Advance Topics in Change Management Lecture 2: Organizational Design and Capabilities in Changing Markets

Objectives To understand how organizational design helps to explain organizational capabilities – and hence competitive advantages and the ability of firms to achieve their strategic objectives.

Concepts Resources Capabilities Routines Firm specific, valuable, rare, difficult to imitate and non-substitutable They are the foundations of: Capabilities At an abstract level, these can be thought of as the ability to co-ordinate activities, learn within an organization, and re-configure resources Routines Help to build resources and capabilities

PROBLEM OF LOCK-IN

Illustrations of Lock-In 1 Northern Rock: Baker [a senior manager at Northern Rock] could not allow that [analysts to get worried] to happen. Northern Rock's rampant growth in the years before its nationalisation was delivered on the back of two things: cheap wholesale funding and an industry-beating risk profile. Northern Rock may have been the pioneer of 125pc mortgages, but its arrears rate was half the industry average. Jeopardise that and cheap funding might not have been so readily available. The Daily Telegraph, http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7587004/Northern-Rocks-hairline-crack-hid-chasm-of-bad-debt.html

Illustrations of Lock-In 2 Christensen (1997), The Innovators Dilemma. Disk drives Incumbents versus new comers (with disruptive innovations) Sony Playstation and Microsoft’s X-Box versus Nintendo Wii

CHARACTERISTICS OF FORDISM PRODUCTION SYSTEMS Dedicated specialised machinery Standardised products in long production runs Standardised work processes Infrequent and expensive product and process changes MARKETS Stable mass consumption of standardised goods Price based competition Adversarial links with suppliers Oligopolistic ORGANISATIONS Mechanistic and bureaucratic Inflexible with high fixed costs Focused on efficiency and cost reduction Narrow tasks and skills Little or no task autonomy by workers

Fordism

The application of Fordist principles becomes counterproductive

An alternative production system to Fordism: Toyotaism

Models of Competition and Coordination I Characteristics Fordism Customised Production Diversified Quality Production Discontinuous Innovation Examples Some cars, consumer electronics, call centres Some advertising agencies, consultancies Some cars, mechanical engineering Biotechnology, some software developers Primary basis of market competition Price Quality Innovation Production volumes Very large Limited Medium/High Standardisation of outputs High Medium Differentiation and change of products Low Ability to respond quickly to competence destructive changes

Models of Competition and Coordination II Characteristics Fordism Customised Production Diversified Quality Production Discontinuous Innovation Flexibility of work processes Low Medium High Inter-firm relations Adversarial Cooperation with competition Adversarial but some narrowly focused partnerships Key organizational and managerial capabilities Coordination and control Integrating skills and adapting to changing demands Coordination and organisational learning Reconfiguring assets rapidly in response to technical and market opportunities

Organizational and Managerial Capabilities Characteristics Coordinating Learning Reconfigurational Competitive Focus Realise economies of scale and scope through systematic integration of work activities Continual improvement of processes and products to meet changing conditions Fast adaptation to rapidly changing market and technical contexts Key Processes Establishing routines for controlling work and integrating activities Continual collective problem solving and knowledge development Rapid adaptation of work processes, skills and other assets to meet changing conditions Involvement of Employees and Business Partners in Developing Capabilities Varies High Considerable Longevity of Employer-employee Commitment Considerable for managers Considerable for skilled workers Limited

Questions about Tecso Think about all of the activities that Tesco carries out. In terms of ‘co-ordinating’, ‘learning’ and ‘re-configurational’, what organizational and managerial capabilities are needed to perform these activities successfully? How would you justify your selections?

Many of their activities (buying, selling, transporting products) Tesco’s Capabilities? Characteristics Coordinating Many of their activities (buying, selling, transporting products) Competitive Focus Realise economies of scale and scope through systematic integration of work activities Search for economies of scale by centralizing purchasing, expanding into new geographical markets (different cities etc, formats) at home and abroad (Poland, Czech Republic, Thailand, US) and product markets (finance) Key Processes Establishing routines for controlling work and integrating activities Most of the above activities would have clear routines. Involvement of Employees and Business Partners in Developing Capabilities Varies Probably limited in most cases, though there may be some scope for involving certain business partners. Longevity of Employer-employee Commitment Considerable for managers Probably limited to managers.

Tesco’s Capabilities? Characteristics Learning Probably strong focus on learning, too, but more or less than co-ordination? Competitive Focus Continual improvement of processes and products to meet changing conditions Learning about product demand – Clubcard? Enables Tesco to learn about changing consumer choices. Key Processes Continual collective problem solving and knowledge development Collective? Probably limited to management and those involved in Clubcard scheme Involvement of Employees and Business Partners in Developing Capabilities High Probably quite limited for most employees and business partners Longevity of Employer-employee Commitment Considerable for skilled workers For certain groups directly attached to learning (managers and those involved in Clubcard) there is likely to be a need for high levels of commitment.

Tesco’s Capabilities? Characteristics Reconfigurational No - if reconfigurational is in the sense of changing rapidly to product market changes Competitive Focus Fast adaptation to rapidly changing market and technical contexts Adapt to product market changes, but how radical are these? Key Processes Rapid adaptation of work processes, skills and other assets to meet changing conditions Assets probably unchanged most of the time (although there has been a logistics revolution) Involvement of Employees and Business Partners in Developing Capabilities Considerable Some as noted above Longevity of Employer-employee Commitment Limited Considerable for some groups.

Tesco’s Capabilities Main capabilities are co-ordination and learning. The ability to radically reconfigure its capabilities is less important – probably completely unimportant in most instances.

Conclusion Strategies are closely linked to capabilities The ability of firms to develop those capabilities (and the necessary resources to support those capabilities) is, in turn, shaped by key features of organizational design that affect routines within companies. But don’t forget the external environment that influences other contingencies (other ‘things’ that a particular strategy or capability depend upon).