Is your strategy impeding or promoting adaptive change?

State Bank now Walgreen'sChange, it’s what most business executives recognize as a constant threat. Unfortunately, many find themselves between a rock and a hard place. How might managers ably meet tomorrow’s change in environmental conditions?

Rather than react, plans that consider structure and processes matter. So too does understanding their organization as an integrated and dynamic whole.

Factors that create efficiency and make an organization and its team effective today appear less stable all too quickly.  The growing connectivity and access to information affects the pace and scale of  technology developments, consumer expectations and competition.

An organization’s survival depends on its ability to adapt and respond to external changes in its environment as well as introduce changes internally.

The connections between strategy, structure and processes not only prove defining for many organizations but also the source of pain or promise to its survival.

Participants in the Strategy discussion took a look in July 2017 at a few articles (posted at the end)  that focused on decision-making challenges that make organizations struggle to adapt.  Here’s some of what we discussed.

Choosing when and what to Change

People adapt to expected change by planning. A strategy clarifies expectations making both planning and adapting to change easier. Strategy when well communicated and understood articulates the underlying purpose that drives an organizations’ leadership to make a change. Strategy in this sense, is a choice of action affects the quality and effectiveness of changes and degree the changes stick.

Management theory differs from strategy, though it too creates expectations that make planning and adapting to change possible.  Management theory determines the organizations’ structure and processes.

Not every change that occurs is expected, and not every expectation gets realized. Both situations require adaptation but few organizations prove capable consistently of decision-making that continuously holds their competitive advantage.

Why one business proves more resilient, and/or adaptive than others continues to elude the best managers and leaders. Cause and effects are complicated to identify let alone sort out.

Nearly fifty years ago,Raymond Miles, Charles Snow, Anal Meyer and Henry J. Coleman, Jr –four management academics set out to understand the process business use to adapt. They looked for patterns in order to prescribe how existing managers might successfully meet tomorrow’s or different environmental conditions.  Their framework remains relevant and informative because it encourages management to see their organization as integrated and dynamic wholes.

For a small, or start-up business this perspective mirrors the intensity of collective singular focus on survival. Once secured, the collective focus naturally diffuses. Accommodating growth each functional role establishes separate priorities that over time compete rather than integrate their resources.

In 1978, existing descriptions of organizations’ ability to adapt were lacking. The authors of Organizational, Strategy structure and process  used their Organizational Behavior and Industrial Relations backgrounds to inform and then describe three categories of processes: entrepreneurial, engineering and administrative.

Miles et al break down basic decision making for managers into three categories: administrative, engineering and entrepreneurial. Organizations’ top management limits their choices of adaptive behavior to those they believe allow them effective direction and control of human resources. They observed that whatever theory of management executives endorsed factor significantly in their subsequent analysis of organizations’ ability to adapt to changes in the environment.

Their preliminary research uncovered a series of patterns relating management theory and organizational strategy and structure.  Fifty years later, these relationships remain evident though more patterns and interpretations and management theories have emerged. Note, this article predates the work of Michael Porter’s industrial economics inspired descriptive five forces theory of Competitive Strategy.

The evolution of expectations between managers and employees are three components of the patterns based on

  1.  a set of assumptions about human attitudes and behaviors,
  2. managerial policies and actions consistent with these assumptions, and
  3. expectations about employee performance if these policies and actions are implemented.

In light of the attention currently paid to organizational culture, their observations prove interesting, especially as nowhere in this article does the word even appear. That’s not to say they overlooked this concept. The authors merely draw the attention of management to individual behaviors and expectations with a prescriptive suggestion for their evolution from a traditional model to a human relations and a human resources model.

Perhaps culture issues playing out in many organizations reflect challenging dynamic patterns these authors identify as: Defenders, Analyzers, Prospectors and Reactors.

Here’s my crude descriptive summary

Defenders Analyzers Prospectors Reactors
Innovation Low Moderate High Low
Efficiency High moderate low low
Centralized Decision-making High Low
P&L autonomy Low High

As you can see, instead of finding a direct alignment between patterns of decision making associated with different management theories and the ability to adapt, the authors  found a mix of assumptions, policies and expectations.

Holding together a dominant coalition with mixed views concerning strategy and structure is not an easy task.

Miles et al found managers engaged in new product or service development struggled to function within planning, control and reward systems established for more stable operations.  Analyzer organizations must be successfully differentiated into its stable and changing areas and managed accordingly.  ….Numerous organizations either led or forced into a mixed strategy (multinational companies, certain forms of conglomerates, many organizations in high technology industries) and their struggles may well produce a new organizational type and demands for a supporting theory of management.

To meet tomorrow’s  environmental conditions successfully, manager’s must ably understand organizations as integrated and dynamic wholes.

A balance sheet view

I reached out to Shep Pryor, a Chicago Booth grad, co-author of The Private Equity Edge and faculty professor. I hoped his  fluency with company financial statements could  help reveal the presence of similar strategic choices about structure and process that Miles, et al described.
I asked him about examples in which the statements might reveal the effectiveness of a decision to enter a market or offer new products, and if they depends less on environmental conditions and more on strategic choices of internal structure and process?  At least that’s what my initial take on the prescriptive in the article.

Here’s Shep’s very cogent reply:

Whether a financial statement analysis, or perhaps a broader 10K, which adds additional content to the financial statements would enlighten the analyst on where the reporting company is in the spectrum described in the article.

First a comment on the article, and then maybe I can shed some light on an answer:

The article categorizes the adaptive capacity of companies more or less as follows:

Low Flexibility High Flexibility
High Stability Defender Analyzer
Low Stability Reactor Prospector

It goes further into its definition by stating that each company must bring some balance to bear on three main problems: entrepreneurial, engineering, and administrative. Finally, the authors point out that managerial theories (and their associated practices) held in high esteem by top management will enhance or confound the company’s ability to adapt.

The main points I [Shep] get from the article are:

  1. Each of the first three types of adaptive behavior may lead to business success but only if the management team’s theories and practices enable them to keep the three fundamental problems (entrepreneurial, engineering, administrative) under control.
  2. Being a Reactor is a default position for companies that lose their capability to maintain strength as one of the other types. Avoiding the position is crucial.
  3. Changing from one box of the matrix to another is a perilous enterprise.

What their commentary brings to mind as good examples:

  1. Ford motor is a Defender, but it is moving toward being a analyzer, as its market is invaded by different technology by such firms as Tesla.
  2. Sears was a defender with no hope of transforming, so it has become a reactor, and will soon become a memory.
  3. United was a Defender when Southwest was a Prospector. As the environment changed to favor Prospectors, Southwest gained dominance.
  4. Kodak Defended its vanishing market to the death, that is, to its own death.

What can you learn from a 10K?

  1. Defenders are likely to be company with higher levels of fixed assets. The more capital intensive a company is within its industry, the more operating leverage it has, and thus the more dependent it is on growth and stability. High sales can lead to colossal margins, while sales below breakeven cannibalize net worth. In the same industry, a company that is less capital intensive, will be able to maintain its margins despite variations in sales.
  2. If the MD&A of the 10k dwells on a variety of new product introductions and a lot of small acquisitions, the company is probably a Prospector.
  3. While companies are notorious for cloaking their true sectors in the 10k sector analysis, if there are disparate businesses highlighted in the sector analysis or the other commentary, it will be clear that the company is at least trying to be an Analyzer. For example, a successful company that makes truck axles and also sells ceremonial tea sets through a party plan is an Analyzer, while an unsuccessful company that does the same is a Reactor.

A little financial forensics can go a long way.

The Articles

Alignment of Strategies

http://smallbusiness.chron.com/alignment-strategies-4649.html

Organizational strategy, structure and process
The Academy of Management Review, July 1978

http://www.wiggo.com/mgmt8510/Readings/Readings5/miles1978amr.pdf


How aligned is your organization

https://hbr.org/2017/02/how-aligned-is-your-organization


OPTIONAL

If you need a focal point to think about the question, consider the activist investor LOEB’s stake in Nestle

Nestle: Third Point Daniel Loeb Activist Investor

https://nyti.ms/2tbczyS

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