopoly or perfect competition etc. then a revolution has occurred. If we now relax the condition that the market has to be homogeneous, i.e. customer wants are not identical; we can consider the situation developing from a perfectly competitive single product market. When customers start showing preferences for different product features and their consequent benefits we can define the emergence of multi product markets. Multi-product markets are those markets in which different customer segments buy functionally similar products with different levels of benefits (it is clearly difficult to measure product benefits absolutely but the concept recognises that differentiation is multi-faceted and in many product groups it may be possible by, for example, surveys to order the relative level of consumer-perceived benefits). Multi-product markets can be defined as follows: . there is a basic product with a minimum level of benefits, each buyer chooses whether s/he wants to pay more for extra benefits above the minimum; . buyers fall into groups with similar wants; . buyers will prefer more benefits at a given price; and . if the prices of all products drop buyers may opt for a higher benefits product or use the money not spent on saving or alternative products. If a multi product market emerges from a single product market then if the only variable that changes is relative economies of scale, a number of possible outcomes can be postulated depending of the nature of those scale economies.

Long-term firm survival

29

MD 43,1

30

If economies of scale are different in different segments and there are no cross-segment effects then the nature of the industry structure in each segment will be different and each segment can be regarded as a separate market. If on the other hand there are cross-segment effects on scale economies then again a number of possibilities exist that can be summed up by the following propositions. P2.

A condition for the existence of firms focusing exclusively on a narrow range of products in multi-product markets is that their market positions and resources cannot be imitated by broad-based suppliers harnessing greater cross-product economies of scale.

P3.

Firms focussing on narrow range of products in a multi product market will exist if there are diseconomies associated with operating across-segments.

We can now consider the situation where resources are now inimitable and that firms can acquire resources that other firms cannot. If this happens firms can either produce products with benefits that no other firm can match or they can produce products with imitable benefits but at lower costs due to inimitable manufacturing technology. If a firm can produce any product benefits at a lower cost than its competitors over all levels of production it will gain a monopoly position on the market place. This leads to: P4.

If one firm gains an inimitable advantage in the costs/benefits ratio over all production volumes it will move to a monopoly position in the market if it uses this advantage to provide greater customer-perceived value in terms of price for a given set of benefits.

However, as argued above, if imitability only exists for a finite time and different firms can produce either superior products or lower cost products alternately, i.e. no one competitor can sustain non-scale-based superiority for a sustained period, then markets will remain in a dynamic equilibrium. In the short time an extrapolation would suggest a change in competitor numbers but the changing resource balance between competitors can keep long-term equilibriums relatively constant. The essence of this discussion is that strategic management is grounded in economic theory and it is this theory that can be used to govern research and practice. Thus from the axioms of economics theoretical idealised markets propositions can be developed and used to discus real markets. The propositions are essentially analytical and their usefulness is judged as to the extent to which they can explain phenomena in real markets and guide managerial action in such markets. Strategic management is thus an applied science or technology based on other disciplines including economics and psychology. External environments and market structures However, we need to discuss more fully the idea of causality (Porter, 1991; Powell, 2003) and address the question as to potential sources of inimitability. Firms do not act in isolation; they are influenced by forces that change their markets. Markets are influenced by the actions of firms and markets are influenced by events beyond the control of firms which in turn influence the actions of firms. The task of management is to understand the impact of events on their markets, not the nature of the events themselves. We have indicated the motivations of firms’ managers to be maximize

their own organisation’s chances of survival as a driver for change. Thus the task of the manager remains the classical strategic management one of understanding both their internal and external environments (Johnson and Scholes, 2002; Williamson et al., 2004). However, the focus is on understanding the firm as a component of a market that is moving to equilibrium that may itself move before it is achieved. The implications for managers in thinking about long-term survival are that it focuses their attention on the long-term impact of actions and events in specific ways. There are a number of questions that strategic managers working from this perspective face: . What will be the impact of change to the market size (demand for the product) on my firm and other firms in the industry? . What actions can change scale economies in the market? . Will the market become more or less segmented and what changes will drive such events? . What are the factors that could lead to the development of inimitable resources in this market? . Where will our firm end up if nothing changes? . How can we change or maintain equilibrium destiny? As the environments of firms change the sizes of their markets can change. Changes in the size of demand do not change absolute scale economies but can change relative scale economies. So a reduction in market size can change the long-term equilibrium point. Thus firms with an eye on survival should be considering the impact of factors that change market size and relative scale economies. For instance the attack on the World Trade Center reduced the number of US citizens travelling on airlines, the occurrence of foot and mouth in the UK in 2002 reduced the number of tourists travelling to that country. Whilst incidents like these are predictable as possible options in scenario building, making provisions for low probability events may be difficult to justify. Firms cannot accommodate every specific possibility, but it is suggested that they consider events generically thus addressing chance not specifically but generally. Consumers buy from the array of products that they perceive as available to them. Thus particular wants are met by particular products at different times. Some products exist now that have not always existed and some products have become obsolete, thus either consumer wants are changing in some fundamental way or the nature of wants is changing. Thus the role of the firm trying to anticipate changing wants is to understand those changes that affect the way markets grow and change both incrementally and stepwise. Over time consumers develop wants and if the market is alert and responsive to those wants then products evolve. If there is equality between firms they develop equally. If, however, some firms or one firm is more responsive to the impact of these changes on customers’ perceptions of their product they will, given the resources, be more able to offer customers prices and product features that are more attractive than their competitors. Thus changing customer perceptions offer opportunities for product development, firms who can exploit these changing perceptions may be able to change the long-term market equilibrium point. This resource imitability can be associated with market position as well as with product and processes (Srivastava et al., 2001).

Long-term firm survival

31

MD 43,1

32

In those cases where incumbents have developed advantages based on relationships concerned with outside regulation of their market and then events have developed beliefs amongst legislators that such relationships are no longer consistent with meeting the needs of consumers. In these situations legislation can change and the relationships between firms and the long-term equilibrium point of the market can change as new entrants with new resources and ideas enter the market place. So further questions are raised about market size and customer wants and the impact of these changes on the nature of the market and how any one firm can optimise its position: . What will happen to the long-term structure of the market if the demand for the product changes? . What is the impact of changing customer wants? . How will the present products evolve as modified products replace older ones? . Will the market split into segments? . Will segments converge and the number of products segments decrease? . Does a firm with an expertise (a resource) in environmental scanning have a potential to survive where others do not? What aspects of the environment should the firm focus on? . Is it possible to reduce scenario planning by focusing key questions about the consequences of predictable but seemingly improbable acts taken as unique events, but less unlikely if taken as one of many potential causes of a particular effect (Quinn, 1978)? Firm-based factors and the structure of markets Suppose we start with the (absurd) assumption that at one point all firms are equal in perfectly competitive environments. Clearly in perfectly competitive markets it is by definition impossible for a firm to make sustained above average profits. Therefore, rational managers of ambitious firms will try to take advantage of conditions that make markets different from perfectly competitive markets. If customer perceptions of product benefits are unchanging and homogeneous then the only way that one firm can gain an advantage is to reduce the cost of producing features that customers perceive as valuable. If, however, customers’ perceptions of product benefits are either homogeneous but unbounded or heterogeneous then there are other routes to advantage. These have been discussed above. In all cases for a firm to achieve an advantage compared to a firm operating in a perfectly or monopolistically competitive market it must achieve economies of scale (a special case of an inimitable resource) or some other inimitable resource that reduce the features/cost ratio of the product so that customers can be offered a product that is perceived to have superior value (the consumer’s judgement of the ratio of price to perceived benefits) to competitive products. In real situations the long-term imitability, and hence value, of resources is never certain so managers have to undertake activities that attempt to maximise their chances of survival in conditions of incomplete knowledge. Bognor et al. (1999) have discussed the nature and sources of resource imitability. A firm can obtain resources and develop resources by:

. . . . . . .

the purchase of assets; the purchase of human skill; using the human skill to manufacture/develop tangible and intangible assets; using human skill to develop expertise in particular activities; learning and improving skill in activities through repeated performance; observing and copying the activities of other firms; and absorbing information from their environment.

It also inherits assets through the nature and location of its founders (Porter, 1990). Strategic management under different circumstances Firm behaviour in a market where products are identical or similar and there are many competitors (approximating to a perfectly or monopolistically competitive environment). In this situation firms may seek to pursue economies of scale if they are available. This would suggest that firm amalgamation would take place until these economies are realised. If they are no economies of scale an ambitious firm could try to find such economies but in order to succeed would have to implement them before others. Inimitability would be required. The firm seeking such advantages is trying to change the equilibrium number of firms in the market. It is trying to precipitate a revolution in market structure.. Another approach would be to try to exploit/develop heterogeneous customer perceptions of different benefits from the standard product. This could lead to product differentiation, increased benefits products, or low cost lower than average benefits products (Porter, 1980). This would require inimitability at least in the short term for some firms while more permanent long-term advantages were developed. For example early mover advantages that could accrue are economies of scale and brand reputation. In this situation one can envisage moves to oligopoly as more successful firms gain market share. Firm behaviour in oligopolies where products have some degree of similarity, economies of scale exist similar and there are few competitors In situations like this a number of potential market structures exist: . All products are similar and competitors have comparable resource endowments and comparable market share. There are an equilibrium number of competitors and they are equally matched. This is characterised as competition in times of evolution. In this situation they can compete head on and reduce the industry profits or they can collude. If they compete head on and each tries to improve production efficiency and the products’ perceived value they make economic profits and pass on all efficiency gains to their customers. However, in this situation they are unlikely to attract new entrants into their industry. Imitative strategies in this situation are not likely to achieve above average profitability, so for any firm with ambitions to make above average profits as the dominant player they need to develop strategies that are likely to diminish the number of equilibrium players in the market. The firm gains an advantage that allows it to offer a higher value product than its competitors. If this advantage is sustained it will become the dominant firm. The alternative strategy is collusion whilst maintaining entry barriers so that new entrants are not attracted in by attractive profits. In a collusive environment all companies will make more profit than

Long-term firm survival

33

MD 43,1 .

34

.

would be the case in a competitive environment and average profits will be high. However, in this kind of market one might expect not to find consistent performance (Powell, 2003). All products are dissimilar enough for one competitor to have a larger market share than other competitors. The leading firm will have a dominant position. Each firm in this situation will have different strategic objectives. If the leading firm is more cost efficient because of its size it will wish to maintain its increase in market share and reinvest its profits into maintaining its advantages. Runner up firms may also recognise that if the status quo remains they will continue to lose market share. In this revolutionary situation there will be efforts to match the offerings of the dominant firm. Industry realignment may take place as the dominant firm takes over weaker firms or stronger runner up firms take over the weaker firms in order to match the dominant firm. If collusion takes place in these kinds of environments it is likely that the key negotiator will be the dominant firm. The market is served by competitors offering a range of products with some suppliers having shares in different segments. The market is a multi product market. In multi-product markets, firms can either offer a range of products or specialise in specific segments. Again the profitability of firms depends on the balance of power between rivals. Decisions about competition or collusion will have to be made on the same basis as discussed above. However, a major dilemma for firms is whether they can survive as broad-based suppliers or focused suppliers. The equilibrium point for these kinds of markets could be monopoly in some segments and oligopoly in others. The automotive market is a useful case to discuss these ideas.

Managing environmental threats and opportunities The above discussion explains how difference in resource endowments impact on firm survival. Firm s that can provide the best value products most profitably will survive. However firms must be continually aware how customer perceptions and exogenous technical advances can affect the way that customer value develops and is delivered. A key resource for successful firms is a competence in environmental scanning. Paradoxically firms need to be prepared for sudden environmental changes that can suddenly impact on demand for their product but do not have to predict the precise nature of such events. However, firms do have to be aware of the content of changes in consumer perceptions and the content of technical changes. History suggests that firms who wish to anticipate or even precipitate sudden changes in the structure of a market can do this by: . recognising hitherto unrecognised market opportunities by understanding consumer perceptions of value, e.g. the development of low cost airlines in the UK and Ireland; and . exploiting new technologies before others, the rise of Amazon books. The resource advantage is understood but imitating it becomes difficult. Dominant firms can strengthen their position by behaving like monopolists building entry barriers. This can be scale economies or brand reputation, for example Coca-Cola. Dominant firms are likely to have no motive to change a market equilibrium structure

that gives them the potential for long-term domination. Runner up firms can try to ape their resource advantage by operating within a similar recipe but from a weaker position but the chances of reversing the long-term trend would appear to be unlikely. However, if there is a significant change in technology or consumer perceptions there are opportunities for underdog or new entrant firms to change equilibrium market structures because in the new situation there is an opportunity to develop a resource that no other firm has. In this way a revolution can occur and long-run market structure equilibrium and can put the innovator in a dominant position. This becomes more likely if other firms have become complacent and believe that actions that achieved success in the past can still achieve such success in changed times (Miller, 1992) The following hypotheses come out of this discussion: H1. The faster the change in technology and/or consumer perceptions the greater is the risk or opportunity for firms in the industry. H2. The faster the change in technology and/or consumer perceptions the greater is the opportunity for new entrants. H3. When consumer perceptions and technology are changing slowly and predictably, the dominant firm may have developed enough resource capital so that the basis of its domination is understood but remains elusive to its competitors. If markets are hypercompetitive the concept of the dominant firm then becomes a tenuous one and the idea of a long-term equilibrium market structure is difficult. The value of resources as assets and competences dedicated to production and marketing become only transiently valuable because they are candidates for obsolescence. McNamara et al. (2003) have investigated these ideas, they concluded that markets have not become significantly more changeable in the last twenty years. They concluded that the management of resources in the context of changing environment remains important to explanations of firm performance. Implications for research A conclusion from the discussion is that strategic management should involve the study of firms in the context of their market situation. This would suggest that rather than conduct cross-sectional studies of organisation performance at particular teams, market-based case studies should seek to understand how markets evolve with time. This will involve interviews with managers as well as the study of company reports and documentation. Thus historical studies would seem appropriate using company reports, newspaper reports and seeking oral descriptions by managers. This methodology will have problems including those of: . Managerial perceptions. Research with managers on their perceptions of their environment has indicated that managers have different perceptions of problems depending on whether they are viewed retrospectively or contemporaneously. Thus multi sources of data will be required. . Variable definition. A number of writers have commented on the difficulty in defining the variables that define competitive advantage. The concept of

Long-term firm survival

35

MD 43,1

36

differentiation is particularly troublesome because it is possible to differentiate in a number of different ways (Mintzberg, 1988; Campbell-Hunt, 2000). For this reason it is suggested that firm performance is more usefully thought of as depending on both resource and market positions. When product features (giving benefits) and costs are a consequence of a firm’s resource endowments predicating market positions that are a consequence of price and benefits (The related concept of perceived value also needs further consideration). Clearly this does not solve definitional problems but at least highlights them.

Implications for managers In this paper we outline the factors that firms need to take into account in order to evaluate their position in relation to their competitors and the kind of industry structure that these relationships imply and the long-term equilibrium that would result if these relationships remain unchanged. (Whether this kind of task is possible is another issue.) In order to do this an algorithm is defined: . First define your industry with reference to ideal type industries equally matched oligopoly, oligopoly with one dominant player, multi-product market segment, etc. . Define the extent to which the industry differs/resembles from a theoretical one and the consequences that this has on the long-term equilibrium point of the industry. . Define those factors, if any, outside the firm that are changing the way that the industry is changing (changing the long-run equilibrium point). . Define those factors inside the firm or other firms (competitor intelligence), if any, that could change the way that the industry is changing (changing the long-run equilibrium point). . In the light of this analysis determine whether any particular firm can influence long-run equilibrium conditions.

References Barney, J.B. (1991), “Firm resources and sustained competitive advantage”, Journal of Management, Vol. 17 No. 1, pp. 99-120. Bognor, W.C., Thomas, H. and McGee, J. (1999), “Competence and competitive advantage: towards a dynamic model”, British Journal of Management, Vol. 10, pp. 275-90. Campbell-Hunt, C. (2000), “What have we learned about generic competitive strategy? A meta-analysis”, Strategic Management Journal, Vol. 21, pp. 127-54. Johnson, G. and Scholes, K. (2002), Exploring Corporate Strategy, 6th ed., Prentice-Hall Europe, Hemel Hempstead. McNamara, G., Vaaler, P.M. and Devers, C. (2003), “Same as it ever was: the search for evidence of increasing hypercompetition”, Strategic Management Journal, Vol. 24, pp. 261-78. Miller, D. (1992), “The Icarus paradox”, Business Horizons, January/February.

Mintzberg, H. (1988), “Generic strategies: toward a comprehensive framework”, in Lamb, R. and Shrivastava, P. (Eds), Advances in Strategic Management, Vol. 5, JAI Press, Greenwich, CT, pp. 1-67. Peteraf, M.A. (1993), “The cornerstones of competitive advantage: a resource-based view”, Strategic Management Journal, Vol. 14, pp. 179-88. Porter, M.E. (1980), Competitive Strategy, The Free Press, New York, NY. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, NY. Porter, M.E. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY. Porter, M.E. (1991), “Towards a dynamic theory of strategy”, Strategic Management Journal, Vol. 12, Summer special issue, pp. 95-117. Porter, M.E. (1996), “What is strategy?”, Harvard Business Review, November/December, pp. 61-78. Powell, T.C. (2001), “Competitive advantage: logical and philosophical considerations”, Strategic Management Journal, Vol. 22, pp. 875-88. Powell, T.C. (2003), “Varieties of competitive parity”, Strategic Management Journal, Vol. 24, pp. 61-86. Priem, R.L. and Butler, J.E. (2001a), “Is the resource-based ‘view’ a useful perspective for strategic management research?”, The Academy of Management Review, Vol. 26 No. 1. Priem, R.L. and Butler, J.E. (2001b), “Tautology in the resource-based view and the implications of externally determined resource value: further comments”, The Academy of Management Review, Vol. 26 No. 1. Quinn, J.B. (1978), “Strategic change: logical incrementalism”, Sloan Management Review, No. Fall. Srivastava, R.K., Fahey, L. and Christensen, H.K. (2001), “The resource-based view and marketing: the role of market-based assets in gaining competitive advantage”, Journal of Management, Vol. 27, pp. 777-802. Williamson, D., Jenkins, W., Cooke, P. and Moreton, K.M. (2004), Strategic Management and Business Analysis, Elsevier/Butterworth-Heinemann, Oxford.

Long-term firm survival

37

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,1

Strategy dynamics in industrial marketing: a business types perspective

38

Klaus Backhaus Westfa¨lische Wilhelms-University Muenster, Muenster, Germany, and

Katrin Muehlfeld Interdisciplinary Institute of Management, London School of Economics and Political Science, London, UK Abstract Purpose – Industrial marketing covers a broad range of heterogeneous products and services. In response to this heterogeneity, researchers have developed a variety of systematisations of transactions on industrial markets. These systematisations have provided insights for the identification of different types of transaction processes (business types), and for deriving type-specific marketing recommendations. Based on this literature, the paper considers the consequences of interpreting the typological criteria as variables that can be influenced by the transaction parties, instead of treating them as data. Design/methodology/approach – Transaction cost economics provides the main theoretical foundations. Focusing on seller-initiated strategy, the paper develops a conceptual framework for shifts between business types that are derived based on differing degrees and horizons of asset specificity. Findings – The paper proposes a conceptual framework and discusses technological and contractual ways of implementing shifts between business types. A central implication of the dynamic perspective is the idea of asset specificity as a choice variable. Research limitations/implications – First, this research is conceptual. Future empirical research is needed regarding the proposed framework as a whole as well as individual hypotheses. Second, based on our qualitative considerations, more formal models could possibly be applied as useful complements in further analysis of some of the raised issues. Practical implications – Fundamental changes in market offerings in the form of shifts between business types are common elements of marketing practice, with recent examples in the automotive industry and the IT sector. The paper offers a framework for systematically considering such shifts. Originality/value – The paper extends existing (static) business types frameworks by incorporating a dynamic perspective. Keywords Strategic planning, Industrial marketing, Transaction costs Paper type Conceptual paper

Management Decision Vol. 43 No. 1, 2005 pp. 38-55 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572470

Introduction A very broad spectrum of products and services is traded on business-to-business markets. It comprises goods as heterogeneous as standardised or customised software, machine tools, standard screws and bolts, and power stations. As a result of this heterogeneity, the development of undifferentiated “one-for-all” marketing programmes is neither promising from the practitioner’s perspective, nor consistent Katrin Muehlfeld gratefully acknowledges financial support from the Economic and Social Research Council under grant PTA-026-27-0083.

with an application-oriented approach in marketing science. Yet, from a scientific perspective it is no more satisfying to focus on the particularities of individual transactions alone, and thereby lose any prospects of gaining somewhat generalisable insights. In response to this dilemma, various conceptions based on different methodologies and using various criteria for systematising transactions on business-to-business markets have been developed. They have provided meaningful insights for the identification of different types of transaction processes (usually referred to as transaction or business types) and for deriving type-specific marketing recommendations. So far such considerations have largely adopted a static perspective: the criteria used for categorisation are taken as given. Building on this literature, we explore the consequences of interpreting these criteria instead as variables that are susceptible to the transaction parties’ manipulation. This allows us to focus on the potential change of market offerings over time, that is, the heterogeneity that arises from shifts between the different types in the course of time. Empirical observations suggest that shifts between business types are very common in marketing practice, for instance in the automotive industry, the chemical industry or the IT sector. Which circumstances are particularly conducive to shift considerations? Which shift directions can be identified? What are the means for implementing such shifts? The present study proposes a sketch of a systematic framework for the analysis of such issues based on a typological approach to industrial marketing. The analysis is organised as follows: first, we present a brief overview of various typological approaches that have been developed in the literature on industrial marketing. We describe in more detail the particular approach which forms the basis of our analysis and which we refer to as business types constellations framework. It is based on the use of asset specificity as basic structuring criterion. We then proceed to discuss a central implication of a dynamic perspective on our typology, that is, the idea of asset specificity as a choice variable. Central to this proposition is the idea that asset specificity may stem from technological/organisational properties of the exchange objects as well as from contractual sources (in particular payment conditions; referring to the structure of delivery of the exchange objects) and that both dimensions may substitute for each other (to some extent at least). Third, some brief considerations on motivations are advanced. Fourth, we consider some means that a seller firm can turn to in order to realise a shift. We finish by concluding and hinting at limitations and directions for further research. Typological approaches in industrial marketing from a static perspective Overview In search for combining some degree of abstraction with a sufficiently differentiated perspective, many researchers in industrial marketing have turned to typological approaches. The popularity of this kind of systematisation is also documented by its extensive use in other related fields of research (e.g. Etzioni, 1975; Miles and Snow, 1978). This popularity notwithstanding, the typological method’s potential to contribute to more complex objectives than purely descriptive categorisations remains a highly controversial issue (Bacharach, 1989; Doty and Glick, 1994). Much of the debate is due to divergences in the definitions of the term and different conceptions of typology construction. In this paper, we include systematising concepts of industrial marketing based on a broad interpretation of the typological method.

Strategy in industrial marketing 39

MD 43,1

40

Typological approaches have some tradition in the literature on industrial marketing. The earliest approaches stand in the tradition of the commodity school (Miracle, 1965; Marrian, 1968; Rowe and Alexander, 1968; more recently, Jarrat and Fayed, 2001; Hutt and Speh, 2003). As a result, they focus primarily on the physical attributes of the exchanged objects and related customer buying habits for the establishment of goods categories. With the advent of new institutional economics (NIE) and transaction cost economics (TCE), in particular, a new stream emerged. Since the 1990s, several scholars in marketing undertook efforts in linking marketing theory to these new microeconomic approaches and derive theoretically grounded systematisations (see, for an overview, Backhaus, 1998; Kleinaltenkamp and Jacob, 2002). Marketing emerges in this context as the promotion of market exchanges between sellers and buyers in the face of information deficiencies and uncertainties with the objective of achieving competitive advantages. These typologies usually identify various transaction (or business) types and derive marketing implications for each type. The large variety of concepts that have been developed to date can be classified based on their underlying research methodology: morphological approaches (e.g. Hutt and Speh, 2003), empirically inductive concepts (e.g. Bensaou, 1999; Cannon and Perreault, 1999), theoretically deductive approaches (e.g. Oster, 1999; Kaas, 1992; Backhaus et al., 1994), and approaches with a broader methodology basis (e.g. Coviello et al., 1997). Outline of the selected approach: business types constellations In this paper, we build on a combination from empirically inductive approaches and theoretically deductive concepts based on TCE (for general theoretical foundations see Macneil, 1974, 1978; Williamson, 1985). Based on an empirical survey, Bensaou (1999) presents a framework of four types of relationships as appropriate for different products and market conditions. He emphasizes that the choice of type is a strategic decision that calls for alignment with a contextual profile. Oster (1999) constructs a matrix of four different types of transactions based on varying degrees of buyer and supplier bargaining power. The approach by Backhaus et al. (2003) uses TCE with its focus on dependencies between transaction partners for deriving a typology of marketing interaction processes between sellers and buyers (Backhaus et al., 2003). In particular, asset specificity is regarded as the central driving force behind divergences in terms of buyer’s and seller’s decision structures. By combining and modifying these approaches, we arrive at the typology shown in Figure 1. Based on asset specificity as the central structuring criterion, the typology features three distinct business types on each side of the transaction: product business (PDB), project business (PJB), and relational business (RB). Particular emphasis is placed on the explicit distinction between seller and buyer perspective and its subsequent combination in deriving a particular constellation (e.g. buyer PDB combined with seller RB). Asset specificity is regarded as a multidimensional construct along the dimensions: degree of specificity; and specificity horizon. The degree of specificity ranges from zero (equivalent to total standardization) to 100 percent (equivalent to complete adaptation to the transaction partner’s needs). For analytical purposes, we adopt a discrete interpretation of this continuum and derive the above three distinct business types. Note that the specificity horizon is only relevant for distinguishing between transactions that involve significantly specific investments. This criterion refers to the nature of the amortisation of a specific investment, i.e.

Strategy in industrial marketing 41

Figure 1. Business types in industrial marketing

whether a transaction party seeks to recoup a specific investment within the course of a single transaction, or only over the course of a whole chain of transactions with a particular partner. We expect the relevance of the various types to differ depending on the perspective. Often, the buyer’s contribution to a transaction (“money”) will be less specific by nature – although specificity may arise from specific investments in terms of time and effort. In exploring the typology’s consequences from a marketing perspective, the general idea is that the seller will need to seek protection against exploitation for its own specific investments. At the same time, the buyer’s transaction costs and safeguarding must be taken into account. When comparing different offers, the buyer will base the purchase decision on an evaluation of the whole “package” consisting of price/product/transaction costs. A seller gains a competitive advantage only, and hence sells its offer, if the respective buyer perceives the offered package as superior to all relevant competitive offers (necessary condition) and also expects a net benefit from the transaction (sufficient condition). If a party transacts in product business (PDB) it undertakes no specific investment. Premature termination as, for instance, cancellation briefly prior to the arranged time of exchange implies no significant loss. Without much effort/cost, the respective party will be able to find an alternative transaction partner that sells a comparable unspecific good (seller) or holds comparable requirements (buyer). Subsequent buying and selling processes are unaffected by the transaction. Note that repeated transactions or a series of transactions involving different goods between a particular buyer and seller are well possible in bilateral product business. Neither party is, however, bound to the other through any past specific investments when considering the next transaction. If a party transacts in project business (PJB) it undertakes an idiosyncratic investment, which relates exactly to the transaction in question. Premature termination as, for instance termination during the phase of construction of a customised product, implies significant loss for that party that has invested specifically because it has to find an alternative transaction partner that has at least partially comparable requirements (in case of seller project business) or that sells an at least partially comparable specific good (in case of buyer project business). Subsequent buying and selling processes are not affected by the investment undertaken in this transaction. If a party transacts in relational business (RB) it undertakes an idiosyncratic investment, which reaches

MD 43,1

42

beyond the initial transaction to cover a whole chain of intended transactions with yet undefined horizon. Premature termination means termination of the relationship before the envisaged number of transactions has taken place. Until this number has been reached, the specifically investing party would incur significant effort/cost in case it had to switch to another transaction partner[1]. Continuation of the chain with another partner would require costly adaptation with the alternative being a new initial investment in order to start a new chain. Hence, after the initial investment has taken place, subsequent buying and selling processes within the envisaged chain are largely if not completely predetermined. In a transaction, it is possible and even likely that both partners’ specific investments are asymmetrically distributed[2]. Consider the following example: seller S sells a pre-programmed business intelligence (BI) software for integration of corporate information to buyer B. Installation at B involves customisation to the existing elements of the information system and subsequent staff training that is provided either by S or a third company (IT-consultancy). Extensions to link with or replace other parts of B’s data processes are bound to be bought from S due to incompatibilities of the initial BI with software from other sellers. While the seller may undertake no specific investment, the buyer may do so and this investment may reach beyond the initial transaction. From the buyer’s perspective, premature termination of the transaction chain would imply a significant loss, but not so for the seller. And while the seller faces no constraints regarding future or other sales, the buyer is restricted in subsequent purchases through the initial calculation, which refers to the whole chain. In the above terminology, such a case would be interpreted as a combination of seller product business and buyer relational business. Following the formal separation of buyer and seller perspective in Figure 1, we bring both sides together in the particular constellation of buyer business type and seller business type and associated lock-in’s. Congruent (corresponding business types) and disgruent (diverging business types) lock-in constellations are feasible and represent distinct (motivational) starting points for a strategic shift. For example, a supplier of automotive components may have invested specifically in machinery for manufacturing seats for a particular model produced by an automobile producer. This producer may have adopted a multiple sourcing strategy for these seats, thereby remaining largely independent of this supplier. The supplier’s incentive to change this disgruence in its favour by altering its business type (e.g. by opening up alternative uses for this machinery) is likely to differ from the incentives that would be present in congruent constellation in which the automobile producer had equally invested specifically. In total, nine feasible constellations result, which are depicted in Figure 2. Each combination of two shaded small boxes represents a particular constellation. The potential benefits from such explicit modelling of the symmetry/asymmetry of different constellations in transaction situations are supported also by research on power relations and (inter-) dependence (see, for example, the early seminal contributions by Thibaut and Kelley, 1959; Emerson, 1962; Blau, 1964). We suggest that, despite the heterogeneity of theoretical roots and core assumptions, research using TCE could potentially gain valuable insights from additionally drawing on ideas that are discussed in research on power-dependence relations (e.g. Heide and John, 1988; Rindfleisch and Heide, 1997; Stump and Joshi, 1998; LaBahn (1999) on investment options for component suppliers in order to

Strategy in industrial marketing 43

Figure 2. Buyer and seller business types and resulting congruity (1-3) and disgruity combinations (4-9)

circumvent power advantages of large customers). Dependence is a crucial construct for both streams. Here, dependence emerges as a descriptive factor in the form of specificity-contingent lock-ins and lock-in differentials in various constellations of business types: the particular partner is irreplaceable or replaceable only at a cost (e.g. Williamson, 1985; Heide and John, 1988). This creates dependency, and gives one party power over the other, resulting in a potential to exploit this dependence through opportunistic quasi-rent appropriation. A particular business type constellation arises from the precise technological/organisational and contractual terms of a market offer. Essentially, it is independent of the functionality of the object. What defines a business types constellation are the specifications of performance (by the seller), and counter-performance (usually mainly consisting of the price to be paid), and the specifications of the time-related structure of their delivery. A so-defined business type constellation is further complemented by contractual specifications to safeguard the ex ante intended creation and distribution of a potential value that arises in the coalition of seller and buyer (as defined by the business type constellation). These latter provisions may exert an indirect influence on the choice of business type since the availability of better safeguards is assumed to encourage an actor’s willingness to invest specifically[3]. Business type constellations are distinguished by differences in the proposed specificity dimensions (degree and horizon). We interpret asset specificity as defined by its essential consequence: the transaction partner’s identity matters (Williamson, 1985, 1999). The presence of an inter-temporal context is then a necessary precondition for asset specificity to represent a problem. Dependence is created by the

MD 43,1

44

fact that the specifically investing party produces and delivers its performance in advance of fully receiving the expected counterpart. Tirole (1986) discusses a particular form of this problem in a game theoretic context as “pre-performance investments”. In case the act of advance delivery – undertaken by whatever party – cannot: be reversed at an insignificant cost; and the performance cannot be transferred to another use where it is (almost) equally valued, the (full) realisation of the respective actor’s purposes attached to the transaction is contingent upon the original partner. Various mechanisms inherent to the transaction can cause such a condition. First, there are technological features of the exchanged good, organisational and human capital related measures for its integration and use that are primarily covered by specifications regarding the content of performance and counter-performance. We refer to these as product-related mechanisms behind the emergence of asset specificity. They are contrasted with mode-related mechanisms, which are formed by contractual provisions that specify the structure or mode of delivery, with payment conditions as a major element. We propose that the two mechanisms may be used as compensatory mechanisms, for instance by “artificially” creating contractual specificity for technology wise unspecific goods. For instance, from a buyer’s perspective, telecommunication via mobile phones is highly unspecific on the product-related side. The particular design of payment conditions like two-part-tariffs, e.g. a two-year contract with a provider, consisting of a fixed monthly rate and variable costs for each call, can imply considerable specificities built up by the buyer that are grounded in the mode-related properties of the transaction(s) (Katz, 1989; Rubin, 1990). Even contractual arrangements such as frequent-flyer programs have been argued to generate some kind of specific investment on the part of the buyer, though rather in terms of opportunity costs (Lieberman and Montgomery, 1988). Finally, linking business types to (marketing) strategy, we propose that in as far as pursuing a particular business type is the result of this quest for competitive advantage, we consider it as a (marketing) strategy which represents the long-term oriented decisions and activities that enable a business unit to achieve and sustain a competitive advantage (Chandler, 1962; Mahoney and Pandian, 1992; Varadarajan and Jayachandran, 1999). Type-specific marketing problems and management focus Various scholars have argued that different business types and constellations call for type-specific marketing programs and have proposed basic recommendations, which we summarise in the following section. Product business. Without the danger of subsequent lock-in, the main problem parties which transact in this business type face is one of efficient ex ante information gathering in order to reduce environmental uncertainty. Buyers who purchase an object in product business seek information on whether, and to what degree, the product or service is likely to fit their needs. The seller’s marketing program has to address this need for information, focusing on communication and information policy (e.g. advertising, promotions or at trade fairs). Easy replaceability of suppliers from the customer’s point of view implies that the traded values are to a certain degree interchangeable. Depending on how pronounced this situation is, various forms of information will be most important ranging from directly product-related information, in the case of very high exchangeability, to such information at the other end of the

spectrum that has more the character of a surrogate as, for instance, branding. Rather high degrees of comparability in the case of buyer product business are likely to lead to a high significance of pricing policy as well. On the other hand, a supplier selling in product business also faces an information problem. Despite the relatively high interchangeability of the individual buyer, information on the market as a whole is important: it is on this level that the supplier invests and seeks amortisation. Market research based on relatively large numbers of respondents from the relevant market(s) is used in order to, for instance, derive price-demand functions. Communication tools that are designed, for example, to encourage customer feedback are also targeted towards mass markets. Project business. The most critical issue in project business is to efficiently ensure a high probability of realising the envisaged profit – despite the danger of opportunistic exploitation, which arises from behavioural uncertainty combined with environmental uncertainty. Due to the lock-in associated with their idiosyncratic investment, buyers who purchase a good in project business face considerable ex post uncertainty which could not (even at a very high cost) fully be eliminated by ex ante information gathering. However, due to the well-defined horizon of the transaction, rather detailed specifications of exchanged objects are feasible and usually include reference to some arbitral institution. Primarily, formal safeguarding in terms of extensive design of contracts (design of incentives and control mechanisms) becomes important. Extensive definition of environmental contingencies and resulting consequences takes place. Additionally, various means with regard to product, pricing or, to a lesser extent, communication policy are at the seller’s hands for credibly signalling to the buyer his competence (as a safeguard against environmental uncertainty) and good will (as a safeguard against behavioural uncertainty). Examples include the management of references (referee customers) or installation of competence centres. Specific investments undertaken by suppliers that sell in project business result in an analogous need for safeguarding. Measures that the seller can actively take are mostly related to appropriate contract design. Examples include bringing the payment structure in line with the time horizon and structure of the specific investment (“split tariffs”), defining the buyer’s obligations and consequences for various eventualities, or active claim management. Outside these contractual options, the seller’s means for safeguarding are, albeit existent, fairly limited to careful selection of customers. Also, there may, for instance, be a situation where an oligopolistic market is generally characterised by unilateral specific investments on the part of the sellers (Backhaus and Bu¨schken (1999) discuss such issues in the context of the German automotive industry). They could – depending on legal restrictions – seek to establish provisions for coordinated action against “bad buyers” in case one of the sellers is faced with opportunistic exploitation. Relational business. A party transacting in relational business undertakes a specific investment that reaches beyond the initial purchase or sale, respectively. Efficient safeguarding of the expected profits against opportunism remains the most pressing concern, however, aggravated now by an ill-defined horizon for intended amortisation. Contractual design becomes less effective in safeguarding, raising the importance of informal credible commitments and credible signalling mechanisms such as reputation even more. (Corporate) reputation has, for instance, been characterised as “. . . a set of attributes ascribed to a firm, inferred from the firm’s past actions” (Weigelt and Camerer, 1988). In this context, it reflects the sum of individual expectations and experiences

Strategy in industrial marketing 45

MD 43,1

46

regarding both the criteria of competence, and of behavioural reliability or trustworthiness. What makes reputation so very suitable as a safeguard is the asymmetric nature of its development: while it takes many individual events and a long time to build a (good) reputation, its destruction can, under extreme conditions, be achieved in a single act of misbehaviour. Therefore, reputation can serve as an effective hostage – unless the expected (short-term) returns from exploitation are greater to the potentially opportunistic party than the expected (long-term) gains from behaving according to the reputation. In the case of buyers purchasing in relational business, the seller’s prime effort lies in the management of buyer perceived uncertainties. Two ways of exerting an impact on this perception can be distinguished, both of which serve to address and soften the danger arising from a potential disgruence: first, establishing a seller-side counterbalance, and, second, reducing the buyer lock-in. While the latter leads to a change in business type, the establishment of a seller-side counterbalance can take place either with respect to a particular relationship (where it would also constitute a change in business type), but also on a more general level with regard to the market as such (e.g. by means of contractual elements such as guarantees or credible commitments such as test installations, engaging in reference relationships, or the installation of a service network). All these features may also contribute to the establishment of a reputation or corporate brand. Decisive factors in its establishment are corresponding delivery of performance and non-opportunistic behaviour and their communication. Relevant activities include encouraging articles in specialist journals, or establishment and support of user groups. Communication in impersonal, seller-controlled mass media is likely to have a lesser effect on creating credibility. Nevertheless, it may be used to generally enhance buyers’ awareness of the seller firm and underline a certain desired image. Seller marketing management will also include considerations on balancing prices over time, for instance, low initial investment requirements coupled with high prices for follow-up transactions or vice versa. Decisions in this area will be influenced not only by what degree of initial lock-in is accepted by customers but also by the potential for discriminating between initial and follow-on customers. In case of a seller business type relational business the considerations outlined for seller project business, essentially, keep their relevance. Reliance on formal contractual safeguards is, though, reduced due to the nature of the business type. Ensuring investment amortization rests even more on the promotion of potential-oriented capabilities such as innovativeness or flexibility in order to sustain the competitive advantage. Vertical marketing or multi-stage-marketing, respectively, can represent an additional way of safeguarding by reducing the seller’s replaceability: if successful, a pull-effect stemming from downstream market stages (e.g. from final users as in the case of automobile tires) is provoked that stimulates demand of direct customers. Particularly well-known examples of such brands include Kevlar and Teflon (Dupont), Pentium and Celeron (Intel), and Thisulate (3M) (Mudambi, 2002). Dynamic perspective: shifts between business types Foundations of a general framework Overview. Asset specificity has been discussed as a choice variable for example by Williamson (1985), Riordan and Williamson (1985), or Aufderheide (1993 2000) (see also Heide (1994) on governance dimensions as strategic variables; Mathur (1984) on typological shifts dynamics, though from a different theoretical angle). Building on this

literature, we propose that a business type constellation is at its core technologically undetermined because the same functionality can be delivered either through general purpose technology (involving unspecific investments) or special purpose technology (involving specific investments). In addition, specificity can be “artificially” created through contractual means (Katz, 1989; Rubin, 1990). Such understanding implies that the product-related and mode-related properties of a transaction are (at least to some extent) interchangeable in determining degree and horizon of specificity. Figure 3 presents a framework that suggests that the transaction parties choose – in accordance with potential legal constraints – the degree and horizon of asset specificity for their investments, and, thereby, the business types constellation employed in the transaction. The framework refers to the classic transaction determinants, asset specificity, uncertainty and frequency, in a somewhat rearranged form. Transaction frequency is captured implicitly in the specificity horizon and the corresponding nature of (intended) investment amortisation. Asset specificity and uncertainty are ordered somewhat more hierarchical than in much of the literature. The distinction is based on the actors’ abilities to shape the particular transaction determinant according to their purposes: while asset specificity is assumed to be entirely and directly within the arena (inside the dotted line which marks the dyad; Figure 3) at the disposition of the actors, uncertainty is regarded to be susceptible to such influence only incompletely and rather indirectly at best via changing to another arena (with the arena depicted by the grey shaded area in Figure 3). The concrete choice results from the idiosyncratic investment’s inherent trade-off between its antagonistic properties (productivity gains which are assumed to be the higher, the

Strategy in industrial marketing 47

Figure 3. Specificity as a choice variable

MD 43,1

48

higher the degree of specificity and danger of potential exploitation). Productivity advantages result in a quasi-rent to be gained, whereas the anticipation of potential exploitation leads to the incurrence of transaction costs: the involved parties make provisions in order to prevent each other from engaging in opportunistic exploitation. These provisions give rise to the emergence of transaction costs. Productivity gains from specificity. The potential productivity gains, which could be reaped from a specific investment, that is, the extent to which a certain transaction specific investment could arise at best as beneficial, are influenced: by the degree and horizon of specificity which directly relate to the object itself; and by (indirect) factors on the seller-side as well as on the buyer-side. On the part of the seller, they are summarised in the issue of efficient technological realisation, which may find its expression in the respective production costs. We propose that two key influences determine a seller’s potential for efficient technological realisation: first, the seller identity, i.e. firm particularities (e.g. size of the firm, alliances with other firms, etc., influenced by path-dependent strategic choices) and, second, the general technological state-of-the-art (Picot and Dietl, 1990; Foss, 2003). By impacting on a firm’s present access to and ability in handling technology, these factors influence its operating costs and costs of capital in doing so. In the light of these ideas, we propose that higher costs incurred by a seller in supplying the productivity gains associated with specific investment will c.p. result in a seller preference for a less specific business type and vice versa. As a result, there seems to be merit in shifting the emphasis from the best constellation for organizing particular transaction to the “. . . best way for a specific firm – with its history, routines, resource endowments, local institutional context, etc. – to organize this transaction” (Madhok, 2002). On the buyer-side, influences are subsumed to the idea of receptivity for specificity: Higher degrees of specificity as expressed through higher customisation, closer relationships, etc. “. . . do not necessarily mean higher performance in the eyes of the customer” (Cannon and Perreault, 1999). Buyers differ regarding the profit increase that they expect from using a specific instead of an unspecific input product. The factors held responsible for the differences in buyer receptivity are, first, buyer identity, i.e. firm particularities, and, second, conditions in subsequent market stages such as customer heterogeneity. In particular, (path dependent) past strategic choices, coupled with the conditions in the relevant sales markets, result in a particular position of the buying firm which impacts on its receptivity for specificity in the acquisition of a particular functionality. Several factors possibly influence the degree of a particular buyer’s receptivity. For instance, the particular end-customer related strategy of OEM’s can be argued to result in differing receptivities for specific investments provided either by component suppliers or suppliers of machinery and software related to the firm’s manufacturing processes (Ghosh and John, 1999). This kind of consideration has also been discussed as “strategic relevance” of a certain component (e.g. Picot, 1991; Amit and Shoemaker, 1993; Dyer, 1996). Related is the issue of whether final customers value the fact that a certain component or process is supplied by a particular seller. A high such appreciation, which may be the result of successful ingredient branding, would not only per se increase that seller’s bargaining power, but may also induce a higher willingness of the buyer to invest specifically in order to secure its supply with the relevant component. This argument generalises to Helper’s (1991) finding that there seems to be a trade-off between more relational, i.e. specific, ways of transacting (at least

with respect to buyer specificity), and buyer bargaining power, whatever the source of it may be (Helper, 1991). While buyer bargaining power is, thus, proposed to reduce receptivity for buyer specificity, the receptivity for seller idiosyncratic investments may actually increase. Overall, we propose that a lower receptivity of a buyer that relates to buyer-specific investment leads to a preference for a less specific own business type, all other things being equal. In case, it refers to specific investments provided by the seller-side, we propose that the result is a lower reservation price for such specificity and that the analogous argument refers to a higher receptivity. Perceived danger of exploitation. The perceived danger of being exploited by the other party results in various efforts including selection of transaction partner and contract negotiation about safeguarding provisions. We propose that determinants can be found directly rooted in the exchange object as the amount at stake, and also within its surroundings in the form of uncertainty. We define each party’s amount at stake as its piece of the composite quasi-rent. We propose that two factors determine its size, first, the magnitude of the value in the first best use and second, the degree of specificity of the investment. Magnitude, hence, captures aspects that are usually implied in the frequency dimension. It influences whether the costs of an elaborate, specialized governance structure are justified. Uncertainty is incorporated as an antecedent to the chosen specific investment through its influence on the perceived danger of exploitation. This interpretation is grounded in the idea that the effects of uncertainty are contingent on the presence of asset specificity (Williamson, 1985). The nature of the relationship between both constructs is then rather simultaneous than sequential (Rangan et al., 1993). Uncertainty consists first, of parametric (environmental) uncertainty. Here, we propose that, given the lack of consensus on the effect(s) of environmental uncertainty and the fact, that this paper is concerned with exchanges over markets (excluding vertical integration as a contractual alternative) growing parametric uncertainty (whether due to technological or volume reasons) will, all other things being equal, reduce an actor’s interest to invest specifically. We propose that this party will favour a move from project or relational business transactions towards product business, with respect to its own business type. The second component is strategic (behavioural) uncertainty, which results from the interplay of bounded rationality and opportunism. In general, the likelihood that a party acts opportunistically can be expected to be correlated with its bargaining power (Argyres and Liebeskind, 1999; Wathne and Heide, 2000). We interpret structural market power issues as a condition associated with uneven bargaining power already at the outset. Hence, the inequality is not brought about by the fundamental transformation, but already prevails ex ante as a result of the particular structures of the markets on the seller and buyer side (e.g. demand oligopoly). Finally, the identity of the particular transaction partner is proposed as an indirect moderating impact on the perceived danger of exploitation. For instance, although inferences on future (opportunistic) behaviour can only be drawn to a limited degree from past behaviour, recent empirical research points to an influence from past transaction history on transaction costs for current exchanges (Stump and Joshi, 1998). Motivations of seller-initiated shifts between business types Focusing on (pro-active) seller-initiated shifts between business types constellations, such changes come into play when variations in the parameter levels occur which

Strategy in industrial marketing 49

MD 43,1

50

induce the seller to attempt changing the degree and/or horizon of the choice variable and, thereby, shift to another business type constellation. Improving one’s situation is generally regarded as a fundamental driver of exchange processes and transactions on markets. A shift between business type constellations will be valuable in this sense if it gets the seller a larger “piece of the pie”, either through increasing the pie, or its share, or both (Brandenburger and Stuart, 1996) as compared to a situation without the shift. This can be achieved either through crating, claiming, or protecting value. Creating value means increasing the total value that can be divided among the transaction partners. From a seller perspective, all other things being equal, this rests on providing the buyer with an offering, which increases its willingness-to-pay and, consequently, allows the seller to extract a higher price. Claiming value characterises manipulating the division of (total) value in one’s favour. The jointly created value of buyer and seller is subject to bargained division with the result being expressed by the price. While the productivity enhancing effects from asset specificity are captured by the first aspect, creating value, the second, claiming value, reflects, first, the issue of the particular constellation (congruent vs disgruent; implied level of congruity/disgruity) and, second, other, structural aspects of (market) power. In contrast to the first, it is likely to be associated with a reduction in total value created due to transaction costs (Foss, 2003). Both issues need to be resolved simultaneously because the division impacts on the relative advantage that the actors derive from the particular dyad. At the extreme, they may choose to switch to another dyad in case they expect a relatively unfavourable deal. However, an ex ante defined agreement on the division of value does not necessarily ensure its realisation later on, due to divergences in fulfilment timing and the related potential for (forced) renegotiation which is in sharp contrast to the initial unconstrained bargaining. TCE reasoning, thus, suggests a third route that may motivate shifts between business types, namely protecting value (from opportunistic exploitation). More secure means of protecting value may reduce the dissipation of value in the possibly arising ex post bargaining over its division and safeguarding the agreement (Foss, 2003). All three aspects represent subgoals to the general objective of increasing value. We presume that with respect to any particular shift all three subgoals are present, albeit with varying weightings attached. These weightings can be expected to be influenced mainly by the previous business types constellation, and the source of impulse (internal, customers, complementors, suppliers, competitors, and environmental framework), which sets the shift process in motion. Means for implementing shifts between business types Within the proposed framework, three directions for shifting between business types exist: increasing specificity, decreasing it or changing its nature, each from a buyer’s perspective as well as a seller’s perspective. With respect to each direction, we can categorise available means as either product-related or mode-related. A reduction in specificity can be achieved technologically by standardising interfaces. If this standardisation increases compatibility with other sellers’ products, the buyer lock-in is decreased. Reshaping the actual product or adding an adapter can achieve this. In case standardisation targets a reduction in seller lock in, modularisation and movement of freezing point as close as possible towards the end of the production process can foster exchangeability of buyers. Contractual means

focus on the time lag between completion of performance and payment. Leasing or renting are ways to narrow this gap from the buyer perspective provided they allow for transforming the initial specific investment into a usage dependent series of payments. Application service providing of software is an example of rent replacing purchase. From a seller perspective reduction of lock in is achieved by shifting payment of those product parts that require specific investment closer to the time of investment, e.g. by agreeing on an appropriate system of down payments in project business or a flat rate covering idiosyncratic costs in relationship business. Examples for the latter are common practices in the trade of natural gas (Wielenberg, 1999). An increase in specificity can technologically be implemented by reducing compatibility of interfaces. A buyer will have to make an idiosyncratic initial investment that decreases exchangeability of sellers during the time until completion of contract (project business) or even regarding following transactions (relationship business). On the seller side a rise in asset specificity allows customisation at an earlier stage of the production process and often to a larger degree. Contractual measures are directed at widening the gap between contractual agreement and full bilateral completion of the (counter-) performance delivery. Two-part tariffs and discounts connecting formerly separated purchasing decisions create a buyer lock in by shifting towards relationship business (see for detailed analysis of such pricing methods exemplary Simon, 1991; Tacke, 1989). Down payments have a similar effect when only one transaction is referred to. A seller seeking to bind itself could undertake a specific investment in terms of individualisation of payment conditions. In the case of project business as targeted transaction type, the seller could offer to produce preliminary work that is paid for with completion of the whole product only. Regarding relationship business calculation of profits over a series of transactions has the same effect when a price for the initial transactions is charged that does not cover costs completely. Changing the kind of specificity requires either splitting one transaction into a whole series or bundling a series into a single transaction – with all transactions involving asset specificity albeit of a different horizon. Technological splitting up essentially means defining basic functions of parts of the former product as stand alone solutions the connection of which would though add further benefit (option for enlargement). Technological bundling combines previously separated products creating a new benefit dimension. Contractual ways of bundling together a series of transaction are the use of carefree-contracts on the buyer side (as increasingly used in the automotive industry, for example) or framework contracts with regard to the seller. Carefree-contracts provide the buyer for a certain period of time with the right and possibility to make full use of the product without paying for any additional “transactions” as, for example, replacement of parts or maintenance. Conclusion, limitations, and directions for further research In a first step, we propose a typology of transactions in industrial marketing that builds on TCE and uses asset specificity as basic criterion for categorisation and suggest some marketing implications. In a second step, we propose that the interpretation of asset specificity as a choice variable is a basic requirement for the feasibility of strategically motivated seller-initiated changes of market offerings, which we conceptualise as shifts between business type constellations. This idea leads to the suggestion of a framework with specificity as a variable subject to deliberate design by

Strategy in industrial marketing 51

MD 43,1

52

the transaction parties. We sketch a framework of factors that potentially impact on this choice are identified. Finally, we outline means for implementing such a shift. While we hope to stimulate discussion on the sketched topics, the analysis also suffers from several limitations. The following are particularly important: . Empirical domain. Due to the conceptual nature of this work, empirical research with regard to the framework as well as to individual hypotheses is needed. . Theoretical domain. The analysis necessarily remains incomplete partly because of the complexity of the issue, partly because some important aspects for the analysis of shifts between business types were beyond the scope of this paper. The identification of circumstances that are conducive to the development of shift activities by the actors is one of these aspects, as well as a thorough analysis of its motivations. Additionally drawing on complementary theoretical frameworks such as Austrian economics may hold promises in this respect. In addition to the proposed qualitative considerations, investigations into the usefulness of formal models (for instance game theory) and their concrete design could facilitate further research. This applies first and foremost to the issue of whether a seller who has identified a particular shift (direction) as an interesting option, in principle, may also be capable of capitalising on it. It refers to quantitative considerations on the efficient assertability of shifts between business types constellations. Notes 1. Related, there exists an extensive conceptual as well as empirical literature on switching costs (e.g. Shy, 2002; Farrell and Klemperer, forthcoming). Detailed discussion is, however, beyond the scope of this paper. 2. The question remains as to whether this inequality relates to unequal absolute amounts of investment or to unequal relative investments (considering the ratio of the investment to some other characteristic variable of that party, e.g. its total sales). Most contributions that emphasize the significance of the difference between symmetric and asymmetric relations of specific investment do not specify whether they focus on absolute or relative terms. Here, the assessment on equality or inequality rests on relative terms, accounting for the subjective perception of the parties with respect to the difficult-to-quantify, non-monetary investments. 3. Any consideration on the availability of safeguards will necessarily imply an evaluation of the costs at which they are available. Generally, the availability of safeguards may vary with institutional conditions that influence the degree of security of property rights, such as stability and quality of legal and political environment (Gatignon and Anderson, 1988; Henisz and Williamson, 1999) The availability of safeguards is, on the other hand, determined by a second component, that is, characteristics inherent to the particular transaction situation (e.g. attributes of the exchange parties, accessible technologies or properties of the particular markets), which may; for instance, render certain kinds of contracts infeasible (Williamson, 1985; Argyres and Liebeskind, 1999, 2000). References Amit, R. and Shoemaker, P.J.H. (1993), “Strategic assets and organizational rent”, Strategic Management Journal, Vol. 14 No. 1, pp. 33-46. Argyres, N.S. and Liebeskind, J.P. (1999), “Contractual commitments, bargaining power, and governance inseparability: incorporating history into transaction cost theory”, Academy of Management Review, Vol. 24 No. 1, pp. 49-63.

Argyres, N.S. and Liebeskind, J.P. (2000), “The role of prior commitment in governance choice”, in Foss, N.J. and Mahnke, V. (Eds), Competence, Governance, and Entrepreneurship, Oxford University Press, Oxford, pp. 232-49. Aufderheide, D. (1993), “Spezifita¨t, vertikale Integration und wettbewerbspolitische Implikationen: Eine Anmerkung”, Working Paper, No. 187, Volkswirtschaftliche Beitra¨ge der Westfa¨lischen Wilhelms-Universita¨t, Mu¨nster.

Strategy in industrial marketing

Aufderheide, D. (2000), “Wettbewerb durch Regulierung?”, unpublished postdoctoral thesis, Westfa¨lische Wilhelms-Universita¨t, Mu¨nster.

53

Bacharach, S.B. (1989), “Organization theories: some criteria for evaluation”, Academy of Management Review, Vol. 14 No. 4, pp. 496-515. Backhaus, K. (1998), “Industrial marketing: a German view”, Thexis, Vol. 15 No. 4, pp. 2-6. Backhaus, K. and Bu¨schken, J. (1999), “The paradox of unsatisfying but stable relationships – a look at German car suppliers”, Journal of Business Research, Vol. 46, pp. 245-57. Backhaus, K., Aufderheide, D. and Spa¨th, G.-M. (1994), Marketing fu¨r Systemtechnologien: Entwicklung eines theoretisch begru¨ndeten Gescha¨ftstypenansatzes, Schaeffer-Poeschel, Stuttgart. Backhaus, K., Plinke, W. and Rese, M. (2003), Marketing – An Economic Perspective, Paderborn, Berlin. Bensaou, M. (1999), “Portfolios of buyer-supplier relationships”, Sloan Management Review, Vol. 40, pp. 35-44. Blau, P.M. (1964), Exchange and Power in Social Life, John Wiley & Sons, New York, NY. Brandenburger, A.M. and Stuart, H.W. Jr (1996), “Value-based business strategy”, Journal of Economics and Management Strategy, Vol. 5, pp. 5-24. Cannon, J.P. and Perreault, W.D.J. (1999), “Buyer-seller relationships in business markets”, Journal of Marketing Research, Vol. 36, November, pp. 439-60. Chandler, A.D. (1962), Strategy and Structure: Chapters in the History of the Industrial Enterprise, MIT Press, Cambridge, MA. Coviello, N.E., Brodie, R.J. and Munro, H.J. (1997), “Understanding contemporary marketing: development of a classification scheme”, Journal of Marketing Management, Vol. 13, pp. 501-22. Doty, D.H. and Glick, W.H. (1994), “Typologies as a unique form of theory building: toward improved understanding and modeling”, Academy of Management Review, Vol. 19 No. 2, pp. 230-51. Dyer, J.H. (1996), “Specialized supplier networks as a source of competitive advantage: evidence from the auto industry”, Strategic Management Journal, Vol. 17 No. 4, pp. 271-91. Emerson, R.M. (1962), “Power-dependence relations”, American Sociological Review, Vol. 27 No. 1, pp. 31-41. Etzioni, A. (1975), A Comparative Analysis of Complex Organizations, The Free Press, New York, NY. Farrell, J. and Klemperer, P. (forthcoming), “Coordination and lock-in: competition with switching costs and network effects”, in Armstrong, M. and Porter, R. (Eds), Handbook of Industrial Organization, Vol. 3, North-Holland, Amsterdam, available at: www.paulklemperer.org Foss, N.J. (2003), “The strategic management and transaction cost nexus: past debates, central questions, and future research possibilities”, Strategic Organization, Vol. 1 No. 2, pp. 139-69.

MD 43,1

Gatignon, H. and Anderson, E. (1988), “The multinational corporation’s degree of control over foreign subsidiaries: an empirical test of a transaction cost explanation”, Journal of Law, Economics and Organization, Vol. 4, Fall, pp. 305-36. Ghosh, M. and John, G. (1999), “Governance value analysis and marketing strategy”, Journal of Marketing, Vol. 63, Special issue, pp. 131-45.

54

Heide, J.B. (1994), “Interorganizational governance in marketing channels”, Journal of Marketing, Vol. 58, January, pp. 71-85. Heide, J.B. and John, G. (1988), “The role of dependence balancing in safeguarding transaction-specific assets in conventional channels”, Journal of Marketing, Vol. 52 January, pp. 20-35. Helper, S. (1991), “Strategy and irreversibility in supplier relations: the case of the US automobile industry”, Business History Review, Vol. 65, Winter, pp. 781-824. Henisz, W.J. and Williamson, O.E. (1999), “Comparative economic organization – within and between countries”, Business and Politics, Vol. 1 No. 3, pp. 261-77. Hutt, M.D. and Speh, T.W. (2003), Business Marketing Management, 8th ed., Thomson South-Western, Mason, OH. Jarrat, D. and Fayed, R. (2001), “The impact of market and organisational challenges on marketing strategy decision making: a qualitative investigation of the business-to-business sector”, Journal of Business Research, Vol. 51, pp. 61-72. Kaas, K.P. (1992), “Marketing und Neue Institutionenlehre”, Working Paper, No. 1, Arbeitspapiere aus dem Forschungsprojekt Marketing und o¨konomische Theorie, Frankfurt am Main. Katz, M.L. (1989), “Vertical contractual relations”, in Schmalensee, R. and Willig, R. (Eds), Handbook of Industrial Organization, Vol. 1, North-Holland, Amsterdam, pp. 655-721. Kleinaltenkamp, M. and Jacob, F. (2002), “German approaches to business-to-business marketing theory – origins and structure”, Journal of Business Research, Vol. 55, pp. 149-55. LaBahn, D.W. (1999), “Avoiding over-reliance on a single large customer: the impact of technical capability, product development and alternative key customers”, Journal of Business-to-Business Marketing, Vol. 5 No. 4, pp. 5-36. Lieberman, M.B. and Montgomery, D.B. (1988), “First-mover advantages”, Strategic Management Journal, Vol. 9, Summer special issue, pp. 41-58. Macneil, I.R. (1974), “The many futures of contract”, Southern California Law Review, Vol. 47 No. 4, pp. 691-816. Macneil, I.R. (1978), “Contracts: adjustment of long-term economic relations under classical, neoclassical, and relational contract law”, Northwestern University Law Review, Vol. 72 No. 6, pp. 854-905. Madhok, A. (2002), “Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and resource-based theories of the firm and the institutional structure of production”, Strategic Management Journal, Vol. 23 No. 11, pp. 535-50. Mahoney, J.T. and Pandian, J.R. (1992), “The resource-based view within the conversation of strategic management”, Strategic Management Journal, Vol. 13 No. 5, pp. 363-80. Marrian, J. (1968), “Marketing characteristics of industrial goods and buyers”, in Wilson, A. (Ed.), The Marketing of Industrial Goods, Hutchinson, London, pp. 10-23. Mathur, S.S. (1984), “Competitive industrial marketing strategies”, Long Range Planning, Vol. 17 No. 4, pp. 102-9.

Miles, R.E. and Snow, C.C. (1978), Organization Strategy, Structure, and Process, McGraw-Hill, New York, NY. Miracle, G.E. (1965), “Product characteristics and marketing strategy”, Journal of Marketing, Vol. 29 No. 1, pp. 18-24. Mudambi, S. (2002), “Branding importance in business-to-business markets: three buyer clusters”, Industrial Marketing Management, Vol. 31, pp. 525-33. Oster, S. (1999), Modern Competitive Analysis, Oxford University Press, Oxford. Picot, A. (1991), “Ein neuer Ansatz zur Gestaltung der Leistungstiefe”, Schmalenbachs Zeitschrift fu¨r betriebswirtschaftliche Forschung, Vol. 43 No. 4, pp. 336-57. Picot, A. and Dietl, H. (1990), “Transaktionskostentheorie”, Wirtschaftswissenschaftliches Studium, Vol. 19 No. 4, pp. 178-84. Rangan, V.K., Corey, E.R. and Cespedes, F. (1993), “Transaction cost theory: inferences from clinical field research on downstream vertical integration”, Organization Science, Vol. 4 No. 3, pp. 454-77. Rindfleisch, A. and Heide, J.B. (1997), “Transaction cost analysis: past, present, and future applications”, Journal of Marketing, Vol. 61, October, pp. 30-54. Riordan, M.H. and Williamson, O.E. (1985), “Asset specificity and economic organization”, International Journal of Industrial Organization, Vol. 3, pp. 365-78. Rowe, D. and Alexander, I. (1968), Selling Industrial Products, Hutchinson, London. Rubin, P.H. (1990), Managing Business Transactions: Controlling the Cost of Coordinating, Communicating, and Decision Making, The Free Press, New York, NY. Shy, O. (2002), “A quick-and-easy method for estimating switching costs”, International Journal of Industrial Organization, Vol. 20, pp. 71-87. Simon, H.A. (1991), “Organizations and markets”, Journal of Economic Perspectives, Vol. 5, pp. 25-44. Stump, R.L. and Joshi, A.W. (1998), “To be or not to be [locked in]: an investigation of buyers’ commitments of dedicated investments to support new transactions”, Journal of Business-to-Business Marketing, Vol. 5 No. 3, pp. 33-63. Tacke, G. (1989), Nichtlineare Preisbildung, Gabler, Wiesbaden. Thibaut, J.W. and Kelley, H.H. (1959), The Social Psychology of Groups, John Wiley & Sons, New York, NY. Tirole, J. (1986), “Procurement and renegotiation”, Journal of Political Economy, Vol. 94, pp. 235-59. Varadarajan, P.R. and Jayachandran, S. (1999), “Marketing strategy: an assessment of the state of the field and outlook”, Journal of the Academy of Marketing Science, Vol. 27 No. 2, pp. 120-43. Wathne, K.H. and Heide, J.B. (2000), “Opportunism in interfirm relationships: forms, outcomes, and solutions”, Journal of Marketing, Vol. 64, October, pp. 36-51. Weigelt, K. and Camerer, C. (1988), “Reputation and corporate strategy: a review of recent theory and applications”, Strategic Management Journal, Vol. 9, pp. 443-54. Wielenberg, S. (1999), Investitionen in Outsourcing-Beziehungen, Gabler, Wiesbaden. Williamson, O.E. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, The Free Press, New York, NY. Williamson, O.E. (1999), “Strategy research: governance and competence perspective”, Strategic Management Journal, Vol. 20 No. 12, pp. 1087-108.

Strategy in industrial marketing 55

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

MD 43,1

56

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Modern project management and the lessons from the study of the transformation of the British Expeditionary Force in the Great War George Bailey University of Westminster, London, UK Abstract Purpose – To apply the theories of project management to the transformation of the British Expeditionary Force (BEF) from the colonial-style army of 1914 into the victorious continental-style armies of 1918. Design/methodology/approach – The methodological approach examines ten elements in the transformation. They range from the resources required to the necessary governmental changes. Emphasis is given to analysing the application of the new technologies, the political and social changes needed for eventual success, and the learning achieved. Findings – Transforming the BEF was not to be an easy process. Obviously, the German nation, allies and armies did all they could to thwart this transformation. The “total war” waged is the ultimate form of “competition”. Thus, difficult lessons of strategic management, people (both men and women) management, and resources utilisation had to be learned. Through the many innovations, the experience curve was climbed to achieve mastery over the German field army. Originality/value – To turn the BEF from a force of 120,000 at the battle of Mons to nearly 2 million at the Armistice on the western front was a remarkable achievement. Despite the strains imposed by German military prowess, the many elements were combined successfully. Although applying warfare principles to company management has become popular in the past decade, this paper avoids coming to simplistic conclusions. Rather it presents the transformation as a case study and suggests linkages to modern project management practices though leaving it to the reader to consider how these might be best applied. Keywords Project management, War Paper type Case study

Modern project management and military history The essence of successful project management is a positive and determined attitude towards setting, maintaining and eventually achieving firmly set objectives, with action taken wherever necessary to keep the project on its planned course (Lock, 2003, p. 58).

Management Decision Vol. 43 No. 1, 2005 pp. 56-71 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572489

The reasoning behind this paper has benefited from discussions over many years with military historians, many within the British Commission for Military History and the Imperial War Museum. I wish to especially mention Professor Brian Bond, Professor Emeritus of Military History, King’s College London, and Dr Christopher Pugsley, the Royal Military College, Sandhurst. They have been very patient as I have grappled with linking the methodology of modern strategic management to the actuality of historical events.

This attitude is what the national management of Britain, its Empire and dominions brought to the western front to achieve victory during the Great War of 1914 to 1918. In recent decades, the application of the principles and the lessons of military conflict to the management of commercial firms has become popular. The actions and writings of personalities such as Sun Tzu (edited by Kheng-Hor, 1992), Alexander the Great, and Carl von Clausewitz (in Paret, 1986) and organizations such as the US Marine Corps (Clemons and Santamaria, 2002) are examined to suggest how their experiences can lead modern firms to gain and sustain competitive success. Unfortunately there too often appears to be considerable naivety about the exact natures of warfare and of commercial management. The author’s links to British and Commonwealth military historians allows him a radically different approach. In 2000 his theoretical understanding of modern management was first brought to bear on analysing specific events in the Great War (Bailey, 2000a)[1]. Thus complementing the methodology traditionally used by historians, beginning from the time of Herodotus and Thucydides some 2,500 years ago (Payne, 1960). Hence this paper does not seek simplistic conclusions. Rather it presents, using management terminology, the project management of the transformation of the British Expeditionary Force (BEF) during the Great War. It draws conclusions as to how strategic changes created the successful all-arms armies of 1918. The reader is left with pointers, to consider how the lessons learned might be applied to better managing projects in today’s highly competitive and turbulent environment. Some may have relevance to transforming modern organisations. From rifle companies to all-arms armies The methodology of project management has become better understood in the second half of the twentieth century (Lock, 2003). However the creation of large-scale projects has a history extending from the Egyptian Pharaohs building their pyramids some 4,500 years ago (Edwards, 1947). This paper focuses on the more recent historical event, the transformation of the British colonial-style army of 1914 into the victorious continental-style armies of 1918. It charts how the transformation came about through the British Empire and dominions responding to the strategic imperatives presented by the western front. Emphasis is given to the application of new technologies, the political and social changes needed for eventual success, and the learning achieved. Clearly it was not a project driven by one individual, say, an engineer such as Thomas Telford or Kingdom Isabard Brunel. Political and military leaders took responsibility for their parts. Thus it was a collective effort brought about by the demands of total war. Hence this overview does not seek to identify individuals, unless like David Lloyd George and Sir Douglas Haig, their actions directly influenced the transformation. Transformation of the British Expeditionary Force The greatest succession of British military victories ever achieved was in late 1918 (Sheffield, 2001). But these victories would not have been possible for the small BEF of 1914. Transforming this force was not to be an easy process. Painful lessons of strategic management, personnel management and resources utilisation had to be learned. Through the many innovations in products and processes, the experience

The BEF in the Great War

57

MD 43,1

58

curve was climbed. National competences and resources were focused on the objective of achieving victory on the western front. Eventually mastery was achieved there over the most powerful army in Europe, the German field army. Setting the strategic scene: the clash of nations The massive clash of the German and French armies in the August of 1914 was based on long-developed plans, Germany’s Schlieffen plan and the French plan 17. The Schlieffen plan aimed to achieve a giant hook through Belgium, past the seaward side of Paris and envelope the remnants of the French armies in central France. But determined Belgian resistance and the Russian invasion of east Prussia (Solzhenitsyn, 1972) – by the recalling of two German corps to meet the invasion – weakened the hook. The outermost army swerved inside the Paris region, exposing its flank. The Miracle of the Marne forced the German retreat northwards to the hillsides overlooking the river Aisne. Plan 17 saw the French armies advance eastwards to recover the provinces of Alsace and Lorraine, seized by the new Greater Germany after the Franco-Prussian War 43 years earlier. These armies were bloodily repulsed in front of Morhange and Sarrebourg (Tuchman, 1962) during the battles of the frontiers before recovering to win on the river Marne. The 120,000 professional soldiers of the BEF supported the left wing of the French armies and retreated alongside them to the Marne before advancing to the Aisne. Consuming the “old contempibles” In the race to the sea, the BEF was then entrained northwards to Ypres after making little progress against the German entrenchments above the Aisne (Bailey, 2000a)[1]. At the battle of First Ypres, this professional army was used up resisting increasingly desperate attacks by overwhelming numbers of German troops. Even students fresh from German universities were thrown in at Langmarck; linking arms in comradeship they marched forward into withering fire, to die in their hundreds (Macdonald, 1987). It was the 15 rounds per minute of aimed rifle fire that stopped the German advances. But once these superbly trained marksmen were used up, their replacement was not possible. Nevertheless they had shown the Kaiser that his contempt for their fighting ability was totally wrong – and were proud to become known as the “old contemptibles”. Starting the transformation Necessity forced the beginnings of the transformation during the coming winter. This was also added to by the crippling French losses requiring long sections of their trench system to be handed over for manning. Newly introduced units from the British Territorials, the Canadians and the Indians joined the BEF survivors. The transformation that followed can claim to be the largest project ever managed in the UK, its dominions and its colonies. The 120,000 personnel rose in four years to 1,966,727 (HMSO, 1922)[2] – a 16-fold increase – as an island nation which normally sheltered behind the protection of the Royal Navy created a land-based force for total war.

Elements making up the transformation The transformation embraced every aspect of Britain’s national life. The key elements are analysed in greater detail in the following sections: . manpower, volunteers and conscription; . high command and the British war cabinet; . infantry weaponry and tactics; . artillery; . suppression of enemy infantry and artillery; . tanks; . aircraft; . moving supplies; . rescuing the wounded; and . patriotism and the maintenance of discipline. Manpower, volunteers and conscription The Great War was welcomed with enthusiasm in many of the European countries including Britain. Once the BEF was committed to France, Lord Kitchener, the Secretary of State for War, called for 100,000 volunteers (Gilbert, 1994) to take the King’s shilling. His powerful poster (still exploited by modern advertisers – even in notices in the School of Management, University of Surrey) brought an overwhelming response. So many men volunteered that the army training system was overwhelmed. Large numbers had to be sent home, the rest were housed in temporary accommodation. Drilling took place without rifles, little other weaponry existed. Many months were to pass before the factories began to manufacture sufficient weapons to arm what became known as the New Armies. During 1915, the remaining regular battalions, the territorial units and the professional units from empire and dominion countries fought and took heavy casualties at Second Ypres, Neuve Chapelle, Aubers Ridge, Festubert and Givenchy. Many of these actions were to support ferocious and largely unsuccessful French assaults in Artois (Notre Dame de Lorette and Vimy Ridge) and in Champagne (to the east of Rheims). Also British, Australian and New Zealand forces (the ANZACs), along with French troops, were committed to the abortive assaults on the Gallipoli peninsula opposite Istanbul (Churchill, 1931). By the autumn of 1915, these units were heavily wasted. Thus at Loos, to support further French attacks in Artois and Champagne, two new army divisions, the 21st and the 24th divisions, of inexperienced troops were committed to battle. The catastrophic results, so starkly presented by Regan (1991), showed that even the “enthusiasm of ignorance” could not break through the thick German wire (Bailey, 2000a)[1]. Because of the shells scandal, which meant the artillery had insufficient shells to weaken the German defences, and the wasteful committing of these two divisions, political and military changes took place. David Lloyd George replaced Prime Minister Herbert Asquith and General Sir Douglas Haig replaced Field Marshall Sir John French. By 1 July 1916, these new armies had become proficient. Spells in the trenches, carrying out trench raids, had given them practical experience whilst incurring limited

The BEF in the Great War

59

MD 43,1

60

casualties. But the opening of the Battle of the Somme was generally disastrous. The inability of British shells to cut the enemy wire (this had to await the development and exploitation of the 106 artillery fuze from the spring of 1917 onwards (Sheffield, 2001)) and to destroy the deep German bunkers meant that their machine-gunners wrought havoc on the heavily weighed-down British “Tommies” as they walked forward across no-man’s land. Only in the south did the British and French troops break through, a success that was not exploited because British generals in charge there could not comprehend the scale of the advances and so refused to order further attacks. Partly, this was due to the limited communications then available – a problem never satisfactorily resolved until the Second World War and which still continues to plague the British forces even today. Two weeks later, the British troops spectacularly conquered the Bazentin Ridge. Officers walked freely across fields behind the German trenches. But again communications failed exploitation. By the time the British and Indian cavalry reached the open country, hours had passed and the Germans had recovered their nerve. The South African Brigade’s sacrifices in defending Delville Wood showed the continuing resilience of the German troops. Understandably, the stream of volunteers began to dry up and the demands for even more troops increased. So the government took the decision to conscript able-bodied men in 1916. Thus, by late 1917, the trenches were being manned by both volunteer and conscripted men. However many of the conscripts would have volunteered anyway. Together with those that had gained experience in battles from 1914 to 1916, they were welded into the all-arms units. The officers leading them were not just the mythical “second lieutenants just out of public schools” but also working class men who had been commissioned because of their proven powers of leadership. They withstood the tremendous shock of the one million extra German troops thrown into the Kaiser’s offensive of the spring of 1918 (men released by the victory on the eastern front in 1917) before driving the German forces backwards during the one hundred days. The heavy and increasing demand for manpower meant that for the first time women became an essential part of the war effort. Hence many went to work in the munitions factories making weapons, shells and small arms cartridges. They continued despite the fact that so many had lost husbands, sons and fiances. Their contribution was recognised in the electoral changes made after the war and the entry of women into Parliament, on to University courses and into the professions. Partly this was the result of the demographic inbalance caused by the 677,515 BEF dead (Simkins, 1997). Whereas the women from the working classes tended to work in manufacturing, those from the middle and upper classes (such as the late Queen Mother) focused on becoming nurses, with many serving in the base hospitals. Vera Brittain’s (1933)[3] memoirs tell of the anguish they faced in trying to help mend the shattered bodies of wounded soldiers. .

High command and the British war cabinet As in the Second World War, the style of leadership at the beginning of the conflict was unsuited to the demands of total war. The years of peace had brought into power Prime Ministers whose strategic policies were framed towards defending the position of the

British Empire. But total war in continental Europe and globally demanded offensive policies if the peace breakers were to be defeated. So in 1940, the gentle Neville Chamberlain was replaced by the warrior Winston Churchill. However, in the Great War, Herbert Asquith kept the confidence for a few more months before being replaced by the more ruthless David Lloyd George. As Minister of Munitions during 1915, Lloyd George had weakened the suspicions about himself by aggressively responding to the shortage of shells. This shortage had condemned the infantry to attacking without adequate artillery support, thus suffering heavy casualties. Lloyd George took a more robust approach to prosecuting the war, including not deferring to the British Army’s high command. In this he was helped by the change of commander as a result of the Battle of Loos. Sir John French paid the price for the misuse of the two new army divisions. Although Sir Douglas Haig was implicated, through his friendship with King George V, he was able to have the blame pinned on French. In December 1915, Haig became the Commander in Chief and brought a professionalism to the execution of the war not found in his predecessor. Analyses have been made of Haig’s personality (Terraine, 1963; Bond and Cave, 1999; Bailey, 2000b)[4] but the enigma still remains. His professionalism is not in doubt, nor his stubbornness in pushing on with his attrition policy. But the flexibility of mind to challenge methods proven to be wasteful remains the source of debate despite his willingness to accept new technologies and innovations such as the tank. As the war went on without sustainable success during late 1916, 1917 and early 1918, the tensions between the high command and the war cabinet increased. Lloyd George despaired of the human cost of Haig’s policies; Haig of Lloyd George’s wishes to interfere in military matters. A clash of personalities worsened the friction. But when Lloyd George suggested a change of commander in chief, opposition from within the cabinet and the BEF showed him this was not possible and his own position might be put at risk. Although harmonious relations would have been desirable, perhaps the tensions were creative in allowing innovations to emerge and to be exploited. In the real world people in power usually have powerful egos. It is the intransigent use of power that separates the dictator from the leader. Lloyd George backed off when he realised there was no support for replacing Haig, and Haig was willing to become answerable to the French commander, Ferdinand Foch, when the allied armies had their “backs to the wall” during the Kaiser’s offensive. The massive enlargement of the BEF required a modern managerial support system to co-ordinate the use of men and the supply to them of the necessary resources ranging from foodstuffs to military hardware. The staff officer system that was developed worked remarkably well in the later stages of the war. Troops received their rations even during the dark days of the Passchendale battle and the Kaiser’s offensive. Wounded soldiers were recovered from the battlefield (often speedily despite the appalling problems of doing so) and well treated. Morale was well maintained so that the mutinies which overtook the French armies in 1917 did not affect the BEF (the minor “mutiny” at Etaples was an aberration due to bullying NCOs not being adequately controlled). The high command relaxing in luxury in their chateaux is a myth. More British generals died of war wounds during the Great War than during the Second World War.

The BEF in the Great War

61

MD 43,1

62

Haig was an abstemious leader unlike the French General Joseph Joffre who loved food and had the girth to prove it. Even the disasters of 1914 did not keep him from his long lunches! Although there were some serious lapses, overall the administration of the BEF met the requirements to transform the BEF into a war-winning instrument. Infantry weaponry and tactics Innovations in small-arms technology transformed the rifle companies into all-arms units capable of fighting independent actions, a transformation that has remained until today. The development of hand-thrown and tube-guiding explosives is detailed below. These reduced the infantry’s reliance on artillery support, leaving the artillery to destroy larger targets such as enemy troop formations, blockhouses, machine-gun nests, and fields of wire. The 0.303-inch short magazine Lee-Enfield rifle, used with such skill by the professional marksman, remained the standard infantry rifle. It provided the means for more distant fighting and when fitted with a bayonet enabled close-fighting. But Napoleonic style tactics for closing with the enemy still ruled. The lessons of the American Civil War, the Franco-Prussian War, the Boer War and the Russo-Japanese War were not absorbed – so leading to the enormous casualties of 1914 and 1915. The vast increase in rapid and accurate fire meant firepower now dominated the battlefield. Redressing the appalling lack of British machine-guns in 1914, the firepower of the battalions was increased many times by the additions of many heavy machine-guns (the 0.303-inch Vickers) and the introduction of the Lewis light machine-guns into units as small as platoons. Transforming the weaponry did allow these units to evolve new tactics, learning from the French tactical developments in the battles around Verdun and on the Somme during 1916. The German storm troopers of 1918 such as the winner of the Pour le Merite, Ernst Junger (Junger, 1929) were also trained by imitating these developments. After the final breaching of the Hindenburg Line in late September 1918, the BEF platoons were able to effectively harass and destroy the German units as they retreated. Artillery The large transformation was in the use of artillery. When the BEF fought at Mons and on the Aisne in 1914, their main artillery support were 13-pounder quick-firing field guns (able to fire at up to 15 rounds a minute, Macdonald, 1987). The Royal Horse Artillery still rode fast into action, unlimbered the guns, fired at the enemy over open sights, before limbering up to ride away. But increasingly the German gunners out-shelled them such as at the famous Affair at Nery. On the Aisne, the gun trailers impeded the guns elevating sufficiently to shell the top of the ridge thus leaving the German troops secure in their entrenchments. Only the few old pattern 6-inch howitzers rushed to the battle were able to cause the Germans much grief. During 1915, more field and heavy guns became available, but not the shell production to permit them to fire rapidly over a long time. Supplies from elsewhere sometimes proved defective, some American made shells being found to contain sawdust, not explosive. The shells scandal gave David Lloyd George the position of Minister of Munitions and robust efforts began to greatly increase the production rate of the shells and small-arms cartridges. When he became Prime Minister a few months later, he retained his drive for increased production.

Cannon fire was an important part of preparing for the infantry assaults on the Somme. But many days of shelling in late June 1916 did not destroy the German wire or bunkers. The shells ploughed into the ground before exploding, and the wire was often thrown into tangles making it even more difficult to pass through. Only the exploitation of the sensitive 106 artillery fuze in 1917 gave a shell that would explode on hitting wire (Sheffield, 2001). Now it became more possible to focus firing programmes on specific areas of wire through which the infantry could pass in relative safety. Once the tank became more useful in late 1917, it was also able to contribute to wire clearing. In 1914, the BEF did not have hand-held explosives. During the winter, the soldiers became expert at turning discarded food tins into primitive bombs. Once the Mills bomb became available, the soldiers could then use explosives effectively for clearing enemy trenches and bunkers. The grenade became one of the most important weapons in the platoon’s armoury. Similarly no longer-range explosives were available. A simple tube device, the three-inch Stokes mortar, was developed by 1916 to throw bombs up to a few hundred yards. Hence the infantry were now able to put down explosives on to enemy trenches without having to rely on getting information back to the gun parks, which inevitably wasted time. The large increase in heavy cannons of many sizes has been mentioned. Some were so huge they had to be transported on rails. Others took days to set up and were cumbersome to move. This became a substantial problem during the rapid advances of the one hundred days when heavy guns had to be hauled over the old battlefields of the Somme valley and the Picardy plain. However the greatly increased firepower of the infantry companies coupled with the use of medium-tanks and armoured cars compensated for the unavoidable irregularities in the overall performance of the artillery. Suppression of enemy infantry and artillery The change in artillery tactics was a major innovation. The 1914 field guns fired mostly shrapnel shells that had little effect on covered entrenchments. The 1916 cannon bombardments could not penetrate the deep bunkers or clear away the fields of wire. The German guns from their concealed positions were able to pulverise the British trenches resulting in the near impossibility of the infantry crossing “no-man’s land” without facing murderous machine-gun fire. In 1916 lifting barrages were developed to bring down fire just in front of the advancing infantry. This worked adequately provided that the infantry were able to keep up as the barrages moved forward. Unfortunately, this rarely happened, so the barrages were far ahead with the infantry facing German machine-gunners who had speedily climbed up out of their bunkers once the barrages passed. As a result of the other combatants’ experiences, fundamental changes were made. Rather than seek to destroy the enemy, fire power was used to keep them within their shelters until the infantry entered their trench systems. This suppressing rather than destruction bombardments not only overcame the problems of the lifting barrages, it also churned up the ground less so that infantry and track vehicles could move forward without encountering deep craters lying close together. Later in the war, gas shells became available, so that they were fired with high explosive shells to keep the enemy

The BEF in the Great War

63

MD 43,1

64

soldiers under cover wearing their cumbersome gas masks whilst the British infantry crossed no-man’s land in relative safety. The cannons themselves were carefully calibrated, thus the gunners could place their shells on the targets without having to spend time and expend shells registering the guns onto the targets. Understandably such registration alerted the enemy to future activity. At Cambrai in November 1917 this method was applied so successfully that the Germans did not realise they were to be attacked until they looked out to see British tanks a few yards away. Essential to gaining more accurate fire was achieving better quality during the making of the gun barrels and the shells. This rapidly improved the standards of manufacturing. With the achievement of finer tolerances, the shells fitted better into the barrels, had more accurately weighed amounts of explosive and propellant, and so when fired landed on the targets. Hence 60-pounder heavy cannons could fire shells from “north London” that would land on “Trafalgar Square”. The management of these improvements was the beginning of what is now known as quality control. The sciences of mathematics and physics were also brought into use. First, by spotting the flashes from the cannons, the British gunners were able to locate the German cannons using trigonometry. In 1917 Lieutenant Lawrence Bragg, of King’s College London, the pre-war Nobel Prize winner and future Knight, helped develop an electrical system for locating cannons by the sound of the firing of their shells. Thus in 1918, British heavy cannons were able to accurately fire upon German gun positions, hence stopping them shelling no-man’s land and the British trench systems. Smaller cannons were able to use predicted fire to shell known machine-gun nests and blockhouses, and mortars to deal with individual machine-guns not previously located. And at le Verguier the Australian divisions under the command of Sir John Monash used 250 machine-guns, firing a continuous barrage 300 yards in front of the advancing troops, to quieten the enemy (Pedersen, 1962). The Royal Horse Artillery was only a few thousand strong in the 1914 BEF. One third of a million gunners made up the 1918 BEF. Firing more than 100,000 shells to support an attack became acceptable (Sheffield, 2001). Tanks The story of the development of the armoured tracked vehicle during 1915 is well known. After experiments with Little Willie and Mother, hiding their purpose by calling them water “tanks”, the tanks were introduced in the battle of Flers on 24 September 1916, a tank earlier having helped finally clear the remains of Delville Wood, fought over since the South African defence of the July. Even the very primitive vehicle, though lacking defensive armour plating, showed the ability to crush wire and break through the enemy trenches. However the tanks made limited impact at Arras in the spring of 1917 and at Messines two months later and failed in the swamp conditions of Third Ypres. After their abortive attacks from September 1915, where even two cavalry divisions were destroyed charging over the ridges of Champagne in attempts to reach the enemy trenches (Farrar-Hockley, 1964), the French began developing the Schneider and St. Chamond heavy tanks. First used during the Nivelle Offensive of early 1917 they met with little success. The Germans later produced some twenty cumbersome AV7 tanks which proved to be little more than a joke.

The refinement of the British tanks, incorporating better steering and proper armour plating, allowed the first ever major tank attack over the firm ground in front of the Hindenburg Line at Cambrai. A force of 324 tanks (Gilbert, 1994) punched through the enemy trenches but the success could not be exploited. Partly this was due to the fortuitous use of Cambrai as a resting area for German divisions not uncovered by British Intelligence, partly due to some German units having practised anti-tank gunnery. By the summer of 1918, technological development based on a continuous loop between tactical experience and modifications during factory production (Strachan, 2003) had made the tank a battle-winning machine. It was easily able to crush and sweep away the field of German wire. Its cannons and machine-guns could destroy enemy trenches, field guns and enemy infantry units. It had become an effective instrument of breakthrough. But its relative unreliability meant it suffered substantial attrition, so after a few days of battle few remained battle-worthy. However once the Hindenburg Line was broken other weapon systems such as the Whippet medium-tanks and armoured cars were able to be exploited in the continuing advances. This included the cavalry denied a proper function for most of the previous four years. Aircraft Flimsy aircraft helped watch the advance of the German armies in 1914 and spot their inward wheel that exposed their flank, to allow the allied victory on the river Marne. Soon the opposing airmen tried to shoot at each other with pistols and rifles. The development of more robust aircraft allowed machine-guns to be mounted, although the propellers limited forward firing that was carefully aimed. German engineers worked out how to synchronise firing with the revolutions of the engine crankshafts that gave their fighter aircraft such as the Fokker Eindecker complete control. But in 1916, the French and the Royal Flying Corps aircraft gained supremacy. New German aircraft types such as the Albatross and the Fokker Triplane, and the creation of “flying circuses” – large formations of fighter aircraft – under the leader of Rittmeister Baron von Richthofen and his successor Hermann Goering (the Luftwaffe commander in the Second World War) regained supremacy. In 1918, the German aircraft became heavily out-numbered, with the now superior allied aircraft piloted by aces such Major McCudden VC winning the dog-fights. The Sopwith Camel was credited with 1,294 victories (Simkins, 1997). Hence British aircraft had relative freedom to survey enemy positions, spot enemy artillery, strafe enemy formations, and even parachute in some supplies. At le Hamel on 4 July, aircraft parachuted in 112,000 rounds of ammunition to replenish the Australian machine-guns (Pitt, 1962; Pedersen, 1962). The new Handley-Page and Vickers bombers were able to drop bombs on the enemy support systems even many miles behind the trench systems to disrupt the resupplying of the front lines. Moving supplies As mentioned earlier great care was taken with delivering food to the soldiers manning the front trenches thereby maintaining their morale. Water, because of its weight, was always a more difficult problem only occasionally solved. At le Hamel, four Carrier tanks were used by the Australian Corps to take forward 50,000 lbs of supplies including water (Fletcher, 1994).

The BEF in the Great War

65

MD 43,1

66

Trench building materials were brought up to near the trenches by rail and by lorries. However, soldiers assisted by mules had to bring these supplies into the trenches, together with the small-arms ammunition, the grenades and the mortar bombs. Under the appalling ground conditions of the Passchendaele battle, this could become extremely difficult. Troop units were also rotated at relatively short intervals, which greatly helped morale (unlike the French whose long stays in the front line contributed to the mutinies). Such rotations had to be handled with great care as the exchange greatly increased the vulnerability to attack. Hence before the battle of Amiens in 1918, an Australian unit rather stupidly carried out an unauthorised raid which greatly upset the Germans. They attacked just when the exchange was taking place and drove the new troops far back from their trenches. These troops then had to fight hard to retake these trenches even before the battle began on 8 August. Overall the learning of how to manage the effective movement of all these requirements laid the beginnings of what is now the modern Royal Logistics Corps.

Rescuing the wounded Greatly assisting the maintenance of morale was the soldiers knowing that an effective system was in place to treat the wounded. When they were collected from the battlefield and brought into nearby advanced dressing stations, those needing simple treatment could be seen quickly. More serious wounds could be stabilised before the ambulances carried the soldiers to the casualty clearing stations where surgery might be performed. Once over the worst or with wounds not requiring life-saving surgery, the soldiers were then brought to base hospitals in France or (even better for the soldiers) in Britain, nicknamed Blighty. Hence a Blighty wound got them home to recuperate after recovery! Female nurses were integral to staffing the base hospitals and the hospitals in Britain, Vera Brittain (1933)[3] speaking so eloquently for that generation of women. Wounds to the head and to the body were often worsened by the shell and bullet splinters causing the wounds and the soldiers’ clothing driven into these wounds. New treatments mainly consisted of the better cleansing of the wounds by saline irrigation and including the surgical removal of the foreign particles. The drugs available in the Second World War had not yet been invented. Unfortunately gangrene often set in, especially where heavily polluted earth had been forced into the wounds, necessitating the amputation of limbs. Controversy still surrounds shell-shock and psychiatric care. Some soldiers suffered military execution who in today’s culture would have received psychological counselling instead. However conditions for civilians, let alone soldiers, were much harder 90 years ago. Stress was unrecognised, the “stiff upper lip” was the accepted standard, and professional counselling outside the Church and medical practices was unavailable. Nevertheless the scale of some of the mental disorders did lead to a recognition that the new science of psychiatry did have relevance to the mental changes resulting from warfare. Hence Siegfried Sassoon spent time in Slateford War Hospital in 1917 when it was decided he was suffering from shell-shock (Sassoon, 1930) before joining Wilfred Owen in the Craiglockart War Hospital for Neurasthenic Officers (Gilbert, 1994).

Patriotism and the maintenance of discipline The initial enthusiasm was maintained longer in Britain than in the other warring countries. Only two of the civilian divisions suffered heavy casualties in 1915. But the numbers of those killed in these divisions during the Battle of the Somme brought home to British civilians the scale of what was happening in the trenches. This was added to when conscripted men began to be killed. After the painful battle of Arras during the Easter weeks of 1917 when little ground was taken other than the Vimy Ridge (for which the Canadians gained renown) a grim determination to complete the job developed. The soldiers became resigned to what had to be done. So did the government despite its deep unhappiness with the casualty figures. The national stoicism meant that there were no French-style mutinies. The strong belief in the future of Britain and its Empire continued among the nations now making up the BEF. Much has been claimed in the modern British culture about a harsh and unforgiving discipline. It needs repeating, things were viewed differently 90 years ago. A total of 304,262 officers and men were court-martialled for offences ranging from drunkenness and theft to capital offences (Peaty, 1999). Of this total, 3,080 were sentenced to death for military crimes such as cowardice and desertion. Many of the crimes carried the civilian death penalty by hanging. Thus 90 per cent of the condemned were reprieved, usually by Haig’s decision after reviewing the individual cases. Most then experienced hard labour, a normal civilian punishment at that time. Of the remaining 10 per cent who were executed, 291 were British and 55 were from other nations. Unfortunately a very few were executed after evidence that in today’s culture would be regarded as unsatisfactory, with the modern knowledge about the impact of real psychological stress. During the 1990s the British Conservative and Labour Governments reviewed the decisions and did not issue pardons. The soldiers prepared to die fighting mostly felt that those executed had let their country down and their comrades down. They knew that civilian Britain still had the death penalty by hanging. Therefore the 345 executed should be benchmarked against the 677,515 of the BEF who accepted and suffered the high risk of death in battle during the fifty-one months of the Great War.

Lessons from the study of the transformation of the BEF in the Great War The lessons are presented in groups of “bullet points” with the BEF example in italics. Each group relates to the sections above but is expressed in modern management language. (1) Personnel: . a total effort requires everyone to help (total war); . leadership skills are transferable (the officers of 1918 came from all socio-economic groups); and . training builds up experience (time out of the trenches was used to learn and practise new techniques and become familiar with objectives to be achieved). (2) Command: . circumstances change the need for certain styles of leadership (Herbert Asquith and David Lloyd George);

The BEF in the Great War

67

MD 43,1

68

leaders united behind a common goal do not need to like each other (David Lloyd George and Douglas Haig); . a sense of mission must be instilled (the BEF morale before the battle of the Somme); . carefully assess the balance between attack and defence where the risk of failure is destruction (the German losses in the Kaiser’s offensive made BEF success in the battle of Amiens more likely); . respect your rivals (the vigour with which the German forces resisted the BEF attacks on the Somme and at Passchendaele); . plan all activities carefully (the weak co-ordination between the infantry and the RHA in 1914 became the superb co-operation between them in 1918); . resources needs are usually twice as much (or more) as originally predicted (the BEF Fifth Army was ill-prepared to withstand the German storm-troopers in the Kaiser’s offensive); . prowess and strength run down as implementation proceeds (BEF soldiers became exhausted during an attack often no more than 400 yards from their start lines); . maintain momentum, once lost it is difficult to regain (the BEF cavalry took many hours to arrive after the spectacular breakthrough on the Bazentin Ridge, 14 July 1916); . change unsuccessful strategies and structures (the overall transformation of the BEF between 1914 and 1918); . position to gain competitive advantage (bringing tanks up to the start lines at Cambrai without the Germans hearing their arrival); . keep up with new technologies (British manufacturing developed the war-winning Mark 5 heavy-tank, German industry the farcical A7V “mobile blockhouse”); and . a culture is required that allows innovations (the tank, sound-ranging, predicted fire). (3) Control: . maintain balance between all activities (the co-operation between the infantry, the tanks, the RA and the RAF during the 100 days); and . control systems must be accepted as reasonable (the BEF soldiers accepted the execution of those condemned for desertion, cowardice and other serious offences). (4) Weapons in the armoury: . pinpoint the likely retaliators and “silence” them (sound ranging allowed the RA heavy cannons to destroy enemy cannons located behind the enemy lines); . exploit new products and processes (all-arms weaponry in the small infantry units, aircraft straffing enemy trenches during infantry attacks); and .

one distinctive competence builds strength (the Lee-Enfield rifle was the core element of the all-arms infantry units). Product portfolio: . ensure the product range is fully covered (the explosive weapons and light machine-guns were added to rifles to give all means of attack and defence to the small infantry units); and . aim for the highest quality of manufacturing and processes delivery (the manufacturing of cannons and shells allowed the successful use of predicted fire). Quietening the competition: defeat the will to resist (many German soldiers were relieved to become prisoners on 8 August 1918 at Amiens). New product development: . launching products too soon (the tanks used at Flers on 24 September 1916 were unfit for serious action); and . recognise the limitations of products (the attrition rate of heavy-tanks remained high so other means were used to carry on what they began). Mobility: seek out opportunities given by new products (the development of heavy bombers for raids well behind enemy lines). Logistics: . build up resources at a planned speed (preparing for the great assaults in 1916 and thereafter required meticulous planning to avoid congestion – a lesson the American forces were forced to learn in their Meuse-Argonne attack of late 1918); and . human needs must be supplied (the morale of the BEF troops in the front trenches remained high because great efforts were made to get food through to them). Communications: . gather intelligence on rivals and their activities (the BEF intelligence officers failed to pay proper attention to the failure to cut the wire before 1 July 1916 and to the swamp condition of the Ypres Salient in late 1917); and . encourage sophisticated knowledge transfer (analyses of military actions determining what had been achieved and what went wrong were parts of developing the new techniques). .

(5)

(6) (7)

(8) (9)

(10)

Climbing the experience curve: the transformation of the BEF These findings show that modern management thinking can be used to better understand historical events. Also such events can provide symbolical actions as applied examples to reinforce modern learning. This assessment does not try to present historical events as certain answers to resolving modern day problems. The very different political, socio-economic and cultural climates make simplistic transfers of lessons of little value. This holistic analysis of the transformation of the BEF between 1914 and 1918 shows many elements that are in tune with modern project management theories and

The BEF in the Great War

69

MD 43,1

70

practices. On the common sense approach of the past have been overlaid theoretical models and techniques such as the Gantt chart, sensitivity analysis and the Ishikawa fishbone diagram (Lock, 2003). Also the recognition that initial estimates often need doubling to be realistic (Gray and Larson, 2002) – hence the military ratio of 3:1 generally adopted for the number of attackers needed to subdue defenders, a ratio that helped start the final one hundred days at Amiens (Sheffield, 2001). Clearly the British political and military actions were beset by much uncertainty and risk. Their outcomes could not be foretold at the beginning. Hence the overall project, unlike building a bridge or a motorway, had to be managed on a step-by-step basis. This demanded an overall vision being maintained by the political and military leaders – and this did happen. Recognising how the events of the Great War still resonate strongly today, the better understanding of management makes it easier for historians to show that the events of these years were part of climbing an experience curve that had to be climbed. Note 1. This web site enlarges on a University of Westminster occasional paper. 2. Source: Imperial War Museum, 25 March 2004; on 1 November 1918, this was made up of 1,561,370 British troops (64,172 officers, 1,497,198 other ranks) and 405,357 (Dominion and Empire troops). 3. Made into a very successful television series in the 1990s. 4. Contains the first professional analysis of Haig’s handwriting by Margaret Webb. References Bailey, G.N.A. (2000a), “Loos”, available at: www.bef-battles.org.uk (accessed 26 March 2004). Bailey, G.N.A. (2000b), “The enigma of Haig”, available at: www.milstrat.org.uk (accessed 26 March 2004). Bond, B. and Cave, N. (Eds) (1999), Haig: A Reappraisal 70 Years on, Leo Cooper, Barnsley. Brittain, V. (1933), Testament of Youth: An Autobiographical Study of the Years 1900-1925, Victor Gollancz, London. Churchill, W.S. (1931), The World Crisis 1911-1918, Thornton Butterworth, London. Clemons, E.K. and Santamaria, J.A. (2002), “Maneuver warfare: can modern military strategy lead you to victory?”, Harvard Business Review, Vol. 80 No. 4, pp. 56-65. Edwards, I.E.S. (1947), The Pyramids of Egypt, Penguin, Harmondsworth. Farrar-Hockley, A.H. (1964), The Somme, B.T. Batsford, London. Fletcher, D. (1994), Tanks and Trenches: First-Hand Accounts of Tank Warfare in the First World War, Grange Books, London. Gilbert, M. (1994), First World War, Weidenfeld & Nicolson, London. Gray, C. and Larson, E. (2002), Project Management: The Complete Guide for Every Manager, McGraw-Hill, New York, NY. HMSO (1922), Statistics of the Military Effort of the British Empire during the Great War, War Office, London. Junger, E. (1929), Storm of Steel, Chatto & Windus, London. Kheng-Hor, K. (1992), Sun Tzu’s Art of War, Pelanduk Publications, Subang Jaya.

Lock, D. (2003), Project Management, 8th ed., Gower, Aldershot. Macdonald, L. (1987), 1914, Michael Joseph, London. Paret, P. (1986), “Clausewitz”, in Paret, P. (Ed.), Makers of Modern Strategy: From Machiavelli to the Nuclear Age, Clarendon Press, Oxford. Payne, R. (1960), The Splendour of Greece, Pan, London. Peaty, J. (1999), “Haig and military discipline”, in Bond, B. and Cave, N. (Eds), Haig: A Reappraisal 70 Years on, Leo Cooper, Barnsley. Pedersen, P.A. (1962), Monash as Military Commander, Melbourne University Press, Melbourne. Pitt, B. (1962), 1918: The Last Act, Cassell, London. Regan, G. (1991), The Guinness Book of Military Blunders, Guinness Publishing, Enfield. Sassoon, S. (1930), Memoirs of an Infantry Officer, Faber & Faber, London. Sheffield, G. (2001), Forgotten Victory: The First World War – Myths and Realities, Headline, London. Simkins, P. (1997), Chronicles of The Great War: The Western Front 1914-1918, Colour Library, London. Solzhenitsyn, A. (1972), August 1914, The Bodley Head, London. Strachan, H. (2003), The First World War: A New Illustrated History, Simon & Schuster, London. Terraine, J. (1963), Douglas Haig, the Educated Soldier, Hutchinson, London. Tuchman, B. (1962), August 1914, Constable and Co., London.

The BEF in the Great War

71

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,1

Interpreting the successful transformation of Shell’s advertising activity 1997-2002

72

Julie Verity Cranfield School of Management, Cranfield University, Bedford, UK Abstract Purpose – Between 1997 and 2002, Shell changed the way it organised its advertising activity, switching from a local approach to a global organisation. The transition was significant, given the group’s long history of decentralisation. It was also very successful. This paper explores how this transition was made by applying the theoretical lenses of the resource-based view (RBV) and dynamic capability view (DCV). Design/methodology/approach – Qualitative data were collected in 2002 from key executives in Shell and J.W. Thompson from which observations were made about Shell’s transition and the change process. These observations are then explored further by applying the theoretical lens of the RBV and its natural extension, the DCV, testing what could be learned from the practical application of these theories. Findings – A dynamic capability is identified as a significant reason for Shell’s success. A second important factor was that Shell did not attempt to copy an organisation with an apparent superior capability. The paper concludes that firms generally should search for internal asymmetries on which to build resources. Originality/value – The RBV and DCV are not new as approaches to strategic thinking, but they do remain mainly of interest to the academic community at the theoretical level. There is little empirical work that makes the concepts easily accessible to practitioners through example and translation into “everyday” experience. This paper makes a contribution in this area. Keywords Resource management, Change management, Competitive advantage Paper type Case study

Management Decision Vol. 43 No. 1, 2005 pp. 72-85 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572498

Introduction Between 1997 and 2002, the oil products[1] business of the global oil group, Shell, changed the way its advertising activity was managed, switching from a local approach to a global organisation. The trigger for change was an increasingly competitive environment within downstream sectors of the oil industry in many countries where Shell had a presence. The focus in Shell was on lowering structural cost generally across the organisation. A favoured option to achieving this was to centralise and simplify the business, reaping economies of scale where feasible. When the global brand and communication (GB&C) team started on this transition, many restraining forces were obvious, especially those derived from the group’s history of strongly-held values of decentralisation, resulting in significant local managerial power and freedom to act. Despite this, the transition was successful. By 2002, Shell’s GB&C team judged progress as significant against their internally-set criteria of: lowered advertising production costs, higher quality advertisements, superior local customer impact when measured against locally-produced communications and, greater transparency and efficiency in the relationship with the global advertising agency (J Walter Thompson (JWT)). Also, by 2002, Shell was

acknowledged by JWT as leading the field for best practice processes of managing a global account. This paper draws on data collected from interviews with key executives in Shell and JWT during 2002. It focuses on observations made about the extent of the transition and the change process. After describing these observations, the paper goes on to interpret Shell’s success through the theoretical lens of the resource-based (RBV) and dynamic capability (DCV) views of the firm. The RBV and DCV are not new as approaches to strategic thinking, but they do remain mainly of interest to the academic community at the theoretical level. There is little empirical work that makes the concepts easily accessible to practitioners through example and translation into “everyday” experience. Methodology The research was qualitative and started in November 2001. Interviews were conducted during December 2001 and January 2002 with senior executives in Shell and at JWT. At Shell, the VP global brands and communications (in-post since 1997, recruited from outside Shell) and the global advertising manager (in post since 1999 with a history of working in Shell) were interviewed. Both supplied supporting information, including market research data and internal communication material. Seven interviews were made with JWT executives. The worldwide director in charge of the Shell account had had periods of involvement with the group since the 1960s and was responsible for the Shell account throughout the period of this study. Two JWT teams were involved, including an account director and account planner. All four executives were interviewed, plus the two creative directors who were responsible for the creative idea and who continued to work on the account throughout. Interviews were unstructured, allowing each respondent to tell their own story, with the intent of not allowing bias into the data. Interviewees were asked to describe the journey they had taken toward managing a global account over the five years. All the conversations were recorded and transcribed. Data from interviews, internal communication material and secondary sources were accessed with the aim of understanding both the extent of the change at Shell and the reasons for its success. From this research key observations were drawn and are presented below. Observations from the research Marketing practice, the oil industry and Shell The oil industry is not renowned as being innovative at marketing practice, especially in the area of brand and communications. In 1997, few would have argued for an oil company name to feature on a list of great brands or companies revered for their marketing competence. A 1996 survey of the world’s top 100 brands placed the Shell brand at number 64, BP’s at number 70 and Exxon failed to appear in the rankings (Kochan, 1996). An internal survey conducted by Ad Age International for Shell in 1995, showed that Shell’s advertising spend worldwide was significantly less than other global brands. For example, Shell’s global advertising spend was about 15 per cent of McDonalds and approximately 10 per cent of Ford. Among the directors interviewed at JWT, there was experience of working on accounts for Unilever, Ford, Kellogg’s, Rolex, De Beers, as well as in the oil industry:

Shell’s advertising 1997-2002 73

MD 43,1

74

Exxon and Dea (at the time, a significant national oil company in Germany). Given this experience, interviewees from JWT confirmed the lack of brand and advertising capability within the sector: “It is not a category that has seen the value that is possible from good marketing practice. There is huge scope [for an organisation] to demonstrate the contribution that brand and communication can make to building customer value”. All interviewees described the advertising from the oil sector in 1997 as undifferentiated, essentially portraying similar images of cars in service stations, populated by smiling, happy people refuelling their cars. All concluded from this that the sector had been allowed to fall to commodity status, which was the dominant customer perception, especially in the most advanced economies: Europe, USA, Canada and Australia. Similarly, there was consensus that the sector was behind other categories in reacting to global trends and in particular initiatives to centralise advertising activity. There were examples of pan-European campaigns by all three major oil companies (late 1980s), but none had been sustained or developed more widely. The executives from JWT experienced a relatively low standard of marketing capability within Shell when compared with their FMCG clients. They talked of their frustrations in finding: “a common language”, “believers”, “people who are instinctive about the consumer”. The executives interviewed from Shell described their internal environment as one which did not recognise the value of advertising or the brand: “Advertising is not paid much attention, it is deemed to be of low importance”, a culture which labelled advertising activity as: “fluff” and the people engaged in advertising as “those that spend a lot of money wining and dining, rather than making money”. Long history of decentralisation, a belief in local autonomy and consensus decision making The Royal Dutch/Shell Group was the result of an alliance made in 1907 between the Royal Dutch Petroleum Company and the “Shell” Transport and Trading Company plc, whereby the two companies agreed to merge their interests while keeping their separate identities. A total of 60 per cent of the interest in Shell remains with Royal Dutch and 40 per cent with Shell Transport in the UK. The group has a presence in 140 countries and its oil product’s businesses supply consumers through 46,000 retail outlets, making Shell the world’s largest retailer, at twice the size of McDonalds. Although oil products is not the largest part of the group’s portfolio, it is Shell’s public face and is where the brand makes a significant difference. From the beginning, the two partners in the Shell Group valued their separate identities. The group’s decentralised nature and structure was well known and much reported (Green, 1985; Grant and Neupert, 1999). Much of Shell’s internal literature focused on the advantage the group believed they gained from the decentralised approach[2]. The decentralised structure, supported by the famous McKinsey matrix (see Grant and Neupert, 1999) was created in 1959 and only dismantled in the mid-1990s. Decentralisation as a philosophy persisted beyond this structural rearrangement. Many years of local autonomy was reflected in the national companies’ power and a lack of central edict. Negotiating, persuading and building consensus were the acceptable ways the centre won local conformance. Executives at the centre were titled

“coordinators” and the headquarter functions in London and The Hague were referred to as “service functions”. From the narratives in this study, Shell executives described the internal mechanism as a “matrix of checks and balances”, “you have to convince people and get them on your side”, and “you have to have proof”. Among the stories from JWT executives, there were several comments about how long it took to get an idea accepted and implemented at the beginning of the transition: “It took me three months and 80 presentations across Europe to sell the strategy, to get buy-in”. The narratives from both Shell and JWT described the mind-set among local marketing management with phrases: “We know about our own local customers”, and “Our local conditions are different from other countries”. The feeling was particularly strongly held about advertising and communications, where each country could find something unique about their national culture. In France, for example, advertising needed to be “more visual and emotional”, in Germany there had to be a strong focus on “product performance and promise” in the USA it had to be “aggressive and comparative”, and the humour used in the UK was only understood by the British. Technocratic and planned culture Shell has a long tradition of valuing scientific and technological expertise (Howarth, 1997). People with strong technological knowledge and backgrounds are commonly found as members of the most senior management teams including the committee of managing directors (annual reports). The culture is strongly focused on the big spending and historically highly profitable upstream exploration business where financial, technical, scientific and engineering skills are highly prized. Shell, as a fully integrated oil company and with its origins in exploring-for, producing and transporting (the UK part of the Shell Group retains its original name of Shell Transport and Trading) oil, has its cultural values firmly rooted in these activities (Howarth, 1997; Post et al., 2002). The experience of the JWT team on the Shell account confirmed this. Narratives held references to Shell people’s comfort with technical specifications and project-management type activities. Several times the label of “chemists” was used to describe Shell people who were involved in the marketing function. Similarly, Shell is well known for its planning systems and leadership in developing sophisticated strategy planning techniques. The company pioneered the use of scenario planning in the 1970s and remains a leader in the art of constructing global scenarios (Schwartz, 1991; de Gues, 1997). In his review of the strategic planning processes in eight of the leading oil and gas majors conducted in 1996/1997, Grant (2003) found that Shell was the only organisation that based its entire process on multiple scenario analysis. Overall, Grant (2003) found that Shell placed greater emphasis on written strategic plans and formal approval processes compared with BP, Exxon or Texaco, and that the distinctive features of Shell’s planning systems were that they acted as a means of communication and coordination around the many parts of the group. Success from using hard data Before 1997, local Shell companies produced their own advertising and brand communications in support of their products and services. They used local creative and

Shell’s advertising 1997-2002 75

MD 43,1

76

media agencies to develop local campaigns for locally briefed propositions in support of fuel, lubricant, retail, smart card and other Shell brands. Every Shell company held its own advertising budget and allocated spend against the brands according to local management direction. The GB&C team started the transition toward a global organisation by commissioning JWT to make a commercial that could be used across many countries in support of one of Shell’s brands. From the start, rigorous consumer research was used to support development of the advertising. More commercials were made after this first attempt proved relatively successful and the quality and quantity of the market research done in support of developing successive advertising increased. The process of developing global advertising evolved into a format of: the creative team at JWT produced three different executions for each brief. All were tested qualitatively as concepts in at least four markets around the world and cover the five zones, East, Latin America, Africa, Europe and North America. From this, one surfaced as the strongest concept, or elements of each gave a strong positive response and this information was used to make the final film. Quantitative research was conducted prior to launch in relevant countries and post-production consumer tests were then made in at least four countries. Consistent methodology and metrics were used for all market research. Commercials were tested with clutter reels against “competitor” ads, i.e. those which were targeted at the same audience as Shell were aiming to reach. Every ad had to reach or exceed the core metric hurdle rates for: impact, recall, relevance, credibility, persuasion, likeability and enjoyability against some of the best commercials in the local market. The process was described in one of the Shell narratives as: “Very research-driven”. The data from this consumer research became the “proof” that was needed to persuade local managers to use central advertising; the proof that their customers had similarities with customers in other cultures; the proof that advertising made somewhere outside their country could be as (usually more) successful with the local audience. It was also the means by which the GB&C team cajoled, persuaded and negotiated with local managers to use the centrally-produced ads, presenting the argument that if, when tested in the country against ads competing for the relevant customer segment attention, the global ad did not perform as well or better, the country team could develop its own advertising. The importance and extent of this market research was noted by all respondents in this study. Comments included: “We did a lot of research”; “We had hard proof that consumers were looking for similar benefits across markets”; “Once we had the proof that the communication would be effective, then the project got executed”; “Shell used the research very well”; “ Local, subjective arguments could be overcome with hard data, and Shell produced a lot of it”; “It is different in Nestle where you can win an argument through the heart, in Shell it has to be won through the head”; “That is something I like about Shell – it is a very rational company – when managers who were dead-set against using global ads saw the research results, they said – OK perhaps we will test it out!” One of the JWT executives reflected: “I think the global brand team were very astute with the research, because [Shell’s] generic skill is technical and scientific, putting the same rigour into the advertising process helps them understand and accept [the advertising]”.

The formula of producing commercials for global markets, testing them and asking local managers to research with the customer before producing a local advertisement, or against a locally made commercial, was repeated in many markets. Between 1997 and 2002, seven films were produced for global consumption. These were screened in 150 countries (some countries aired several commercials from the portfolio). The quality of the creative idea behind the commercials was obviously crucial to the success of the advertising in the comparative testing, but it was the process of doing the testing and providing rational reasons to accept centrally-produced film and ideas that finally persuaded local managers to become advocates for using global advertising. A JWT account director said, “I remember in markets like Malaysia. In year one, they were dead-set against even testing the first executions . . . In year two the ad was screened. In year three they were positive after seeing the data and in year four they were demanding more ads from the centre”. Success through planning and control The process Shell and JWT created for managing the global account increased in sophistication over time, but despite the amount of consumer testing and the extent of advertising coverage the account was being managed by a very small team both at Shell (two people) and JWT (four people). Comments in the narratives of JWT executives confirmed that this was unique in their experience: “The entire process operates with just six people. We have other clients that have teams twice that size to look after the UK alone”; “It shows the power of a smaller [than we are used to] core team on the agency side and a client who is willing to work unbelievably close together”. Also, the VP of the global brand team at Shell said: “We have not created vast groups of people. We are still tiny and it is fascinating how few people can make the process work”. The processes Shell have in place with JWT are highly structured and disciplined. Narrative data from both Shell and JWT confirm this: “I came to the conclusion that to make this work we needed to make clear exactly what was involved. We need to know who is going to do what and exactly what our critical dates are for each country. We need a proper schedule of work in front of us. Also, with JWT we need to have detailed scope of the global projects, who will work on what, what steps are involved, the hours it will take and the estimated costs – everything”; “It makes it easier if roles and responsibilities are laid out clearly”; “Shell keep us on track in terms of the plan, timing and process – they are very good at process and what we do is tightly controlled”; “We coordinate all the work that is done around the world by local offices. Anything done out there is put on the extranet and sent back to us so that we can check the quality of the work, check that it conforms to the creative idea”. At the start of the transition toward producing global advertising, the GB&C team commissioned JWT to produce commercials and offered these as examples of what could be done if local companies chose to cooperate. At the start, the GB&C team wrote the creative brief and took responsibility for every part of the process. During the transition, this changed and responsibility for briefing JWT switched back to lead markets[3]. This was recorded in one of the Shell narratives, “Until the brief is issued we have no control, but from that point, we keep the coordination”. Gradually, five stakeholder groups became partners in the process, the individuals in each changing depending on the brand and the customer proposition featured in the advertising. The

Shell’s advertising 1997-2002 77

MD 43,1

78

strict discipline imposed by the development process was seen as the route to involvement and coordination across the diverse and often widespread interests of the group. This system is very similar in philosophy to that which has existed for many years within Shell’s planning systems and structure. The GB&C team has become the heart of the old “matrix”. Its primary task is not to dictate what the “markets” need but to serve as coordinators and owners of a process that allows different groups across Shell to communicate and work together to better effect. A unique and valuable outcome The JWT team saw the degree of process control the GB&C team had achieved, to be a unique and very beneficial feature of the new process: “No company I know does the process better than Shell do at the moment. The team is so small and so busy there is no time for unimportant discussions”; “What our other clients are interested in is how Shell streamline the operation . . . ”. Between 1997 and 2002, Shell estimated the savings they made on advertising production costs alone to be in the region of US$24 million. The large database of consumer research gathered over the period, showed that the global advertisements consistently exceeded the core metric benchmarks set internally and that the impact of these commercials when measured against other brand communications in many countries, was always the highest or a close second (Figures 1 and 2). The transition Shell made was from a low point in terms of marketing capability, within a sector that lagged behind other companies in producing global communications, to a position of leadership in both. JWT executives acknowledged this in their narratives: “What they were doing five years ago and are doing today – the difference is night and day”; “We have started to use the Shell model with other clients as an example of how to run a global account”. This was achieved against a

Figure 1. Core metric, benchmarks and advertising research

Shell’s advertising 1997-2002 79

Figure 2. Advertising impact

traditional structure and philosophy of decentralisation that had been largely unchanged for nearly 40 years. Instrumental in the transition was the use of hard data, rational arguments and detailed planning – capabilities that Shell is renowned for and are also congruent with the organisation’s value system. The theoretical lens In this section, the RBV and DCV are outlined and then used to interpret the observations made above about Shell’s transition, aiming to uncover additional insights about why this change was successful and to generalise the data, i.e. what does the theory infer about the transferability of Shell’s experiences to other organisations and transition contexts? What is the RBV? The RBV focuses managerial attention on the internal capabilities and assets of the firm as the means of gaining competitive advantage. Its grounding tenet is that all organisations are different and it is out of this heterogeneity that firms build competitive advantage. This paper uses the term “asymmetries” to describe these inherent differences (Miller, 2003). By definition, they have to be rare, inimitable and non-substitutable since without these qualities they would cease to confer lasting difference on the organisation (Barney, 1991). When asymmetries also meet the criteria of delivering superior performance to the organisation, by securing competitive advantage, they become “valuable” and are defined as “resources”. These four criteria that Barney (1991) originally described: valuable, rare, inimitable and non-substitutable are often referred to as the VRIN tests. Some of the literature goes further, adding more terms to describe the internal complexity of organisations. Examples are found in Miller (2003) where capabilities, core capabilities, capability configuration are put into distinct categories. This paper,

MD 43,1

80

however, uses the term resources, to mean any bundle of capabilities, assets, routines, processes, cultural values and philosophies that meet the VRIN criteria. The rarity and valuable criteria are assessed at a point in time and are audited by making comparisons with competitors, whereas, the difficult-to-copy and non-substitutable criteria, address sustainability. If resources are easily imitated by rivals, competitive advantage can be readily competed away. Resources are more difficult to imitate if they are “protected” (by patents for example) or are very complex, intangible or are created with specialist knowledge that can only be accumulated over long periods of time. Because they are likely to have evolved and contain elements of tacitness and causal ambiguity (Lippman and Rumelt, 1982), the organisation itself might find it difficult to “know” its own resources and understand how these have been built. In this respect, a deep understanding of the history and culture of the organisation is essential. Substitutability infers that a resource can be replaced by another that delivers the same outcome. The key issue here is to have a good understanding of how the resource is achieving competitive advantage, i.e. what it is that is valuable. Only by understanding this, will finding a suitable substitute become viable. What organisations share in common are most likely to be tangible assets. Off-the-shelf software packages would fall into this category, although if these were used in a unique way in an organisation, this combination of an asset and an unusual capability would become an asymmetry. Miller (2003) argues that organisations are likely to have many asymmetries – many ways that one organisation does something slightly different from another, whereas resources will be rarer, suggesting that many asymmetries are not used in ways that extract value for the organisation. The logical outcome of this is that there may be asymmetries that are burdensome, wasted and might be viewed in certain contexts as liabilities. Advertising activity supports a firm’s delivery of differentiated products and services to its markets. It creates brands that can grow revenues by increasing sales of products and services or builds a favourable reputation for the firm that might increase shareholder value. In this respect, advertising activity has the potential to be a resource to the firm. It also has the potential to become redundant if it fails to deliver equivalent value as competing brands. This was noted as long ago as 1961 by Telser: “Consumers tend to forget brands and continuous advertising is needed to maintain a given rate of sales. Thus, advertising expenditures can be viewed as a capital good that depreciates over time and needs maintenance and repair” (Telser, 1961, p. 197). Miller (2003) observed that asymmetries, even ones that appeared valueless in one context, could become resources when combined with other asymmetries, directed to achieve different objectives, or matched with new market opportunities. For example, talent that existed within teams where it was not being exploited, was a valueless asymmetry until matched with projects that could utilise that potential. Similarly, relationships or assets that were under-exploited in one context, could become valuable when channelled to new market opportunities. Combining asymmetries, reassigning them into new configurations, aligning them to new objectives, suggests that organisational interventions are required to create new resources. Earlier work by Teece et al. (1997) and Eisenhardt and Martin (2000) described similar change processes as “dynamic capabilities”.

DCV Essentially, the RBV takes a static view, auditing organisational resources at any one time and assessing the future likelihood that these will be sustained. The dynamic capability perspective extends the RBV, focusing attention on how resources are changed or renewed to sustain competitive advantage in the face of competition or a changing environment (Teece et al., 1997). Dynamic capabilities are processes and routines adopted by organisations to bring about change. They are the systems used to alter the resources the firm has by deploying, adapting, configuring them in new ways to achieve specific ends. Hence Teece et al. (1997) define dynamic capabilities as the firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organisational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve and die. Eisenhardt and Martin (2000) started from this definition, and developed it further by arguing that these processes were familiar to organisations as the means used, repeatedly, to support change, i.e. form new alliances, develop new products or take strategic decisions. In this respect, firms may share the same dynamic capabilities (many firms have well rehearsed routines geared to innovation, for example). However, each will be idiosyncratic in terms of how these processes have developed within their own organisational context since these will be caused by the path followed and, the assets available to the organisation to use, in their evolution. Despite these idiosyncrasies, the outcomes might be equally as effective, i.e. the process firm A has developed, while different from that of firm B, could match the performance of that of firm B. Eisenhardt and Martin (2000) conclude that it is not the dynamic capabilities themselves that create long-term competitive advantage, but the resource configurations they shape. Therefore, dynamic capabilities help organisations remain flexible and responsive to changing environments. They are built from within the organisation and are characterised by the assets specific to the organisation and the path chosen to development. They are not bought. Organisations with dynamic capabilities are able to influence, to some extent, the environment in which they compete by raising the game of best practice or creating new competitive advantage. If organisations do not have dynamic capabilities, or means to identify and reconfigure asymmetries, over time resources that confer competitive advantage will be hard to find as they are “down-graded” (by imitation, substitution or losing relevance in a changing market) to assets and activities which cease to have value. Interpreting Shell’s successful transformation Through the lens of the RBV, Shell’s advertising activity in 1997 lacked distinctive characteristics. Similar to direct competitors in the oil industry, the output from its advertising function was undifferentiated and unremarkable. In Shell, brand communications were under valued and suffered from a lack of investment relative to global brands outside the industry. No information about relative costs over competitors was readily available. In common with close competitors, communication assets were distributed to local operating companies, and many of these were described in the data recorded for this case study as without distinction. In 1997, therefore, Shell’s

Shell’s advertising 1997-2002 81

MD 43,1

82

stock of assets in advertising and communications was widely dispersed and generally at a very low level compared with global brands outside of the oil industry. Little investment or attention to marketing capabilities and the brand as an asset, had allowed both to become relatively obsolete. Given this analysis of Shell’s capability at the beginning of the transition, it was clear that there were few capabilities or internal strengths on which to start building new competitive advantage. The asymmetry which started to emerge during 1997, was the GB&C team, which was responsible for managing the Ferrari sponsorship for the oil products business. This team was no more than a handful of people and had limited responsibility given that power for brand and communication activities were located in national companies. However, a new VP joined this team early in 1997 from outside of Shell, arriving with significant brand and communication experience gained from working in recognised marketing companies outside of the oil industry. His presence started to influence the activities of the team. Exploiting asymmetry The new VP brought a distinctive capability into the organisation. He believed in the power of communication activity and had gained from his past experience an understanding of what could be valuable to Shell in the current context of increasingly competitive local markets. He said, “I was responsible for something in the 1980s . . . I saw the power of integrated communications and the cost efficiencies that could be gained. Integrated communications was a solution to the structural cost problem we were trying to solve at Shell. It could also provide consistency of communication. We (Shell) needed a branding idea – visual territory that we could occupy. To do this, one advertising agency was essential”. The VP was instrumental in making this happen. At the beginning of 1998, JWT became Shell’s sole creative agency and the GB&C team were made responsible for producing all the TV commercials for oil products businesses worldwide. This reduced the power of local brand teams, significantly aiding the transition, and enhanced further the asymmetry of the GB&C team. In this way, assets were re-aligned and new relationships formed – essentially as a means to solving the problem of lowering structural cost. Before these changes were made, the role of the central brand team was to manage Shell’s sponsorship relationship with Ferrari. The budget that came with this role was a very important asset at the start of transition to global advertising. This money provided the means to start producing something tangible. In his narrative, the VP said, “What I knew from working elsewhere was that I had to do something tangible. In a head-office position, if you only make strategy and policy statements (there are many of these around already) – it will not be valued, nothing will happen”. Hence, the GB&C team used this budget to start producing high quality commercials. These were then used as “proof” that centrally produced advertising could be relevant across cultures. The other important aspect of producing these commercials, was the opportunity they provided for the central brand team to raise their skill levels and build new capabilities. Because all the work was concentrated in this small team, which remained largely intact throughout the five-year period, learning was accelerated and protected. As a result this capability was developed quickly and valuable talent was retained where it could be very effective.

The dynamic capability Whilst very important to delivering a successful transition, changing the creative agency and re-allocating budgets did not create positive energy for change in local marketing teams. After many years of a strong decentralised practice and philosophy, local resistance to central control was strong. The narratives from this research reveal the frustration of those driving the change: “We spent months trying to get markets to take the ideas we had. A total of 80 per cent of them said no”. The dynamic capability used to overcome this resistance was Shell’s rational planning process, a well-known and practiced routine in the organisation. The combination of researching, proving, using hard data with rigour and consistency, was from the heart of Shell’s technocratic culture. It was familiar to local, central, junior and senior management. The approach made sense and transformed advertising activity from something vague and unaccountable – fluff – into a scientific methodology. While the new VP did introduce some ideas from his own background about how to solve problems in the Shell context, this dynamic capability of proving through rational argument with data was clearly one that Shell held in its own stock. The in-coming VP to the brand communication team said, “I knew that I could not apply anything I learnt from Nestle directly into Shell. I can’t deny my past, but what is important to this organisation is very different. You can not take a P&G formula and force it into Shell. There has to be a model that will work for Shell. This is the reason why many marketing people who join from outside leave, because they can not influence the organisation to take their intact recipes”. Over time the process adopted by the GB&C team became increasingly disciplined and prescribed, but also inclusive of a wide range of stakeholder groups. Responsibility for briefing and initial creative work was given back to the local markets. The GB&C team have the power to “approve”, but in talking about the role they now play, a key word is coordination and providing a service. These words have also been linked with the central offices at Shell for much of its history. The dynamic capability literature stresses that such processes cannot be copied from elsewhere or bought on the open market. A significant contribution to the success of the centralisation of Shell’s advertising activity was that no copying was attempted. This is recorded in the Shell narratives. “We have developed the process ourselves. We did not invent it in an afternoon, but we started on a journey and slowly developed the processes, the whole thing. JWT have been very enthusiastic partners, but we did not copy any other account”. In other words, Shell used an existing, very well rehearsed dynamic capability to great effect in this transition. The new resource Over the transition period, the dynamic capability of testing, proving, planning, coordinating became deeply embedded into the bundle of relationships, knowledge and assets that is the new resource. Hence, the “dynamic” element ceased and the “planning” aspects became the “operational” capability of the new resource (Helfat and Peteraf, 2003). The advertising produced from this resource has been shown to meet the valuable and rare tests and, whilst it is obvious that other organisations might be able to achieve the same outcomes by substitution, imitation can not be a rival’s route to successful transition. This is because testing, proving, planning, has meaning for Shell but is unlikely to have meaning for other firms. Because organisations are

Shell’s advertising 1997-2002 83

MD 43,1

84

heterogeneous and have different asymmetries, developed from different histories, meaning will not translate from one to another. Hence, employing a model predicated on rational planning in a different organisation, will not provide the positive energy for change that it did in Shell. Similarly, other organisations will not be able to match Shell’s ability to coordinate its resources in this way. Learning to do so, might distract from the change effort by diverting time and resources to matching a capability Shell has learnt to do over many years. Part of the rarity of the Shell model is the small size of the team running the account – many other organisations would like to know how to copy this. But, there is likely to be a large content of “tacitness” and causal ambiguity in Shell’s processes that makes such a small core team viable. Other stakeholders in Shell’s process, for example, do not need to learn how to operate within this process, the routine is familiar and well known. It is very unlikely that competitors could copy this effectively or efficiently. Conclusion From a low stock of assets in brand and communication activity and relatively little capability in organising globally, Shell transformed this part of their oil products’ business successfully. Viewed through the lens of RBV and DCV, it is suggested that a significant reason explaining this success was the deployment of a dynamic capability from the heart of its technocratic culture. The story suggests that an organisational asymmetry – rational planning – became the dynamic capability that enabled change, which subsequently became the operational capability embedded within a new set of assets, which in turn, became a resource of some significance. The importance of not trying to copy is emphasised by RBV theory and is supported by what was observed from Shell’s transition. Instead it is proposed that success is more likely if internal asymmetries are found from which new resources can be created. By applying the theory, it can also be argued that other organisations will not be able to copy the model Shell and JWT have created. While other global account models might be able to deliver the same competitive advantage in terms of lower cost and/or superior customer value, this will need to be achieved by substitution rather than imitation. Notes 1. Oil products include: fuels businesses especially retailing petrol and diesel; lubricants businesses selling engine oils and industrial machine oils plus, associated services such as forecourt services and convenience shops. 2. For example, in the Royal Dutch Centenary publication (1990) the chairman of the committee of managing directors explained that the special feature of the Royal Dutch/Shell Group is in fact above all the “unity in diversity”. From the outset of the group companies have had a great degree of autonomy, united since 1907 under the Shell flag. Wherever the group is active, there is a strong desire to be recognised as a “national company”, a part of that specific society and with local staff in nearly all positions. Cultural and social barriers have been broken down in favour of a multiracial and multinational collaboration. 3. Local companies which share common customer value propositions for specific brands and act as sponsors for producing a supporting TV commercial.

References Barney, J. (1991), “Firm resources and sustained competitive advantage”, Journal of Management, Vol. 17, pp. 99-120. de Gues, A. (1997), The Living Company, Nicholas Brealey, London. Eisenhardt, K.M. and Martin, A.M. (2000), “Dynamic capabilities: what are they?”, Strategic Management Journal, Vol. 21, pp. 1105-21. Grant, R.M. (2003), “Strategic planning in a turbulent environment: evidence from the oil majors”, Strategic Management Journal, Vol. 24, pp. 491-517. Grant, R.M. and Neupert, K.E. (1999), Cases in Contemporary Strategy Analysis, 2nd ed., Blackwell, Oxford. Green, W.N. (1985), The Strategies of the Major Oil Companies, UMI Research Press, Ann Arbor, MI. Helfat, C.E. and Peteraf, M.A. (2003), “The dynamic resource-based view: capability lifecycles”, Strategic Management Journal, Vol. 24, pp. 997-1010. Howarth, S. (1997), A Century in Oil, Weidenfeld & Nicolson, London. Kochan, N. (Ed.) (1996), The World’s Greatest Brands, Macmillan, London. Lippman, S. and Rumelt, R. (1982), “Uncertain imitability: an analysis of inter-firm differences in efficiency under competition”, Bell Journal of Economics, Vol. 13, pp. 418-38. Miller, D. (2003), “An asymmetry-based view of advantage: towards an attainable sustainability”, Strategic Management Journal, Vol. 24, pp. 961-76. Post, E.J., Lee, E.P. and Sachs, S. (2002), Redefining the Corporation, Stanford University Press, Stanford, CA. Schwartz, P. (1991), The Art of the Long View, Doubleday, New York, NY. Teece, D., Pisano, G. and Shuen, A. (1997), “Dynamic capabilities and strategic management”, Strategic Management Journal, Vol. 18 No. 7, pp. 509-33. Telser, L. (1961), “How much does it pay whom to advertise?”, American Economic Review, pp. 194-205.

Shell’s advertising 1997-2002 85

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,1

The role of scenarios as prospective sensemaking devices

86

Wolverhampton Business School, University of Wolverhampton, Telford, UK

Alex Wright Abstract Purpose – The purpose of this paper is to undertake a critical consideration of the role of scenarios as prospective sensemaking devices through the dual theoretical perspectives of social constructionism and narrative. Design/methodology/approach – The scholarly literature in the fields of strategy and scenario thinking, sensemaking, social construction and narrative are analysed and critically discussed, with their major contributions to the debate identified. Findings – The main findings suggest that transformational change is observed to occur through inductive strategizing at the organization’s periphery, in contrast with deductive strategy making at its centre. This causes one to question one’s understanding of the strategist as a rational planner. An alternative perception of the strategist as interpretive bricoleur is offered. Adopting a scenario outlook and developing the capacities that comprise sensemaking are said to enhance the abilities of the inductive strategist. Through this, managers are more open to the unexpected and are able to construct meaning from uncertainty and ambiguity, laying the foundations for transformational strategizing. Originality/value – This paper is of value to both practitioners and scholars. For those involved in practical scenario construction it proposes a refocusing of scenarios from influencing managers’ decision making to enhancing their sensemaking capacities. For scholars, it supports and joins the call for strategy researchers to focus on how strategy in organisations is constructed and offers conceptual pointers on what may prove fruitful avenues to pursue. The paper concludes by proposing that through prospective sensemaking individuals can construct meaningful interpretations of their socially constructed worlds. Keywords Management strategy, Decision making Paper type Conceptual paper

Management Decision Vol. 43 No. 1, 2005 pp. 86-101 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572506

Introduction Organizations today face an increasingly turbulent external environment, which is characterized as uncertain, ambiguous and populated by equivocal cues that result in discontinuous rather than evolutionary change. This dynamic complexity requires us to rethink our approaches to strategy and strategizing if we are to provide insight that helps organisations in their efforts to transform themselves and their contexts. Greater uncertainty can lead to confusion and an over-cautiousness that paralyses organizations and their managers into inactivity. Alternatively, ignoring complexity can lead to misplaced over-confidence where decision-making is undertaken with important cues being rejected as they do not conform to existing mental models. One challenge then, is for organizations to be better prepared for escalating uncertainty, for managers to develop their capacities to make sense of phenomena, and to develop a perspective of the future that replaces naı¨ve determinism with social pluralism. Sensemaking is the means by which individuals interpret equivocal cues into meaningful narratives (Weick, 1995; Lamertz, 2002). It is a social activity whereby, through multi-contextual conversations, sense is constructed, destructed and

reconstructed in an on-going attempt to craft, understand and accept new conceptualizations prior to action consistent with those new interpretations (Kezar and Eckel, 2002). Sensemaking is seen by Weick (1995) as something we naturally engage in, it has no beginning or end, and is fundamental to our conceptions of self-image and identity construction (Vaara, 2003). When a capacity to make sense is challenged by unexpected cues that cannot be located within existing mental models (Hill and Levenhagen, 1995), rejection of these can mean that important opportunities or potential threats are missed. If individuals, groups or organizations become overwhelmed by unforeseen signals or encounters an ability to make sense can collapse, resulting in a loss of meaning and ineffective decision-making. From a sensemaking perspective, organizations can be interpreted as open social systems (Weick, 1995, 2001) that invent and interpret their environments through explanations and accounts of the sensed features (Gephart, 1997). In short, organizations are organized through acts of sensemaking. The development of scenarios and their use within organizations is an approach to strategy and strategic thinking that recognises the inherent unpredictability of the future. Whilst unpredictable, the future is not entirely random either, therefore neither should it be ignored as it has still to be created (Godet and Roubelat, 1996; Bernstein et al., 2000). The scenario perspective of strategy sees multiple plausible alternatives constructed as narratives with the aim of providing frameworks within which assumptions and key decisions can be “wind tunnelled” (Goodwin and Wright, 2001; van der Heijden, 1996) for their robustness. Scenarios are not predictions, nor are they forecasts; they are more typically, socially constructed stories that integrate predetermined events with critical uncertainties in creative ways to encourage managers to challenge their assumptions in a safe and risk-free hypothetical environment (Schwartz, 1996; van der Heijden, 1996). Our natural ability to perceive multiple plausible futures is said by Ingvar (1985, p. 127) to originate in the prefrontal cortex of the brain, due to its capacity to arrange serial information such that causal relations are ordered, enabling us to plan and act. The purpose of this paper is to construct a deeper understanding of how scenarios can stimulate prospective sensemaking. This is important as Brown and Starkey (2000) identify wise organizations as those able to construct meaningful social systems that work to secure their future strategic health. This is discussed through reviewing the current literature surrounding these two concepts from social constructionist and narratological perspectives. In addition, it considers how prospective sensemaking enables transformation through enhancing inductive strategizing at the periphery of the organization. The retrospective nature of sensemaking is challenged, although the notion of sensegiving is rejected as this suggests sense is objectified. Scenarios’ traditional focus on managerial decision-making is questioned on a cognitive basis. The paper concludes, by suggesting that scenario construction aimed at the sensemaking capacities of individuals and groups repositions the strategist from deductive rational planner to inductive interpretive bricoleur. Scenarios Scenarios as a strategy methodology for business was originally brought to most people’s attention through Pierre Wack’s (1985a b) description of Royal Dutch/Shell’s use during the 1970s and 1980s. Prior to this, their application had been primarily

Scenarios as sensemaking devices 87

MD 43,1

88

restricted to the military and to issues of social concern (Schwartz, 1996). The Royal Dutch/Shell (RDS) scenarios were in part a response to a growing concern about the assumptions and restrictions of traditional single-point forecasts used by most organizations at that time. The focus of these scenarios was to challenge RDS managers to revisit their unspoken assumptions and to influence their decision-making (Wack, 1985a, b). The view of this primary role of scenarios has persisted, with Mason and Herman (2003) recently stating that engaging the management team fully and creatively remains scenarios’ biggest challenge. The need for this is explained by Godet and Roubelat (1996, p. 165) who remark that creative anticipation is not widespread among managers, as when things are going well there is no need for it, and when things are going badly it is too late. A “windtunnelling” metaphor (e.g. Goodwin and Wright, 2001; van der Heijden, 1996) is frequently used to demonstrate how scenarios can be used as an experimental laboratory, where strategic decision options can be tested for their robustness in a variety of plausible worlds. A decision that is seen to produce a successful outcome in each scenario is considered a safer bet than one that flourishes in only one or two of the possible scenarios. The chief attraction of scenarios to organization strategists has traditionally been as a tool that facilitates decision-making under conditions of uncertainty and ambiguity (Miller and Waller, 2003). The relationship between scenarios and decision-making has been comprehensively analysed by van der Heijden et al. (2002). They note that organizations typically have well-rehearsed and familiar decision making routines that are followed with little conscious thought. They suggest that one of the significant benefits of using scenarios is that they provide a vehicle for mental experimentation through formulating strategic options and examining their consequences in a range of plausible future environments, leading to increased confidence in organisational decision making (van der Heijden et al., 2002, p. 143). However, Goodwin and Wright (2001) have identified limitations in the use of scenarios as decision-making tools. They feel many scenario approaches see decision-making carried out informally, leading to inferior strategies being selected (Goodwin and Wright, 2001). They suggest integrating scenarios with multiattribute value modelling to create a more scientific decision making process that is; formal, documented and defendable (Goodwin and Wright, 2001, p. 14). As representatives of what might be termed the Strathclyde School, van der Heijden et al. (2002) represent the most prolific and possibly influential scholars in the scenario field. However, one of the contradictions to emerge from their output lies in how they address the subjective element of scenarios. They describe such approaches as “simple unstructured models” (Cairns et al., 2004, p. 231) and negatively contrast them with more “sophisticated highly quantified scenario-modelling techniques” (Cairns et al., 2004, p. 233). They go on to identify the “central problem in scenario development, then, is the fact that aside from a limited set of tools, the task is essentially a creative one and the process is ‘more art than science’” (Cairns et al., 2004, p. 233). This view seems to represent a modernist perspective of strategy that places emphasis on “using scientific methods to find out about and programme the future” (Woods and Joyce, 2002, p. 71). Bernstein et al. (2000), however, see scenarios as a reaction against neo-positivist approaches as they represent an attempt to construct plausible contingent causal mechanisms that lead to an identified end-state.

Perhaps it is who the scenarios are aimed at that dictates how they are created. Goodwin and Wright (2001) and the Strathclyde School appear to see scenarios as aimed squarely at the senior managers located at the organization’s centre. However, as Regne´r (2003) has observed, new strategic insight that leads to novel and transformational strategizing occurs away from the organization’s centre, and is little influenced by the strategies created there. Regne´r (2003) suggests that new strategy frequently emerges from those managers who operate at the organization’s periphery, at its margins, which is then refined at the centre where it becomes policy. Millett (2003) agrees, to him scenarios have limited appeal if they are only seen as a tool for aiding senior management strategy making. Ultimately, to benefit what organizations do in practice scenarios need to influence the operational activities that managers at the periphery undertake (Millett, 2003). Scenarios as social constructions Scenarios are not discovered, they are created, their very existence is a construction. Additionally, because they are the product of more than one person they are social constructions (Berger and Luckmann, 1966). Burr (1995, p. 162) advises us when exploring an unknowable future, the search for an objective truth is misguided, that we must adopt a relativist ontology (Denzin and Lincoln, 2000) and accept the existence of many alternative constructions of events. The construction of scenarios though is not an innocent practice. Scenarios are not developed in isolation, but are fashioned against a backdrop of competing and shared understandings and history, and geopolitical and cultural practices (Schwandt, 2000; Greene, 2000). The role of text and language in the creation of scenarios is under-researched, but is recognised as of central importance in the formation of constructions (Burr, 1995; Greene, 2000). This conception of scenarios as social constructions is not identified in the practitioner-focused literature, but provides us with a new lens through which to view them and evaluate their influence on organizations. This idea potentially locates scenarios as representing a new modernist perspective of strategy that; “stresses the importance of the strategist(s) interacting with other stakeholders and experimenting through strategic projects rather than planning from on high and then dictating changes which have been totally programmed – being able through foresight as opposed to forecasting to build a bridge from the present to the future” (Woods and Joyce, 2002, p. 71). Scenarios as narratives Barry and Elmes (1997) hold the view that strategy itself is one of the most prominent, influential and costly of stories, and that all strategy is a work of fiction, and therefore, all strategists are authors of fiction whether they be non-narrative strategic plans or narrative based scenarios. Czarniawska (2004, p. 6) offers two narrative perspectives as being relevant when understanding the role stories play in organizations; as modes of knowing and modes of communication. Narratives as modes of knowing indicate their use as a resource for organizational knowledge, and therefore the attraction of such an approach lies in its pragmatism (Czarniawska, 1997). Scenarios as stories of multiple plausible potential futures seem to concur with narratives as modes of knowing. While narratives as modes of communication suggests a use as a way of describing complex phenomena that is accessible, respectful and legitimizes form and content (Currie and Brown, 2003). It is through encountering and interpreting such narratives that actors

Scenarios as sensemaking devices 89

MD 43,1

90

appreciate themselves and engage in constructing meaning in their own lives (Cottle, 2002). Scenarios are their most effective when they communicate environmental uncertainty in a way that results in people seeing their worlds in new and different ways (Barry and Elmes, 1997). As a mode of communication, narratives emphasise the simultaneous presence of multiple interlinked realities, which causes us to look at how language is used to construct meaning (Barry and Elmes, 1997). Within the strategy field one of the contributions a narrative approach can make – but is ignored in most of the scenario literature – is how language and authorship influences strategic stories (Barry and Elmes, 1997). Traditional strategy and those that advocate a “sophisticated” approach to scenarios see strategy communication as value-free and untainted by individual or group interpretation. Sensemaking The relationship between the organization and its environment is a continually evolving dynamic phenomenon subject to constant unpredictable change. Schneider (1997) sees the interaction of the organization with its environment as constituting strategy. Steinthorsson and So¨derholm (2002) explore this relationship and argue that an organization doesn’t merely adapt to its environment, nor is it simply embedded within it. Rather, an organization lives in co-existence with its environment and constantly co-creates its unique relationship with it, through its actions, decisions and sensemaking. In their view, “strategic management is constituted of both enactment (of the environment) and embeddedness (of the organization)” (Steinthorsson and So¨derholm, 2002, p. 243). They conclude, strategic management processes are acts of multi-contextual sensemaking aimed at coping with the great variety of uncertainties and ambiguities organisations encounter (Steinthorsson and So¨derholm, 2002). Sensemaking is presented as one of the main preoccupations of corporate executives, (Roubelat, 2000) with attempts to integrate it into the strategic discourse resulting in the notion of “sensegiving” (Dunford and Jones, 2000; Ericson, 2001; Gioia and Chittipeddi, 1991; Hill and Levenhagen, 1995). The act of sensegiving is seen as the process whereby a manager seeks to influence and gain support for his/her construct of reality, which itself has been the result of sensemaking acts (Ericson, 2001; Hill and Levenhagen, 1995). Gioia and Chittipeddi (1991) present a model of sensemaking and sensegiving as a sequential and reciprocal cycle. Within this model a manager creates sense (Roubelat, 2000, p. 111) through establishing a vision as a representation of an initial act of sensemaking. This is then communicated to organizational actors who, through engagement with the vision, seek to make sense of it. Achievement of the vision requires decisions and acts based upon the sense made by actors who attempt to influence its realised form. These acts are seen as sensegiving feedback activities to the manager, who in turn modifies the original vision as a further act of sensemaking (Gioia and Chittipeddi, 1991). This sequence continues in an ongoing cycle of sensegiving and sensemaking. However, this notion is problematic in that it objectifies sense and suggests it can be transferred to a recipient, who having received it is then in a better position to undertake more effective decision-making. Sensemaking and decision-making are felt by Weick (1995) to occur in an almost simultaneous relationship where; enactment is followed by sensemaking, which is followed by decision-making, which is followed by enactment and sensemaking, and so on. The direct affects of the decision and the indirect ripples that are caused by the

decision are then made sense of, and precipitate further rounds of enactment, sensemaking and decision-making. It is this perception of sensemaking that lead to it being described as a retrospective activity that involves people making judgements about causal relationships (Gioia et al., 2002; Louis, 1980; Orton, 2000; Weick, 1995). However, it is its retrospective nature that results in its practical benefits being questioned. For, if sensemaking is exclusively retrospective, what advantage could there be to developing the capacities that comprise it? Gioia et al. (2002, p. 622) see making sense of the future as possible and as a task that requires an ability to envision the future as if it had already occurred. They locate this role within the realm of strategic leaders, who are charged with the task of being primary change agents within organizations. How in practice this is to be carried out is suggested through the creation of an idealized future state where leaders then engage in a retrospective interpretation of how that state occurred. Godet and Roubelat (1996, p. 164) offer an alternative view, for them a future oriented attitude is captured in the term la prospective, which, rather than focus on a single future, calls for an outlook that synthesizes a long-term preoccupation with a sensitivity for interrelationships and phenomena that are really important, and a willingness to take risks while maintaining an interest in human consequences. Prospective sensemaking therefore is indicated as involving both an attitudinal and task response that involves acts of exploration and interpretation in an imagined future. Social construction of sense As sensemaking never ends (or begins) sense is not constructed, but is always in the process of construction. And although sense is individual, it is created through social interaction. Weick (1995 1996) advises organizational leaders to cultivate four abilities that advance sensemaking capacities. These are: improvisation, wisdom, respectful interaction and communication. Improvisation means developing individual and group intuition with the aim of becoming creative under pressure by surfacing, testing and restructuring understanding to bring order out of chaos (Weick, 1996). Wise people within organizations realise that absolute knowledge is unattainable and that full understanding of phenomena or an external environment is not possible. They acknowledge the inevitable ambiguity and inherent uncertainty in their lives, allowing them to avoid the trap of misplaced overconfidence while at the same time steering clear of restrictive over-caution resulting from a sense of helplessness, paralysing an ability to act. Paradoxically then, wisdom improves confidence and increases doubt, resulting in greater learning and improved decision-making. Respectful interaction has three imperatives: “Respect the reports of others and be willing to base beliefs and actions on them (trust); report so that others may use your observations in coming to valid beliefs (honesty), and respect your own perceptions and beliefs and integrate them with the reports of others without depreciating them or yourself (self-respect)” (Weick, 1996, p. 148). If trust, honesty and self-respect collapse, organization unity crumbles, resulting in a disregard for others and a wider purpose, and concentration solely on short term individual needs. The resulting fragmentation and sub-optimisation inevitably affect sensemaking’s social element and in turn the decision-making capability of managers. Communication through conversation and storytelling is a generative practice through which reality is experienced and individuals constitute and reconstitute themselves, rather than a tool used for

Scenarios as sensemaking devices 91

MD 43,1

92

representing and transmitting people’s understanding or knowledge (Brown and Jones, 2000; Ford and Ford, 1995). Narratives of sense Sensemaking is created by and represents narratives in use. Narratives provide the fundamental medium through which the dynamics of organizational knowledge creation, utilization and institutionalization is ordered and made commonsensical (Patriotta, 2003). It is only through constructing narratives can the complexities, subtleties, nuances, debates and dramas of organizational life be made meaningful. Narratives also provide a common language through which the ambiguities and equivocalities of everyday life are shared and collectively made sense of. It is through narratives that happenings are assigned meaning and structure, and through emplotment these events are given both a linear and spatial dimension. As Patriotta (2003, p. 353) states, “the strength of narratives as interpretive devices stems precisely from their ability to link the present to the past and the future, anticipation to retrospection and repetition”. To summarize, this section has introduced and discussed the concepts of sensemaking and scenarios in relation to scholarly literature, and social constructionism and narratology. Scenarios are seen to be multiple plausible narratives created through acts of social construction. Sensemaking is identified as the means by which individuals and groups construct meaningful narratives of encountered events. The following discussion will focus on scenarios as prospective sensemaking devices and the implications this carries for transformational strategizing, the strategist and decision-making. Discussion – prospective sensemaking through scenarios Attempts to explain strategy making at a macro organizational level provide only limited explanations of inertia and change, as all too often the focus is on planned strategic activity rather than on what managers actually do (George and Jones, 2001). Refocusing attention toward more micro-level strategizing offers the possibility of gaining deeper insight into how transformational change happens. This approach also raises questions concerning how the information that forms the basis of strategic change decision-making is created, analysed and used, and what role the values and beliefs of the individual play in this. A recent study by Regne´r (2003) draws the important conclusion that a stark difference was observed in how strategy was created at the corporate centre to how it was constructed away from the centre, at the organization’s margins. At the centre, strategy was developed through adopting a deductive approach to order data and information, while at the periphery individual managers were seen to engage in acts of induction that produced novel insights with the potential to lead to transformational strategizing (Regne´r, 2003). A contrast between inductive and deductive reasoning during individual change episodes has also been distinguished by George and Jones (2001, p. 435) who found that inductive practices were used when the change stimulant was perceived as positive by the individual, with deductive routines associated with negative cues. In their research into the role and use of qualitative methodologies amongst managers, Skinner et al. (2000, p. 164) found that whilst frequently expressing

concern at the inadequacy of quantitative techniques, managers used these approaches largely because they were unaware that alternatives exist. Deductive strategy making at the corporate centre is largely a mechanistic activity, (Farjoun, 2002) that is, industry focused with an emphasis on current knowledge structures and how these can be exploited to develop competence-based competitive advantage (Regne´r, 2003). This approach sees strategy as establishing fit with the external environment (e.g. Porter, 1996). It is this context that most scenario planning activities have attempted to influence through establishing “fit” with corporate perspectives of strategy making, whilst at the same time seeking to expand thinking to include plausible alternatives. Deductive strategy making emphasises current and traditional sources of knowledge in attempting to improve and perfect the existing strategy. A deductive perspective suggests an ideal strategy exists external to the organization, and it is the role of the strategic planner to discover it and implement plans to exploit its benefits. Deductive strategy making stands comparison with Bruner’s logico-scientific mode of thinking which characterizes this approach as: top-down, theory driven, de-contextualized and consistent, and as involving argument, tight analysis, reason, Aristotelian logic and proof (Tsoukas and Hatch, 2001, p. 983). One of the key elements the deductive/logico-scientific approach discounts, is the role of the individual and how his/her sensemaking of the knowledge and information encountered and created influence the strategizing process (Johnson and Duberley, 2003). Inductive transformational strategizing at the margins of the organization is externally focused on generating and establishing new organizational knowledge structures, through which potential opportunities are nurtured. This more organic epistemological perspective is said to offer two advantages over its mechanistic alternative; an appreciation of environmental complexity and a sensitivity towards the interdisciplinary nature of strategy (Farjoun, 2002, p. 562). The purpose of this approach is to engage with the external environment through greater understanding of its movement and interrelationships rather than to control it through superior knowledge (Bernstein et al., 2000). By interacting with the environment the manager is inevitably creating it as much as he/she is created by it (Weick, 1995). The activities that were observed to comprise strategizing at the periphery are more intuitive than planned. Managers here sought transformational change through interacting with external sources, both within the same industry and outside, through both formal and informal networks. The acts individuals undertook to achieve this were seen to involve “trial and error, informal contacts and noticing, experiments and heuristics” (Regne´r, 2003, p. 77), resulting in these managers being described as “hands-on guys” (Regne´r, 2003, p. 67). At times when the internal and external environments are experiencing heightened uncertainty and complexity, inductive acts of strategizing are particularly useful as they allow for greater flexibility and increased responsiveness. This reappraisal calls into question the traditional view of new transformational strategy development as formed in the centre and communicated to the periphery for implementation as not representative of what actually happens. What Regne´r (2003) observed was the opposite; new strategy making at the margins that had little to do with the corporate strategy developed at the centre, it involved dialogue and discussion with formal and informal contacts, and ultimately resulted from an ongoing process of

Scenarios as sensemaking devices 93

MD 43,1

94

conversation and negotiation between individuals and groups (Gioia and Chittipeddi, 1991). These acts represent Bruner’s narrative mode of thought in action, whose methods value; intuition, inspiration and aesthetics, and whose characteristics include context sensitivity and experience which is often contradictory in nature (Tsoukas and Hatch, 2001, p. 983). In essence, when faced with confusing or unfamiliar cues these peripheral managers create sense by transforming their raw experiences into a linguistic framework (Brown, 1986) through self-narration (Maines, 1993): The “bricoleur” is adept at performing a large number of diverse tasks; but, unlike the engineer, he does not subordinate each of them to the availability of raw materials and tools conceived and procured for the purpose of the project. His universe of instruments is closed and the rules of his game are always to make do with “whatever is at hand”, that is to say with a set of tools and materials which is always finite and is also heterogeneous, because what it contains bears no relation to the current project, or indeed to any particular project, but is the contingent result of all the occasions there have been to renew or enrich the stock or to maintain it with the remains of previous constructions of destructions (Le´vi-Strauss, 1966, p. 17).

Viewing strategy making at the periphery as an act of induction challenges the traditional deductive-based notion of strategist as analyst and planner. Due to its “hands-on”, “trial-and-error” description, the function of strategy making can be seen as an act of bricolage, and the strategist as bricoleur. The terms bricoleur and bricolage have become fairly well known within the organizational theory field but have so far failed to gain currency within the scholarly discourse on strategy. Typically, the term is narrowly applied to acts and actors, when its deeper and fuller meaning is found in modes of thought as well as action (Gabriel, 2002, p. 140). A bricoleur is an interpreter who uses a variety of methods and whatever can be brought to hand to construct meaningful strategy (Denzin and Lincoln, 2000). The bricolage is the strategy that results from the bricoleur’s methods (Brown and Jones, 2000). A bricoleur uses skills, knowledge, instinct and interpretation to craft an understanding of the world within which actions are meaningful but temporary. The strategist as bricoleur recognises the need to continually scan the environment for signs of change that requires modification of his/her strategic outlook and intelligence. The skills honed through formal data gathering and analysis are now applied to much less formal and messier sources of intelligence, where the art and craft of the bricoleur becomes one of synthesizing diverse cues to gain insight. Although a bricoleur uses conversation and social interaction to fashion strategy, using the principles of verisimilitude (Brown and Jones, 2000; Maines, 1993) associated with induction, the bricolage produced will be an individual construct subject to multiple interpretations. The bricoleur’s activities are restricted by both the tools to hand – when all you have is a hammer, everything looks like a nail – and by their mental model of what is possible within their constructed worlds. Managers’ mental models limit what decisions are considered sensible. Decisions that appear “common sense” in one manager’s constructed world, may appear “nonsense” in another’s. Restrictive sensemaking can result in important cues being rejected or ignored as they cannot be integrated into an existing narrative. Weick (1993 1995) calls for organizations to refocus from decision-making to sensemaking as ineffective and wrongheaded strategy can arise from good decision-making but deficient sensemaking.

Scenarios provide a means by which sensemaking can be broadened by making the unexpected expectable through a set of narratives that incorporate uncertainty into their construction. They supply the strategist with an additional tool in which to explore their own understanding of their often unspoken assumptions about the future, and to test how their own self-image and identity constructions would be challenged within each scenario. Similarly, managers need to develop their own wisdom through becoming increasingly self-reflexive and aware of how their acts of construction, deconstruction and reconstruction could affect the crafting of strategy (Brown and Starkey, 2000). Scenario thinking can help us move beyond current notions of modernism and postmodernism, and can perhaps be conceptualized as new modernist thinking where strategizing is achieved through an experimental orientation to change and a pluralist practice (Woods and Joyce, 2002, p. 77). Roubelat (2000, p. 99) sees sensemaking as the process through which scenarios are operationalized, however he views the relationship as one where members’ strategic paradigms are challenged. Sensemaking as a challenge artefact is not one that is discussed elsewhere in the scholarly literature. Sensemaking is more commonly seen as developing and enhancing a natural capacity (e.g. Weick, 1995) rather than as an act that confronts existing mental models. Scenario thinking involves the capacity to retain and be conscious of concepts of future events (Ingvar, 1985). These enable managers to cope with the complexity of strategy in order that the tendency to use over-simplistic analysis and decision frameworks is avoided (Goodwin and Wright, 2001). Foresight as a characteristic of wisdom is built upon the assumption that the future can inform the past (Gioia et al., 2002). This notion of foresight suggests that by constructing scenarios where managers imaginatively locate themselves in the future, the past and present can be made sense of more fully through re-interpreting schematic responses.

Implications for practice This paper has challenged several commonly held views surrounding the role of the strategist and the function of strategy. As organizations grapple with increasing uncertainty and discontinuous change – not only in high-speed industries but in the public sector too, where increasingly conflicting demands and expectations are creating a turbulent and complex environment – the need for individuals and groups to enhance their ability to work with ambiguity and equivocality is of utmost importance. The temptation in such times is for managers to veer between the extremes of brash over-confidence, where solutions are “obvious”, and destructive helplessness, where a sense of powerlessness and negativity pervades. Sensemaking and scenario thinking are everyday acts. We all construct and test possible responses in multiple plausible futures, whether it is scanning the horizon while driving down a motorway and preparing a response should the car ahead change lanes suddenly, or holding imaginary conversations in our heads prior to attending an important meeting to rehearse possible alternative replies, depending on how the conversation may go. Sensemaking is also something we do naturally; in response to the question “how was the journey?”, we reflect on our experience and communicate our interpretation of the important cues we draw from it. Similarly, following an important meeting, to help us to understand how the outcome was arrived at, we tend

Scenarios as sensemaking devices 95

MD 43,1

96

to reconstruct the key events and conversations, and replay them with alternative responses. Both these acts rely on our ability to construct narratives that contrast what is “normal” usual, and expected, and the “abnormal”, unusual, and unexpected. Their power as modes of knowing and modes of communication does not depend on their connection to the world outside the story, but in their openness for negotiating meaning (Czarniawska, 2004). Narratives invite encounters. It is through the telling of our narratives that we come to understand ourselves and invite others into our worlds (Cottle, 2002). When managers communicate they are telling one story amongst an infinite number; when we encounter that story we engage in sensemaking to make the story meaningful to us. For managers seeking to make sense of the past, present and future in their knowledge intensive organizations, this holds important implications: . The four capacities of sensemaking described by Weick (1996) provide an alterative typology to traditional decision making. . Scenarios are socially constructed narratives that provide a means by which sensemaking of the future can be enhanced. . Transformational strategies are more likely to originate at the organization’s periphery than from its centre. . Individuals who operate at the organization’s margin create new strategy through acts of induction, and therefore are more accurately perceived of as interpretive bricoleurs rather than rational planners. This raises the question, if transformational strategies are created at the periphery what role do senior managers at the corporate centre have? Regne´r (2003) sees their role as refining the inductively created strategy through utilising deductive techniques. However, this may create conflict when rationalist judgemental criteria of: objectivity, validity, verification, measurement and generalizability (Easterby-Smith et al., 2002) are asked of socially constructed data and information, whose claims rest more on reasonableness, plausibility, cohesion and verisimilitude. An alternative role for senior managers would be as stewards of the business idea (Normann, 2001) and facilitators of the strategic conversation (van der Heijden, 1996). The business idea represents the senior management’s perspective of how the organization generates wealth through the interaction of factors, processes, systems and stakeholders that comprise its working function (Normann, 2001). The strategic conversation is the process whereby unstructured thoughts, feelings, hunches, concerns and hopes become an acceptable ingredient of both the formal and informal dialogue of the organization (van der Heijden, 1996). Implications for research This paper supports and advances recent calls for a refocusing of strategy research from broad macro-based idealized strategic planning, to what strategists actually do, here termed strategizing (e.g. Balogun et al., 2003; Johnson et al., 2003; Samra-Fredericks, 2003; Vaara et al., 2004; Whittington, 1996). In conjunction with this, is a parallel call for research into how the values, emotions, identities, interests and personal aspirations of the individuals engaged in strategizing affects both the

process and outcomes (e.g. Hardy et al., 2000; Hendry and Seidl, 2003; Watson, 2003). Possible areas for future research include: . How the possibility of transformational change is enhanced through inductive strategizing at the oragnization’s periphery. . How strategists use their sensemaking skills to interpret and create meaningful worlds. . How scenarios enhance sensemaking and strategizing. . How transformational strategy is constructed, destructured and reconstructured through narratives. Conclusion This paper has discussed scenarios as prospective sensemaking devices from a social constructionist and narratological perspective. The main challenges made against the existing literature has been levelled at the Strathclyde School’s view that the subjective element of scenarios constitute its “central problem”, (Cairns et al., 2004, p. 233) and the claim that sensemaking can only be done retrospectively (Weick, 1995). In addition, how transformational strategy at the periphery of an organization is created is contrasted with how strategy is formed at the corporate centre (Regne´r, 2003). It is suggested that managers at the periphery engage in acts of sensemaking during this inductive process in order to make sense of the cues they encounter. This process represents the manager as bricoleur and the strategy as constituting an act of bricolage. Scenarios provide a common vocabulary (Bernstein et al., 2000) to complement the communication characteristic of sensemaking, through which: . . . people learn, develop, unlearn, relearn and apply common understandings by which to exchange, combine, create, renew and transfer tacit, implicit, explicit and codified processes of knowing from blueprints, idea, emotional states and fuzzy hunches into problem definitions, solutions, added value and markets in lifeworlds of ongoing uncertainty, ambiguity and contingency (O’Donnell et al., 2000, pp. 187-200

Acts of sensemaking are concerned with finding small details that fit together and flesh out hunches to create meaningful worlds where sensible decisions can be taken (Weick, 1995, p. 133). Scenarios and scenario thinking provide a further channel to facilitate this and to expand it from a retrospective activity to one that is future focused and therefore prospective. However, to fully realise this potential the focus of scenarios needs to change from that of individual and group decision-making to sensemaking. Through this approach, strategizing at the periphery can be improved through individuals developing their capacity to assimilate divergent, and often contradictory, messages into a coherent narrative form. Inductive strategizing is above all an act of interpretation, the ability to improvise, develop wisdom, respectfully interact and communicate, (Weick, 1995) are vital skills to aid this. Meaningful interpretations “are often seen as critical to the success and even the survival of organizations, mainly because of their implications for influencing action alternatives and subsequent outcomes” (Thomas et al., 1993, p. 240). References Balogun, J., Huff, A.S. and Johnson, P. (2003), “Three responses to the methodological challenges of studying strategizing”, Journal of Management Studies, Vol. 40 No. 1, pp. 197-224.

Scenarios as sensemaking devices 97

MD 43,1

98

Barry, D. and Elmes, M. (1997), “Strategy retold: toward a narrative view of strategic discourse”, Academy of Management Review, Vol. 22 No. 2, pp. 429-52. Berger, P.L. and Luckmann, T. (1966), The Social Construction of Reality, Doubleday Anchor, New York, NY. Bernstein, S., Lebow, R.N., Stein, J.G. and Weber, S. (2000), “God gave physics the easy problems: adapting social science to an unpredictable world”, European Journal of International Relations, Vol. 6 No. 1, pp. 43-76. Brown, A.D. and Jones, M. (2000), “Honourable members and dishonourable deeds: sensemaking, impression management and legitimation in the ‘arms to Iraq affair’”, Human Relations, Vol. 53 No. 5, pp. 655-89. Brown, A.D. and Starkey, K. (2000), “Organizational identity and learning: a psychodynamic perspective”, Academy of Management Review, Vol. 25 No. 1, pp. 102-20. Brown, M.H. (1986), “Sense making and narrative forms: reality construction in organizations”, in Thayer, L. (Ed.), Organization Communication: Emerging Perspectives, Ablex, Norwood, NJ, pp. 71-84. Burr, V. (1995), An Introduction to Social Constructionism, Routledge, London. Cairns, G., Wright, G., Bradfield, R., Van der Heijden, K. and Burt, G. (2004), “Exploring e-government futures through the application of scenario planning”, Technological Forecasting and Social Change, Vol. 71, pp. 217-38. Cottle, T.J. (2002), “On narratives and sense of self”, Qualitative Inquiry, Vol. 8 No. 5, pp. 535-49. Currie, G. and Brown, A.D. (2003), “A narratological approach to understanding processes of organizing in a UK hospital”, Human Relations, Vol. 56 No. 5, pp. 563-86. Czarniawska, B. (1997), Narrating the Organization: Dramas of Institutional Identity, The University of Chicago Press, Chicago, IL. Czarniawska, B. (2004), Narratives in Social Science Research, Sage, London. Denzin, N.K. and Lincoln, Y.S. (2000), “The discipline and practice of qualitative research”, in Denzin, N.K. and Lincoln, Y.S. (Eds), Handbook of Qualitative Research, 2nd ed., Sage, Thousand Oaks, CA, pp. 1-28. Dunford, R. and Jones, D. (2000), “Narrative in strategic change”, Human Relations, Vol. 53 No. 9, pp. 1207-26. Easterby-Smith, M., Thorpe, R. and Lowe, A. (2002), Management Research: An Introduction, Sage, London. Ericson, T. (2001), “Sensemaking in organisations – towards a conceptual framework for understanding strategic change”, Scandinavian Journal of Management, Vol. 17, pp. 109-31. Farjoun, M. (2002), “Towards an organic perspective on strategy”, Strategic Management Journal, Vol. 23, pp. 561-94. Ford, J.D. and Ford, L.W. (1995), “The role of conversations in producing intentional change in organizations”, Academy of Management Review, Vol. 20 No. 3, pp. 541-71. Gabriel, Y. (2002), “Essai: on paragrammatic uses of organizational theory – a provocation”, Organization Studies, Vol. 23 No. 1, pp. 133-51. George, J.M. and Jones, G.R. (2001), “Towards a process model of individual change in organizations”, Human Relations, Vol. 54 No. 4, pp. 419-44. Gephart, R. (1997), “Hazardous measures: an interpretive textual analysis of quantitative sensemaking during crises”, Journal of Organizational Behavior, Vol. 18, pp. 583-622.

Gioia, D.A. and Chittipeddi, K. (1991), “Sensemaking and sensegiving in strategic change initiation”, Strategic Management Journal, Vol. 12, pp. 433-48. Gioia, D.A., Corley, K.G. and Fabbri, T. (2002), “Revising the past (while thinking in the future perfect tense)”, Journal of Organizational Change Management, Vol. 15 No. 6, pp. 622-34. Godet, M. and Roubelat, F. (1996), “Creating the future: the use and misuse of scenarios”, Long Range Planning, Vol. 29 No. 2, pp. 164-71. Goodwin, P. and Wright, G. (2001), “Enhancing strategy evaluation in scenario planning: a role for decision analysis”, Journal of Management Studies, Vol. 38 No. 1, pp. 1-16. Greene, J.C. (2000), “Understanding social programs through evaluations”, in Denzin, N.K. and Lincoln, Y.S. (Eds), Handbook of Qualitative Research, 2nd ed., Sage, Thousand Oaks, CA, pp. 981-99. Hardy, C., Palmer, I. and Phillips, N. (2000), “Discourse as a strategic resource”, Human Relations, Vol. 53 No. 9, pp. 1227-48. Hendry, J. and Seidl, D. (2003), “The structure and significance of strategic episodes: social systems theory and the routine practices of strategic change”, Journal of Management Studies, Vol. 40 No. 1, pp. 175-96. Hill, R.C. and Levenhagen, M. (1995), “Metaphors and mental models: sensemaking and sensegiving in innovative and entrepreneurial activities”, Journal of Management, Vol. 21 No. 6, pp. 1057-74. Ingvar, D.H. (1985), “‘Memory of the future’: an essay on the temporal organization of conscious awareness”, Human Neurobiology, Vol. 4, pp. 127-36. Johnson, G., Melin, L. and Whittington, R. (2003), “Micro strategy and strategizing: towards an activity-based view”, Journal of Management Studies, Vol. 40 No. 1, pp. 3-22. Johnson, P. and Duberley, J. (2003), “Reflexivity in management research”, Journal of Management Studies, Vol. 40 No. 5, pp. 1279-303. Kezar, A. and Eckel, P. (2002), “Examining the institutional transformation process: the importance of sensemaking, interrelated strategies, and balance”, Research in Higher Education, Vol. 43 No. 3, pp. 295-328. Lamertz, K. (2002), “The social construction of fairness: social influence and sense making in organizations”, Journal of Organizational Behavior, Vol. 23, pp. 19-37. Le´vi-Strauss, C. (1966), The Savage Mind, Oxford University Press, Oxford. Louis, M.R. (1980), “Surprise and sense making: what newcomers experience in entering unfamiliar organizational settings”, Administrative Science Quarterly, Vol. 25, pp. 226-51. Maines, D.R. (1993), “Narrative’s moment and sociology’s phenomena: toward a narrative sociology”, The Sociological Quarterly, Vol. 34 No. 1, pp. 17-38. Mason, D.H. and Herman, J. (2003), “Scenarios and strategies: making the scenario about the business”, Strategy & Leadership, Vol. 31 No. 1, pp. 23-31. Miller, K.D. and Waller, H.G. (2003), “Scenarios, real options and integrated risk management”, Long Range Planning, Vol. 36, pp. 93-107. Millett, S.M. (2003), “The future of scenarios: challenges and opportunities”, Strategy & Leadership, Vol. 31 No. 2, pp. 16-24. Normann, R. (2001), Reframing Business: When the Map Changes the Landscape, John Wiley & Sons, Chichester. O’Donnell, D., O’Regan, P. and Coates, B. (2000), “Intellectual capital: a Habermasian introduction”, Journal of Intellectual Capital, Vol. 1 No. 2, pp. 187-200.

Scenarios as sensemaking devices 99

MD 43,1

100

Orton, J.D. (2000), “Enactment, sensemaking and decision making: redesign processes in the 1976 reorganization of US intelligence”, Journal of Management Studies, Vol. 37 No. 2, pp. 213-34. Patriotta, G. (2003), “Sensemaking on the shopfloor: narratives of knowledge in organizations”, Journal of Management Studies, Vol. 40 No. 2, pp. 349-75. Porter, M.E. (1996), “What is strategy?”, Harvard Business Review, November/December, pp. 61-78. Regne´r, P. (2003), “Strategy creation in the periphery: inductive versus deductive strategy making”, Journal of Management Studies, Vol. 40 No. 1, pp. 57-82. Roubelat, F. (2000), “Scenario planning as a networking process”, Technological Forecasting and Social Change, Vol. 65, pp. 99-112. Samra-Fredericks, D. (2003), “Strategizing as lived experience and strategists’ everyday efforts to shape strategic direction”, Journal of Management Studies, Vol. 40 No. 1, pp. 141-74. Schneider, S.C. (1997), “Interpretation in organizations: sensemaking and strategy”, European Journal of Work and Organizational Psychology, Vol. 6 No. 1, pp. 93-102. Schwandt, T.A. (2000), “Three epistemological stances for qualitative inquiry: interpretivism, hermeneutics, and social constructionism”, in Denzin, N.K. and Lincoln, Y.S. (Eds), Handbook of Qualitative Research, 2nd ed., Sage, Thousand Oaks, CA, pp. 189-213. Schwartz, P. (1996), The Art of the Long View: Planning for the Future in an Uncertain World, Currency Doubleday, New York, NY. Skinner, D., Tagg, C. and Holloway, J. (2000), “Managers and research: the pros and cons of qualitative research”, Management Learning, Vol. 31 No. 2, pp. 163-79. Steinthorsson, R.S. and So¨derholm, A. (2002), “Strategic management as multi-contextual sensemaking in intermediate organizations”, Scandinavian Journal of Management, Vol. 18, pp. 233-48. Thomas, J.B., Clark, S.M. and Gioia, D.A. (1993), “Strategic sensemaking and organizational performance: linkages among scanning, interpretation, action, and outcomes”, Academy of Management Journal, Vol. 36 No. 2, pp. 239-70. Tsoukas, H. and Hatch, M.J. (2001), “Complex thinking, complex practice: the case for a narrative approach to organizational complexity”, Human Relations, Vol. 54 No. 8, pp. 979-1013. Vaara, E. (2003), “Post-acquisition integration as sensemaking: glimpses of ambiguity, confusion, hypocrisy, and politicisation”, Journal of Management Studies, Vol. 40 No. 4, pp. 859-94. Vaara, E., Kleymann, B. and Seristo¨, H. (2004), “Strategies as discursive constructions: the case of airline alliances”, Journal of Management Studies, Vol. 41 No. 1, pp. 1-35. Van der Heijden, K. (1996), Scenarios: The Art of Strategic Conversation, Wiley & Sons, Chichester. Van der Heijden, K., Bradfield, R., Burt, G., Cairns, G. and Wright, G. (2002), The Sixth Sense: Accelerating Organizational Learning with Scenarios, John Wiley & Sons, Chichester. Wack, P. (1985a), “Scenarios: uncharted waters ahead”, Harvard Business Review, September/October, pp. 73-89. Wack, P. (1985b), “Scenarios: shooting the rapids”, Harvard Business Review, November/December, pp. 139-50. Watson, T.J. (2003), “Strategists and strategy-making: strategic exchange and the shaping of individual lives and organizational futures”, Journal of Management Studies, Vol. 40 No. 5, pp. 1305-23.

Weick, K.E. (1993), “The collapse of sensemaking in organizations: the Mann Gulch disaster”, Administrative Science Quarterly, Vol. 38 No. 4, pp. 628-53. Weick, K.E. (1995), Sensemaking in Organizations, Sage, Thousand Oaks, CA. Weick, K.E. (1996), “Prepare your organization to fight fires”, Harvard Business Review, May/June, pp. 143-8. Weick, K.E. (2001), Making Sense of the Organization, Blackwell, Oxford. Whittington, R. (1996), “Strategy as practice”, Long Range Planning, Vol. 29 No. 5, pp. 731-5. Woods, A. and Joyce, P. (2002), “The arrival of postmodernist strategic theory: its academic manifestation and the development of a new modernist perspective”, Strategic Change, Vol. 11, pp. 71-80.

Scenarios as sensemaking devices 101

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

MD 43,1

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

The paradox of using tacit and explicit knowledge Strategies to face dilemmas

102

Sajjad M. Jasimuddin, Jonathan H. Klein and Con Connell School of Management, University of Southampton, Southampton, UK Abstract Purpose – This paper contrasts two perspectives on the distinction between tacit and explicit knowledge: on the one hand, the perspective that categorises knowledge as belonging to either one or the other class; and, on the other hand, the perspective that views knowledge type as a graded continuum. Design/methodology/approach – The paper explores the extensive literature on the topic, and from this literature engages in conceptual development. Findings – The paper adopts the view that the continuum perspective, in which knowledge in a particular context has both tacit and explicit characteristics, is of particular value when considering the knowledge strategy of an organisation. Whereas the former perspective presents a well-known dilemma, the continuum perspective permits the specification of a strategy in which the advantages of both tacit and explicit knowledge can, in principle, be obtained. One such strategy might be one that renders organisational knowledge as internally explicit, but externally tacit. Originality/value – The paper develops a view of the explicit/tacit dilemma that leads to a possible way forward in resolving the dilemma for organisations. Keywords Knowledge management, Corporate strategy Paper type Conceptual paper

Introduction In post-industrial society, the knowledge within an organisation is frequently identified as the main source of its competitive advantage (Kogut and Zander, 1992; Prahalad and Hamel, 1990; Starbuck, 1992; Nonaka, 1994; Nonaka and Takeuchi, 1995). In the early 1990s, Drucker (1993) observed that, for the emerging knowledge-based economy, the traditional primary resources of production (land, labour, and capital) were becoming secondary to knowledge. This was echoed by Nonaka (1994), who suggested that knowledge was the single most important production factor in terms of the capacity of an organisation to survive and, subsequently, the means of its gaining and sustaining competitive advantage. The point has been underscored by others (Quinn, 1992; Grant, 1996; Quinn et al., 2004; Solow, 1997; Stewart, 1997; Sveiby, 1997; Thurow, 1997). As Quinn (1992, p. 241) put it:

Management Decision Vol. 43 No. 1, 2005 pp. 102-112 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572515

. . . with rare exceptions, the economic and producing power of the firm lies more in its intellectual and service capabilities than its hard assets – land, plant and equipment . . . virtually all public and private enterprises- including most successful corporations – are becoming dominantly repositories and coordinators of intellect.

Against this backdrop, academics and practitioners have shown a strong interest in understanding various aspects of managing knowledge, such as the distinction between tacit and explicit knowledge (Polanyi, 1967; Nonaka, 1994; Nonaka and

Takeuchi, 1995; Jasimuddin, 2004), the transfer of knowledge (Szulanski, 1996; Connell et al., 2003; Smith and McKeen, 2003), the knowledge creation process (Nonaka and Takeuchi, 1995), the storing of knowledge (Huber 1991; Walsh and Ungson, 1991; Stein, 1995; Scarbrough, 1995; Stein and Zwass, 1995) and the social aspects of knowledge (Brown and Duguid, 1991; Spender, 1996). However, there are still many gaps in our understanding of organisational knowledge and its implications for firms and managerial practices, particularly how it might “transform” organisations. Among the questions that still remain unresolved is one that arises from the categorisation, and subsequent utilisation, of tacit and explicit knowledge. This issue seems to be one of the key organisational problems that firms encounter, and that managers have to address. Our contention is that it would be easier to utilise the transformational potential of organisational knowledge if we can recognise a range of different strategies for knowledge management, and understand how these strategies relate to one another. Failure to recognise the implications of such strategies may undermine our efforts to use knowledge more effectively. Our purpose in this paper is to highlight the implications of knowledge management strategies for firms and to indicate how the dilemmas of choice of strategy might be resolved. In particular, the strategic choice of making organisational knowledge more accessible, perhaps by converting tacit to explicit knowledge, provides organisations with a dilemma; tacit knowledge is less vulnerable but less accessible by legitimate organisational users, whilst explicit knowledge is more accessible but also more vulnerable to illegitimate exploitation. This paper begins by reviewing the relevant and extensive literature to identify the roots of this paradox. It continues by cautioning against over-emphasising one type of knowledge while neglecting the other, and prescribes a strategy that encourages the use of both tacit knowledge and explicit knowledge in complementary ways so as to enhance the competitive advantage of the firm. Knowledge as a category versus knowledge as a continuum The categorisation of knowledge into that which is explicit and that which is tacit is well known. To date it seems that two dominant perspectives on the relationship between tacit and explicit knowledge have emerged: knowledge as a category and knowledge as a continuum. Hislop (2002) labels these respectively as embodying objectivist and a practice-based philosophies of knowledge. The knowledge-as-a-category viewpoint is embedded in the vast majority of current literature on organisational knowledge (e.g. Hedlund, 1994; Nonaka 1994; Spender, 1996; Leonard and Sensiper, 1998; Pan and Scarbrough, 1999; Bolisani and Scarso, 2000; Roberts, 2000). This perspective suggests that tacit and explicit knowledge represent two separate types of knowledge having distinct features. This dichotomy is one of the most widely accepted distinctions between different types of knowledge, and represents one of the earliest attempts to classify organisational knowledge. Tacit knowledge, as originally characterised by Polanyi (1958, 1967, 1969), is constructed from individuals’ own experience in the world and forms the basis for explicit knowledge. Reflecting this view, Nonaka and Kanno (1998) argue that tacit knowledge represents knowledge that people possess, while explicit knowledge, on the other hand, represents knowledge that can be codified in a tangible form. Tacit knowledge is embodied in the human brain and cannot be separated from the people who possess it; it derives from the

Tacit and explicit knowledge 103

MD 43,1

104

background and experience of the individuals who possess it and is thus highly idiosyncratic (Dixon, 2000; Roberts, 2000). As a consequence, it is more difficult and costly to access and transfer than explicit knowledge. In contrast, explicit knowledge can be codified, documented and transmitted, making it easily and cheaply available to large numbers of people at little or no marginal cost (Roberts, 2000). Polanyi suggests that the knowledge that can be expressed explicitly is only a small part of the whole body of knowledge; he proposes that “we know more than we can tell” (Polanyi, 1967, p. 4). The distinctive features of tacit and explicit knowledge, as dichotomised by the knowledge-as-a-category perspective, are shown in Table I. Hislop (2002) contends that tacit knowledge and explicit knowledge have fundamentally different and distinctive characteristics, which significantly influence the ways in which they can be shared. The alternative view of knowledge recognises it as a continuum. Notwithstanding that tacit and explicit knowledge exhibit the features depicted in Table I, many scholars (e.g. Brown and Duguid, 1991; Lave and Wenger, 1991; Kogut and Zander, 1992; Boland et al., 1994; Blacker, 1995; Spender, 1996; Tsoukas, 1996; Lam, 1997; Cook and Brown, 1999; Boiral, 2002; Hall and Andriani, 2003) have advocated that tacit and explicit knowledge should not be seen as two separate types of knowledge. Instead, it is suggested that all knowledge has both tacit and explicit components. Kogut and Zander (1992), for example, comment that knowledge is not strictly polarised between the explicit-tacit dichotomy, but exists along a continuum of tacitness and explicitness. In parallel with this, Boland et al. (1994) treat tacit and explicit knowledge as the extremes of a continuum. Along similar lines, Hall and Andriani (2003) envisage a spectrum of knowledge running from tacit knowledge at one extreme to explicit knowledge at the other. From the knowledge-as-continuum perspective, tacit knowledge and explicit knowledge are the poles of a knowledge spectrum. Using tacit and explicit knowledge Focusing on knowledge-as-a-category, several researchers, including Sanchez (1997), Hansen et al. (1999) and Connell et al. (2003), suggest two very different strategies in

Features

Tacit knowledge (i.e. skills and experience of employees)

Explicit knowledge (i.e. documents, codes, tools)

Content (Polanyi, 1967; Hu, 1995; Non-codified Nonaka and Kanno, 1998)

Codified

Articulation (Spender, 1995)

Difficult

Easy

Location (Polanyi, 1958, 1967)

Human brains

Computers, artefacts

Communication (Ambrosini and Bowman, 2001)

Difficult

Easy

Media (Boje, 1991; Connell et al., Face-to-face contact, storytelling Information technology and 2003; Johannessen et al., 2001) other archives

Table I. Salient features of tacit and explicit knowledge

Storage (Boiral, 2002; Connell et al., 2003)

Difficult

Easy

Strategy (Hansen et al., 1999)

Personalisation

Impersonalisation

Ownership

Organisation and its members

Organisation

order to manage knowledge. The personalisation strategy, which tends to focus on tacit knowledge, addresses the storage of knowledge in human minds and its transferring through person-to-person interface (through activities such a storytelling). The codification strategy, which focuses chiefly on explicit knowledge, allows knowledge to be carefully codified and stored in databases where it can be made easily available to use. As Connell et al. (2003, p. 141) have observed, personalisation can appear to offer more than the codification view for managing intellectual capital. Hansen et al. (1999) argue along similar lines, noting that the personalisation strategy is an approach where knowledge is closely tied to the person who developed it and is shared mainly through direct person-to-person interaction, while in the codification strategy knowledge is carefully codified and stored in databases, where it can be accessed and used easily by anyone in the organisation. They maintain that the personalisation strategy provides creative, analytically rigorous advice on strategic problems by challenging individual expertise, while, in contrast, the codification strategy provides fast implementation by reusing articulated knowledge. However, researchers agree that whether tacit or explicit knowledge is central to the strategy of an organisation, there are both negative and positive impacts (see Figure 1). Several authors, most notably Spender (1995), Alvesson (2001), Ambrosini and Bowman (2001), Johannessen et al. (2001), and Hall and Andriani (2003), identify several benefits that a firm can gain from using tacit knowledge. Spender (1995), for example, contends that tacit knowledge held by the organisation is the most secure and strategically significant kind of knowledge since other organisations would find it difficult to understand and imitate. In this connection, Johannessen et al. (2001, p. 13) remark that tacit knowledge acts as an “imitation guard”, while Hall and Andriani (2003) characterise it as “externally safe”. This view is an extension to that of Ambrosini and Bowman (2001, p. 826), who contend that the principal reason why tacit knowledge has been argued to be a source of sustainable advantage is because of its immobility and inimitability. Another advantage enjoyed by an organisation using tacit knowledge is that such knowledge is ambiguous in nature. The ambiguity also makes duplication of the knowledge difficult (Hall and Andriani, 2003). McEvily et al. (2000) argue that when casual ambiguity is reduced, a firm’s performance advantage may be eroded. Other researchers identify other benefits that a firm can gain from using tacit knowledge in terms of its contribution to innovation (Alvesson, 2001) and low investment in information technologies (Johannessen et al., 2001). However, tacit knowledge is not free from difficulties. An organisation cannot store such knowledge beyond the mind of individuals without some process of articulation, it is difficult to communicate to others, and it can, at best, be difficult to digitise (Ambrosini and Bowman, 2001; Johannessen et al., 2001; Boiral, 2002; Connell et al., 2003). There is a reluctance to share tacit knowledge due to fear of losing power and status (Szulanski, 1996), and intellectual property rights provide little practical protection of such knowledge (Teece, 1986; Hall and Andriani, 2003). However, the most serious and distinctive problem an organisation faces in using tacit knowledge is the risk of losing such knowledge due to loss of employees. As Boiral (2002, p. 296) puts it, “the displacement of people translates into a loss of tacit knowledge”; Hall and Andriani (2003) say the use of tacit knowledge makes a company “internally vulnerable”.

Tacit and explicit knowledge 105

MD 43,1

106

Figure 1. Possible organisational implications of knowledge strategies

Explicit knowledge, on the other hand, is easily communicable and easy to store because such knowledge is codified. There is little chance of losing explicit knowledge due to employee turnover because such knowledge is articulated, codified, and available in organisational repositories. Such knowledge can be accessed and used easily by anyone in the organisation (Grant, 1996; Hansen et al., 1999). In this regard, Hall and Andriani (2003) comment that explicit knowledge is “internally safe”. Since it is open, it can be protected through intellectual property rights (Teece, 1986; Antonelli, 1997; Hall and Andriani, 2003). However, if information technology is exclusively used to store and retrieve explicit knowledge, a considerable investment must be made. During the past decade, many organisations have invested heavily in electronic systems, hoping to increase their

ability to manage the vast array of knowledge they possess (Eginton, 1998; Sbarcea, 1998). Alternatively, a vast space is needed to keep documents (hard copy). In this regard, Boiral (2002) argues that codifying knowledge can involve high expenditure and lead to excessive documentation. However, the main difficulty in using explicit knowledge is that there is high risk of imitation by competitors, leading to loss of potential or actual competitive advantage. Hall and Andriani (2003) observe that explicit knowledge is “externally vulnerable”. The tacit-explicit paradox This, then, is the tacit-explicit paradox: efforts by an organisation to articulate and make explicit its knowledge enhance the potential for imitation and consequent loss of value of the knowledge, while retaining knowledge in tacit form makes the organisation vulnerable to loss of the knowledge if its holders, for whatever reason, leave. Neither strategy truly protects the organisation, which faces a fundamental dilemma. Following a personalisation strategy focusing on tacit knowledge provides external protection but internal susceptibility. Adopting a codification strategy focusing on explicit knowledge internally protects the knowledge, but leaves externally susceptible. Formulated in this fashion, the paradox leads to the question of which strategy is best for an organisation in particular circumstances. The design of a knowledge strategy Several scholars argue that tacit knowledge occupies the central role in the development of sustainable competitive advantage (Nonaka, 1991; Grant, 1996; Spender, 1996). We consider, however, following Johannessen et al. (2001), that both tacit and explicit knowledge are crucial organisational resources. Johannessen et al. (2001) contend that the knowledge base of an organisation is both tacit and explicit, and that over-emphasising one at the expense of the other may lead to a situation where the organisation loses its competitive edge. Tacit and explicit knowledge are inseparable. Their relationship can be likened to the portions of an iceberg above and below the waterline: the exposed explicit knowledge is supported – given meaning – by the hidden tacit knowledge. Unlike an iceberg, however, the proportions that are exposed and hidden can vary from instance to instance. The position of knowledge on the tacit-explicit continuum is determined by its tacit-explicit mix. Neither the personalisation strategy nor the codification strategy alone is sufficient to manage organisational knowledge. Personalisation and codification approaches need to be integrated so that the benefits of both tacit and explicit knowledge can be gained. Accordingly, an organisation should seek an integrated approach to knowledge management that ensures the interaction of the strategies: a symbiosis strategy. A survey conducted by Edwards et al. (2004) supports this argument. In their study, 83 per cent of respondents disagree with the statement that an organisation cannot use both collaboration (network) and codification KM strategies together. A successful symbiosis strategy is one that takes advantage of the positive features of both the personalisation and codification strategies. To explore how such a strategy might be achieved, we suggest that the mix of tacit and explicit knowledge that any instance presents is subjective: a function of the perceptions of the observer. In terms of the iceberg analogy presented above, different proportions of the iceberg are exposed

Tacit and explicit knowledge 107

MD 43,1

108

to different observers. What we require is a strategy that renders certain categories of knowledge highly explicit to legitimate observers (those within the organisation), but highly tacit to illegitimate observers (those outside). If knowledge within the organisation is perceived as explicit, the organisation can protect itself from loss of knowledge due to loss of personnel. If, at the same time, the knowledge is perceived as tacit outside the organisation, this protects the organisation from leakage of knowledge. The above can be realised in practice by development of an appropriate organisational culture. A successful symbiosis strategy would be based upon an organisational culture that is conducive to easy knowledge replication within the organisation but presents difficulty in imitation by competitors. Such a culture needs to be strong and pervasive within the organisation, but at the same time idiosyncratic and unique to the organisation. An idiosyncratic organisational culture provides a language or code in which knowledge can be exchanged. For subscribers to the culture, the exchange takes place in terms of explicit knowledge, because its tacit components are embedded within the culture and are understood by its members. To outsiders, the knowledge that the insiders work with appears tacit in nature, for they do not possess the cultural key to decoding it as explicit knowledge. The observation that the extent to which knowledge is tacit or explicit is dependent on observing conditions is made by Hall and Andriani (2003), who note that “until the system of bass and treble clef notation was devised the knowledge of music could only be acquired by direct experience”; hence musical knowledge, they argue, was shifted from a strongly tacit to a strongly explicit position on the tacit-explicit continuum around the twelfth century. While Cook (1998) argues that no musical notation captures all musical knowledge, the point is nevertheless well made (see also Goodall, 2001). However, we can extend their point by noting that, for the observer who cannot read musical notation, musical knowledge is still fairly tacit (Klein et al., 2003). The extent to which an individual has assimilated the appropriate cultural codes determines his or her ability to interpret knowledge. Sims and Doyle (1995, p. 120) describe how, in an approach to assisting managers in coping with complex issues known as cognitive sculpting, the everyday objects used in the approach “become a shorthand, even an argot, for participants to refer concisely and precisely to a complex of ideas already shared, but only by the in-group”. To the participants, references are communicating precise ideas in an explicit manner; to outsiders, the explicit content of the communications is nonsensical, and its intended message is tacit and inaccessible. Lave and Wenger (1991, p. 98) make a similar point, more generally, about communities of practice: “a community of practice is an intrinsic condition for the existence of knowledge, not least because it provides the interpretive support necessary for making sense of its heritage”. Brown and Duguid (1991, p. 48) describe the process of learning within the context of a community of practice as one in which learners “acquire that particularly community’s subjective viewpoint and learn to speak its language . . . they are enculturated . . . acquiring . . . the embodied ability to behave as community members”. This enculturation provides a context in which members of the community can practice, and, crucially from our point of view, exchange knowledge about practice, in a manner which is comparatively meaningless to outsiders, apparently relying on a great deal of tacitness, but is fairly explicit to insiders. Elsewhere, Brown and Duguid (2002, p. 430) make the point that “emerging

knowledge (the sort of knowledge that is critical to innovation) . . . is intelligible only among close groups” until it becomes “standardized, embedded in products . . . and part of widely acknowledged practices”, arguing that, contrary to popular predictions, despite the globalisation of information, innovative knowledge is intrinsically local. The protective nature of the culture we envisage would be reinforced by the development of a high level of trust within it, enhancing both the willingness of organisational members to share their tacit knowledge among themselves, and at the same time make them reluctant to disclose their knowledge to outsiders (so as to retain the trust of their fellows). Furthermore, top management should drive the development of the culture; top management support usually entails initiating, funding knowledge networks and projects, as well as developing skills to apply any strategy (Mayo, 1998). The organisation should offer attractive incentive and compensation packages and adopt appropriate contractual strategies so that employees neither leave nor transfer their knowledge to competitors. Conclusion In the literature both perspectives – knowledge-as-a-category and knowledge-as-a-spectrum – have received attention in describing the ways in which tacit and explicit knowledge are conceptualised. This paper firmly advocates the spectrum approach, in which tacit and explicit knowledge are considered inseparable and organisational knowledge exists along a continuum of tacitness and explicitness. To resolve the dilemma posed by the tacit-explicit paradox, we suggest the development of a symbiosis knowledge management strategy premised on the proposition that an organisational culture should be developed in which, as far as possible, valuable organisational knowledge is internally explicit but externally tacit. The symbiosis strategy would integrate personalisation and codification strategies, on the one hand codifying knowledge internally, but, on the other, treating the codes themselves as personalised and tacit. The effect would be to create an environment that eases knowledge replication within the organisation but at the same time makes imitation difficult for competitors. References Alvesson, M. (2001), “Knowledge work: ambiguity, image and identity”, Human Relations, Vol. 54 No. 7, pp. 863-96. Ambrosini, V. and Bowman, C. (2001), “Tacit knowledge: some suggestions for operationalization”, Journal of Management Studies, Vol. 38 No. 6, pp. 811-29. Antonelli, C. (1997), “New information technology and the knowledge-based economy: the Italian evidence”, Review of Industrial Organisation, Vol. 12 No. 4, pp. 593-607. Blacker, F. (1995), “Knowledge, knowledge work and organization: an overview and interpretation”, Organization Studies, Vol. 16 No. 6, pp. 1021-46. Boiral, O. (2002), “Tacit knowledge and environmental management”, Long Range Planning, Vol. 35, pp. 291-317. Boje, D.M. (1991), “The storytelling organisation: a study of story performance in an office supply firm”, Administrative Science Quarterly, Vol. 36, pp. 106-26. Boland, R., Tenkasi, R. and Te’eni, D. (1994), “Designing information technologies to support distributed cognition”, Organisation Science, Vol. 5 No. 3, pp. 456-75.

Tacit and explicit knowledge 109

MD 43,1

110

Bolisani, E. and Scarso, E. (2000), “Electronic communication and knowledge transfer”, International Journal of Technology Management, Vol. 20 No. 1, pp. 116-33. Brown, J. and Duguid, P. (1991), “Organisational learning and communities of practice: toward a unified view of working, learning, and innovation”, Organisation Science, Vol. 2, pp. 40-57. Brown, J.S. and Duguid, P. (2002), “Local knowledge: innovation in the networked age”, Management Learning, Vol. 33, pp. 427-37. Connell, N.A.D., Klein, J.H. and Powell, P.L. (2003), “It’s tacit knowledge but not as we know it: redirecting the search for knowledge”, Journal of Operational Research Society, Vol. 54, pp. 140-52. Cook, N. (1998), Music: A Very Short Introduction, Oxford University Press, Oxford. Cook, S. and Brown, J. (1999), “Bridging epistemologies: the generative dance between organisational knowledge and organisational knowing”, Organization Science, Vol. 10 No. 4, pp. 381-400. Dixon, N. (2000), Common Knowledge: How Companies Thrive by Sharing What They Know, Harvard Business School Press, Boston, MA. Drucker, P.F. (1993), Post-Capitalist Society, HarperCollins, New York, NY. Edwards, J.S., Handzic, M., Carlsson, S. and Nissen, M. (2004), “Knowledge management research and practice: visions and directions”, Knowledge Management Research & Practice, Vol. 1 No. 1, pp. 49-60. Eginton, K. (1998), “Knowledge management – law firms can do it too”, Australian Law Librarian, Vol. 6, pp. 247-55. Goodall, H. (2001), Big Bangs: The Story of Five Discoveries that Changed Musical History, Vintage, London. Grant, R.M. (1996), “Toward a knowledge based theory of the firm”, Strategic Management Journal, Vol. 17, Special issue, pp. 109-22. Hall, R. and Andriani, P. (2003), “Managing knowledge associated with innovation”, Journal of Business Research, Vol. 56, pp. 145-52. Hansen, M.T., Nohria, N. and Tierney, T. (1999), “What’s your strategy for managing knowledge?”, Harvard Business Review, March/April, pp. 106-16. Hedlund, G. (1994), “A model for knowledge management and the N-form corporation”, Strategic Management Journal, Vol. 15, pp. 73-90. Hislop, D. (2002), “Mission impossible? Communicating and sharing knowledge via information technology”, Journal of Information Technology, Vol. 17, pp. 165-77. Hu, Y.S. (1995), “The international transferability of the firm’s advantages”, California Management Review, Vol. 37 No. 4, pp. 73-88. Huber, G.P. (1991), “Organisational learning: the contributing process and the literatures”, Organization Science, Vol. 2 No. 1, pp. 88-115. Jasimuddin, S.M. (2004), “Critical assessments of emerging theories of organizational knowledge”, paper presented at the 64th annual meeting of the Academy of Management, New Orleans, LA. Johannessen, J., Olaisen, J. and Olsen, B. (2001), “Mismanagement of tacit knowledge: the importance of tacit knowledge, the danger of information technology, and what to do about it”, International Journal of Information Management, Vol. 21, pp. 3-20. Klein, J.H., Connell, N. and Meyer, E. (2003), “Sharing notes: amateur musical event from a knowledge management perspective”, in Edwards, J.S. (Ed.), Knowledge Management Aston Conference 2003, Operational Research Society Ltd, Aston.

Kogut, B. and Zander, U. (1992), “Knowledge of the firm, combinative capabilities, and the replication of technology”, Organization Science, Vol. 3, pp. 383-96. Lam, A. (1997), “Embedded firms, embedded knowledge: problems in collaboration and knowledge transfer in global cooperative ventures”, Organization Studies, Vol. 21 No. 3, pp. 487-513. Lave, J. and Wenger, E. (1991), Situated Learning: Legitimate Peripheral Participation, Cambridge University Press, Cambridge. Leonard, D. and Sensiper, S. (1998), “The role of tacit knowledge in group innovation”, California Management Review, Vol. 40 No. 3, pp. 112-32. McEvily, S.K., Das, S. and McCabe, K. (2000), “Avoiding competence substitution through knowledge sharing”, Academy of Management Review, Vol. 25 No. 2, pp. 294-311. Mayo, A. (1998), “Memory bankers”, People Management, Vol. 4 No. 2, pp. 34-42. Nonaka, I. (1991), “The knowledge-creating company”, Harvard Business Review, Vol. 69 No. 6, pp. 96-104. Nonaka, I. (1994), “A dynamic theory of organisational knowledge creation”, Organization Science, Vol. 5 No. 1, pp. 14-37. Nonaka, I. and Kanno, N. (1998), “The concept of ‘Ba’: building a foundation for knowledge creation”, California Management Review, Vol. 40 No. 3, pp. 40-54. Nonaka, I. and Takeuchi, H. (1995), The Knowledge Creating Company, Oxford University Press, Oxford. Pan, S.L. and Scarbrough, H. (1999), “Knowledge management in practice: an exploratory case study”, Technology Analysis & Strategic Management, Vol. 11 No. 1, pp. 359-74. Polanyi, M. (1958), Personal Knowledge: Towards a Post-Critical Philosophy, Routledge & Kegan Paul Ltd, London. Polanyi, M. (1967), The Tacit Dimension, Routledge & Kegan Paul Ltd, London. Polanyi, M. (1969), Knowing and Being, Routledge & Kegan Paul Ltd, London. Prahalad, C.K. and Hamel, G. (1990), “The core competition of the corporation”, Harvard Business Review, May/June, pp. 79-91. Quinn, J.B. (1992), Intelligent Enterprise, The Free Press, New York, NY. Quinn, J.B., Anderson, P. and Finkelstein, S. (2004), “Leveraging intellect”, Academy of Management Executives, Vol. 10 No. 3, pp. 7-27. Roberts, J. (2000), “From know-how to show-how? Questioning the role of information and communication technologies in knowledge transfer”, Technology Analysis and Strategy Management, Vol. 12 No. 4, pp. 429-43. Sanchez, R. (1997), “Managing articulated knowledge in competence-based competition”, in Sanchez, R. and Henne, A. (Eds), Strategic Learning and Knowledge Management, John Wiley & Sons Ltd, London, pp. 163-87. Sbarcea, K. (1998), “Know what, know how, know why: implementing a knowledge management system – the Philips Fox experience”, Australian Law Librarian, Vol. 6, pp. 4-8. Scarbrough, H. (1995), “Black boxes, hostages and prisoners”, Organization Studies, Vol. 16 No. 6, pp. 991-1019. Sims, D.B.P. and Doyle, J.R. (1995), “Cognitive sculpting as a means of working with managers’ metaphors”, Omega, Vol. 23, pp. 117-24.

Tacit and explicit knowledge 111

MD 43,1

112

Smith, H. and McKeen, J.D. (2003), “Knowledge transfer: can KM make it happen?”, WR 03-05, Queen’s Centre for Knowledge-Based Enterprises, available at: www.business.queensu.ca/ kbe Solow, R.M. (1997), Learning from Learning by Doing: Lessons for Economic Growth, Stanford University Press, Stanford, CA. Spender, J.C. (1995), “Organizational knowledge, collective practice and Penrose rents”, International Business Review, Vol. 3/4, pp. 1-5. Spender, J.C. (1996), “Competitive advantage from tacit knowledge? Unpacking the concept and its strategic implications”, in Moingeon, B. and Edmondson, A. (Eds), Organizational Learning and Competitive Advantage, Sage, London, pp. 56-71. Starbuck, W.R. (1992), “Learning by knowledge intensive firms”, Journal of Management Studies, Vol. 29 No. 6, pp. 713-40. Stein, E.W. (1995), “Organizational memory: review of concepts and recommendations for management”, International Journal of Information Management, Vol. 15 No. 2, pp. 17-32. Stein, E.W. and Zwass, V. (1995), “Analyzing organizational memory with information systems”, Information Systems Research, Vol. 6 No. 2, pp. 85-114. Stewart, T.A. (1997), Intellectual Capital: The New Wealth of Organizations, Doubleday, New York, NY. Sveiby, K.E. (1997), The New Organisational Wealth: Managing and Measuring Knowledge-based Assets, Berrett-Koehler, San Francisco, CA. Szulanski, G. (1996), “Exploring internal stickiness: impediments to the transfer of best practice within the firm”, Strategic Management Journal, Vol. 17, Winter special issue, pp. 24-43. Teece, D.J. (1986), “Profiting from technology innovation: implications for integration, collaboration, licensing and public policy”, Research Policy, Vol. 15 No. 6, pp. 285-305. Thurow, L.C. (1997), The Future of Capitalism, Nicholas Brealy, London. Tsoukas, H. (1996), “The firm as a distributed knowledge system: a constructionist approach”, Strategic Management Journal, Vol. 17, Special issue, pp. 11-25. Walsh, J.P. and Ungson, G.R. (1991), “Organizational memory”, Academy of Management Review, Vol. 16 No. 1, pp. 57-91. Further reading Gopal, C. and Gagnon, J. (1995), “Knowledge, information, learning and the IS manager”, Computerworld, Vol. 29 No. 25, pp. 1-7. Lippman, S.A. and Rumelt, R.P. (1982), “Uncertain imitability: an analysis of interfirm differences in efficiency under competition”, The Rand Journal of Economics, Vol. 13, pp. 418-38. Polanyi, M. (1962), Personal Knowledge: Towards a Post-critical Philosophy, University of Chicago Press, Chicago, IL.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Dealing with the uncertainties of environmental change by adding scenario planning to the strategy reformulation equation

Uncertainties of environmental change 113

Philip R. Walsh Lecturer in Corporate Strategy, School of Management, University of Surrey, Guildford, UK Abstract Purpose – This paper serves to discuss the benefit of applying scenario-planning techniques to more traditional approaches to strategy development in helping firms deal with uncertainty and evolutionary change in their surrounding environment. Assessing this environment provides insight into the unique changes, the implications these changes have on a firm’s strategies, and the creation of special techniques required to understand them. One of these special techniques is scenario planning. Any study of the relationship between strategy, environment and performance must include variables that involve business scope and resource commitments. Design/methodology/approach – A review of the research literature on the use and benefits of both the traditional approaches and the scenario approach to constructing the future strategy of a firm in a changing environment is undertaken. Findings – The results suggest that a better understanding of the performance of firms within a changed environment can be achieved using the combination of a PESTEL analysis, internal resource analysis and the use of scenarios. This reformulation equation creates a model of a possible environment in which the firm must operate and an investigation of the strategic implications of various scenarios to the firm. Originality/value – This paper is unique in that it marries the traditional approaches to strategy development with the application of scenario planning. It is of benefit to managers and strategic planners by illustrating how a firm may better develop insight into how it should formulate and implement its strategy in order to retain or create a competitive advantage in the changed environment in which it operates. Keywords Corporate strategy, Organizational change Paper type Conceptual paper

Introduction When a firm finds itself exposed to a change to the environment in which it operates, it must determine how the processes of change in the marketplace impact on that firm’s choice of strategies, its related resource deployment and the nature of its competitive advantage within that environment. Specifically the following questions need to be addressed: . What are the key market variables that emerge as a result of environmental change in that market? . What is the effect of these market variables on a firm’s strategies? . What changes will firms have to make to their resource and competency base in order to create new strategies?

Management Decision Vol. 43 No. 1, 2005 pp. 113-122 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572524

MD 43,1

114

The evolution of market variables arising from environmental change within a market may require a change in a firm’s strategies in order to respond to the potential opportunities created by these variables. What these new strategies will be is related to that firm’s evaluation of those opportunities. Once a firm has created new strategies to deal with the opportunities presented by a changed marketplace, certain alterations may be required within their organization to satisfy the critical success factors identified by the firm for achieving a competitive advantage. This paper deals with the application of scenario planning to the strategic development process in order to help a firm in addressing these questions, particularly as it is affected by the need to discover and develop new forms of competitiveness and sources of strategic advantage. Strategic change Strategic change involves changes in a firm’s scope, resource deployment, competitive advantages and synergies so that they align a firm more suitably with a changed environment and allowing it to meet its objectives (Rajagopalan and Spreitzer, 1996; Boeker, 1989). Strategic change theory has traditionally been broken into two distinct schools of thought: the content school and the process school. The content school has involved the research of firms before and after a strategic change (Haveman, 1992; Smith and Grimm, 1987; Shortell and Zajac, 1990), while the process school has focused on the role of managers in the strategic change process (Kelly and Amburgey, 1991; Rajagopalan and Spreitzer, 1996). It has been argued (Rajagopalan and Spreitzer, 1996) that, although related, these two schools have been evolving independently of each other and that there has been a continual accumulation of contradictory findings that have added little to the understanding of strategic change. The content school promotes strategic change as a planned search for optimal solutions for well-defined problems by using a firm’s previously defined objectives and by management maximizing firm performance by creating and implementing a strategic vision that allows for the alignment of a firm with its changing environment. Content school research suffers from its inability to determine the effects of management’s experience and cognitive input that, aside from strategic content, may have had an affect on the firm’s performance arising from the strategic change. Furthermore, from a methodological standpoint, the research involved the measurement of environmental conditions at an industry level while strategic changes were measured at a firm level (Rajagopalan and Spreitzer, 1996). The process school deals with management’s involvement during strategic change. Research, while not as empirically dominated as the content school, complements the content school research by adding information related to management’s input during a firm’s strategic change (Eisenhardt and Bourgeois, 1988; Boeker, 1997), but it does suffer from an inability to distinguish the actions of management that may influence the environment and the firm from those actions taken to undertake the content of the strategies themselves (Rajagopalan and Spreitzer, 1996). To bridge the gap between measuring environmental changes at an industry level and changes in strategy at the firm level, it has been suggested that researchers either operationalize environmental antecedents in terms of industry analysts’ opinions or

utilize the judgements of researchers on the basis of their industry knowledge (Rajagopalan and Spreitzer, 1996). Another area of debate within the research community regarding strategic change is the issue of whether or not organizations are adaptive or inertial (Boeker, 1989; Kelly and Amburgey, 1991). Adaptive firms are those organizations in which management is encouraged to identify changes in the environment and to make changes in corporate strategy to improve the firm’s ability to compete. Inertial organizations are those firms whose strategy (purposely or not) cannot change quickly enough to match up with changes occurring in the surrounding environment. Inertial firms will find future strategic changes hampered by the initial strategy, which will predominate within the inertial organization (Boeker, 1989). Research into strategic change has found more-consistent findings resulting from cross-sectional studies that deal with the effect of a specific change in a firm’s environment, in particular deregulation (Rajagopalan and Spreitzer, 1996). Many studies (Corsi et al., 1992; Smith and Grimm, 1987; Haveman, 1992; Shortell and Zajac, 1990; Chwalowski, 1997) support the positive relationship between a firm’s change in strategy and environmental change. Research into deregulating markets (Corsi et al., 1992; Smith and Grimm, 1987; Haveman, 1992; Shortell and Zajac, 1990; Chwalowski, 1997; Kim and McIntosh, 1999) indicates that firms with focused strategies pre-deregulation continued to have focused strategies after deregulation. By extending research undertaken by Smith and Grimm (1987) and Zajac and Shortell (1989) of firm behaviour in newly deregulated industries, Kim and McIntosh (1999) found that any study of the relationship between strategy, environment and performance must include variables that involve business scope and resource commitments. These variables included service quality, pricing, product dependability and marketing – all of which had been validated through previous industry research. With competitive markets, the intent is to allow the market forces to establish market segmentation. This is done by letting firms devise strategies that create market segments dictated by price, quality, technology or scale and scope economies. As a result, competitive marketplaces never reach a static state, but rather exhibit continuous change over time (Grant, 1998). As environmental changes impact the performance of firms within the market, (Luffman et al., 1996; Smith and Grimm, 1987; Haveman, 1992) a popular technique, the PESTEL analysis, has been employed to explore the general environment (Lynch, 1997; Luffman et al., 1996). The PESTEL analysis refers to the political, economic, social, technological, environmental and legal factors influencing the environment in which a firm must operate (Day, 1990; Sanchez and Heene, 1997; Gay, 2002; Hopkinson, 1993; Mayer-Wittman, 1989). Assessing an environment provides insight into the unique changes, the implications these changes have on firms’ strategies, and the creation of special techniques required to understand them. While there are no formulas to guide the choice of environmental factors to consider, the specifics of a firm’s business will determine what factor is relevant to it (Day, 1990; Boeker, 1997; Baden-Fuller and Volberda, 1997). A second technique, one which can be applied on an ex ante basis, involves the use of scenarios to create a model of a possible environment in which the firm must operate

Uncertainties of environmental change 115

MD 43,1

116

and an investigation of the strategic implications of that scenario to the firm (Mercer, 1995; Schoemaker, 1995; Tucker, 1999; Wright, 2000). Scenario planning The application of scenario planning to a firm’s strategic development process is appropriate when one considers that, with environmental change, these firms are dealing with uncertainties regarding the eventual outcome of the market. Where forecasting assumes that the future can be predicted, scenarios aid in the understanding of how environmental changes may affect, as opposed to predict, the future outcome. Schwartz (1996) believes that scenario planning involves making choices at present with an understanding of how they may turn out in the future. Schoemaker (1995) concurs that scenario planning is an attempt to consider the range of possibilities that motivates decision makers to consider changes that would have been ignored before. Competitive advantage can be enhanced from the process of scenario planning because it improves the speed of decision making and the understanding of decision outcomes resulting from the analysis of many different scenarios and their impact on firm performance (Simpson, 1992; Fahey, 2000; Mercer, 1995). Scenario planning is a commonly used tool for strategy development, particularly when dealing with environmental change in energy and public utility businesses (Simpson, 1992). Scenario planning differs from other traditional approaches to developing strategy. van der Heijden (1996) describes these approaches as either “rationalistic”, whereby firms believe that their industry is a predictable one and that a successful strategy can be developed if the right measure of the available information is determined in order to predict success, or “evolutionary”, whereby a firm’s strategy emerges as a result of its ongoing involvement in an industry. The problem with the rational approach is that it fails to adequately deal with any event that is unforeseen (Schoemaker, 1995; Wright, 2000), whereas the evolutionary approach suggests that forward planning on strategy is moot and therefore is disliked by managers of the firm (van der Heijden, 1996). Scenario planning is identified as a processual approach to strategy development (van der Heijden, 1996) that allows a firm to recognize that certain aspects of operating in a market yet to be developed remain unpredictable, but that other aspects are predetermined. Scenario planning arranges these possibilities in a more simplified form than what might be encountered in a rational approach, making it easier to comprehend while continuing to challenge any prevailing mind-set. For firms faced with uncertainty and change, the addition of scenario planning to the strategy reformulation equation provides a bridge between the traditional approaches to strategy development (see Figure 1). Scenario development Although the process of developing scenarios is described in the literature in a number of different ways (Schoemaker, 1995; Wright, 2000; van der Heijden, 1996; Simpson, 1992; Fahey, 2000; Mercer, 1995; Tucker, 1999; Epstein, 1998), in general, the development of scenarios is described as a simple process that can be summed up as using the following steps: (1) identification of future actionable issues or drivers of change; (2) creation of framework for conceptualizing data pertaining to issues or drivers;

Uncertainties of environmental change 117

Figure 1. Traditional approaches to strategy development in helping firms deal with uncertainty and evolutionary change

(3) (4) (5) (6)

development and testing of a large number of scenarios (seven to nine); reduction of initial scenarios to smaller number of ultimate scenarios (two to four); construction of the scenarios; and examination of scenarios and identification of issues arising from them.

Identification of future actionable issues or drivers of change This first step involves the examination of the environmental analysis and the results derived from it. The results of the analysis determine those factors commonly referred to as “variables” or “drivers” that will impact the nature of the future environment in which a firm will be operating (Mercer, 1995). These drivers can be separated into two broad categories – environmental forces and the actions of institutions (Fahey and Randall, 1998) – including actions within the firm itself. While the environmental forces would include those events identified in the previously discussed environmental analysis, the actions of institutions would expand the scope of analysis to include the influence of different types of business organizations (external and internal), political parties and regulatory agencies. van der Heijden (1996) characterizes these drivers as variables that have a high level of explanatory power in relation to the data derived from the analysis. This data or information creates a database of useful intelligence needed to address short-term decision-making and longer-term scenarios (Tucker, 1999). As part of the determination of variables, the participants in the scenario planning process should attempt to deal with timing and scope of the scenarios. The time frame and scope is dependent upon a number of factors falling out of the external environmental analysis, such as political changes, product life cycles and technological change (Schoemaker, 1995), or the analysis of institutional action, such as competitor response (external) or industrial action within the organization (internal), with no restrictions on the absolute time frame chosen. The usefulness of scenarios, whether in a shorter or longer time frame, is related to the degree of uncertainty versus predictability in any decision situation (van der Heijden, 1996). Research into scenario

MD 43,1

118

development (Mercer, 1995) suggests that the longer the timeframe identified within the first step the more likely the participants use of a greater portion of the external environment in gathering variables. Creation of framework for conceptualizing data pertaining to variables/drivers Once the variables or drivers have been gathered along with the related data, a conceptual framework can be developed that incorporates the variables into clusters or along strings that link them either in a cause/effect relationship (van der Heijden, 1996) or through common themes (Schoemaker, 1995). The identification of themes or linkages between variables is dependent upon the participant’s ability to comprehend the complexity of patterns inherent within the data (Mercer, 1995). To simplify this process it has been suggested that the use of variables representative of extreme worlds within the context of a future external environment or organization, or identifying the top two uncertainties about the future external environment or organization, are suitable methods for structuring scenarios. The framework developed can fall out of either an inductive or deductive approach. An inductive approach develops a framework as the available data is generated allowing the participants to create a structure of emerging scenarios. With the deductive approach the framework is initially inferred by the participants and the data that is gathered is fitted within that framework. The inductive method has been criticized because it is difficult to achieve consensus among participants as to which driving forces are the most important to an organization. It has been suggested that the deductive approach, with its predetermined framework, can be more effective (Schwartz and Ogilvy, 1998). van der Heijden (1996) identifies a third approach to developing the scenario framework that he labels the incremental method. In situations where the organization is less committed to the concept of scenario planning and its contribution towards strategy development, the incremental method allows the participants to use their consensus forecast of the future environment as a base starting point and to entertain scenarios that extend from that base. If only a few dominant uncertainties exist then the incremental approach will tend to produce similar results to the inductive and deductive methods. Development and testing of a large number of scenarios (seven to nine) The previous step usually results in the development of between seven and nine scenarios (Mercer, 1995). Each of these scenarios needs to be tested for internal consistency and plausibility (Schoemaker, 1995; van der Heijden, 1996). Applying logic tests to each of the scenarios helps determine whether they are plausible or internally consistent. Such tests might include determining if the trends identified and used to create scenarios are compatible with the time frame chosen for that scenario, or determining whether certain scenarios conflict with each other in such a manner that the combined outcomes are inconsistent. Scenarios must be able to grow logically from the past through to the present and into the future, and they should be consistent with an organization’s past, current and potential business direction. Trends and events used to identify scenarios should be related through cause-and-effect linkages. Ultimately, testing can result in the identification of scenarios that are either illogical or should be grouped with other scenarios to create a larger scenario that logic dictates would evolve eventually.

Reduction of initial scenarios to smaller number of ultimate scenarios (two to four) The larger number of scenarios developed and tested should end up being reduced to a smaller number of scenarios important to the organization. Mercer (1995) notes that although there is no theoretical reason for reducing to just two or three scenarios, in all practicality experience dictates that the ideal number is two. van der Heijden (1996) concurs that more than four scenarios has proven to be organizationally impractical, but that at least two scenarios are needed to reflect uncertainty. Simpson (1992) argues that when only two scenarios are generated it is a sign of near-sighted vision on the part of the participants, but if more than four scenarios are developed then there are issues being addressed that are not critical to the operation of the participants. Construction of the scenarios The form in which scenarios are written up can vary depending on the participant’s experience, the level of complexity of the scenario, and the participant’s ability to develop strategy related to that scenario. Mercer (1995) points out that the best way may be to use the form the author of the scenario finds most comfortable. Examination of scenarios and identification of issues arising from them The final stage of scenario development is the examination of the scenarios to identify the critical issues pertaining to the impact of those scenarios on the future of the organization. Each scenario may present different opportunities or threats that challenge an organization’s strategic direction and resource capabilities (Schoemaker, 1995). Identifying these issues focuses the participants toward using the scenarios to develop corporate strategies that deal with those opportunities and threats potentially facing the organization and helps the participant define the appropriate resource requirements. Strategy development The process of strategy formation is a dynamic one that corresponds to the dynamic conditions that drive it. Mintzberg et al. (1998) point out that the recent resource-based approach to competitive advantage was reborn in reaction to the criticism that the external environment approach could not keep up with the volatile nature of shifting customer preferences and rapid changes in technology. But Mintzberg et al. (1998) also question whether the resource-based view, while serving as a correcting device for those firms that have dominated their strategic thinking with external environmental analysis, has shifted strategic management theory too far in its direction. They suggest that the design school model for strategy making may be the appropriate approach because of its emphasis on a balanced fit of external and internal situations. The design school model generated the traditional notion of SWOT – strengths, weaknesses, opportunities and threats – and is the most influential of the strategy formation processes (Mintzberg et al., 1998). Figure 2 is a model derived from the work of Kenneth Andrews, who, as part of the general management group at the Harvard Business School, developed the design school of thought toward strategy formulation. This model incorporates the balanced approach of the traditional design school and expands upon it by modifying the external and internal appraisals to take into account the application of scenario planning to the strategic development process.

Uncertainties of environmental change 119

MD 43,1

120

Figure 2. Strategy development model

Conclusions Environmental change encourages firms to undertake a review of their strategies. Specifically, firms must address the change in the context of key success factors involved in creating competitive advantage, the strategies to be developed to satisfy those factors and the resources required to undertake these strategies. Understanding the performance of firms within a changed environment can be achieved using the combination of a PESTEL analysis, internal resource analysis and the use of scenarios to create a model of a possible environment in which the firm must operate and an investigation of the strategic implications of that scenario to the firm. Assessing this environment provides insight into the unique changes, the implications these changes have on firms’ strategies, and the creation of special techniques required to understand them. Research into strategic change has found more-consistent findings resulting from cross-sectional studies that deal with the effect of a specific change in a firm’s environment. Any study of the relationship between strategy, environment and performance must include variables that involve business scope and resource commitments. These variables include service quality, pricing, product dependability and marketing, all of which had been validated through previous industry research. Scenario planning can be a useful tool for strategy development particularly when dealing with recent or impending environmental change. Combined with the results of an environmental analysis, one can determine those factors commonly referred to as “variables” or “drivers” that will impact the nature of the future environment in which a firm will be operating By addressing the effects of those variables through the application of scenario planning, a firm develops insight and intelligence into how it should formulate and implement its strategy in order to retain or create a competitive advantage in the changed environment in which it operates.

References Baden-Fuller, C. and Volberda, W. (1997), “Strategic renewal: how large complex organizations prepare for the future”, International Studies of Management & Organization, Vol. 27 No. 2, pp. 95-120. Boeker, W. (1989), “Strategic change: the effects of founding and history”, Academy of Management Journal, Vol. 32 No. 3, pp. 489-515. Boeker, W. (1997), “Strategic change: the influence of managerial characteristics and organizational growth”, Academy of Management Journal, Vol. 40 No. 1, pp. 152-70. Chwalowski, M. (1997), “Predicting success after deregulation: an evaluation of airline, trucking and telecommunication firms”, Issues and Trends Briefing Paper, No. 76, EEI, January. Corsi, R.D. et al., (1992), “The effects of LTL motor carrier size on strategy and performance”, Logistics and Transportation Review, Vol. 28 No. 2, p. 129. Day, G.S. (1990), Market Driven Strategy: Processes for Creating Value, The Free Press/Macmillan Inc., New York, NY. Eisenhardt, K.M. and Bourgeois, L.J. III (1988), “Politics of strategic decision making in high velocity environments: toward a midrange theory”, Academy of Management Journal, Vol. 31 No. 4, pp. 737-70. Epstein, J.H. (1998), “Scenario planning: an introduction”, The Futurist, Vol. 32 No. 6, pp. 50-5. Fahey, L. (2000), “Scenario learning”, Management Review, March, pp. 29-34. Fahey, L. and Randall, R.M. (1998), “What is scenario learning?”, in Fahey, L. and Randall, R.M. (Eds), Learning from the Future: Competitive Foresight Scenarios, John Wiley & Sons, New York, NY. Gay, G. (2002), “Audit risk reduction”, Australian CPA, March, pp. 68-70. Grant, R.M. (1998), Contemporary Strategy Analysis, Blackwell Publishers Ltd, Oxford. Haveman, H.A. (1992), “Between a rock and a hard place: organizational change and performance under conditions of fundamental environmental transformation”, Administrative Science Quarterly, Vol. 37 No. 1, p. 48. Hopkinson, J. (1993), “Towards the year 2000 – a personal view of future changes”, Management Services, May, pp. 18-22. Kelly, D. and Amburgey, T.L. (1991), “Organizational inertia and momentum: a dynamic model of strategic change”, Academy of Management Journal, Vol. 34 No. 3, pp. 591-612. Kim, E. and McIntosh, J.C. (1999), “Strategic organizational responses to environmental chaos”, Journal of Managerial Issues, Vol. XI No. 3, pp. 344-62. Luffman, G. et al. (1996), Strategic Management: An Analytical Introduction, Blackwell Publishers Ltd, Oxford. Lynch, R. (1997), Corporate Strategy, Pitman Publishing, London. Mayer-Wittman, K.M. (1989), “Economic analysis and corporate strategic planning”, Business Economics, April, pp. 27-31. Mercer, D. (1995), “Scenarios made easy”, Long Range Planning, Vol. 28 No. 4, pp. 81-6. Mintzberg, H. et al. (1998), Strategy Safari: A Guided Tour through the Wilds of Strategic Management, The Free Press/Simon & Schuster, New York, NY. Rajagopalan, N. and Spreitzer, G.M. (1996), “Toward a theory of strategic change: a multi-lens perspective and integrative framework”, Academy of Management Review, Vol. 22 No. 1, pp. 48-79.

Uncertainties of environmental change 121

MD 43,1

122

Sanchez, R. and Heene, A. (1997), “Managing for an uncertain future: a systems view of strategic organizational change”, International Studies of Management & Organization, Vol. 27 No. 2, pp. 21-42. Schoemaker, P.J.H. (1995), “Scenario planning: a tool for strategic thinking”, Sloan Management Review, Vol. 36 No. 2, pp. 25-40. Schwartz, P. (1996), The Art of the Long View: Planning for the Future in an Uncertain World, Currency Doubleday, New York, NY. Schwartz, P. and Ogilvy, J.A. (1998), “Plotting your scenarios”, in Fahey, L. and Randall, R.M. (Eds), Learning from the Future: Competitive Foresight Scenarios, John Wiley & Sons, New York, NY. Shortell, S. and Zajac, E.J. (1990), “Perceptual and archival measures of Miles and Snow’s strategic types: a comprehensive assessment of reliability and validity”, Academy of Management Journal, Vol. 33 No. 4, pp. 817-32. Simpson, D.G. (1992), “Key lessons for adopting scenario planning in diversified companies”, Planning Review, Vol. 20 No. 3, p. 10. Smith, K.G. and Grimm, C.M. (1987), “Environmental variation, strategic change and firm performance: a study of railroad deregulation”, Strategic Management Journal, Vol. 8 No. 4, pp. 363-77. Tucker, K. (1999), “Scenario planning”, Association Management, Vol. 51 No. 4, pp. 70-5. van der Heijden, K. (1996), Scenarios: The Art of Strategic Conversation, John Wiley & Sons, New York, NY. Wright, A.D. (2000), “Scenario planning: a continuous improvement approach to strategy”, Total Quality Management, Vol. 11 No. 4-6, pp. 433-8. Zajac, E.J. and Shortell, S.M. (1989), “Changing generic strategies: likelihood, direction, and performance implications”, Strategic Management Journal, Vol. 10, pp. 413-30.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Strategic alliances and models of collaboration

Strategic alliances

Emanuela Todeva School of Management, University of Surrey, Guildford, UK, and

David Knoke

123

Department of Sociology, University of Minnesota, Minneapolis, Minnesota, USA Abstract Purpose – The purpose of this paper is to engage in a comprehensive review of the research on strategic alliances in the last decade. Design/methodology/approach – After presenting a typology of diverse alliance governance forms, reviews recent analyses of alliance formation, implementation management, and performance outcomes of collaborative activities. Findings – Strategic alliances developed and propagated as formalized interorganizational relationships. These cooperative arrangements represent new organizational formation that seeks to achieve organizational objectives better through collaboration than through competition. Practical implications – The paper provides future research directions on partner selection, networks patterns and processes, understanding the integration in alliances through fusion, fission, and how to manage developmental dynamics. Originality/value – Concludes with some future directions for theory construction and empirical research. Keywords Strategic alliances, Corporate strategy, Organizational structures Paper type Literature review

Introduction The international business literature has already acknowledged a number of positive outcomes for companies actively engaged in strategic alliances, such as higher return on equity, better return on investment, and higher success rates, compared with integration through mergers and acquisitions, or companies in the Fortune 500 list that avoid building inter-corporate relationships. At the same time, it is an acknowledge fact that there is little understanding among business executives regarding the formation processes, the dynamics and evolution of inter-corporate relations, and what are the factors that determine the success rate in strategic alliances (O’Farrell and Wood, 1999). Much of the fundamentals in this field were established with the seminal edited volume by Contractor and Lorange (1988a) on co-operative strategies in international business, with contributions from Buckley and Casson (1988) on a “theory of co-operation”, Contractor and Lorange (1988b) on “the strategy and economic basis for cooperative ventures”, Harrigan on “partner asymmetries” – among other positional papers in the same volume. The research in the field was marked also by contributions from Cunningham and Calligan (1991) on “competitiveness through networks of relationships”, Hamel (1991) on “inter-partner learning in strategic alliances”, Auster (1994) on “theoretical perspectives on inter-organisational linkages”, Gulati (1995a) on “the relationship between repeated

Management Decision Vol. 43 No. 1, 2005 pp. 123-148 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510572533

MD 43,1

124

transactions and trust”, Doz (1996) on the “learning processes in strategic alliances”, and on “management of collaborations in technology based product markets”. The issues of trust, partner selection, knowledge transfer through co-operative business ventures, complementarities and synergies between partners have dominated the scientific discourse. Some of the leading research questions explored were: why alliances are set-up (Gugler, 1992; Lei, 1993); the international context of cross-border strategic alliances (Snodgrass, 1993; Levinson and Asahi (1995), or how to achieve success in international strategic alliances (Bleeke and Ernst, 1993; Mohr and Spekman, 1994). In general the contributions to the field of inter-corporate strategic alliances focus either on an in-depth analysis of a selected narrow issue – such as the effect of knowledge ambiguity on technological knowledge transfer in strategic alliances (Simonin, 1999), and methodological issues of construct validity in measuring strategic alliance performance (Arino, 2003), or swiping generalizations of more general magnitude – such as Bensimon’s (1999) executive guidelines: . assimilate the competencies of your partner; . think of your partner as today’s ally and tomorrow’s competitor; . Share power and resources, but share information wisely; and . structure your alliance carefully. In this paper, we seek to go beyond the current trends in the business and management literature on strategic alliances, and to explain the formation, implementation, and consequences of strategic alliances among autonomous actors in an organizational field. We review the recent theoretical and empirical research literatures on strategic alliances and the globalization of competition and cooperation. We examine the purposes and motives of organizations entering into strategic alliances, and driving forces behind this process. Next, we analyze the implementation processes and problems encountered in managing alliances, particularly building partner trust and safeguarding against opportunism. We look at the consequences of strategic alliances, including: the transformation of various kinds of organizational capital (human, financial, cultural, social); outcomes for both an alliance and its partner organizations; their impacts on the division of labor within organizational fields; and consequences at the societal level. Finally, we conclude with some speculations about future directions for theory construction and research on strategic alliances. The concepts of strategic alliances and organizational fields Several interorganizational formations emerge when organizations search for new efficiencies and competitive advantages while avoiding both market uncertainties and hierarchical rigidities. The classification below presents 13 basic forms of interorganizational relations appearing in the theoretical and research literatures: (1) Hierarchical relations: through acquisition or merger, one firm takes full control of another’s assets and coordinates actions by the ownership rights mechanism. (2) Joint ventures: two or more firms create a jointly owned legal organization that serves a limited purpose for its parents, such as R&D or marketing. (3) Equity investments: a majority or minority equity holding by one firm through a direct stock purchase of shares in another firm.

(4) Cooperatives: a coalition of small enterprises that combine, coordinate, and manage their collective resources. (5) R&D consortia: inter-firm agreements for research and development collaboration, typically formed in fast-changing technological fields. (6) Strategic cooperative agreements: contractual business networks based on joint multi-party strategic control, with the partners collaborating over key strategic decisions and sharing responsibilities for performance outcomes. (7) Cartels: large corporations collude to constrain competition by cooperatively controlling production and/or prices within a specific industry. (8) Franchising: a franchiser grants a franchisee the use of a brand-name identity within a geographic area, but retains control over pricing, marketing, and standardized service norms. (9) Licensing: one company grants another the right to use patented technologies or production processes in return for royalties and fees. (10) Subcontractor networks: inter-linked firms where a subcontractor negotiates its suppliers’ long-term prices, production runs, and delivery schedules. (11) Industry standards groups: committees that seek the member organizations’ agreements on the adoption of technical standards for manufacturing and trade. (12) Action sets: short-lived organizational coalitions whose members coordinate their lobbying efforts to influence public policy making. (13) Market relations: arm’s-length transactions between organizations coordinated only through the price mechanism. The principal dimension ordering this classification is that, from bottom to top, collaborating firms experience increasing integration and formalization in the governance of their interorganizational relationships. Governance refers to combinations of legal and social control mechanisms for coordinating and safeguarding the alliance partners’ resource contributions, administrative responsibilities, and division of rewards from their joint activities. At the bottom of the list are pure market transactions requiring no obligation for recurrent cooperation, coordination, or collaboration among the anonymous exchanging parties. At the top are hierarchical authority relations in which one firm takes full control, absorbing another’s assets and personnel into a unitary enterprise. In between these extremes of market and hierarchy are 11 general strategic alliance forms, or “hybrids” that combine varying degrees of market interaction and bureaucratic integration (Williamson, 1975). A strategic alliance involves at least two partner firms that: . remain legally independent after the alliance is formed; . share benefits and managerial control over the performance of assigned tasks; and . make continuing contributions in one or more strategic areas, such as technology or products (Yoshino and Rangan, 1995, p. 5). These three criteria imply that strategic alliances create interdependence between autonomous economic units, bringing new benefits to the partners in the form of

Strategic alliances

125

MD 43,1

126

intangible assets, and obligating them to make continuing contributions to their partnership. Different alliance forms represent different approaches that partner firms adopt to control their dependence on the alliance and on other partners. The strategic alliance forms in the list are also associated with different legal forms, which enable firms to control the resources allocation and the distribution of benefits among the partners (see also Knoke, 2001, pp. 121-8). An organizational field consists of “those organizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organizations that produce similar services or products” (DiMaggio and Powell, 1983, pp. 148). At any time, a particular organizational field may contain numerous alliance networks that compete against rival alliances and traditional single firms. The overarching structure of the field’s alliance networks varies according to the degree of overlap or separation among each strategic alliance’s partner firms. To the extent that trust substitutes for more formal control mechanisms, such as written contracts, an alliance can reduce or avoid paying several types of transaction costs, such as searching for information about potential partners and monitoring to ensure that each party meets its obligations (Gulati, 1995a, pp. 88-91). An alternative psychological conceptualization emphasizes trust as confidence in another’s goodwill, of faith in the partner’s moral integrity (Ring and Van de Ven, 1994). The social psychological explanation of trust is rooted in basic social exchange principles, including conformity to such norms as reciprocity, commitment, forbearance, cooperation, and obligations to repay debts. The formation of network relationships is intimately related to the creation of social capital. However, networks and social capital are closely related, but not identical, concepts. If a relation proves not to be beneficial for attaining an actor’s goals and turn instead into constraints that impede performance, then it constitutes a social liability (Leenders and Gabbay, 1999, p. 3). Corporate social capital also originates in macro-level processes that are more than aggregated interpersonal ties. Interorganizational networks can generate corporate social capital in the form of organizational prestige, reputation, status, and brand name recognition. The analysis of macro-level processes in the business literature emphasizes the concept of intangible assets that firms accumulate by using their human resources and labor. Webster (1999) conceptualized three types of investment in intangible assets: knowledge capital (intangible assets which improve the human understanding of the market and the profit opportunities); capacity capital (intangible assets which raise the maximum level of production through employment of new organization and labor technologies); and control capital (intangible assets that enable firms to control their input markets, the quality and quantity of work efforts, and the output markets). The latter can also be divided into rent-seeking capital (dictating prices to suppliers), organization capital (controlling the work flow), and market access capital (controlling output prices and the level of demand) (Webster, 1999, p. 14). Analysts consider firms’ intangible investments as enabling them to reduce competition in order to increase the profits from their activities and the potential for appropriation of financial capital through market and nonmarket transactions. The fundamental bases of intangible capital include the individual and collective skills, capabilities, and understandings

used by a firm to influence and control its relations with other firms, business partners, consumers, and governmental regulators. The formation of strategic alliances While many analysts regard strategic alliances as recent phenomena, interorganizational linkages have existed since the origins of the firm as a production unit. Some examples include firm and entrepreneur ties to credit institutions such as banks; to trade associations such as the early Dutch Guilds; and to suppliers of raw materials, such as family farms, individual producers, and craftsmen. Contemporary firms’ networks typically include diverse organizations, such as suppliers, buyers, competitors, regulatory authorities, financial and credit institutions, that together comprise the “economic organization of production” (Ghoshal and Bartlett, 1990). Lorange and Roos (1993) likewise referred to multinational corporations (MNCs) as “networks of alliances” that cross national borders and industrial sectors. Dicken (1994) described these production networks as a mix of intra- and interfirm structures of relationships, shaped by different degrees and forms of power and influence over inputs, throughputs, and outputs. Strategic alliances are not only trading partnerships that enhance the effectiveness of the participating firms’ competitive strategies by providing for mutual resource exchanges (technologies, skills, or products). They are also new business forms that enable the partners to enhance and control their business relationships in various ways. Strategic alliances as hybrid forms Analysts widely recognize that alliances are hybrid organizational forms or hybrid arrangements between firms that blend hierarchical and market elements (Auster, 1994; Olk, 1999). They encompass both short-term project-based, and long-term equity-based, cooperation between firms with varying degrees of vertical integration and interdependence. Whenever legal or economic constraints prevent a firm from using hierarchy or full ownership as a solution, it may opt to enter into an alliance to counteract certain market forces that threaten its well-being (Anderson and Gatignon, 1986; Hennart, 1991). To a some extent, alliances combine the assets and capabilities with the uncertainties and liabilities of all partners. An asymmetry exists in organizational abilities to exert power and control over another organization and its resources (Oliver, 1990). Effective cooperation requires mutual recognition of these differences and a serious commitment by the partners not to take advantage of one another when opportunities arise. Institutionalizing cooperative agreements is very problematic because it requires new structures, routines, and organizational practices to emerge from routine interactions and transactions between partners. Strategic alliances as an organizational form stand intermediate to individual firms and more complex social formations such as organizational fields and communities of economic actors. Strategic motives, intents, and choices Firms undertake strategic alliances for many reasons: to enhance their productive capacities, to reduce uncertainties in their internal structures and external environments, to acquire competitive advantages that enables them to increase

Strategic alliances

127

MD 43,1

128

profits, or to gain future business opportunities that will allow them to command higher market values for their outputs (Webster, 1999). Partners choose a specific alliance form not only to achieve greater control, but also for more operational flexibility and realization of market potential. Their expectation is that flexibility will result from reaching out for new skills, knowledge, and markets through shared investment risks. The strategic motives for organizations to engage in alliance formation vary according to firm-specific characteristics and the multiple environmental factors. As summarized below, this diversity has triggered the development of several classification schemes in the theoretical literature (elaborated from Agarwal and Ramaswami, 1992; Auster, 1994; Doz and Hamel, 1999; Doz et al., 2000; Harrigan, 1988a; Hennart, 1991; Lorange and Roos, 1993; Zajac, 1990): . market seeking; . acquiring means of distribution; . gaining access to new technology, and converging technology; . learning and internalization of tacit, collective and embedded skills; . obtaining economies of scale; . achieving vertical integration, recreating and extending supply links in order to adjust to environmental changes; . diversifying into new businesses; . restructuring, improving performance; . cost sharing, pooling of resources; . developing products, technologies, resources; . risk reduction and risk diversification; . developing technical standards; . achieving competitive advantage; . cooperation of potential rivals, or pre-emptying competitors; . complementarity of goods and services to markets; . co-specialization; . overcoming legal/regulatory barriers; and . legitimation, bandwagon effect, following industry trends. Bleeke and Ernst (1993) summarize the generic needs of firms seeking alliance as cash, scale, skills, access, or their combinations. Such motivational diversity characterizes alliance formation in many industries, and theorists have proposed several explanatory schemes to classify and analyze the range of collaborative solutions adopted by firms. The level of cooperation between businesses seems much less influenced by internalized costs and benefits than by: the history of the partnering firms’ relationships; the current market positions of each firm; their joint resource capabilities; and informational asymmetries relative to firms engaging in arm’s-length market transactions (Dietrich, 1994). In other words, forming business networks and contractual or relational alliances is driven less by firms’ retrospective economic rationalities than by their strategic intentions. Two or more autonomous organizations decide to form an alliance for an emerging joint purpose. Therefore, their decision to

collaborate cannot be determined in a rational way by the purpose itself, nor by the current environmental pressures that compel them to cooperate. On the contrary, these factors merely help firms to construct post-facto justifications and rationalizations about their collaboration decision. A decision to cooperate is not a responsive action, but is fundamentally a strategic intent, which aims at improving the future circumstances for each individual firm and their partnership as a whole. Ultimately, the variety of motives and drivers is enacted at four distinctive levels: organizational economic, strategic and political. While seeking partnerships firms try to address internal organizational problems, they consider economic benefits, engage in strategic positioning, or political maneuvering with governments and competitors. The motives to engage in strategic alliances listed above therefore can be grouped in four different categories: A fundamental contrast between strategic and operational decisions is that the latter are based on transaction cost calculations, while strategic choices are determined by the perceived benefits from future activities. A firm’s strategic decisions are driven not only by evaluations of its present circumstances, but also by expectations about its future outcomes. Strategic decisions involve both company policies and the resource investments necessary for their implementation, treating the perceived future benefits as expected returns on those investments. Strategic alliances challenge the neoclassical economic assumption of interfirm competition, because they are driven not by expected direct impact on costs, profits, and other tangible benefits, but by indirect positive outcomes from their accumulated intangible assets and corporate social capital. They lock competitors in cooperative ventures where the partners share both the risks and the benefits resulting from their collective activity. The transaction cost concept no longer provides a sufficient explanation of organizational behavior because the firms pay relational costs arising from all their joint efforts to build bridges to span the partnership’s uncertainties. Relational costs in an alliance are not merely expenditures necessary to maintain informal relations with business partners, but additionally include the commitments and investments the partners commit to their risky and uncertain venture. Relational costs to each firm arise from potential negative impacts on a company’s profits, occurring because the partners must strategically adjust their other business relations and operations to accommodate the new alliance. Participation in an alliance may require a firm to reorganize, reduce, or terminate other business relations in order to oblige a new partner’s interests. This post-decision adjustment leads to foreclosures of some future business opportunities and their associated loss of potential benefits and profits. Deciding to enter a strategic alliance and selecting a specific governance form also conveys organizational power implications. These choices are shaped by the distribution of economic power along the production chain within and outside the partnering firms. Pressures to form alliance derive from processes inside and outside organizations. Researchers have found that alliance forms vary with the firms’ market positions (leader vs follower) and the strategic importance of collaborations within each parent firms’ portfolios (core vs peripheral business) (Lorange and Roos, 1993). Firms tend zealously to protect their core businesses and, are thus more willing to enter alliances involving peripheral activities that offer wider scope for organizational learning and less vulnerability from sharing confidential information. Lorange and Roos also offered examples of how large firms use joint ownership to restructure their

Strategic alliances

129

MD 43,1

130

poorly performing business segments. In such instances, the partnership generates instrumental value by allowing the dominant firm to undertake radical changes its portfolio’s peripheral activities. Business environment factors Alliance formation is broadly shaped by general economic conditions and the institutional frameworks in countries of operation, including legal requirements, macro-economic policies, price controls, financial capital markets, distribution channels, and methods of contract enforcement. State regulatory activity affects firms’ freedom to form business coalitions and joint ventures. Thus, government intervention provides the major constraints and opportunities for strategic alliance formation. Alliances often require formal approval by national governments, particularly in adhering to antimonopoly or antitrust regulations. Likewise, some research and development (R&D) alliances originate as government-funded projects that may include heavy state supervision. Tax incentives and international trade regimes established by foreign governments can also directly affect domestic firms’ decisions whether to enter into long-term overseas business relationships. Empirical researchers have conducted little comparative research explaining the impact of state interventions on alliance formation. Most investigations of state privatization and economic liberalization policies emphasized only the creation of general economic investment opportunities, without ascertaining whether individual firms or strategic alliances were more likely to seize such opportunities. Unfortunately, regulation theorists remain steadily focused on macro-level dynamics, while corporate governance researchers explore the strategic management practices of individual corporations. Thus, the meso-level is ripe for analytic development. Another neglected researched area is private-sector partnerships with government agencies. Strategic collaborations with governments are in the business-press hype, particularly regarding large global infrastructure projects such as energy, water supply, or telecom systems. Particularly in less-developed countries, or in the defense sector in all countries, government procurement, general funding, and other state initiatives are a major factor in the proliferation of MNC alliances with local firms. Another country-specific systemic feature shaping coordinated action patterns is the complex set of relations among corporations, business associations, local and central governments, and elite universities. Italian industrial districts are just one renown instance where historically rooted local business communities display dense interfirm relationships, based on simultaneous competition and cooperation, where alliance ties occur both within and extend well beyond the district boundaries. To explain this phenomenon, Mizruchi and Schwartz (1987) mentioned the development theory relationship between the structure of national business communities and economic development. Their core proposition is that businesses take distinct institutional forms at different stages of economic development. Although cooperative ventures occur at all developmental stages, business strategic alliances were a globalization phenomenon that emerged only after the Second World War. Theorists generally recognize that firm responses to state regulatory interventions vary widely across national cultures. Two salient examples are the Korean chaebol and the Japanese keiretsu, distinctive alliances forms that evolved from such traditional

societal institutions as the extended family and the industrial cluster (Amin, 1992; Gerlach, 1992). Another consensus is that both multinational corporations and international strategic alliance networks usually seek to overcome, circumvent, or subvert the regulatory mechanisms established by national governments (Dicken, 1994).

Strategic alliances

Industrial factors The industrial context of alliances also exerts strong direct impacts on interfirm relationships. The intensity of industry competition and the social organization of specific product markets powerfully influences whether firm decide to internalize certain activities, to compete for greater market share, to cooperate with other firms for particular strategic advantages, or to internationalize by entering foreign markets. The importance of industrial contexts lies in how leading supply chains spread across different subsectors and which economic transactions occur among connected firms. Extreme contrasts are industries with long-established oligopolies or duopolies and industries with low barriers to entry and high rates of new firm creation. Industries may be classified along numerous dimensions, such as resource consumption levels, capital investment, labor scarcity, knowledge intensity, and technological innovation. This multidimensionality means that potentially many industry factors drive organizational strategies in seeking alliances for comparative advantage. Analysts generally recognize that, due to technical or economic rationales, firms are more vulnerable when closely tied up to a dominant partner (e.g. Pennings, 1994). Technology plays a significant role in setting organizational field boundaries and shaping internal structures. Among the competing technologies in a specific industry, some are core and leading while others are supporting. Rapid technological changes, or the abrupt emergence of a competence-destroying technology, can radically restructure an entire organizational field’s competitive and collaborative alignments. The private and governmental sources of technology research funding, and R&D expenditure levels in general, differ markedly across industries. Cross-border technology alliances benefit directly from these differences. In most national economies, indirect subsidization takes place as governments fund R&D.

131

Organizational factors The diversity of organizations in an organizational field stems from such company-specific properties as their sizes, visible and tacit assets, collaborative histories, ownership forms, corporate social capital networks, product ranges and diversification, market shares, and market penetration through distribution channels. Given such diversity, propensities to participate in strategic alliances should vary across firms operating within the same organizational field. Corporate social capital influences alliance creation, as new ties build on existing interfirm relations (Walker et al., 1997; Gulati, 1998, p. 300). Alliance formation processes are also shaped by a dominant corporation (national or multinational). Dicken (1994) suggested that MNCs, with their complex headquarter-subsidiary relationships, have established new foundations for business networks and multifirm alliances. Therefore, the subunit coordination taking place

MD 43,1

132

inside an MNC provides a convenient blueprint for coordinating complex alliance networks. This dynamic is one reason why alliance analysts can never resolve the debate over control and resource allocation processes. Foreign investors facilitate local companies’ integration into global production and distribution chains, creating business opportunities for local firms. In addition, MNCs help to develop domestic markets, generate demand and competition, thereby restructuring existing relations within the markets they penetrate. However, studies of equity joint ventures make clear that huge discrepancies occur between the objectives of foreign and domestic firms. Domestic firms typically seek opportunities to improve their export capabilities, while foreign firms desire greater access to the host country’s markets (Buckley and Casson, 1988; Pan and Li, 1998). This tension over incompatible objectives, capabilities, and constraints among international joint venture (IJV) partners is a crucial reason why partnering firms often seek equity controls to safeguard their alliance risks. A substantial difference between an MNC and a strategic alliance lies in the concept of shared control. Metaphorically, CEOs describe the alliance management problem by referring to the old logic of the octopus and the new logic of the network, where a different kind of interdependence emerges (Lorange and Roos, 1993). The octopus symbolizes classical management control from the center, while the network metaphor requires decentralized organizational structures and management processes to facilitate shared control. Strategic interdependence is one salient feature of successful alliances in dynamic markets (Sanchez, 1994). Globalization drivers and commodity chains Market globalization transforms the nature of corporate operations. Competitive and strategic advantages now derive from companies’ capacities to cooperate with other firms; to form business networks with suppliers and buyers; to reap economies of scale; and to share costs and benefits with partners in geographically and culturally distant locations. Globalization forces are among the key drivers forcing corporations to explore alternative ways of gaining and preserving competitive advantages. These factors include: heightened competitive pressures on a global scale; shorter product life-cycles and rapid technological change; emergence of new competitors; personnel recruitment and placement practices that extend corporate social capital across national boundaries; and increased demand by global firms for systemic solutions. Long-term strategies based on win-win scenarios enable them to leverage their outputs for a broader commercial application across different locations and market segments (Lorange and Roos, 1993). According to Zajac’s survey of MNC leaders, strategic alliances were considered a viable alternative to mergers and internalization strategies by the majority of respondents (Zajac, 1990). Traditional global commodity chains are producer-driven and comprised of four segments: raw material supply network, production network, export network, and marketing network (Gereffi, 1990). Each segment and the entire commodity chain consists of interlinked firms, representing an input-output structure with spatial dispersion and concentration of units, and a governance structure to coordinate the entire production system (Gereffi, 1994). This governance form has more linear ties and is based on repetitive transactions and long-term contracts where the producers become push-factors moving their products towards the final retail market. In contrast, the buyer-driven chain has multiple backward and forward linkages and resembles a

strategic alliance structure with complex logistics pulled by the retail sector with buyer-driven orders. The selection of firms for such chains is very much determined by whether the coordinator role is dominated by producers or buyers, and varies across industry contexts. Thus, the globalization of commodity chains has stimulated complex economies of scale and scope that foster increasing rates of strategic alliance formation.

Strategic alliances

133 The implementation of strategic alliances Alliance implementation issues include the choice of governance mechanisms, enhancing trust and reciprocity between partners, managing the integration of project staffs from different organizational cultures, and resolving conflicts that arise among partners with divergent expectations about and contributions to their collaboration. Relational contracting Some firms engaging in repeated long-term transactions may attempt to use hierarchical governance forms to safeguard the specific assets that evolve during their exchanges (Haugland, 1999). Hierarchical governance mechanisms include empowering one firm’s decisions over another’s; creating a neutral body with authority and power to control specific issues; and implementing standard operating procedures within the alliance. As an alternative to hierarchical governance, Haugland (1999) proposed that relational contracting could counteract the uncertainties associated with arm’s-length contracts. Relational governance forms rely on such diverse coordination mechanisms as reciprocity norms, interorganizational trust, and social capital embedded in multiplex exchanges and social interactions. As a theoretical perspective, the concord that implicitly underlies relational contracting contrasts with the opportunism explicitly presumed in both agency theory and transaction cost economics (Borsch, 1994). Relational contracting embraces not only unspecifiable terms and conditions in complex and open-ended contracts, but also collective interorganizational strategies for eliminating rivalry through tacit coordination. Pursuing a collective strategy typically depends on unanticipated future conditions that cannot be explicitly written into formal contractual agreements. Hence, successful strategies require basic trust, mutual understanding, unrestricted learning, and interorganizational knowledge-sharing to achieve a high level of joint decision making at both strategic and operational levels. Doz et al. (2000) operationalized these processes as “open solicitation” and “seeking domain consensus,” where the relational partners continually elaborate on their mutual objectives, capabilities, resources, and tasks. Achieving a well-documented consensus would then serve as a foundation on which relationally contracted firms could subsequently announce and implement a formal strategic alliance. A central issue remains how best to manage the balance between interdependence and control, with the alternative strategic alliance governance forms discussed above serving as particularly important mechanisms for resolving conflicts and preserving the partners’ relationship (Harrigan, 1988a; Haugland, 1999). Social capital, in the form of interpersonal and interorganizational trust, is indispensable to reducing the costs of negotiations between partners. Moreover, many analysts treat trust as both an alliance outcome variable and a predictor of alliance success (Olk and Earley, 2000).

MD 43,1

134

Managing alliance formation Once organizations decide to form a strategic alliance, the partners face serious challenges of turning their good intentions into a viable enterprise at all levels, from routine activities to strategic policies. This implementation phase typically requires that two autonomous firms pool some human resources and material assets; develop a practical governance structure with sufficient power and control; and learn how to cooperate for mutual benefit. The inevitable misunderstandings and conflicts arising in a collaborative undertaking demand that partner firms and their employees master new management skills, especially coping with complex lateral relationships spanning legally autonomous entities. When two firms simply attempt to work together according to an agreement, the clean authority lines of a corporation hierarchy typically are supplanted with disorderly parallel command-and-report systems. The managers delegated by the partners to implement the joint project may be initially uncertain about who is really in control and possesses final decision making authority. Careful attention must be paid to selecting staff and leaders for liaison management, “the required continual linkages among partners and between partners and the alliance” (Mockler, 1999, p. 144). Creating a formal separate subsidiary having its own board of directors and internal authority hierarchy, with equity stakes legally dividing ownership and control among the partners, may help to clarify the venture partners’ ultimate rights and expectations vis-a`-vis one another. But, even the most meticulous contractual safeguards provide no guarantees against the uncertainties, ambiguities, and disputes that constantly surface during daily operations. Several social control processes, such interorganizational trust, reciprocity, and confidence (Das and Teng, 1998), loom large as mechanisms for sustaining alliances during their precarious implementation phase. Generating trust among alliance participants is crucial to overcoming competitive rivals’ initial suspicions about possible partner opportunism, which may prevent effective implementation of their collaborative agreement. Imbalances in organizational power, indicated by disparities in the resources contributed and controlled by each partner organization, can impede trust creation due to the partners’ unequal capacities to fulfil their obligations (Goel, 1994; Chaudhuri, 1995; Brousseau and Quelin, 1996; Lin and Germain, 1998). Initial alliances among previously inexperienced partners (“virgin ties”) often begin with formal contractual linkages that expose the partners only to small risks. Because both organizations still have few grounds for trusting one another, equity-based contracts predominate as legal protections against potential opportunism (so-called “hostage-taking” purportedly limits each firm’s capacity to act in disregard of the partner’s interests). Once both partners gain mutual confidence through continual testing, then “informal psychological contracts increasingly compensate or substitute for formal contractual safeguards as reliance on trust among parties increases over time” (Ring and Van de Ven, 1994, p. 105). Repeated strategic alliances among experienced partners are more likely to rely on interorganizational trust than on formal safeguards against potential partner opportunism. Prior alliances Using a 1980-1989 panel of 166 corporations operating in three worldwide sectors (US, Japanese, and European new materials, industrial automation, and automotive

products firms), Gulati (1995b) conducted event-history analyses on a variety of dyadic alliances ranging from licensing agreements to closely intertwined equity joint ventures. He found strong evidence that formal equity-sharing agreements decreased with the existence and frequency of prior ties to a partner. Domestic alliances less often involved equity mechanisms than did international agreements, supporting claims that trust relations are more difficult to sustain cross-culturally. Strategically interdependent firms (i.e. companies operating in complementary market niches) formed alliances more often than did firms possessing similar resources and capabilities. Previously allied firms were more likely to engage in subsequent partnerships, suggesting that over time, each firm acquired more information and built greater confidence in its partner. However, beyond a certain point, additional alliances reduced the likelihood of future ties, perhaps reflecting fears of losing autonomy by becoming overly dependent on a partner (see also Walker et al., 1997; Gulati and Gargiulo, 1999.) Indirect connections within the social network of prior alliances also shaped the alliance formation process: previously unconnected firms were more likely to ally if both were tied to a common third-party, but their chances of partnering diminished with greater path distances. Gulati (1995b, p. 644) concluded that “the social network of indirect ties is an effective referral mechanism for bringing firms together and that dense co-location in an alliance network enhances mutual confidence as firms become aware of the possible negative reputational consequences of their own or others’ opportunistic behavior.” His results reflected a logic of clique-like cohesion rather than status-competition among structurally equivalent organizations. Trust and reciprocity Andrea Larson’s (1992) ethnographic exploration of dyadic alliances illuminated the role of trust and reciprocity norms during the alliance implementation phase. She conducted in-depth interviews in the mid-1980s with informants from seven partnerships created by four small entrepreneurial companies (a telephone distributor, a retail clothing company, a computer firm, and a manufacturer of environmental support systems). Although mutual economic gain was a necessary incentive for an alliance to emerge, sustaining the relationship required a trial period, lasting between six and 18 months, during which the partners incrementally built stable and predictable structures to govern their collaboration. Key features of this critical trial phase were the institutionalization of implicit and explicit rules and procedures, and the evolution of clear expectations that became taken-for-granted by managers in both companies. As a relationship solidified over time, organizational actions grew more integrated and mutually controlled through intertwined operational, strategic, and social mechanisms. Strategic alliances outcomes Although organizations form strategic alliances for diverse motives, and partners generally expect to benefit from their collaboration, analysts encounter difficulties in untangling the impact of environmental, economic, organizational, and interorganizational factors on alliance outcomes and consequences. Authors of “how to” guides typically trumpet the alleged positive consequences of joint ventures and equity arrangements (e.g. Triantis, 1999; Wolf, 2000). Empirical researchers generally appear more pessimistic about partners’ abilities to overcome the inherent tensions

Strategic alliances

135

MD 43,1

136

between competition and cooperation to achieve lasting results. For example, Das and Teng (1998, p. 493) observed that “the essentially fickle and tentative nature of partner cooperation should not be overlooked” because it renders many strategic alliances “fundamentally self-defeating, unstable, and transitional in nature” (see also Inkpen and Beamish, 1997). Conceptual and measurement problems plague performance and productivity assessments, whether using objective outcome indicators (e.g. financial gains, innovations) or subjective indicators (e.g. partner satisfaction with the collaboration). Evaluating international alliances is especially complicated, because firms from different countries and cultures generally apply divergent success criteria (Si and Bruton, 1999; Yan and Zeng, 1999). Despite such operational difficulties, researchers have investigated a variety of factors affecting several dimensions of strategic alliance consequences. Survival and termination One difficulty in assessing performance outcomes is that most interorganizational collaborations are intentionally short-lived affairs, designed to achieve only limited purposes. A fundamental performance question is, how long do strategic alliances survive beyond their formal announcement before eventual termination? A collaborative agreement may terminate through complete project dissolution, either before or after achieving its formal objectives; by a joint venture’s acquisition by one of its partners; or through an organizational merger of the parent firms. Researchers have investigated several factors that may affect the survival rates and end states of various types of alliances. Most analysts found high levels of strategic alliance instability and dissolution, with failure rates approaching 50 percent (Harrigan, 1988b; Kogut, 1988; Dacin et al., 1997). Alliances in the technologically volatile telecommunication industry exhibit an “alarming tendency to fall apart due to fickle behavior of members” (Curwen, 1999, p. 141). Bleeke and Ernst (1993) used unpublished reports and interviews with insiders of top companies in the USA, Europe and Japan to determine that, among 49 cross-border alliances, 51 percent were successful for both partners while 33 percent resulted in failure for both. Success meant that the partners achieved their own strategic objectives and recovered their financial capital costs. An event history analysis of 186 joint ventures among US and Japanese electronics firms between 1979-1988 found a 43 percent dissolution rate, with an average life span of less than five years (Park and Ungson, 1997). IJVs are purportedly more vulnerable to misunderstandings arising from incompatible national and corporate cultures, resulting in high managerial conflicts and early terminations (see also Lin and Germain, 1998; Simonin, 1999; Steensma and Lyles, 2000). However, contrary to expectations, Park and Ungson found that US-Japanese electronics joint ventures lasted longer and were less likely to dissolve than domestic alliances between American firms. Analysts disagree whether project acquisition, or the internalization of a joint venture by one of the partners, should be treated as an alliance failure or a successful realization of the acquiring organization’s personnel and capital investments. The widespread assumption that instability is equivalent to collaborative failure may be inaccurate. Data on 272 terminated IJVs revealed frequent equity transfers between the parent firms, reflecting the ultimate owner’s strategic intentions from the start of the venture (Reuer, 1997). More than 80 percent of the international alliances studied by

Bleeke and Ernst (1995, p. 97) ended in acquisitions, usually by the stronger partner. Among the important factors explaining this outcome were firm size, frequency of interorganizational communication, board of directors power, the relative size of partner contributions, and inequalities in distributing the benefits produced by the partnership. A complete merger between organizations represents an extreme outcome of a strategic alliance. Partnerships may serve as a transitional phase (“courtship”) in which potential mates explore the feasibility of fusing their identities into a new enterprise. By enabling two courting organizations to observe one another’s business activities from the inside, alliances familiarize top managers with both corporate cultures and reveal the potential for performance improvements by combining operations (Nanda and Williamson, 1995). However, Hagedoorn and Sadowski (1999) argued that transitions from strategic technology alliances to acquisitions and mergers rarely occur. Just 2.6 percent of 6,425 alliances from 1970-1993 could be directly linked to such transformations. The authors concluded that strategic technology partnering is a distinct mode of governance which is unconnected to subsequent merger (for other views of this sector’s dynamics, see Hennart and Reddy, 1997; Jamison, 1998).

Achieving learning objectives Many organizations enter alliances with great anticipation about learning from their partners, whether as the primary goal or as a derivative of other objectives, such as creating new products and technologies or penetrating into new markets. Organizational learning occurs when a firm acquires, assimilates, and applies new information, knowledge, and skills that enhance its long-run performance and competitive advantage. Strategic alliances can operate as institutionalized channels for transferring and creating new organizational capacities. Learning may occur either through exploitation as one organization acquires another’s know-how, or through common experience as partners learn synergically while implementing a collaborative agreement (Tsang, 1999). The first dynamic connotes competition, while the latter process implies greater mutuality and interdependence. Factors shaping basic organizational learning capacity include “the nature of the shared business activity, the type of knowledge jointly developed, and the firm’s reward system” (Lei et al., 1997, p. 210). Although substantial organizational enlightenment may occur through vicarious learning and imitation of a more sophisticated partner, R&D collaborations typically require mutual experiential learning activities to synthesize original knowledge, which then becomes the venture owners’ joint intellectual property. Whether organizational learning involves acquiring routine or extraordinary knowledge, transaction cost analysts caution that alliance participants risk potential opportunism from their partner’s unrestricted access to proprietary secrets and patented processes. Repeated collaborations enhance mutual learning experiences as interorganizational trust emerges to substitute for formal protections against the fear of being ripped off. A study of 212 alliances in six manufacturing and service industries found that higher levels of relational capital (social capital based on trust, respect and friendship) and integrative conflict resolution mechanisms (ensuring fairness and procedural justice) increased both corporate learning and protection of proprietary assets (Kale et al., 2000).

Strategic alliances

137

MD 43,1

138

Organizational success in achieving alliance learning objectives depends on several dimensions of knowledge and organizational structure. In particular, both organizations’ absorptive capacities – their interwoven human resources, finance capital, social capital, and organizational belief systems – constrain their effective information processing, acquisition of partner expertise, and adoption of innovations. In a survey with high-tech firms, the most significant determinant of knowledge transferability was tacitness, defined as knowledge “which cannot be easily communicated and shared, is highly personal and deeply root in action and in an individual’s involvement with a specific context” (Simonin, 1999, p. 469). Moreover, the impacts of partner cultural distance, asset specificity, and past experience on knowledge ambiguity were moderated by alliance duration, firm size, and collaborative experience. An exploratory study of network formation in 53 R&D consortia (Doz et al., 2000) found that tacit learning was more strongly connected to similar interests of the partners, and was unrelated to solicitation and consensus-seeking processes during the alliance formation period. Thus, the partners’ attitudes and needs had stronger influence on their learning capabilities than did their interactions prior to entering the alliance. Case studies of learning in specific industries have also identified factors that aid or thwart innovation and knowledge transfer among alliance partners. Embedded internal constraints on knowledge exchange and organizational learning, arising from the firms’ incompatible organizational structures and corporate cultures, ultimately doomed collaboration among unequals. Alliance impacts on partners Apart from the immediate outcomes of formal collaborative activities, strategic alliances may also affect the partnering organizations’ performances and survival chances. Some analysts seek to link alliance characteristics to various firm economic indicators such as stock prices, profits, productivity, market shares. A more difficult task is to demonstrate that alliances produce substantial non-financial, or transformational, outcomes such as enhanced organizational credibility (Human and Provan, 1997). For example, do firms involved in certain types of collaborations gain in perceived legitimacy, trustworthiness, and reputation for quality within their organizational fields? A considerable empirical problem is how to detect the consequences of relatively small alliances for their much large parent organizations. One outcome hypothesis attracting recent research attention is that strategic alliances contribute to superior production performance by the parents. Research on 142 Canadian biotechnology startup firms from 1991-1996 found that their initial performances were enhanced by establishing alliance networks that provided access to “diverse information and capabilities with minimum costs of redundancy, conflict, and complexity,” gave more opportunities to learn from established rivals, but avoided risky intra-alliance rivalries (Baum et al., 2000, p. 287). In particular, the startups’ alliance networks boosted their innovativeness as measured by rates of patenting and R&D growth. A comparative study of alliance networks among 138 steel and 130 semiconductor firms from 1990-1994 found that the influence of network characteristics on firm performance varied with industry contexts. In another analysis of semiconductor firms from 1985-1991, Stuart (2000) investigated the impact of alliances on innovation rates and economic growth. He

measured innovation as the number of patents granted and growth as annual semiconductor sales. The crucial factors were not the size of each firm’s alliance portfolio (number of alliances formed during the previous five years), but the resource profiles of its partners. Specifically, both innovation and sales rates increased substantially if a firm was connected to more technologically innovative and revenue-rich alliance partners. These effects were especially potent for younger and smaller firms. An important implication of Stuart’s analysis is that firms derive advantage from their partners’ corporate social capital, even if their strategic alliance fails to achieve its professed formal objectives. Again we see that defining alliance success and failure is fraught with ambiguities. Another basic outcome hypothesis is that a strategic alliance increases a firm’s equity value if the collaboration enhances the parent organizations’ competitive advantages. Firms that transfer proprietary knowledge and pool specialized resources and employee skills into a joint R&D project sometimes achieve technological breakthroughs with widespread product applications that yield market windfalls for all partners. Several investigations uncovered positive impacts of alliances on corporate shareholder value. The average stock price response was positive on the day of announcements for 345 nonequity strategic alliances by 460 most high-tech firms from 1983-1992 (Chan et al., 1997). Among alliances between firms within same industry, a bigger stock price jump occurred for technical than for marketing agreements, suggesting “that partnering firms from the same industry can better take advantage of technological complementarities” (Chan et al., 1997, p. 213). In contrast to robust research on the financial consequences of alliances for partner organizations, studies of noneconomic outcomes are relatively rarer. Typical subjective measures include informant ratings of performance and subjective satisfaction with the alliance partner. For example, Sim and Ali (1998) found higher success ratings with past joint venture experience and greater cooperation. Saxton (1997) found that perceptions of initial and overall relationship satisfaction increased with higher partner reputation for management quality; with greater shared strategic decision making; and with greater strategic fit or similarities between the partners. However, a prior partnership with another firm was linked only to initial satisfaction but not to longer term alliance benefits. Continued partnering reflects inertia or institutionalization “as opposed to a reflection of mutual trust and commitment” (Saxton, 1997: 455). Among negative consequences of alliance networks researchers identify the effect of social embeddedness on market efficiencies by locking partners into unproductive relations or blocking collaboration with other viable firms, and “rigidity in changing order levels and trading partners [and] potential lack of market stimulus” (Gulati et al., 2000; Sako, 1992, p. 239). Societal consequences Researchers have paid least attention to the impacts of strategic alliances on the larger social systems in which they are embedded. Economists have sounded theoretical alarms about the increased anticompetitive consequences of cooperative endeavors, warning that partnerships can hinder efficient production, restrict market access, and reduce economic competition (Carlton and Salop, 1995). In particular, multiple recurrent R&D projects among members of an alliance network may create opportunities for collusion by firms that simultaneously compete across multiple

Strategic alliances

139

MD 43,1

140

product markets (Vonortas, 2000). Although alliance participation by foreign firms in domestic industries may safeguard against anticompetitive behavior, domestic firms sometimes set up joint ventures precisely to deter market entry (Zhao, 1999). An alliance between an incumbent airline with excess capacity and an entrant to share expensive facilities at lower costs can appear efficient and competitive, but “may be made to discourage the entrant from building its own facility and entering at a larger, more competitive scale” (Chen and Ross, 2000, p. 328). By reducing the total capacity that might otherwise be constructed (thus keeping consumer prices higher through restricting supply), anticompetitive arrangements can reduce societal welfare even when the alliance partners do not directly compete. Negative impacts may be especially flagrant where multinational firms use joint ventures with local firms as strategic devices to penetrate developing nations. Similar qualms concern greater concentration within industries arising from the competitive advantages achieved by R&D alliances compared to firms that independently pursue R&D innovations. The superior economic efficiencies accruing to R&D alliance members may paradoxically contribute to less-competitive outcomes at the industry level, with consumers again paying higher prices. If alliance networks lead to concentration of R&D funding within an industry, rates of innovation may fall in the absence of competitors to spur exertions forward. Conclusions and future directions Strategic alliances are more than simple instrumental means for achieving collective goals directly benefiting the collaborators. They also constitute each partner firms’ corporate social capital, providing potential access to various assets controlled by other strategic alliance network members. Alliances provide opportunities for participants to tap into the resources, knowledge, and skills of their immediate partners in a portfolio of inter-firm agreements. Further, given latent reachability across strong ties and possibilities for activating brokerage efforts to interconnect the partners of partners, these complex patterns of social capital embedded within an organizational field-net of a strategic alliance offer enormous potential for significantly leveraging its member firms’ resource capabilities. Theoretical conjectures and empirical investigations of strategic alliances over the past two decades reveal an accelerating proliferation of these interorganizational phenomena. Arm’s-length market exchanges may prove less efficient than alternative interfirm arrangements for carrying out many complex co-production processes, such as R&D on highly uncertain technologies, as well as for overcoming legal-political-cultural barriers to cross-national transactions. Current debates over the globalization of business systems emphasize how both local and international environments foster IJV partnerships, but these environments may also inhibit the full realization of benefits obtainable through such relationships. The images of mixed advantages and drawbacks accruing from collaborative enterprises reflect the current ambiguous state of knowledge about strategic alliance networks and their multidimensional consequences. Partner selection Partner selection comprises the largest and richest body of empirical research. It seeks to explain who collaborates with whom, at what rates, for how long, and deploying

what governance forms (especially equity or nonequity ownership of joint enterprises). An important subset focuses on IJVs, with their added complexity of diverse cross-national cultures and legal-governmental systems. Analysis of alliance formation processes should feature more explicit contingency perspectives that explicitly identify how variations in business systems, industries, strategic alliance networks (organizational field nets), markets, and organizational attributes condition participation opportunities and organizational perceptions of collaborative efficacy. We also urge more study of innovative dynamics occurring at the strategic alliance network level; that is, not by examining the creation of new products and technologies, but explaining how tie-formation processes subsequently feedback to transform the global network structure itself. Some other fundamental questions whose conditional elaboration could be profitably pursued include: Similarity versus complementarity in partner choice If strategic alliances are primarily about gaining access to useful resources not possessed by an organization, then collaborating with complementary strengths and weaknesses presumably yields larger payoffs than affiliating with highly similar peers. But, which organizational attributes hold the keys to a more perfect union and under what conditions? Products, market positions, technologies, human resources, managerial styles, or more intangible elements such as reputation and institutional thought patterns? Perhaps curvilinear relationships are more plausible. Regarding the issue of cultural distance a relevant question is whether particular nations have specific cultural codes, equivalent to the trust-based cooperative norms of Japanese society, that foster and sustain higher cross-national collaboration rates? Researchers also recognize a strong tendency for partners to repeat their alliances over time, but the conditions favoring persistence and desistence aren’t fully understood. Brokerage processes, involving third-party introductions and vetting, are crucial social mechanisms for forging new ties between unacquainted organizations. But, more needs to be learned about the characteristics and conditions favoring successful as well as failed match-making. The complementarity principle suggests that brokers will perform better if they serve to connect somewhat disparate, rather than highly similar, partners. Network patterns and processes Organizational field nets typically exhibit internally differentiated but malleable structures, with some actors occupying more central locations and controlling access to information and resources. Researchers can apply network principles to investigate important questions about alliance formation processes across several levels of analysis. At the micro-level of a firm, how do individual organizations’ varied positions within the strategic alliance network facilitate or impede the construction of more diverse portfolios? Among the several alternative centrality conceptualizations, which measures yield greater explanatory accuracy in predicting new and repeat alliances? At the macro-level of a complete field-net, how do changes in various structural dimensions alter alliance formation rates over time? Most intriguing, what cross-level conditional effects occur, involving interactions among firm attributes, ego-centric positions, and complete networks on collaborative dynamics?

Strategic alliances

141

MD 43,1

142

Fusion or fission? Not all alliances are intentionally designed to achieve mutually beneficial outcomes for all parties. Some organizations may enter strategic alliances as cautious, lower-risk pathways for exploring opportunities for subsequent mergers, takeovers, or business-unit divestitures. Researchers need a deeper understanding of conditions promoting such manipulative behavior, with or without partner consent, and how such arrangements differ from collaborations intended to preserve partner autonomy. When are firms more disposed to form temporary alliances for controlled risk-assessment prior to taking the plunge into full-fledged corporate fusion or fission? Developmental dynamics The period after an alliance announcement, from implementation to termination, is less thoroughly investigated. Analysts routinely stress the importance of trust as a crucial form of corporate social capital important to overcoming awkwardness and potential conflicts while partners attempt to turn their plans into practices. Power dynamics also come into play as project managers negotiate the practical allocation of authority, property rights, management responsibilities, and division of rewards or losses from the undertaking. We have little information about immanent failures during initial attempts to implement a formal agreement. What conditions lead to the abrupt breakdown of negotiations and discourage further efforts to relaunch a new partnership? Organizational researchers have conducted too few ethnographic studies to comprehend the full range of patterns and problems encountered by real alliance participants. What institutional, relational, and organizational features of a strategic alliance network push projects along increasingly cooperative or hostile trajectories? In the absence of hierarchical controls, are agents’ personal attributes or organizations’ structural features more important for sustaining corporate trust and implementing quality working relations? What measures of absorptive capacity could enable researchers to test many interesting theoretical hypotheses about knowledge transfers between partners and learning processes occurring within projects? Organizational sociology needs more detailed explorations of alliance termination dynamics, particularly whether amicable or unpleasant conclusions produce lingering impacts for subsequent attempts to collaborate with the same or new partners. Performance outcomes An impressive literature has accumulated about the performance outcomes of alliances and the parent organizations. Some empirical studies suggest that most collaborations are relatively short-lived, with many failing to achieve their formal objectives of R&D innovation, organizational learning, or foreign-market penetration. Other evidence indicates that the parent organizations often derive significant performance benefits, such as stock price boosts and sales growth following alliance announcements. This mixed evidence apparently has not dampened the accelerating reliance on strategic alliance, especially among global businesses. Analysts should increasingly disentangle the relative impacts of organizational, relational, and environmental contexts on various performance measures. Theorists could construct more nuanced specifications of detailed social mechanisms that conditionally influence outcomes in strategic alliance networks. For example, which formal governance structures interact with what organizational components to boost learning and knowledge transfer? How does

the corporate social capital embedded in interfirm trust relations combine with social norms emerging from a collaboration to shape the distribution of outcome rewards among the partners? Finally, because analysts have paid so little attention to the unintended consequences of proliferating alliances at the societal and international levels, researchers have much to scrutinize. Conclusion In conclusion, organizational sociology’s collective understanding of the social organization and dynamics of strategic alliance behavior has come far over the past two decades. But, as this section indicates, we still have many more questions than answers. Fortunately, numerous opportunities abound for collaborative theorizing and analysis. References Agarwal, S. and Ramaswami, S. (1992), “Choice of foreign market entry mode: impact of ownership, location and internationalization factors”, Journal of International Business Studies, Vol. 23, pp. 1-27. Amin, A. (1992), “Big firms versus the regions in the single market”, in Dunford, M. and Kafkalas, G. (Eds), Cities and Regions in the New Europe: The Global-Local Interplay and Spatial Development Strategies, Belhaven Press, London. Anderson, E. and Gatignon, H. (1986), “Models of foreign market entry: a transaction cost analysis and propositions”, Journal of International Business Studies, Vol. 17, pp. 1-26. Arino, A. (2003), “Measures of strategic alliance performance: an analysis of construct validity”, Journal of International Business Studies, Vol. 34, pp. 66-79. Auster, E.R. (1994), “Macro and strategic perspectives on interorganizational linkages: a comparative analysis and review with suggestions for reorientation”, Advances in Strategic Management, Vol. 10B, pp. 3-40. Baum, J.A.C., Calabrese, T. and Silverman, B.S. (2000), “Don’t go it alone: alliance network composition and startups’ performance in Canadian biotechnology”, Strategic Management Journal, Vol. 21, pp. 267-94. Bensimon, S. (1999), “Strategic alliances”, Executive Excellence, Vol. 16 No. 10, p. 9. Bleeke, J. and Ernst, D. (Eds) (1993), Collaborating to Compete: Using Strategic Alliances and Acquisitions in the Global Marketplace, Wiley, New York, NY. Bleeke, J. and Ernst, D. (1995), “Is your strategic alliance really a sale?”, Harvard Business Review, Vol. 73, January, pp. 97-105. Borsch, O. (1994), “The process of relational contracting: developing trust-based strategic alliances among small business enterprises”, Advances in Strategic Management, Vol. 10, pp. 113-36. Brousseau, E. and Quelin, B. (1996), “Asset specificity and organizational arrangements: the case of the new telecommunications services market”, Industrial and Corporate Change, Vol. 5, pp. 1205-30. Carlton, D.W. and Salop, S.C. (1995), “You keep on knocking but you can’t come”, Evaluating Restrictions on Access to Input Joint Ventures, Working Paper, No. 111, University of Chicago Center for the Study of the Economy and the State, Chicago, IL. Chan, S.H., Kensinger, J.W., Keown, A.J. and Martin, J.D. (1997), “Do strategic alliances create value?”, Journal of Financial Economics, Vol. 46, pp. 199-221.

Strategic alliances

143

MD 43,1

144

Chaudhuri, P.R. (1995), “Technological asymmetry and joint product development”, International Journal of Industrial Organization, Vol. 13, pp. 23-39. Chen, Z. and Ross, T.W. (2000), “Strategic alliances, shared facilities, and entry deterrence”, RAND Journal of Economics, Vol. 31, pp. 326-44. Contractor, F. and Lorange, P. (1988a), “Why should firm co-operate? The strategic and economic basis for co-operative ventures”, in Contractor, F. and Lorange, P. (Eds), Cooperative Strategies in International Business, Lexington Books, Lexington, MA, pp. 3-28. Contractor, F. and Lorange, P. (Eds) (1988b), Cooperative Strategies in International Business, Lexington Books, Lexington, MA. Cunningham, M. and Calligan, N. (1991), “Competitiveness through networks of relationships in information technology product markets”, in Paliwoda, S. (Ed.), New Perspectives in International Marketing, Routledge, London. Curwen, P. (1999), “Survival of the fittest: formation and development of international alliances in telecommunications”, info, Vol. 1, pp. 141-58. Dacin, M.T., Hitt, M.A. and Levitas, E. (1997), “Selecting partners for successful international alliances: examination of US and Korean firms”, Journal of World Business, Vol. 32, pp. 3-16. Das, T.K. and Teng, B.-S. (1998), “Between trust and control: developing confidence in partner cooperation in alliances”, Academy of Management Review, Vol. 23, pp. 491-512. Dicken, P. (1994), “Global-local tensions: firms and states in the global space-economy”, Advances in Strategic Management, Vol. 10, pp. 217-47. Dietrich, M. (1994), Transaction Cost Economics and beyond: Towards a New Economics of the Firm, Routledge, London. DiMaggio, P. and Powell, W. (1983), “The iron cage revisited: institutional isomorphism and collective rationality in organizational fields”, American Sociological Review, Vol. 48, pp. 147-60. Doz, Y. (1996), “The evolution of co-operative strategic alliances: initial conditions or learning processes?”, Strategic Management Journal, Vol. 17, pp. 55-83. Doz, Y. and Hamel, G. (1999), Alliance Advantage: The Art of Creating Value through Partnering, Harvard Business School Press, Boston, MA. Doz, Y.L., Olk, P.M. and Ring, P.S. (2000), “Formation processes of R&D consortia: which path to take? Where does it lead?”, Strategic Management Journal, Vol. 21, pp. 239-66. Gereffi, G. (1990), “Commodity chains and footwear exports in the semi-periphery”, in Martin, W. (Ed.), Semiperipheral States in the World Economy, Praeger, Westport, CT. Gereffi, G. (1994), “The organization of buyer-driven global commodity chains: how US retailers shape overseas production networks”, in Gereffi, G. and Korzeniewicz, M. (Eds), Commodity Chains and Global Capitalism, Praeger, Westport, CT. Gerlach, M.L. (1992), Alliance Capitalism: The Social Organization of Japanese Business, University of California Press, Berkeley, CA. Ghoshal, S. and Bartlett, C.A. (1990), “The multinational corporation as an interorganizational network”, Academy of Management Review, Vol. 15, pp. 603-25. Goel, R.K. (1994), “Research joint ventures and uncertain innovation”, Economic Notes, Vol. 23, pp. 266-74. Gugler, P. (1992), “Building transnational alliances to create competitive advantage”, Long Range Planning, Vol. 25 No. 1, pp. 90-9.

Gulati, R. (1995a), “Does familiarity breed trust? The implications of repeated ties for contractual choices in alliances”, Academy of Management Journal, Vol. 38, pp. 85-112. Gulati, R. (1995b), “Social structure and alliance formation patterns: a longitudinal analysis”, Administrative Science Quarterly, Vol. 40, pp. 619-52.

Strategic alliances

Gulati, R. (1998), “Alliances and networks”, Strategic Management Journal, Vol. 19, pp. 293-317. Gulati, R. and Gargiulo, M. (1999), “Where do networks come from?”, American Journal of Sociology, Vol. 104, pp. 1439-93. Gulati, R., Nohria, N. and Zaheer, A. (2000), “Strategic networks”, Strategic Management Journal, Vol. 21, pp. 203-15. Hagedoorn, J. and Sadowski, B. (1999), “The transition from strategic technology alliances to mergers and acquisitions: an exploratory study”, Journal of Management Studies, Vol. 36, pp. 87-107. Hamel, G. (1991), “Competition for competence and inter-partner learning with international strategic alliances”, Strategic Management Journal, Vol. 5 No. 1, pp. 33-55. Harrigan, K.R. (1988a), “Joint ventures and competitive strategy”, Strategic Management Journal, Vol. 9, pp. 141-58. Harrigan, K.R. (1988b), “Strategic alliances and partner asymmetries”, in Contractor, F. and Lorange, P. (Eds), Cooperative Strategies in International Business, Lexington Books, Lexington, MA, pp. 205-26. Haugland, S. (1999), “Factors influencing the duration of international buyer-seller relationships”, Journal of Business Research, Vol. 46, pp. 273-80. Hennart, J.-F. (1991), “A transaction cost theory of joint ventures: an empirical study of Japanese subsidiaries in the United States”, Management Science, Vol. 37, pp. 483-97. Hennart, J.-F. and Reddy, S. (1997), “The choice between mergers/acquisitions and joint ventures: the case of Japanese investors in the United States”, Strategic Management Journal, Vol. 18, pp. 1-12. Human, S.E. and Provan, K.G. (1997), “An emergent theory of structure and outcomes in small-firm strategic manufacturing networks”, Academy of Management Journal, Vol. 40, pp. 368-403. Inkpen, A.C. and Beamish, P.W. (1997), “Knowledge, bargaining power, and the instability of international joint ventures”, Academy of Management Review, Vol. 22, pp. 177-202. Jamison, M.A. (1998), “Emerging patterns in global telecommunications alliances and mergers”, Industrial and Corporate Change, Vol. 7, pp. 695-713. Kale, P., Singh, H. and Perlmutter, H. (2000), “Learning and protection of proprietary assets in strategic alliances: building relational capital”, Strategic Management Journal, Vol. 21, pp. 217-37. Knoke, D. (2001), Changing Organizations: Business Networks in the New Political Economy, Westview Press, Boulder, CO. Kogut, B. (1988), “A study of the life cycle of joint ventures”, in Contractor, F. and Lorange, P. (Eds), Cooperative Strategies in International Business, Lexington Books, Lexington, MA, pp. 169-85. Larson, A. (1992), “Network dyads in entrepreneurial settings: a study of the governance of exchange relationships”, Administrative Science Quarterly, Vol. 37, pp. 76-104. Leenders, R.T.A.J. and Gabbay, S.M. (Eds) (1999), Corporate Social Capital and Liability, Kluwer, Boston, MA.

145

MD 43,1

Lei, D. (1993), “Offensive and defensive use of alliances”, Long Range Planning, Vol. 26 No. 4, pp. 32-41.

146

Levinson, N. and Asahi, M. (1995), “Cross-national alliances and interorganisational learning”, Organisational Dynamics, Vol. 24 No. 2, pp. 50-3.

Lei, D., Slocum, J.W. Jr and Pitts, R.A. (1997), “Building cooperative advantage: managing strategic alliances to promote organizational learning”, Journal of World Business, Vol. 32 No. 3, pp. 203-23.

Lin, X. and Germain, R. (1998), “Sustaining satisfactory joint venture relationships: the role of conflict resolution strategy”, Journal of International Business Studies, Vol. 29, pp. 179-96. Littler, D., Leverick, F. and Wilson, D. (1998), “Collaboration in new technology based product markets”, International Journal of Technology Management, Vol. 15 No. 1/2, pp. 139-59. Lorange, P. and Roos, J. (1993), Strategic Alliances: Formation, Implementation, and Evolution, Blackwell Business, Cambridge, MA. Mizruchi, M.S. and Schwartz, M. (1987), “The structural analysis of business: an emerging field”, in Mizruchi, M.S. and Schwartz, M. (Eds), Intercorporate Relations, Cambridge University Press, New York, NY, pp. 3-21. Mockler, R.J. (1999), Multinational Strategic Alliances, Wiley, New York, NY. Mohr, J. and Spekman, R. (1994), “Characteristics of partnership success, partnership attributes, communication behaviour, and conflict resolution techniques”, Strategic Management Journal, Vol. 15, pp. 135-52. Nanda, A. and Williamson, P.J. (1995), Corporate Restructuring: How Joint Ventures Can Help Ease the Pain, Working Paper, No. 95/82/EAC, INSEAD, Paris. O’Farrell, P. and Wood, A. (1999), “Formation of strategic alliances in business services: towards a new client-oriented conceptual framework”, The Service Industries Journal, Vol. 19 No. 1, pp. 133-51. Oliver, C. (1990), “Determinants of interorganizational relationships: integration and future directions”, Academy of Management Review, Vol. 15, pp. 241-65. Olk, P.M. (1999), “Explaining a member organization’s influence in an R&D consortium: a joint test of the dimensions of task characteristics and organizing routines and of the level of analysis”, Journal of High Technology Management Research, Vol. 10, pp. 123-46. Olk, P.M. and Earley, C. (2000), “Interpersonal relationships in international strategic alliances: cross-cultural exchanges and contextual factors”, in Faulkner, D. and de Rond, M. (Eds), Perspectives of Cooperation: Confronting Complexity in Interorganizational Collaborations, Oxford University Press, New York, NY. Pan, Y. and Li, X. (1998), “Alliance of foreign firms in equity joint ventures in China”, International Business Review, Vol. 7, pp. 329-50. Park, S.H. and Ungson, G.R. (1997), “The effect of national culture, organizational complementarity, and economic motivation on joint venture dissolution”, Academy of Management Journal, Vol. 40, pp. 279-307. Pennings, J. (1994), “Commentary: recreating and extending buyer-supplier links following international expansion”, Advances in Strategic Management, Vol. 10, pp. 73-9. Reuer, J.J. (1997), The Dynamics and Effectiveness of International Joint Ventures, Working Paper, No. 97/108/SM, INSEAD, Paris. Ring, P.S. and Van de Ven, A.H. (1994), “Developmental processes of cooperative interorganizational relationships”, Academy of Management Journal, Vol. 19, pp. 90-118.

Sako, M. (1992), Prices, Quality and Trust: Inter-firm Relations in Britain and Japan, Cambridge University Press, Cambridge. Sanchez, R. (1994), “Higher-order organization and commitment in strategic options theory”, Advances in Strategic Management, Vol. 10, pp. 299-307. Saxton, T. (1997), “The effects of partner and relationship characteristics on alliance outcomes”, Academy of Management Journal, Vol. 40, pp. 443-62. Si, S.X. and Bruton, G.D. (1999), “Knowledge transfer in international joint ventures in transitional economies: the China experience”, Academy of Management Executive, Vol. 13, pp. 83-90. Sim, A.B. and Ali, Y. (1998), “Performance of international joint ventures from developing and developed countries: an empirical study in a developing country context”, Journal of World Business, Vol. 33, pp. 357-77. Simonin, B. (1999), “Ambiguity and the process of knowledge transfer in strategic alliances”, Strategic Management Journal, Vol. 20 No. 7, pp. 595-623. Snodgrass, C. (1993), “The use of networks in cross-border competition”, Long Range Planning, Vol. 26 No. 2, pp. 41-50. Steensma, H.K. and Lyles, M.A. (2000), “Explaining IJV survival in a transitional economy through social exchange and knowledge-based perspectives”, Strategic Management Journal, Vol. 21, pp. 831-51. Stuart, T.E. (2000), “Interorganizational alliances and the performance of firms: a study of growth and innovation rates in a high-technology industry”, Strategic Management Journal, Vol. 21, pp. 791-811. Triantis, J.E. (1999), Creating Successful Acquisition and Joint Venture Projects: A Process and Team Approach, Quorum, Westport, CT. Tsang, E.W.K. (1999), “A preliminary typology of learning in international strategic alliances”, Journal of World Business, Vol. 34, pp. 211-29. Vonortas, N.S. (2000), “Multimarket contact and inter-firm cooperation in R&D”, Journal of Evolutionary Economics, Vol. 10, pp. 243-71. Walker, G., Kogut, B. and Shan, W. (1997), “Social capital, structural holes and the formation of an industry network”, Organization Science, Vol. 8 No. 2, pp. 109-25. Webster, E. (1999), The Economics of Intangible Investment, Edward Elgar, Cheltenham. Williamson, O. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, Free Press, New York, NY. Wolf, R.C. (2000), Effective International Joint Venture Management: Practical Legal Insights for Successful Organization and Implementation, M.E. Sharpe, Armonk, NY. Yan, A. and Zeng, M. (1999), “International joint venture instability: a critique of previous research, a reconceptualization, and directions for future research”, Journal of International Business Studies, Vol. 30, pp. 397-414. Yoshino, M.Y. and Rangan, U.S. (1995), Strategic Alliances: An Entrepreneurial Approach to Globalization, Harvard University Press, Cambridge, MA. Zajac, E.J. (1990), “CEOs’ views on strategic alliances”, paper presented at the Marketing Science Institute Conference on Managing Long-Run Relationships, Boston, MA. Zhao, S. (1999), “Joint ventures for entry deterrence”, Managerial and Decision Economics, Vol. 20, pp. 25-35.

Strategic alliances

147

MD 43,1

148

Further reading Buchko, A. (1994), “Barriers to strategic transformation: inter-organizational networks and institutional forces”, Advances in Strategic Management, Vol. 10, pp. 81-106. Buckley, P. and Casson, M. (1988a), “A theory of co-operation in international business”, in Contractor, F. and Lorange, P. (Eds), Cooperative Strategies in International Business, Lexington Books, Lexington, MA, pp. 31-54. Buckley, P. and Casson, M. (1988b), “A theory of cooperation in international business”, Management International Review, Special issue, pp. 19-38. Child, J. and Faulkner, D. (1998), Strategies of Cooperation: Managing Alliances, Networks and Joint Ventures, Oxford University Press, New York, NY. Giddens, A. (1979), Central Problems in Social Theory: Action, Structure, and Contradiction in Social Analysis, University of California Press, Berkeley, CA.

Note from the publisher Emerald structured abstracts have arrived! After months of preparation by journal editors, authors and Emerald publishing staff, structured abstracts are ready for publication in all Emerald journals. The abstracts appear in journals from the first issues of all 2005 volumes and a glance at any article title page in this journal will illustrate the format and style of the new-style abstracts. The format differs slightly in the electronic version of articles on Emerald’s web site but this is only a cosmetic variation and takes account of the different medium and way in which people use abstract information. The idea for the structured abstracts came about at the start of 2004 and a small team has worked on the design and introduction of structured abstracts throughout the year. Thanks to the hard work of everyone involved in producing this journal, Emerald is now able to showcase the abstracts for the first time. We believe they provide real benefits to our readers and researchers and that they answer some of the key questions journal users have about a paper without them having to scan or read the entire article. Some of these questions might include: . “What research has been conducted on this topic?” . “How was the research approached – what methods were used?” . “What were the main findings?” . “Are there any literature reviews on this topic and are they selective or inclusive?” . “So what? The authors have shown this but what does this mean for my work/organization?” . “I want to conduct research in this area but what questions still need to be answered?” . “Has this work got any relevance and value for me?” . “What did the writer set out to show?”

Note from the publisher

149

Structured abstracts provide the answers to these kinds of questions without the researcher having to go any further into the article itself. Authors can be more confident that their paper will be noticed and read by others with a real interest in the topic or research. As far as possible, we have alerted our authors and editorial team members to this change via Literati Club Newslines and communications with journal editors. Authors who have been asked to rewrite their abstracts in the new format have readily obliged. The response from all parties has been very encouraging: Structured abstracts are increasing in popularity among the social and behavioral sciences. There’s overwhelming evidence that readers (and indexers) glean more from structured abstracts (Jonathan Eldredge, MLS, PhD, AHIP, Associate Professor, School of Medicine, Academic & Clinical Services Coordinator and Author, Health Sciences Library and Informatics Center, Health Sciences Center, The University of New Mexico, USA).

Management Decision Vol. 43 No. 1, 2005 pp. 149-150 q Emerald Group Publishing Limited 0025-1747

MD 43,1

150

For more on structured abstracts and their value for researchers and writers, read the short paper by Liz Bayley and Jonathan Eldredge at: http://research.mlanet.org/ structured_abstract.html Everyone has difficulties in the digital environment in weighing up the value of any piece of information and structured abstracts go some way towards a remedy to the problem of information overload. Emerald is the very first publisher in the management field to introduce structured abstracts and whilst we are mindful that this means change for authors and researchers, we feel our pioneering work in this area gives our journals a strong competitive advantage. We are pleased and proud to be the first in the field to implement this extremely good idea. Unfortunately, we are unable to go back through more than 40,000 papers already in Emerald’s database to change already-published abstracts into structured ones. On a more positive note, however, nearly 5,000 new papers will be deposited into the database this coming year and all will be accompanied by a structured abstract. Emerald would be pleased to hear what you think about this initiative. E-mail your views to Sue de Verteuil, Head, Editorial Developments at: sdeverteuil @emeraldinsight.com