EXPLORING THE ORGANIZATION – ENVIRONMENT LINK: CHANGE AS COEVOLUTION
Sophia Philippidou Doctoral Candidate, Management Sciences Laboratory, Athens University of Economics and Business, Evelpidon 47, Gr 113 62 Athens, Greece.
[email protected] Klas Eric Söderquist Research Fellow, Management Sciences Laboratory, Athens University of Economics and Business and Associate Professor, Grenoble Graduate School of Business, France. Gregory P. Prastacos Professor, Director of the Management Sciences Laboratory, Athens University of Economics and Business.
ABSTRACT Building on coevolution theory and existing knowledge about strategic and organizational change, this paper develops a conceptual framework for studying change in organizations as coevolution. The focus is on how organizations create constructed environmental conditions, hence forming the context for themselves and other organizations and their environment. The paper illustrates this problematic by focusing on the interplay between public and private organizations. A set of propositions and an integrated framework laying the ground for future empirical research are developed.
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Introduction The literature on change in organizations, whether focused on strategic, structural, technological, process, cultural or human change, is abundant. Several schools of thought contribute to an improved understanding of the complex phenomena of change (c.f., e.g., Beer & Nohria, 2000; Pettigrew et al 2001; Rajagopalan & Spreitzer, 1996; Van de Ven & Pool, 1995). Building on previous research into change in organizations, this paper will highlight a particular aspect, namely that of the interplay between change in organizations and environmental context. Special emphasis is put on how organizations shape the context for themselves and other organizations. We illustrate this problematic by focusing on the interplay between public and private organizations from a coevolutionary perspective. We conceptually develop a novel research perspective on change in public and private organizations as coevolution. Chapter one briefly reviews the theory of coevolution. Chapter two identifies major changes in the current economy influencing as well private and public organizations. We then introduce a basic model of change in organizations. Chapter four develops the propositional framework and identifies areas for empirical research. Coevolution Theory Drawing on evolutionary biology in considering organizations as “organisms” (McKelvey, 1999), coevolution theory assumes that the development of organizations (firms and public organizations) is an outcome of the interplay between forces internal and external to organizations. As refined by Lewin et al (1999), coevolution theory considers organizations, their populations (industries), and their environments as the interdependent outcome of deliberate actions, institutional influences, and extrainstitutional changes. The focus of Lewin et al (1999) is on the firm, leading them to consider public areas such as regulatory mechanisms, rule making, educational system and governance structure as constituting an important part of the institutional environment together with capital markets and employment relationships. In their model, further, the extra-institutional environment is composed of technology, demographics, social movements, new entrants, global interdependence and management logics. Figure 1 depicts their model of coevolution of a firm, its industry and environment. 2
Institutional Environment - Countries
Extra-Institutional Environment
Firm
Industry
Macro evolution
Coevolution
Micro evolution
Figure 1. Coevolution of firm, its industry and environment, adapted from Lewin et al (1999), p. 537.
The strength of the coevolution perspective lies in its generalizability and integrative view of the "interplay between the adaptation of individual organizations, their competitive dynamics, and the dynamics of the institutional systems within which firms and industries are embedded" (Lewin et al, 1999, p. 536). A potential weakness in the particular framework depicted above is that the constituents of institutional and extrainstitutional environment are not empirically determined. In particular, if coevolution between public and private organizations is to be informed, the different factors contained in the institutional environment might need to be separated. Moreover, organizations, in particular firms, might have a larger influence on factors such as technology and management logics compared to demographics and social movements, all considered as extra institutional factors in the model. In their literature review of prolegomena of coevolution, Lewin & Volberda, (1999) identify a few studies focusing on institutional – firm coevolution (e.g., Calori et al, 1997). It is this particular aspect of coevolution that we propose to study in more depth in the current context of a rapidly changing economic landscape. When changes occur, organizations will search and invent new paradigmatic forms (Lewin et al, 1999). Our focus is on how firms and public sector organizations coevolve in that transformational environment.
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A Changing Economic Landscape Overlooking the history, the economic landscape is going through waves of discontinuous change and temporary equilibrium where, according to the Schumpetarian School, disequilibrium is the driving force of capitalism (c.f., e.g., Abernathy & Utterback, 1978; Tushman & Anderson, 1985; Hart & Milstein, 1999). The current economy, even though still undergoing turbulent changes, is supposedly converging towards a new temporary equilibrium where creation, handling and exploitation of knowledge and information are at the center of economic activity (in opposition to agricultural exploitation or industrial manufacturing in previous equilibriums). Several efforts have been made to describe this Information Economy (that in some cases simply has been called the “new economy”). Table 1, synthesizes the literature on environmental factors driving change in public and private organizations in the Information Economy (Whittington et al, 1998; Hitt et al, 1998; Hamel & Prahalad, 1996; Illinitch et al, 1996, OECD, 1997; PUMA, 2001). Economic and Political Factors 1. 2. 3. 4. 5.
Opening of global markets – Free trade – New economic alliances Extreme emphases on price, quality and satisfaction of customers needs Macro-economic and fiscal crisis (particular to Public Sector) Gradual domination of market oriented ideology (particular to Public Sector) Party-political engagements in favour of cutbacks (particular to Public Sector)
6. 7. 8. 9. 10.
Internet (the new information highway) Intranets Electronic mail Mobile telecommunication technology Business process support software (CRM, Knowledge Management, ERP,..)
Technology factors
Contextual and structural factors 11. 12. 13. 14.
Elimination or blurring of organizational and industry (sectorial) boundaries Fewer distinction between industrial and service businesses Discontinuous change of contextual factors Govern within limits (particular to Public Sector) Process factors
15. 16. 17. 18.
Greater knowledge intensity Increased focus on innovation both in technology and in new products / service Reduced time – frames for all strategic actions Transparency (particular to Public Sector)
Table 1. External contextual factors driving change in public and private organizations in the Information Economy.
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In order to navigate successfully in this economic landscape, organizations need to focus their attention to strategic leadership, flexibility, core competencies, human resources, and organizational structure (Hitt et al, 1998; Prastacos et al, forthcoming; Zarah & O'Neill, 1998; Whittington et al, 1999). Hence, logically speaking, these areas (among others) will be subject to intensive change in organizations. However, in comparison to the vast literature on what is changing in the economic landscape and on how organizations adapt to new environmental conditions, there is little focus on how organizations actually lead change (Brown & Eisenhardt, 1998) and, thus, create the environment for other organizations, and, at the end of the day, for themselves. For example, globalisation or the "IT explosion" are not phenomena independent of purposeful managerial (in private organizations - firms) or political (in public organizations) acts. Within and cross-sector mega mergers reinforce a globalisation where public bodies (such as the European Union) play a role of a regulator of competition and free trade within a political framework of European integration. A strong market push by firms in the IT and telecom sectors give birth to new technologies and products, often quickly adopted and seen as indispensable tools in organizations. We refer to such factors as constructed environmental conditions. The research perspective we propose aims at focusing on this interplay between organizations and the constructed environment. We recognise, in accordance with coevolution theory, that there are factors that are to a large extent independent of purposeful managerial acts or purposeful political acts. Besides demographics and social movements, economical, ecological or catastrophical factors such as stock market volatility, pollution, wars or terrorism are of this type. We refer to these as emerging environmental conditions to which organizations have to adapt. Proposition 1. Environmental conditions influencing change in organizations can be separated into constructed and emerging conditions. Proposition 1.1. Organizations are adapters to emerging environmental conditions when these act as driving forces for change.
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Proposition 1.2. Organizations are actors, through purposeful managerial or political acts committed in the organization, in the creation of constructed environmental conditions. Proposition 1.3. Specific driving forces for change in a specific organization can be the direct consequence of environmental conditions constructed through purposeful managerial or political acts for leading change committed in other organizations. In the following, we position two types of organizations and two types of management logics adopted by organizations when facing change. We propose that each one of them characterise public vs. private organizations. Two Types of Organizations The driving forces for change identified above, whether "emerging" or "constructed", lead private and public sector organizations to develop new forms and new management logics (Whittington et al, 1999). How easy is to do so depends on the type of organization – mechanistic or organic (Burns & Stalker, 1966) - and on the extent of exploration or exploitation adaptation of organizations to changing conditions (March, 1991; Lewin et al, 1999). With respect to the propositions developed above, emphasising the importance of leading change, it seems contradictory to talk about exploitation adaptation. The expression is justified in Lewin et al (1999) because they talk about how firms react when facing change. Here, however, we emphasise the parallel process of leading and adapting. We therefore prefer using the notion exploration or exploitation reaction of organizations to changing conditions. Mechanistic organizations are characterised by a high degree of specialization, standardization and formalization. We assume that public organizations to a large extent are of that kind. Based on the developments in Lewin et al (1999), we further assume that mechanistic organizations are more inclined towards an exploitation reaction when facing change. Exploitation emphasizes refining; standardizing, routinizing and elaborating established ideas, paradigms, technologies, heuristics and knowledge. Organic organizations are characterized by cross-functional integration, decentralization and free flow of communication. We assume that private organizations, also of large size, 6
are operating to a dominant extent as organic organizations, and that this type of organization is more inclined towards exploration reaction when facing change. This means focus on innovation, variation and risk taking. Table 2, synthesises the main characteristics of these types of organizations and forms of reaction to change. Mechanistic Organization 1. High Degree of Specialization 2. High Degree of Standardization 3. High Degree of Formalization 4. Strong Emphasis on Hierarchy 5. Strong Emphasis on Horizontal Communication 6. Low Role of Flexibility and Discretion 7. Rigid Departmentalisation 8. Clear Chain of Command 9. Narrow Spans of Control 10. Centralization
Organic Organization 1. Cross Functional Teams 2. Cross Hierarchical Teams 3. Free Flow of Communication 4. Wide Span of Control 5. Decentralization 6. Low Formalization 7. Low Standardization 8. Low Specialization 9. More Loosely Designed 10. Lateral Communication
Exploitation Reaction to Change 1. Systematic reasoning 2. Risk aversion 3. Defining and measuring performance 4. Improving existing capabilities, processes and Technologies as well as rationalizing and reducing Costs
Exploration Reaction to Change 1. Innovation 3. Variation 4. Risk taking 5. Relaxed control 6. Loose discipline 7. Flexibility 8. Experimenting with ideas, paradigms, Technologies and strategies
Table 2. Main characteristics of the Mechanistic and Organic Organizations and the Exploration and Exploitation logics of reaction to change in environments.
The arrow in Table 2 shows how both the mechanistic and organic organizations can influence and conflict each other and at the same time how can they apply an alternative reaction to change with respect to that assumed as "normal". Proposition 2: Public organizations operate mostly as mechanistic organizations. They react to changes in the environment essentially through an exploitation logic. Proposition 3: Private organizations / firms operate mostly as organic organizations. They react to changes in the environment essentially through an exploration logic.
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Proposition 4: When facing particular changes, mechanistic and organic organizations can apply an alternative reaction to change with respect to what would be "normal" (propositions 3 and 4). In particular, public organizations might experiment with organic forms and more of exploration reaction to change. Proposition 5: Organizations (whether firms or public) applying an exploration logic can be supposed to lead change in a particular area, thus creating the environment for other organizations. Proposition 5.1: Organizations that lead change are also subject to an adaptation logic in other fields of change than that they are leading in. Basic Model of Change in Organizations The plethora of literature on change in organizations has led to a certain terms confusion. The all-encompassing notion, designating the field we are analysing, is change in an organizational entity (Van de Ven & Poole, 1995), where the word change refers to "an empirical observation of difference in form, quality of state over time in an organizational entity", (Van de Ven & Poole, 1995, p. 512). An organizational entity can be an individual's job, a work group, a strategy for the organization, a product or service, or the overall organization as such. Building on this definition of change, Rajagopalan & Spreitzer (1996) define strategic change to encompass two things: 1) changes in the content of a firm's strategy as defined by its scope, resource deployments, competitive advantage and synergy; and 2) changes in external environment and organization brought about to initiate and implement changes in the content of strategy. In their review of research into strategic change they identify the field as dealing with: Triggers (environmental and internal conditions and changes); Managerial cognitions (though, sense-making and learning processes); Managerial actions (measures undertaken to implement change); and Organizational outcomes (the results of the change process). However, there is less focus on the "objects" of change. In other words, if the content of strategy changes, this will supposedly lead to changes in, for example, structure, processes or HR policies. To some extent, therefore, studies of strategic change in organizations operates with a black box being the object situated between the changing
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strategy and the organizational outcomes. This gap is bridged by studies of organizational change focusing on changes in the form, quality or state over time in organizational dispositives and mechanisms, e.g. structure, processes, people and boundaries (Whittington et al, 1999) The complementary between strategic and organizational change studies becomes obvious as the latter is less preoccupied by the goals and outcomes of change predominant in the former. Hence, an all-encompassing framework for studying change in organizations would analyze as well triggers, organizational conditions, managerial cognitions, managerial actions and organizational outcomes, as the organizational dispositives and mechanisms undergoing change (figure 2).
Environmental Conditions & Changes
ORGANIZATIONAL ENTITY
Managerial Cognitions
Change in the Content of Strategy
Outcomes
Change in Organizational Dispositives and Mechanisms
Managerial Actions
Organizational Conditions Direct Links Learning Links
Figure 2. A multi-lens perspective of strategic change (adapted from Rajagopalan & Spreitzer, (1996), p. 51, 57, 63 and 70).
This model identifies a large number of direct and learning links for studying change in organizations. From our coevolutionary perspective, we propose the in-depth study of two particular links: 1) "Managerial Actions Î Environmental Conditions and Changes" and 2) "Outcomes Î Environmental Conditions and Changes". 9
With respect to the previous knowledge synthesised in figure 2, we formulate the following proposition: Proposition 6: Study of change in organizations as coevolution should focus particularly on the interplay between environmental conditions and changes, and managerial actions and the outcomes of change processes. Further, change in organizations can be explained alternatively or complementarily over time by four different "motors" for change; life cycle, teleology, dialectic or evolutionary (Van de Ven & Pool, 1995): •
Life-Cycle theories search for an inherent "order" in the organization that can explain how change unfolds.
•
Teleology theories search for the goals of the change process and for the factors that govern the formulation of goals. They search for innovative patterns to attain goals and emphasize monitoring of progress and corrective action.
•
Evolutionary theories focus on the form of organization that emerges under certain conditions. They search to explain macro level conditions that set the parameters for micro-level variation, selection and retention and explain these processes as such. The resulting explanations will show how organizations persist and evolve over time.
•
Dialectical theories pose the probability of conflicting events, forces or values competing for domination and control. They enable to identify the contents of thesis and antitheses and to explain how they are constructed. A dialectical lens further focuses on the thresholds of confrontation and the process of overthrowing status quo. It focuses studies of change on power struggles.
Van de Ven & Pool (1995) suggest to integrate these four motors in studies of change in organizations by viewing them as providing alternative explanations of change processes without nullifying each other. The coevolution theory has by definition its roots in evolutionary theory. The other three lenses, however, might contribute to a more compete picture of change in organizations as coevolution.
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Proposition 7: Change in organizations as coevolution can be informed complementarily by searching for explanations to how change unfolds in lifecycle, teleological, dialectical and evolutionary theory. Proposed Framework for Studying Change in Organizations as Coevolution The proposed framework (figure 3) integrates the propositions developed (P1-P7). It positions public organizations and firms in the center. Change in these organizations unfolds as a systemic interaction between the environment, the reciprocal interplay between public and firm organizations, and the core elements of the internal change process, i.e., managerial cognitions and actions, change in the content of strategy and in organizational dispositives and mechanisms, organizational conditions and outcomes (P6).
Emerging Environmental Conditions (e.g. societal, economical, ecological, catastrophical)
Constructed Environmental Conditions (e.g. technology, management logics, regulations, educational system, governance structure), Evolutionary and Dialectical Change Motor
Construction: Process of Coevolution P1.2 P1-1.1
P1.3
P1.3
P5 Teleology Change Motor
P5.1
Teleology Change Motor
Public Org Change Process Managerial Cognitions. Managerial Actions. P6
Change in the Cont. of Strategy. Change in Org Dispositives & Mechanisms.
Org. Conditions
P2
Outcomes
Essentially Mechanistic Org. & Exploitation Reaction to Change
P1-1.1
P5.1 Firm Change Process
P4 Adoption of alternative forms and reactions to change Process of Coevolution Evolutionary and Dialectical Change Motor
Life-Cycle Change Motor
Managerial Cognitions. Managerial Actions.
Change in the Cont. of Strategy. Change in Org Dispositives & Mechanisms.
Org. Conditions
Essentially Organic Org. & Exploration Reaction to Change Life-Cycle Change Motor
Figure 3. Proposed framework for studying change in organizations as coevolution.
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P6
Outcomes
P3
Emerging environmental conditions can influence the change process, and organizations adapt to these variations (P1-1.1). Constructed environmental conditions are the results of purposeful managerial or political acts (P1.2) that influence other organizations (P1.3). With respect to proposition 7, the purposeful acts are underpinned by a teleology motor. In their adaptation processes and in their way of reacting to change and manage change internally, public organizations, essentially of mechanistic character, follow an exploitation path, while firms, essentially of organic character, follow an exploration path (P 2-3). With respect to proposition 7, this implies that a life-cycle motor govern adaptation, reaction to and management of change. Moreover, the exploration logic may further inform the process of construction of environmental conditions. As developed in propositions 5 and 5.1, organizations applying an exploration logic might become leaders of change in particular areas, thus creating the environment for other organizations in the concerned areas. However, leading change in one area does not exclude adaptation to change in other areas (P 5.1). Concerning the change process in public organizations and firms, there is an interrelationship in the sense that when facing particular changes, alternative organizational structures and reactions can be explored (P4). Of particular interest is experimentation with organic forms and more of exploration reaction in public organizations. This change in form and reaction pattern could be seen as the confrontation of a supposed "paradigm" or "thesis" ruling in the public sector, and an "antithesis" inspired by firms. Hence, this process of change would be explained by a dialectical motor (c.f. P7). The coevolution imperative (evolutionary motor with respect to proposition 7) permeate the entire model in the sense that all of the identified interrelationships are of coevolutionary nature (reciprocal influence). Conclusion Our framework is intended to provide a broad and integrative base for conducting research into change in organizations as a coevolutionary process. The novel perspective that we suggest is to examine 1) how environmental conditions are constructed through 12
purposeful actions and the resulting outcomes in firms and private organizations, 2) how this constructed environment influence back to firms and public organizations, and 3) to what extent mechanisms of coevolution determine the content of the constructed environment. Moreover, the framework integrates the four motors of change identified by Van de Ven & Pool (1995), thus enabling the development of a quad motor theory of change, at present not existing. The roots of purposeful acts and change outcomes lie in the process of change that unfolds in individual organizations, that in turn are determined by organizational form and the inherent logics of reacting to changing conditions. Thus, in order to understand the coevolution processes between firms, public organizations and constructed environment, these roots have to be determined or controlled for in research. We suggest that future research should operate with the objective of opening up the black box of construction of environmental conditions. A first step would be to determine empirically the environmental factors that are object to construction. Once this is done, the construction process could be researched using a particular factor, for example technology as unit of analysis. A particular aspect of coevulution in the construction of new environmental conditions concerns the potential conflict between firm goals (fundamentally to maximize rent) and public goals (fundamentally to maximize public wealth). In this process, a solution to a particular problem, for example regulatory aspects of firm taxation, would typically create a temporary synthesis acting back as a constructed environmental condition on firm and public organization populations.
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