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Managerial Theory of Strategic Behavior of Environment Serving Organizations (pp. 43-75)

By: Jorge A. Cardenas

BUS 8010- Spring 2008

Dr. Lewis

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5. Model of Environmental Turbulence (ET)

• Models based on 3 factors• Novelty, speed, predictability

• Integrate the 3 factors into ET scale• Show how the new scale can predict

success of strategic behavior

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5.1 Predictability

• Figure 5.1 Evolution of Knowledge About an Environmental Change

• Shows how changes in the environment contribute to the available knowledge

• Makes operational the concept of partial ignorance

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5.1 Predictability

• All new technologies develop through the 7 states of Fig. 5.1• Speed of evolution is different

• Fig. 5.2 Time remaining vs. States of knowledge (Speed) • shows time remaining for each state and until full

impact

• Since 1920’s it has become increasingly difficult to recognize change

• Time until impact is shrinking

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5.1 Predictability

HYPOTHESIS 5.1: DECREASING PREDICTABILITY

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5.2 Novelty of Change

• Impact of change determines the importance of predictability

Definition: The novelty of a change is a measure of the inapplicability of the ESO’s capability to deal with the change

• Telepresence solutions• R&D departments need time to design, build, and test

(capability)• Sales departments need time to strategize and build sales

force (execution)

Tr = Tc + Te

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5.2 Novelty of Change

• Fig. 5.3 Response Time vs. Novelty vs. Early Start of Response• The more novel the change the more time is

needed to respond in each state of knowledge

HYPOTHESIS 5.2: INCREASING NOVELTY

Capability of firms to respond to changes has decreased therefore time required to respond has increased

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5.3 Escalation of Turbulence

• Fig. 5.4 State of Knowledge at Which Response Must Start• Time available to respond has become

shorter• Must make decisions with less available

knowledge• Response sometimes must be started

before “sense of impending change”• Surprise management systems

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5.3 Escalation of Turbulence

Definition: The level of turbulence in an industry is characterized by the state of knowledge at which ESO’s in the industry must start responses in order to respond effectively to environmental changes

• First half of 20th century• Second and third stages

• Second half of 20th century• First stage

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5.3 Escalation of Turbulence

• Fig. 5.4 State of Knowledge at Which Response Must Start• Crossover point has continually shifted to the left

• 3 transition points • Gradual (redistribution of power within the firm) or rapid

(invention of transistor)

HYPOTHESIS 5.3: ESCALATION OF TURBULENCE

During the 20th century the level of turbulence has progressively escalated in most industries

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5.4 Evolution of Organizational Intelligence

• Organizational learning varies within industries• Intelligence of firms also varies

• Not-for-profits prior to 1950’s• Slow learners

• Solutions to discontinuities • Reactive (Extrapolation) • Anticipatory

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5.4 Evolution of Organizational Intelligence

HYPOTHESIS 5.4 ORGANIZATIONAL LEARNING

ESO’s respond to drops in predictability and increase in novelty by developing appropriate response capabilities

HYPOPTHESIS 5.5 EVOLUTION OF ORGANIZATIONAL INTELLIGENCE

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5.5 Scale of Turbulence

• Each industry may have a different level of turbulence• Financial services vs. food services

• Graphic model of turbulence based on the atom• Fig. 5.5 Orbital Analogy of Turbulence

• Strategic budget level, unpredictability of change, novelty of change, frequency of change

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5.5 Scale of Turbulence

• Fig. 5.6 Scale of Environmental Turbulence in an Industry• 5 turbulence levels• 7 attributes which determine turbulence level

• Strategic budget- % of budget spent on strategic activity• Predictability• Response time- low – high• Novelty- applicability of historical capability • State of knowledge- minimum state of knowledge before

response must begin• Applicable forecasting technology- forecasting methods used

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5.5 Scale of Turbulence

• Turbulence scales for the commercial environment• Fig. 5.7 Level of entrepreneurial turbulence

• 10 attributes

• Fig. 5.8 Levels of marketing turbulence• 11 attributes

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5.6 STRATEGIC THRUST

• Strategic thrust or Aggressiveness• The set of characteristics which remain common to its strategic

activity over time• Fig. 5.9 Types of Strategic Thrust

• Entrepreneurial thrust- departure from historical product-market-tech. mix

• Marketing thrust- marketing aggressiveness• Fig. 5.1 Economic Effectiveness as a Function of

Strategic Thrust• Maximum returns are achieved by those whose strategic thrust

is ahead of the average• First mover advantage

• Those farthest away from the leaders are less effective

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5.6 STRATEGIC THRUST

HYPOTHESIS 5.6: DISTRIBTION OF STRATEGIC THRUSTIn a steady environment the strategic thrust of the largest group of ESO’s will match the turbulence level…but many above and below

HYPOTHESIS 5.7 EFFECTIVENSS OF THRUSTThose slightly ahead of turbulence level are most effective…

ROI te = ROI ee * thrust effectiveness factor * S * R

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5.7 Effect of the Rules of the Game

• Fig. 5.11 Economic Effectiveness of Business and Non- Profit Industries• Strategic thrust • Stable, Reactive thrust

Not-for-profit • Rules of the Game

• Strong survival pressure, freedom to choose thrust (for-profit)

• Weak survival pressure, less freedom to choose thrust (not-for-profit)

• Inconsistency in the rules of the game• “Limit strategic freedom, but must make a profit”

For-profit Positive ROI

Negative ROI

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5.7 Effect of the Rules of the Game

HYPOTHESIS 5.8: IMPACT OF RULES OF THE GAMEThe rules of the game imposed on an industry affect the level of economic effectiveness of the ESO within itHYPOTHESIS 5.9 REASONS FOR UNPROFITABILITY1) Market it serves is unprofitable2) Rules of the game make it unprofitable

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5.7 Effect of the Rules of the Game

HYPOTHESIS 5.1: STRATEGIC TRAP

Positive economic effectiveness in an industry under free market conditions will eventually be unprofitable due to constraints (political/government regulation)

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6. Strategic Capability6.1 Openness of Behavior

• Organizational Openness • Internal counterpart of strategic thrust• Information perspective, Action perspective

• Each perspective matches the other• Determinants- strategic culture, strategic

capability• Fig 6.1 Levels of Organizational Openness

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6.2 Model of Strategic Performance Potential

HYPOTHESIS 6.1: OPTIMAL THRUSTThere is a strategic thrust which will produce optimal resultsHYPOTHESIS 6.2: LIMITS ON EFFECTIVNESS OF THRUSTEach strategic thrust has a maximum strategic potentialHYPOTHESIS 6.3: MATCH OF THRUST AND CAPABILITYMatch thrust with capability that will support

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6.2 Model of Strategic Performance Potential

HYPOTHESIS 6.4 STRATEGIC PERFORMANCE POTENTIAL

Determined by five factors:

1) Match ET with thrust 2) match thrust with capability 3) size of strategic budget 4) strength of socio-political constraints on ESO 5) the capacity for effective spending of the strategic budget

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6.2 Model of Strategic Performance Potential

HYPOTHESIS 6.5: IRRATIONALITY OF ESO BEHAVIOR

Many ESO’s do not choose the optimal thrust, nor support their thrust with optimal capability