1. Chapter 12 The Management of Strategic Change Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Bourgeois, Duhaime, & Stimpert

2. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives t Review and further explore the factors that inhibit managerial responsiveness to changes in industry environments. t Describe different types of organizational learning and their relationships to strategy formulation and implementation. t Identify factors that influence the rate and extent of organizational learning.

3. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives (cont.) t Offer some recommendations for managers and their organizations that aim to make firms more responsive, innovative, and adaptive.

4. Copyright © 1999 by Harcourt Brace & Company All rights reserved IntroductionIntroduction t Key premise is that all business environments are in a state of change. © In order to remain successful, firms must take one of two actions: Stay aligned with changes in their environments by responding quickly; or Actively anticipate changes in customer demographics, future technologies, and potential new products/services, and thereby recreate their industries.

5. Copyright © 1999 by Harcourt Brace & Company All rights reserved Introduction (cont.) t Many managers are unable to see industry changes or to appreciate the impact of those changes on their industry. © Price for failing to keep pace with changes: Direct impacts on employees and shareholders (lost jobs and revenues). Write-offs and reductions in investment and R&D.

6. Copyright © 1999 by Harcourt Brace & Company All rights reserved Technologies How to Compete The Industry Size and Diversification How to Organize Customers Products & Services The Firm The Industry or Competitive Environment Business Strategy Capabilities Business Definition Corporate Strategy Organizational Structure Managers’ Mental Models Exhibit 12.1

7. Copyright © 1999 by Harcourt Brace & Company All rights reserved Introduction (cont.) t Danger of falling out of step with industry changes will increase in the future: © International competition intensifies. © Exploitation of new technologies. © New customer preferences caused by shifts in customer demographics. © Managers will need to embrace “Strategic Change Management.”

8. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Managerial thinking and environmental change. © Managers fail to anticipate or adequately respond to change for three reasons: They simply fail to notice the changes. Managers can be aware of changes, but they fail to interpret these changes correctly. Even if some managers notice the changes and they interpret them correctly, they might still fail to adopt an appropriate course of action.

9. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t The problem of noticing. © If environmental changes are not noticed, action will not be taken. © Many managers focus all their attention on the firms’ strategies -- while most of the changes are occurring outside their area of focus. Most changes are not overtly obvious. When changes are noticed, it is sometimes too late for firms to respond effectively.

10. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Interpretation of data. © “Seeing [changes] is not always believing.” Railroad industry in 1950s and 1960s discounted the potential impact of trucks on their industry. GM in 1980s…share decline from 50% to 33%. There is a tendency for managers to give more weight to data that confirms their beliefs, while discounting data that would require them to alter their mental models.

11. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Limits in organizational action. © Many companies, while noticing and appreciating the changes, still fail to devise strategies to meet the threats. Kodak is example of taking effective action to deal with new digital technologies. Big Three auto makers in US did not react decisively to threat posed by import cars. –When they did act, they chose to imitate the practices of the foreign companies.

12. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Two different types of organizational learning and tendency for organizations to emphasize low-level learning. © Failures in organizational learning also limit organizational adaptation and change. © Lower-level learning Characterized by improvements in or refinements of existing beliefs, understandings, and organizational processes.

13. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness © Higher-level learning Developing totally new beliefs, understandings, and organizational processes. © Firms who only use lower-level learning are vulnerable to being blindsided by new rivals, technologies, and products. Companies must get better at what they already do while also exploring new opportunities.

14. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness © Importance of lower-level learning is shown in Exhibit 12.3 below. Leads to refinements of existing organizational knowledge that allows firms to reduce unit costs as cumulative output increases. Cumulative Output Unit Costs Exhibit 12.3

15. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Without higher-level learning, firms can fall into “competency traps.” © They become increasingly adept at routines and processes that are no longer appropriate due to changes in their environments. Example of railroads during the 1950s. © Unfortunately, most firms allocate more resources to lower-level learning.

16. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Two factors influence the extent of higher-level learning: © Higher-level learning is most likely to result from problemistic search. When routine policies or procedures fail to deal effectively with organizational problems, managers initiate search activity that leads to higher-level learning in order to solve those problems. Too much success breeds complacency and a failure to engage in higher-level learning.

17. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness © Second factor which is important to success of higher-level learning is absorptive capacity. Ability of firms to recognize the value of new information, assimilate it, and apply it to commercial ends. Firms with higher levels of absorptive capacity are better able to recognize the importance of significant developments and then assimilate that knowledge into the organization.

18. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Homogeneity in managerial thinking. © Also limits managerial responsiveness to environmental change. Many firms are caught in an “Attraction-Selection- Attrition” (ASA) cycle that tend to promote homogeneity in managerial thinking. Exhibit 12.4: Attraction- Selection-Attrition (ASA) Cycle

19. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Organizations can overcome the dangers of like- minded thinking in at least two ways. © Give greater attention to “contrarian voices.” They are most likely to see aspects of changing industry environments that are ignored by top managers. © Encourage greater turnover among top management ranks. If not, top managers become more and more committed to status quo.

20. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Power of industry influences in limiting organizational change. © Industry norms and standards (the so-called “common body of knowledge”) can blind managers to new opportunities, technologies, and potential competitors. Very difficult to formulate and implement totally new strategy in the face of pressures to maintain the status quo. –New entrants almost always have something that is totally different from industry norms.

21. Copyright © 1999 by Harcourt Brace & Company All rights reserved Factors that Contribute to Lack of Responsiveness t Summary: 4 factors can limit responsiveness of managers to industry changes: © Problems associated with noticing, interpreting, and responding to changes. © Tendency for managers to emphasize low-level learning over high-level learning. © Tendency for organizational hiring and promotion practices to foster homogeneity in managerial thinking. © Power of institutionalized industry practices.

22. Copyright © 1999 by Harcourt Brace & Company All rights reserved Implications and Recommendations t Advantage comes from thinking (and acting) like an outsider. © Take risks that would be considered unconventional given industry norms. © Give greater credence to maverick views. t Demographic diversity versus “genetic diversity.” © Economic value of demographic diversity (more women and minorities) is the possibility that it will lead to greater cognitive diversity (or what is called “genetic diversity”).

23. Copyright © 1999 by Harcourt Brace & Company All rights reserved Implications and Recommendations (cont.) t Organizational learning and strategic change. © Organizational learning is essential if firms are going to formulate and implement strategic change successfully. © Different types of organizational change: First order -- or evolutionary -- change: –Refinements to existing products/services/technologies (line extensions, software upgrades, or new models). Second-order -- or revolutionary -- changes: –Totally new product lines reaching totally new groups, or adopting new technologies.

24. Copyright © 1999 by Harcourt Brace & Company All rights reserved Implications and Recommendations (cont.) t It’s unlikely that managers will simply embrace or welcome change. © Therefore, managers must institutionalize change. Many companies adopt product planning strategies that attempt to institutionalize innovation in their product development process. –3M and Rubbermaid require that a certain percentage of each year’s sales to come from products that did not exist previously.

25. Copyright © 1999 by Harcourt Brace & Company All rights reserved ConclusionsConclusions t Key roles of general managers. © General managers, and not abstract industry forces, are a much more important influence in organizational success. t Investments in physical assets are less important than the managerial thinking that guides investment decisions.

26. Copyright © 1999 by Harcourt Brace & Company All rights reserved Conclusions (cont.) t Managers must pursue two types of learning. © Exploit the known and explore the new (lower-level and higher-level learning).

27. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 12 t Lack of responsiveness to and inability to anticipate environmental change is major organizational problem. © Probably far greater that most other business problems. t Lack of responsiveness appears to be related to four factors: © Problems of managerial cognition, including problems of noticing and interpreting environmental stimuli and problems of taking action;

28. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 12 (cont.) © Preference for and emphasis on lower-level learning over higher-level learning; © Homogeneity in managerial thinking; and © The limiting influence of industry norms and standards. t Managers can become more responsive to environmental change. © By thinking and acting like industry outsiders. © By emphasizing higher-level learning. © By institutionalizing change.

29. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 12 (cont.) t Many important roles played by general managers. t Fundamental importance of managerial decision making.