Dynamics of Drivers of Organizational Change 3834930512, 9783834930514

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Nicole Zimmermann Dynamics of Drivers of Organizational Change

GABLER RESEARCH

Nicole Zimmermann

Dynamics of Drivers of Organizational Change With a foreword by Prof. Dr. Dr. h. c. Peter Milling

RESEARCH

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation University of Mannheim, 2010

1st Edition 2011 All rights reserved © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011 Editorial Office: Stefanie Brich | Nicole Schweitzer Gabler Verlag is a brand of Springer Fachmedien. Springer Fachmedien is part of Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: KünkelLopka Medienentwicklung, Heidelberg Printed on acid-free paper Printed in the Netherlands ISBN 978-3-8349-3051-4

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Foreword The design of organizational change has become a permanent managerial task in order for organizations to adapt to their environment or to exert influence on it. Accordingly, change in organizations can be reactive and proactive; either as a response to new demands which exert influence on the organization from outside, or as a deliberate measure to gain competitive advantage. Drivers of change and its management are the focus of Nicole Zimmermann’s dissertation. It explains change in organizational structures and processes by the interaction of internal and external stimuli. Here, it addresses the question of why some organizations are able to recognize new challenges early on and face them adequately, while others persist in their habituated structures and behavior patterns and are finally driven out of the market. Two major research questions are at the core of the investigation: (i) what are the drivers of organizational change, and (ii) is a history of successful change processes helpful or obstructive for further change? As such, problems are investigated as to why companies in a more specific sense and organizations in a more general sense have difficulties to change their strategies which have proven successful in the past whenever circumstances change. It is an important methodological characteristic of the stated problem and indeed a trivial fact that organizational change is a highly dynamic phenomenon. However, much research that addresses this topic employs methods that are adequate for static subjects of study. Often, this results in considerable differences in organizational theories and in their statements concerning change. The example of the New York Stock Exchange (NYSE) represents the basis of an extensive investigation of processes of inertia and change in an organization that has been successful for a very long period of time and then ran into difficulties that threatened its continued existence. The case study is used in order to collect data of a concrete example, to formulate hypotheses and to test them. Methodologically, the system dynamics approach is used because it is equally appropriate for theory formulation and the analysis of a case study. The author develops a formal model which can later be used for computer simulation. It is based on a multitude of also qualitative data that she derived predominantly from weblog entries and a number of interviews with employees of the New York Stock Exchange. She succeeds at developing hypotheses, at postulating causal relationships, at testing them by analyses, and at developing them further. The research question focuses on the transition from manual to electronic securities trading, which had been delayed for a long period of time, but which has since been implemented very quickly. Different periods, resistance, and impulses for change are analyzed, formed into hypotheses, and transferred to a model format. The comparison of simulated behavior over time with empirical data shows high consistency. The combination of exogenous pressure for the abandonment of manual

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Foreword

trading with endogenous actions by the management team creates a process that quickly transforms the habituated behaviors at the NYSE. The statements and insights which have been derived from the case study are generalized in order to derive the basic elements of a theory of organizational change. For this purpose, the original model that analyses a specific situation is transferred into a generic one that represents an entire class of applications. Elaborations on this generic model, its structure, and its behavioral patterns allow the author to gain insight into the processes of organizational change. Drivers of and resistance to change, external and internal factors, perception and actions of the management team are represented, analyzed, and consolidated towards the direction of a system of hypotheses—a theory—of organizational change. The analysis reveals that both developments in the environment and decisions by the managerial team determine the evolution of organizations. Additionally interests of stakeholders and the cognitive flexibility of the management team play a decisive role. In particular, the behavior of stakeholders can be used as a valuable source of information about the organizational environment.

Professor em. Dr. Dr. h. c. Peter Milling

VII

Acknowledgements Organizational phenomena have been a major topic of interest for me for a long time. In particular, the dynamic interplay of pressure for change and inertia has caught my attention. I have experienced its practical relevance and gained more and more interest in the theoretical side of this issue. Organizational change is situated at the interface between the system ‘organization’ and human beings. This dissertation concentrates on this interconnectedness of systemic drivers of and barriers to organizational change and on human interaction with this system. The dissertation grew out of my work during my time as an external PhD student and later as a research and teaching assistant at the Chair of Industrial Management (Industrieseminar) at the University of Mannheim. Additionally I profited from a research year at the University at Albany, State University of New York. The period as a doctoral student and assistant was interesting, challenging, and informative, which made it very valuable to me. Many people supported me during this phase and I would like to express my gratitude to them. I am greatly indebted to my advisor, Prof. Dr. Dr. h. c. Peter Milling, for giving me the possibility to work and develop under his guidance and for his continuing support and encouragement. I am also much obliged to researchers at the University at Albany. Here, I would like to express my gratitude to Professor George Richardson for many fruitful conversations and his support, as well as for co-refereeing this dissertation. Professor David McCaffrey aroused my enthusiasm for the case of the New York Stock Exchange, and Professor David Andersen helped to see the forest for the trees. Navid Ghaffarzadegan, Hyunjung Kim and Mohammad Mojtahedzadeh also made helpful suggestions. Additionally, I would like to thank Professor David Lane of the London School of Economics. Several years ago by his lecture he inspired me and aroused my enduring interest for system dynamics modeling and for systemic questions. My colleagues, Dr. Philipp Konecny, Dr. Christian Lehr, Switbert Miczka, Dr. Lena Oswald, Oliver Schmitzer, Prof. Dr. Jörn-Henrik Thun and Christian Weitert as well as our secretary Iris Scheuermann, have accompanied me during my years as a research and teaching assistant. They made it a pleasant time. In my personal environment, I have been able to rely on my close friends’ and family’s support, for which I am truly greateful. My sincere thanks go out to them all. I would also like to emphasize the assistance with final editing by Susanne Eschbach and, in particular, Dr. Lena Oswald. My parents have continuously encouraged me during my time as a doctoral student and on my entire path of life. I would like to thank them for their wonderful encouragement, for the motivation they gave me, and their loving support.

Nicole Zimmermann

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Contents Foreword.................................................................................................................... V Acknowledgements ................................................................................................ VII Contents ................................................................................................................... IX List of Figures ........................................................................................................ XIII List of Tables ........................................................................................................ XVII List of Abbreviations ............................................................................................ XIX A

The Challenge of Triggering Change in Organizations ................................... 1

B

Deterministic and Voluntaristic Theories of Organizational Change ............. 9 B.I

Incommensurable Drivers of Organizational Evolution ................................. 9 B.I.1

The Classical View of Adaptation to the Environment ..................... 11

B.I.1.a

Deterministic Adaptation and Impediments to the Adaptation Process ................................................................................... 11

B.I.1.b

Behavioral Elements of Adaptation ......................................... 15

B.I.2

Inertia and Routines as Determinants of Change ............................ 21

B.I.2.a

Inertia Leading to Environmental Selection ............................. 21

B.I.2.b

Routines Hindering and Driving Change ................................. 24

B.I.3

Transformation Triggered by Strategic Choice ................................ 28

B.II Reconciliation of Environmental Determinism and Managerial Choice ...... 33 B.II.1

Compatibility of Voluntaristic and Deterministic Views ..................... 33

B.II.2

Understanding Change by the Combination of Environmental and Managerial Forces ........................................................................... 37

B.II.3

A Reconciled Theory of Radical Change ......................................... 43

B.III Cognition and Attention as Drivers and Restraints of Alteration ................. 49 B.III.1 Perception of the Environment Through a Cognitive Managerial Lens ................................................................................................. 49 B.III.2 Selective Attention to Issues and Stakeholders ............................... 54 B.IV Need for a Dynamic Feedback View of Organizational Change ................. 61

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Contents

C

The Phenomenon of Inertia and Change Exemplified in a Case Study of the New York Stock Exchange ........................................................................ 65 C.I

A Method Mix for Studying Change in Organizations and Especially at the New York Stock Exchange ................................................................... 67 C.I.1

Contribution of Studying Change with System Dynamics and Case Study Methodologies .............................................................. 69

C.I.2

The Process of Model Conceptualization Supported by Case Study Research Methods................................................................. 72

C.I.3

Confidence Through Model Analysis and Testing............................ 79

C.II Reacting to Automation in the U.S. Securities Market ................................ 80 C.II.1

Automation of Order Clearing, Routing, and Information Systems .. 80

C.II.2

Moving Towards an Electronic Market ............................................. 87

C.II.3

The New York Stock Exchange’s Recast of Trading Systems ......... 93

C.III Structure and Behavior of Forces for Retention and Change ................... 100 C.III.1 A Perspective of Adaptation to the External Environment ............. 101 C.III.2 An Endogenous Struggle of Culture and Resistance ..................... 111 C.III.3 Managerial Impact on Change ....................................................... 120 C.III.4 Full Model Behavior ....................................................................... 139 C.IV Analyses of Model Structure and Behavior .............................................. 145 C.IV.1 Confidence in Model Structure and Parameterization .................... 146 C.IV.2 Validation of Model Behavior and Sensitivity ................................. 149 C.V Implications of the New York Stock Exchange’s Recast of Trading Systems ................................................................................................... 160 D

Generic Interpretation of Organizational-Environmental Forces, Feedback, and Change ................................................................................... 165 D.I

A Generic Model of Organizational Inertia and Change ........................... 165 D.I.1

Motivation for a Generic View ........................................................ 165

D.I.2

Generic Model Structure ................................................................ 168

D.II Structural-Behavioral Analysis and Causal Theory .................................. 182 D.II.1

Validation of the Generic Model ..................................................... 182

D.II.2

Effects of Reinforcing and Balancing Feedback on the Occurrence of Change ................................................................... 185

Contents

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D.III Possibilities of Managerial Intervention for Driving Change ..................... 192 D.III.1 Inertia and the Ambiguous Effects of the Responsiveness to Pressure ........................................................................................ 192 D.III.2 Effects of Increases in the Responsiveness of Attention ............... 198 D.IV Joint Management of Leverage Points ..................................................... 199 D.IV.1 Relationship Between the Responsiveness of Strategy to Pressure and Attention .................................................................. 200 D.IV.2 Policy Implications in Different Environments ................................ 205 D.V A Feedback Theory of Organizational Inertia, Change, and Attention...... 211 E

Realization of Change in Organizations ....................................................... 217

References ............................................................................................................. 227 Appendix................................................................................................................ 257

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List of Figures Figure A-1: Innovation typology .................................................................................. 5 Figure B-1: Adaptive feedback .................................................................................. 12 Figure B-2: Impediments to adaptive feedback ......................................................... 15 Figure B-3: Limitations to adaptation......................................................................... 20 Figure B-4: A feedback view of strategic choice in a theory of organization ............. 31 Figure B-5: Sociological paradigms (Burrell and Morgan) ......................................... 34 Figure B-6: Convergence in the punctuated equilibrium model ................................. 44 Figure B-7: Determinants of stakeholder attention according to Mitchell, Agle, and Wood ............................................................................................... 59 Figure C-1: Trade participants and interactions in floor trade ................................... 66 Figure C-2: Percentage of leading stock exchanges enabling some or full e-trade (BOT) ..................................................................................................... 88 Figure C-3: NYSE market share in NYSE-listed securities (BOT) ............................. 90 Figure C-4: Adaptation process of stock exchanges ................................................. 93 Figure C-5: Spread.................................................................................................... 94 Figure C-6: Reference mode (BOT) .......................................................................... 98 Figure C-7: Diagramming conventions .................................................................... 100 Figure C-8: Sector diagram of the adaptation view ................................................. 101 Figure C-9: External influences in the remaining market (SFD) .............................. 103 Figure C-10: Diffusion of electronic trading in the securities market (BOT)............. 104 Figure C-11: External influences (CLD) .................................................................. 105 Figure C-12: Customer pressure for e-trade (SFD) ................................................. 106 Figure C-13: Limiting effect of e-trade on change ................................................... 106 Figure C-14: Customer pressure for e-trade (CLD) ................................................. 107 Figure C-15: Specialist participation from data (BOT) ............................................. 108 Figure C-16: Customer pressure for market quality (SFD) ...................................... 109 Figure C-17: Customer pressure for floor trade (CLD) ............................................ 110 Figure C-18: Adaptation view (BOT) ....................................................................... 111 Figure C-19: Sector diagram of the culture and resistance view ............................. 112 Figure C-20: Commissions and spread (SFD and BOT) ......................................... 113 Figure C-21: Resistance pressure from floor (SFD and effect) ............................... 114

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List of Figures

Figure C-22: Resistance pressure from floor (SFD and CLD) ................................. 115 Figure C-23: Cultural pressure from floor (SFD and CLD) ...................................... 117 Figure C-24: Effect of institutional customers on power of floor firms ..................... 118 Figure C-25: Power of floor firms (SFD and CLD) ................................................... 119 Figure C-26: Culture and resistance (BOT) ............................................................. 120 Figure C-27: Sector diagram of the management view ........................................... 120 Figure C-28: Inertia and repetitive momentum (SFD) ............................................. 122 Figure C-29: Relationship between change and inertia........................................... 123 Figure C-30: Inertia and repetitive momentum (CLD) ............................................. 123 Figure C-31: Relationship between customer orientation and change (SFD) ......... 126 Figure C-32: Repetitive attention loop (SFD) .......................................................... 128 Figure C-33: Customer orientation (SFD) ............................................................... 129 Figure C-34: Perception bias from managerial attention (CLD) .............................. 129 Figure C-35: Spread and market share (SFD) ........................................................ 132 Figure C-36: Relationship between time at NBBO and market share ..................... 133 Figure C-37: Market share adjustment from speed and market quality (SFD) ........ 134 Figure C-38: Relationship between time to execution and market share ................ 134 Figure C-39: Relationship between market share and openness to change (SFD). 135 Figure C-40: Confidence effect of market share on openness to change ............... 136 Figure C-41: Market share (CLD) ............................................................................ 137 Figure C-42: Liquidity algorithms as a response to low market quality (SFD) ......... 138 Figure C-43: Adaptation, Culture and Resistance, and Mgmt (BOT) ...................... 139 Figure C-44: Underlying forces (BOT)..................................................................... 140 Figure C-45: Relationship between the time at the NBBO and market share ......... 141 Figure C-46: Comparison with reference mode (BOT) ............................................ 142 Figure C-47: Full NYSE model (CLD) ..................................................................... 143 Figure C-48: Importance of liquidity algorithms and market quality ......................... 144 Figure C-49: Sector diagram making explicit the model boundary .......................... 147 Figure C-50: Linear development of e-trade in market ............................................ 148 Figure C-51: Sensitivity for institutional customer pressure for e-trade ................... 151 Figure C-52: Sensitivity for resistance..................................................................... 152 Figure C-53: Sensitivity for resistance, power, and cohesiveness of floor firms ...... 154

List of Figures

XV

Figure C-54: Sensitivity for the fractional change in trading per pressure ............... 156 Figure C-55: Sensitivity for fractional change in customer orientation .................... 157 Figure C-56: Sensitivity for managerial parameters ................................................ 158 Figure C-57: Sensitivity for changes in stakeholder and management parameters 159 Figure D-1: Diffusion of B (SFD) ............................................................................. 169 Figure D-2: Adaptation pressure for strategy B (SFD) ............................................ 170 Figure D-3: Effect the relative quality B on the perceived inadequacy of strategy .. 171 Figure D-4: Adaptation pressure for strategy B (CLD) ............................................ 171 Figure D-5: Resistance pressure for strategy A (SFD) ............................................ 172 Figure D-6: Effect of adequacy of quality A on resistance pressure ........................ 173 Figure D-7: Resistance pressure for strategy A (CLD) ............................................ 173 Figure D-8: Inertia and repetitive momentum (SFD) ............................................... 174 Figure D-9: Effect of change on the decrease of inertia .......................................... 175 Figure D-10: Limitations to changes of strategy (SFD) ........................................... 176 Figure D-11: Attention to stakeholders (SFD) ......................................................... 177 Figure D-12: Repetitive momentum in the generic model (CLD) ............................. 178 Figure D-13: Limitations to changes in attention (SFD)........................................... 178 Figure D-14: Adaptation of Attention (CLD) ............................................................ 179 Figure D-15: Performance (SFD) ............................................................................ 180 Figure D-16: Relationship between performance and change (SFD) ...................... 181 Figure D-17: Performance (CLD) ............................................................................ 182 Figure D-18: Sensitivity for changes in stakeholder and management parameters 184 Figure D-19: Generic base run (BOT) ..................................................................... 186 Figure D-20: Phases of loop dominance (BOT and CLD) ....................................... 187 Figure D-21: Comparison of early and late radical adaptation (BOT) ..................... 189 Figure D-22: Relationship between difference in quality B and strategy inadequacy......................................................................................... 190 Figure D-23: Two environmental changes (BOT) .................................................... 191 Figure D-24: Effects of high inertia (BOT) ............................................................... 194 Figure D-25: Sensitivity to variations of inertia ........................................................ 195 Figure D-26: Sensitivity for change per perceived pressure.................................... 197 Figure D-27: Sensitivity for changes in adaptability of attention .............................. 199

XVI

List of Figures

Figure D-28: Delayed adaptation and early radical adaptation (BOT) ..................... 201 Figure D-29: Nonlinear relationship between fractional change and adaptation effectiveness ...................................................................................... 202 Figure D-30: Effect of attention to stakeholders on model behavior (BOT) ............. 204 Figure D-31: Adaptation of attention to stakeholder favoring B (CLD) .................... 205 Figure D-32: Reaction to quicker environmental change (BOT) .............................. 206 Figure D-33: Nonlinear relationship between the fractional change and adaptation effectiveness in the case of quick environmental change . 207 Figure D-34: Sensitivity to the variation in the permanent pressure for strategy A .. 208 Figure D-35: Inconsistent managerial setup (BOT and CLD) .................................. 210 Figure E-1: Full generic causal loop diagram (CLD) ............................................... 223

XVII

List of Tables Table B-1: Theoretical focus of the dissertation ........................................................ 10 Table B-2: Selected examples of multi-paradigm research in organizational change theory.......................................................................................... 40 Table C-1: Research design ..................................................................................... 69 Table C-2: Data sources for variable derivation ........................................................ 75 Table C-3: Exemplary derivation of variables, causal relationships, and behavior.... 78 Table C-4: Quantitative content analysis of the Exchanges Weblog ....................... 125 Table D-1: Strategies and their qualities ................................................................. 168

XIX

List of Abbreviations Amex

American Stock Exchange

BOT

behavior over time

CEO

chief executive officer

CLD

causal loop diagram

COO

chief operating officer

DEC

Digital Equipment Corporation

DMM

designated market maker

DOT

Designated Order Turnaround

i.e. (id est)

that is

NASDAQ

National Association of Securities Dealers Automated Quotations

NBBO

national best bid and offer

NGO

non-governmental organization

NYSE

New York Stock Exchange

PC

personal computer

SEC

U.S. Securities and Exchange Commission

SFD

stock and flow diagram

SIAC

Securities Industry Automation Cooperation

SOFFEX

Swiss Options and Financial Futures Exchange

vs.

versus

WHO

World Health Organization

1

A The Challenge of Triggering Change in Organizations Organizational environments are dynamic, and the speed of environmental change as well as its direction is often difficult to anticipate. In order to survive in the long term, organizations need to be able to successfully cope with a changing environment. They have to respond to emerging technologies or strategies even before they are fully established in the market.1 For this purpose, they need to be crafted in a way that makes them adaptable systems. Quick and appropriate organizational reactions are desired, and the ability to trigger organizational adaptations and transformations is important, but this poses great challenges to organizations. There is wide agreement that—in particular for established organizations—change is a difficult task. These establishments are often incapable of responding effectively to shifts in their external environment.2 “[… E]xisting organizations, especially the largest and most powerful, rarely change strategies and structures quickly enough to keep up with the demands of uncertain, changing environments.”3 This failure to understand the need for change or to initiate it threatens the performance and even the survival of organizations.4 Three examples will elaborate more clearly the difficulties organizations encounter when the demands from their environments change. The world's largest food corporation Nestlé, which originated from a breast-milk substitute producer, took more than a decade to adapt to its customers’ demands for ethical conduct. In the early 1970s, critics addressed Nestlé for its aggressive marketing practices for infant formula in the developing world, such as the failure to label products appropriately as well as the use of personnel dressed like nurses who advised mothers to use milk substitutes. Critics argued that, in combination with the prevailing conditions of water contamination, illiteracy, and poverty, infants often received a diluted and contaminated meal. They attributed the resulting malnutrition, diarrhea, and higher mortality rates to the use of breast-milk substitutes.5 Nestlé reacted by only minor modifications to its marketing practices.6 It even sued some of its 1

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See Benner, Mary J.: Securities Analysts and Incumbent Response to Radical Technological Change: Evidence from Digital Photography and Internet Telephony, in: Organization Science, Vol. 21 (2010), No. 1, pp. 42 and 59. See ibid., p. 42; Tripsas, Mary and Giovanni Gavetti: Capabilities, Cognition, and Inertia: Evidence from Digital Imaging, in: Strategic Management Journal, Vol. 21 (2000), No. 10/11, p. 1147. See also Hannan, Michael T. and John Freeman: Structural Inertia and Organizational Change, in: American Sociological Review, Vol. 49 (1984), No. 2, p. 151; and Schaefer, Scott: Influence Costs, Structural Inertia, and Organizational Change, in: Journal of Economics and Management Strategy, Vol. 7 (1998), No. 2, pp. 237–238. Hannan, Michael T. and John Freeman: Organizational Ecology, Cambridge, MA [et al.] 1989, p. 12. See Hill, Charles W. L. and Frank T. Rothaermel: The Performance of Incumbent Firms in the Face of Radical Technological Innovation, in: The Academy of Management Review, Vol. 28 (2003), No. 2, p. 257. See Newton, Lisa H.: Truth is the Daughter of Time: The Real Story of the Nestle Case, in: Business and Society Review, Vol. 104 (1999), No. 4, p. 369. See Sethi, S. Prakash: Multinational Corporations and the Impact of Public Advocacy on Corporate Strategy: Nestlé and the Infant Formula Controversy, Boston 1994, p. 53.

N. Zimmermann, Dynamics of Drivers of Organizational Change, DOI 10.1007/978-3-8349-6811-1_1, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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critics for libel. The company continued to affirm that its marketing practices were in accordance with industry standards and law. Due to Nestlé’s reluctance to react to its critics, activists organized a boycott in 1977 that won support from the World Health Organization (WHO) and UNICEF. In 1980 the WHO drafted an industry-wide code of conduct. Discussions between the two parties began, and Nestlé slowly started to accept several of the boycotters’ demands.7 It had noticed that it needed to adapt its culture and management to changes in its socio-political environment.8 The boycott was called off when Nestlé accepted the code in 1984, seven years after the boycott started and more than a decade after its critics pointed to problems caused by its marketing practices. Although the Nestlé Company still has many critics, it has started to change the way it deals with its stakeholders. The next time when some European customers and Greenpeace aired their displeasure with a genetically modified candy bar produced by the organization, it reacted quickly by removing the bar from the European market. It also refrained from introducing further genetically engineered products. Although the organization was very reluctant to change its strategy in the infant formula case, with respect to candy bars it quickly aligned its strategic orientation with the public’s expectations. While Nestlé finally adapted to stakeholder demands, other organizations failed to undergo necessary change in their strategic orientation. Digital Equipment Corporation (DEC) used to be a leading computer manufacturer and a highly innovative company during the minicomputer generation in the 1970s and early 1980s. With the emergence of the much simpler personal computer (PC), DEC remained with its old strategy and continued to offer rather expensive and specialized all-in-one solutions including storage, processing, infrastructure, and applications. The emergence of the personal computer changed DEC’s market environment as well as the needs of a fast growing number of private customers. DEC’s management did not perceive this new group and thus failed to recognize the potential of the new product.9 The DEC culture kept the organizational focus on customers with a higher technological interest. Deeply embedded convictions about the prevalence of their technologically innovative products in the market led to a diminished perception of the significance of problems and of customer groups which developed in a radically altered environment.10 In the view of Kampas, the degree of environmental determinism, meaning the degree to which the market drives organizations, increased with the development of the PC as a dominant design in the computer market. DEC with its inwardly focused culture 7

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See Post, James E.: Assessing the Nestlé Boycott: Corporate Accountability and Human Rights, in: California Management Review, Vol. 27 (1985), No. 2, p. 123; and Sethi: Multinational Corporations and the Impact of Public Advocacy on Corporate Strategy, 1994, pp. 226–227 and 273–282. See Sethi: Multinational Corporations and the Impact of Public Advocacy on Corporate Strategy, 1994, pp. 121 and 226–227. See Schein, Edgar H. with Peter DeLisi, Paul J. Kampas, and Michael M. Sonduck: DEC is Dead, Long Live DEC: The Lasting Legacy of Digital Equipment Corporation, San Francisco, CA 2003, p. 291. See ibid., pp. 251–252.

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3

could not keep up with external developments.11 After many of its businesses had been sold already, the company was bought up by Compaq in 1998, which was later acquired by Hewlett-Packard. DEC thus represents an example of a company that did not align its strategy with changing environmental conditions. The failure to perceive and orient to a new customer group despite existing environmental pressure was significant for the absence of change. A relatively young company represents the third example of an organization having problems to reorient. The digital photography company Linco, founded in 1996, soon became the technological market leader in digital photo memory, and faced problems of inertia as early as 2001. This means it was not sufficiently open to demands from its environment. Linco originated from an exploratory research project within another company, became a formal business unit in 1993 and independent in 1996. Shortly after its founding, the CEO and management established the firm’s identity as a digital photography company.12 Here, identity is defined as what insiders and outsiders perceive to be the core of an organization. It is closely associated with norms and shared beliefs about legitimate behavior and manifests itself in capabilities, routines, and procedures.13 In order to increase internal identification with digital photography, management even handed out digital cameras to employees. In 2000, by the time the organization went public, Linco was also regarded from the outside as a photography company. Resource allocation, capital investment, and human resource policies were guided by identity. Because the technological and industry context were viewed through the lens of digital photography, Linco’s perception of other opportunities was limited. Even when USB flash drives—which overlapped the functionality of Linco’s digital film—were launched by its competitors, Linco was reluctant to adapt because flash memory did not fit its identity.14 Customers adopted the competitors’ product. From 2001 on, a new CEO tried to change the organization’s identity, but both internally and externally the company did not converge on a new identity for several years. Linco faced significant difficulty adopting identity-challenging technologies that violate self-reinforcing core beliefs.15 It is surprising how quickly identity manifested once the organization embarked on the digital photography strategy. This then created a reinforcing cycle between cognitive elements of the organization and its actions, preventing it from deviating from the direction taken. It becomes evident from the examples that many established organizations have problems adapting to a new strategy demanded or pursued by other market partici11

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See Kampas, Paul J.: The Impact of Changing Technology, in: Schein, Edgar H. (Ed.): DEC is Dead, Long Live DEC: The Lasting Legacy of Digital Equipment Corporation, San Francisco, CA 2003, pp. 138–139. Directly see Tripsas, Mary: Technology, Identity, and Inertia through the Lens of 'The Digital Photography Company', in: Organization Science, Vol. 20 (2009), No. 2, p. 444. See ibid., p. 450. See ibid., pp. 450–451. See ibid., p. 454.

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A The Challenge of Triggering Change in Organizations

pants. Organization theorists argue that organizations are transformed all the time.16 For many of them, peripheral change or the fine-tuning of processes to further improve an old but also a relatively new strategy does not pose great challenges. DEC and Linco, for example, were very innovative in the minicomputer and digital photography business. However, they had great difficulties adopting a new strategy requiring a change in the organization’s core. In the view of Hannan and Freeman, the organizational core is comprised of stated goals, forms of authority, the core technology, as well as the marketing strategy, indicating which clients the organization orients to.17 Tushman and Romanelli hold a very similar notion of core strategy or strategic orientation. In contrast to a narrow understanding of strategic orientation as a product or business strategy, it not only tells what business the firm is in, but also how it competes in this area. Change of the strategic orientation can then be regarded as a shift in the business and product strategy as well as the structure, control systems, power relationships, or in the core values of an organization.18 The dissertation follows the broad definition of strategic orientation suggested by Hannan and Freeman as well as Tushman and Romanelli. This view of organizational change goes beyond the mere adoption of a technological innovation or disruptive technology with different technological features that customers value. Figure A-1 places the three examples discussed into a grid that measures the extent of technological innovation and the newness of the market served. The three market developments fall into very different categories, and it cannot be said that they all serve new markets or are radical technological innovations. Only digital photography can be subsumed under disruptive innovations.19 The concept described here additionally extends to non-technological changes in the market and includes all significant shifts in customer or stakeholder demands that impinge on an organization and require a change in the organization’s core. Many organizations seem to have difficulty with transformations that require such a form of rethinking. Organizations already fail to recognize the need and to make the decision to adopt a new strategy.20

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19

20

See March, James G.: Footnotes to Organizational Change, in: Administrative Science Quarterly, Vol. 26 (1981), No. 4, p. 563. See also Kimberly, John R. and Robert H. Miles: The Organizational Life Cycle: Issues in the Creation, Transformation, and Decline of Organizations, in: The Jossey-Bass Social and Behavioral Science Series, San Francisco, CA 1980, p. 2. See Hannan and Freeman: Structural Inertia and Organizational Change, 1984, p. 156. Directly see Tushman, Michael L. and Elaine Romanelli: Organizational Evolution: A Metamorphosis Model of Convergence and Reorientation, in: Cummings, Larry L. and Barry M. Staw (Ed.): Research in Organizational Behavior, Vol. 7, Greenwich, CT 1985, pp. 175–176. See Christensen, Clayton M: The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, Boston, MA 1997, p. xxv. Christensen defines a disruptive technology as an inferior technology which has different features that customers value. See Christensen: The Innovator's Dilemma, 1997, p. xv. See Mellahi, Kamel: The Dynamics of Boards of Directors in Failing Organizations, in: Long Range Planning, Vol. 38 (2005), No. 3, Special Issue: Organizational Failure, p. 270; Shattock, Michael: The academic profession in Britain: A study in the failure to adapt to change, in: Higher Education, Vol. 41 (2001), No. 1/2, pp. 45–46; and Sheppard, Jerry Paul and Shamsud

5

A The Challenge of Triggering Change in Organizations

new newness of market served

personal computers

ethical products

digital photography

existing incremental radical extent of technological innovation

Figure A-1: Innovation typology From the reluctance to change among organizations the problem arises of what enhances their adaptability. The recognition of drivers of change allows for a more appropriate strategic orientation of organizations that goes beyond the mere understanding of change obstacles. Theoretical positions concerting drivers of change are far from concordant with each other. Opinions on what triggers development in organizations are indeed diverse, as the following statement highlights. “Although development can be considered as the natural model of organizational behavior, there is no theoretical consensus as to which forces generate development or hold it back. There is a debate as to how far one should seek to interpret the development of organizations as the product of external forces rooted in the social and economic system, as opposed to interpreting it as the product of idiosyncratic purposive behavior on the part of those within organizations who decide on strategies. It is a debate over the significance of environmental forces as opposed to managerial action, over organizational dependence as opposed to autonomy. This has been a fundamental issue both in the economic theory of the firm and in organization theory […].”21 As the statement reveals, the question of what determines change is central in organization theory. Different theories propose contrasting drivers and also inhibitors of change. The disagreement among organization theories shows that there is need for a deeper exploration. This investigation in this dissertation will therefore be guided by the research question of what the drivers of change are. The query will be discussed also in relation to possible inhibitors of change that proved to be important in the short examples presented. Reasons for the difficulty to make the decision to change will be analyzed. As the DEC case showed, managerial perception of old and emerging stakeholder groups turned out to be essential. Also the Linco study revealed the significance of a cognitive lens in relation to self-reinforcing beliefs and routines. The

21

D. Chowdhury: Riding the Wrong Wave: Organizational Failure as a Failed Turnaround, in: Long Range Planning, Vol. 38 (2005), No. 3, Special Issue: Organizational Failure, p. 250. Child, John and Alfred Kieser: Development of organizations over time, in: Starbuck, William H. and Paul C. Nystorm (Ed.): Handbook of organizational design, Vol. 1. Adapting organizations to their environments, Oxford 1981, p. 28.

6

A The Challenge of Triggering Change in Organizations

Nestlé example demonstrated differences in the organization’s reaction to a first and second customer demand of a similar kind. These aspects deserve consideration in their relation to drivers of change. Overall, this dissertation addresses the questions of, first, what drives organizational change, and second, whether prior change serves as a driver for future transformations. In this way, it addresses the problem of why organizations have difficulties making the decision to alter their core strategy. A better understanding of what prevents and drives change in organizations is expected to lead to better organizational strategies and enhance organizations’ adaptability. Previous research on organizational change has often investigated drivers of change from a static perspective. Many approaches illuminate single aspects and disregard interdependencies and their evolution over time. This investigation employs a long-term focus of behavior and structure of organizations. Change is analyzed by system dynamics modeling and simulation as this approach accounts for the system’s complexity as well as the interaction of hindering and driving forces for transformation. It is also able to incorporate cognitive aspects and show how the system’s history is captured in accumulations, which may create path-dependent behavior.22 The relation of structure to behavior helps understand organizations’ evolution and elicit triggers of change. For the reason of educing determinants of organizational evolution, in chapter B, organizational theories are discussed in their relation to drivers of change. First, single-driver theories are addressed. Second, there may be multiple drivers and inhibitors. Therefore, it is clarified whether it is legitimate from a philosophical point of view to combine drivers and theories of change. After this discussion on legitimacy, several examples of combined or multiple-paradigm theories follow that include several of the elements of the single-paradigm theories. As there still remains a need for a more dynamic consideration of drivers of change, a case study helps elicit causal relationships of change and its absence. Chapter C deals with a case study of the New York Stock Exchange’s move to electronic trading and its methodical analysis. In the beginning, the system dynamics method is described together with its potential to reveal complex causal relationships, link structure and behavior, and provide understanding for what determines change. In particular the use of system dynamics for case study research in combination with qualitative methods is elaborated. Subsequently, the reader is introduced to important developments in the securities market which led to the emergence of electronic trading. The NYSE’s initial lack of response and later radical adaptation to electronic trading are analyzed in more detail by system dynamics methods. This part of the inquiry particularly focuses on different drivers of change. As the NYSE-specific analysis provides many examples of more generic relevance, a further, generic model is developed in chapter D. It represents a more ge22

For an overview of the principles system dynamics modeling see Forrester, Jay W.: Industrial Dynamics, Cambridge, MA 1961, pp. 67–72.

A The Challenge of Triggering Change in Organizations

7

neric system dynamics theory and investigates the interconnectedness of drivers of change and possibilities for managerial intervention for creating different patterns of change. Chapter E summarizes the findings and consolidates the implications.

9

B Deterministic and Voluntaristic Theories of Organizational Change There are many schools of thought concerned with organizations and their evolution. Innovation research, for example, focuses on process and product innovations in business.23 Institutional theories and industrial organization deal with market exchanges.24 Strategic management is concerned with the competitiveness of companies.25 Many theories pay attention to single aspects in organizations such as power, culture, or sensemaking.26 Additionally, there are practical approaches such as change management and organization development, aiming at successful change implementation. This dissertation, however, concentrates on organization theory and its sub-category of organizational change. The reason is their focus on behavioral elements of decision-making. Structure and process are both important in organization theory, and some theories even take into account cognitive elements of decisionmakers.27 The organization theory approach also incorporates many of the aspects of strategic management, the dynamic capabilities view, and innovation research. This, together with decision-behavioral elements, makes it particularly suited for the analysis of change in organizations.

B.I

Incommensurable Drivers of Organizational Evolution

The organization theory field combines many smaller organizational theories. These theories have various and often incommensurable opinions regarding the origin of change. Despite these differences, they hold similar views of the essence of organizations and consider them as socially constructed systems of human activity. Organi-

23

24

25

26

27

See Milling, Peter M.: Modeling innovation processes for decision support and management simulation, in: System Dynamics Review, Vol. 12 (1996), No. 3, pp. 215–218; Milling, Peter M.: Understanding and managing innovation processes, in: System Dynamics Review, Vol. 18 (2002), No. 1, pp. 75–80; and Rogers, Everett M.: Diffusion of Innovations, 5. Ed., New York, NY [et al.] 2003, pp. 136–157. See Nelson, Richard R. and Sidney G. Winter: An evolutionary theory of economic change, Cambridge, MA [et al.] 1982, pp. 3–4; and North, Douglass C.: Institutions, institutional change and economic performance, Cambridge, MA [et al.] 1990, pp. 93–96 and 108–109. See Chandler, Alfred D. Jr.: Strategy and Structure: Chapters in the History of the Industrial Enterprise, Cambridge, MA 1962, p. 11; and Porter, Michael E.: On Competition, updated and expanded Ed., Boston, MA 2008, pp. 3–4. See Pfeffer, Jeffrey: Managing With Power: politics and influence in organizations, Boston, Mass. 1992, pp. 8–13; Schein, Edgar H.: Organizational Culture and Leadership, 3. Ed., San Francisco, CA 2004, pp. 1–8; and Weick, Karl E.: Sensemaking in Organizations:, Thousand Oaks [et al.] 1995, pp. 4–16. See Scott, W. Richard: Reflections of a Half-Century of Organizational Sociology, in: Annual Review of Sociology, Vol. 30 (2004), No. 1, pp. 3–4 and 7–8.

N. Zimmermann, Dynamics of Drivers of Organizational Change, DOI 10.1007/978-3-8349-6811-1_2, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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B Deterministic and Voluntaristic Theories of Organizational Change

zations are goal-directed and maintain boundaries that reflect their goals.28 Hence they are social systems that have persisting elements and a purpose. Following the organizational literature in general, the view of organizations employed in this piece of work mainly focuses on business organizations, but also extends to non-profit organizations, as they obey similar processes and share properties important in the organization theory field. Phenomena discussed in organization theory—such as decision-making in organizations, organizational behavior, and particularly organizational change—also apply to administrative, charitable, or health care organizations. The characteristics of organizational theories employed in this dissertation are summarized in Table B-1. Characteristics of organization theory employed Similar definitions of organizations, but different views on drivers of change

Focus on behavior and decision-making in combination with organizational elements

Focus on organizational change

Primary focus on organizational level of investigation

Table B-1: Theoretical focus of the dissertation Research has approached organizations and their evolution at different levels of investigation: the individual, group, organization, and even the industry. This dissertation concentrates on decisions and behavior at the group and organizational level. Accordingly, it relies on an aggregate view of individuals although they may be influenced by the psychological micro-perspective. Since the focus is on the organization, reasons for changes in the market will also be outside the boundary of the subject matter. They may be described, but will be included only in so far as they impinge on decision-makers in the organization as part of their decision environment. Much attention has been paid to the relationship between the environment or market and the organization. Environmental drivers of change have been found in changes in demand, technological innovations, and institutional conditions.29 The perspective according to which organizations adapt to the environment is one of the most prominent views of organizational theory and change. 28

29

See Aldrich, Howard E.: Organizations and Environments, Stanford, CA 2008, pp. 4–6; and Aldrich, Howard E. and Martin Ruef: Organizations Evolving, 2. Ed., London [et al.] 2006, p. 4. See also Barnard, Chester I.: The Functions of the Executive, Cambridge, MA 1938, p. 65. See Romanelli, Elaine and Michael L. Tushman: Organizational Transformation as Punctuated Equilibrium: An Empirical Test, in: Academy of Management Journal, Vol. 37 (1994), No. 5, p. 1145. See also Abernathy, William J. and James M. Utterback: Patterns of Industrial Innovation, in: Technology Review, Vol. 80 (1978), No. 7, pp. 41–46; Haveman, Heather A., Michael V. Russo and Alan D. Meyer: Organizational Environments in Flux: The Impact of Regulatory Punctuations on Organizational Domains, CEO Succession, and Performance, in: Organization Science, Vol. 12 (2001), No. 3, p. 253–254 and 269; and Meyer, Alan D., Geoffrey R. Brooks and James B. Goes: Environmental Jolts and Industry Revolutions: Organizational Responses to Discontinuous Change, in: Strategic Management Journal, Vol. 11 (1990), No. -, Special Issue: Corporate Entrepreneurship, pp. 94–97.

B.I Incommensurable Drivers of Organizational Evolution

B.I.1 B.I.1.a

11

The Classical View of Adaptation to the Environment Deterministic Adaptation and Impediments to the Adaptation Process

Well into the second half of the 20th century, organization theory was dominated by views of rational adaptation. Many theories fall into the rational adaptation category, ranging from scientific management to industrial organization economics and resource dependence theories.30 In their core these ‘modern’ theories are based on the assumption of human rationality and utility maximization, and they rely on humans as decision-makers according to the concept of the homo economicus.31 Based on this cognitive and behavioral assumption of humans, entire organizations are assumed to rationally adapt to the environment. Hannan and Freeman describe rational adaptation as “designed changes in strategy and structure of individual organizations in response to environmental changes, threats, and opportunities.”32 Since the environment is assumed to set the point of time and the direction of adaptation, many authors call these theories deterministic.33 Management choice plays a minor role in these theories that were originally rather focused on content; a management team is only assumed to direct the organization to match the environmental demands and the organization to be able to change in this adaptive direction that management sets. In this way, classical organization theory is thus also based on the premise of the malleability of the entire organization.

30

31

32 33

A more detailed list of theories includes scientific management, Fordism, Weber’s bureaucracy, industrial organization economics, contingency theories, and resource dependence theories. See Whittington, Richard: Environmental Structure and Theories of Strategic Choice, in: Journal of Management Studies, Vol. 25 (1988), No. 6, pp. 524–526. A concept of man is an assumption or abstraction about the nature of human beings. The deterministic concept of the homo economicus can be traced back to classical 19th century economists, particularly to Wilfried Pareto and John Stuart Mill. See Persky, Joseph: Retrospectives: The Ethology of Homo Economicus, in: The Journal of Economic Perspectives, Vol. 9 (1995), No. 2, p. 222. See Hannan and Freeman: Structural Inertia and Organizational Change, 1984, p. 150. See Child, John: Organizational structure, environment and performance: The role of strategic choice, in: Sociology, Vol. 6 (1972), pp. 8 and 10; Mellahi, Kamel and Adrian Wilkinson: Organizational failure: a critique of recent research and a proposed integrative framework, in: International Journal of Management Reviews, Vol. 5/6 (2004), No. 1, pp. 23 and 27; Child, John: Strategic Choice in the Analysis of Action, Structure, Organizations and Environment: Retrospect and Prospect, in: Organization Studies, Vol. 18 (1997), No. 1, p. 45; and de Rond, Mark and Raymond-Alain Thietart: Choice, chance, and inevitability in strategy, in: Strategic Management Journal, Vol. 28 (2007), No. 5, pp. 539 and 546.

12

B Deterministic and Voluntaristic Theories of Organizational Change

The adaptation process to environmental drivers of change can be described by a feedback loop. As Figure B-1 reveals, a gap between the target organization’s and the environment’s strategic orientation leads to adaptation pressure, consequently aligning the target’s strategic orientation with environmental demands and reducing the gap. This constitutes a balancing, also called negative, goal-seeking or adaptive feedback relationship—here the balancing loop Deterministic Adaptation. ENVIRONMENT'S STRATEGIC ORIENTATION

Strategic Orientation + - + (B) Deterministic gap Adaptation pressure to adapt + strategic orientation

Note on the Nomenclature of Feedback Figures Loop Polarity: The letters (B) or (R) in the center of a feedback loop indicate the polarity of the entire feedback cycle. A balancing loop (B) is a self-correcting loop that seeks to achieve an equilibrium stage and to remain at this stage. The antipode of a balancing feedback loop is a reinforcing feedback cycle (R). It enhances what happens in the system. Arrow Polarity: The signs next to the arrows specify the polarity of the respective causal relationship. If x changes, a plus indicates a change of y in the same direction, a minus indicates a change of y in the opposite direction. The mathematical representation is shown in the following: +

x՜y ֜ -

x ՜ y ֜

˜y ˜x ˜y ˜x

t

>0ǡ and for accumulations Y= ‫׬‬t=0ሺx+…ሻds+Yt0 ;  t