Fit, Failure & the Hall of Fame

Charles C. Snow, Raymond E. Miles

• Publisher: Free Press
• Year: 2001
• eBook ISBN: 9781439106280
• Topic: Business
• Subtopic: Business General
• Index: Business

In this incisive analysis of corporate success and failure, the authors maintain that success is derived from a mix of ingredients--a company's strategy, its structure, and its processes working in concert. This book will supply managers with the fundamentals of achieving lasting success.

PART ONE
WHY ORGANIZATIONS SUCCEED

Success is not the goal of an organization. The goal is the production of goods and services that are valued by customers and the broader society. Success is the outcome of achieving that goal. Some companies are never successful. Others are successful in the short run. Only a few are successful over long periods of time. Those that flourish in good times and cope well during lean periods—that is, those that demonstrate year after year that they know what they are doing and do it—we call Hall of Fame companies.

As we stated in the Introduction, company success depends on putting together a complete and complementary package of ingredients: strategy, structure, processes, and a managerial ideology that holds these together and gives them meaning. Further, this package of characteristics must be widely understood and disseminated so that it becomes part of the daily behavior of everyone in the organization. We call this process “achieving fit.”

In.Chapter 1, we discuss the concept of fit. We describe the external fit between the firm and its environment, and the internal fit of organization structure, management systems, and managerial ideology to a chosen strategy. More important, however, we examine the dynamics of fit. Our contention is that “minimal fit” is necessary for a company to survive, “tight fit” frequently results in excellence and accolades of admiration, and “early fit” may enable a company to be a candidate for the mythical corporate Hall of Fame—an imaginary place of recognition for those firms that sustain unusually high levels of performance over an extended period of time. (Of course, some firms never achieve fit and even Hall of Fame companies, like outstanding athletes, may suffer downturns in performance. We reserve our discussion of “misfits,” which usually fail, for Chapter 4.)

Chapter 2 discusses the companies that pioneered the major organizational forms that have appeared over the past hundred years or so. Key historical developments are traced from the time when Carnegie Steel pioneered the functional organization, through General Motors’ (and other companies’) development of the divisional organization, to TRW’s role in the creation of the matrix organization. In each case, the creation or early use of a new organizational form gave the pioneering company a competitive advantage that was difficult to overtake and therefore was long lasting.

Today’s successful companies are discussed in Chapter 3. These companies, described in the business press as “winners,” “most admired,” and so on, include General Electric, Wal-Mart, and Rubbermaid. They have assembled effective organizations from the beginning or have reengineered themselves to be strong competitors—in each case by using a modern version of a traditional organizational recipe. In addition, many of today’s successful companies are using the newest form of organization, the network.

THE PROCESS OF ACHIEVING FIT

How does a successful company go about putting together its particular package of essential organizational ingredients? What’s involved in devising an effective strategy, organizing to pursue that strategy, and so on? There are no simple answers to these questions. If success were simply a matter of connecting the dots in the right order, there would be many more worldclass companies than there are today.

Nevertheless, over the course of business history, many companies have achieved continued success—enough, in fact, to reveal a pattern in how success develops. To understand this pattern, we believe it is useful to think of success as achieving fit. Fit is both a state and a process. That is, if one were to take a snapshot of a successful company at any given point in time, the picture would show a strong external fit between the company and its environment. As a result, customers, securities analysts, community officials, and other constituents would speak highly of the company’s products and services. In short, one could say that such a company had a good “strategy.”

The same snapshot would also show a strong internal fit; that is, the organization’s structure, processes, and managerial ideology would support the firm’s strategy. The picture would exhibit great clarity, reflecting the fact that inside the organization everything was working smoothly.

Organizations, however, do not stand still, so the challenge of achieving fit is best conceptualized as a journey rather than as a destination. Our view of the process of fit has several markers along the way, labeled “minimal,” “tight,” and “early.” In this chapter, we will describe each type of fit and illustrate each with company examples. Further, we will describe how the internal and external aspects of fit, properly communicated and understood throughout the organization, turn complexity into simplicity. Last, we will extend the notion of simplicity to the asset of people—what their essential role is in an organization and how they should be managed.

STRATEGY: ACHIEVING FIT WITH THE MARKETPLACE

The process of achieving fit begins, conceptually at least, by aligning the company to its marketplace—by finding a way to respond to or help shape current and future customer needs. This process of alignment defines the company’s strategy. Over time, successful firms relate to the market and the broader environment with a consistent approach that builds on their unique competencies and sets them apart from their peers.

Some firms achieve success by being first, either by anticipating where the market is going or by shaping the market’s direction through their own research and development efforts.¹ We call these firms “Prospectors” because they continually search for new products, services, technologies, and markets. In the electronics industry, for example, Hewlett-Packard has been widely recognized as a Prospector for most of its history.

Other successful firms move much less quickly. Instead, they study new developments carefully, wait until technologies and product designs have stabilized, and then apply their competence in developing process efficiencies that will allow them to offer a standard product or service of high quality at a low price. We call these firms “Defenders.” Defenders usually do not attempt to operate across a wide product or service arena. Instead, they search for economies of scale in those areas that are relatively healthy, stable, and predictable. By the time Defenders have come on line, most Prospectors have already moved on to new models and applications. They know they have neither the inclination nor the competence to compete with Defenders once the competitive game has focused on the cost-efficient production of standardized offerings.

Table 1-1 BUSINESS STRATEGIES AND ORGANIZATIONAL CHARACTERISTICS

Organizational Characteristics	Defenders	Prospectors	Analyzers
Adapted from Raymond E. Miles and Charles C. Snow, “Designing Strategic Human Resources Systems”; reprinted, by permission of publisher, from Organizational Dynamics, Summer 1984, © 1984. American Management Association, New York. All rights reserved.
Productmarket strategy	Limited, stable product line	Broad, changing product line	Stable and changing product line
	Cost efficiency through scale economies	Product innovation and market responsiveness	Process adaptation, planned innovation
	Market penetration	First in to new markets	Second in with an improved product
Research and development	Process skills, product improvement	Product design, market research	Process and product adaptation
Production	High-volume, low-cost specialized processes	Flexible, adaptive equipment and processes	Project development shifting to low-cost production
Organizational structure	Functional	Divisional	Mixed project and functional matrix
Control process	Centralized, managed by plan	Decentralized, managed by performance	Stable units managed by plan; projects managed by performance
Planning process	Plan→Act→Evaluate	Act→Evaluate→ Plan	Evaluate→Act→Plan

Successful Prospectors and Defenders are both innovative but in different ways. Prospectors are especially innovative in developing new technologies and products, while Defenders are innovative in delivering an existing line of products and services to their customers. In the computer industry, National Semiconductor follows a Defender strategy, focusing narrowly on efficient chip production utilizing advanced process technology, whereas Intel Corporation is a leader in product innovation.

If Prospectors succeed by moving fast, and Defenders by moving efficiently, a third group of firms succeeds by doing both in a carefully conceived manner. This type of firm, which we call the “Analyzer,” succeeds by being the “second mover” or “fast follower.” Most Analyzers operate with a base of established products to which they add carefully chosen new products. Analyzers typically do not originate these products but use their process engineering and manufacturing skills to make a new product even better and their considerable marketing skills to sell it. Matsushita is known for pursuing this strategy in the global consumer electronics business.

Markets are seldom static. They are constantly on the move as tastes change and advanced products and services raise expectations. Prospectors push an industry into new territory, and Defenders help an industry to remain efficient and costconscious, making sure the customer gets the most for the least. Analyzers keep both Prospectors and Defenders alert—forcing Prospectors to continue to innovate by matching some of their best offerings at a lower price and forcing Defenders to make new investments in efficiency by approaching their price levels with goods or services of more advanced design. Healthy industries tend to be populated with companies pursuing these different but complementary strategies.

In most industries, during the stable periods between transitions, major companies pursue their own strategies within a comfortable market segment. However, over time, firms may choose to modify their strategies. Prospectors that grow very large—General Motors in the 1960s, for example—may become more like Analyzers. Similarly, some Defenders run out of room in a given product or service area and begin to branch out, also appearing to act more like an Analyzer. Wal-Mart may be headed in this direction, having moved into membership stores and Hypermarts in addition to its standard stores.

Thus, competitive strategies may be modified and even changed. Such shifts, however, are seldom smooth or easy. Externally, a change in competitive strategy may disrupt the industry, and internal changes are never painless. Consequently, unless a firm is alert and adept, today’s fit becomes tomorrow’s misfit. A company’s strategy, or external alignment, must be constantly monitored and periodically evaluated. Everyone in the organization must believe that the strategy is sound and that it will hold up in the foreseeable future.

FITTING ORGANIZATIONAL STRUCTURE AND MANAGEMENT PROCESSES TO STRATEGY

Developing a strategy that fits the marketplace is a necessary ingredient in the organizational “package” of successful firms, but it is far from sufficient. It can only be implemented and sustained by pulling together the necessary resources—people, equipment, money, and so forth—and by arranging these resources in a form that facilitates rather than impedes the chosen strategy.

For example, Prospectors make heavier investments in research and development than Defenders, who in turn tend to invest more heavily in special-purpose equipment than either Prospectors or Analyzers. Moreover, a strategy that depends on responsiveness and innovation generally requires an organization whose rules and rewards focus on results rather than procedures. Conversely, companies attempting to succeed through long-term cost efficiency need to tie operations together with plans and systems that incorporate scale and experience into standard operating procedures.

In general, structure and process ingredients come in only a few generic packages. Three are widely used, though they are not always well understood by the managers who operate them. These are the functional, the divisional, and the matrix organization. A newer organizational form, the network, is still developing. We will discuss these forms, especially their strengths and limitations, in later chapters, but it is useful here to describe them briefly and illustrate how they are linked to different types of strategies.

The functional organization arranges human resources by functional specialty—manufacturing, marketing, finance / accounting, underwriting, customer service, and so forth—and then coordinates their specialized outputs by centrally devised plans and schedules. Most firms pursuing the efficiencyoriented Defender strategy utilize some version of a functional organization. Wal-Mart, for example, integrates functional specialists with a state-of-the-art information system to produce huge logistical efficiencies.

The divisional organization groups a collection of nearly self-sufficient resources around a given product, service, or region: the Jeep/Eagle Division, information technology consulting, southwest region, and so on. Firms pursuing the first-mover or Prospector strategy usually use a structure that allows self-contained groups substantial operating autonomy. As a Prospector, Rubbermaid focuses each of its operating divisions on a particular market segment and expects it to deliver 25 percent or more new products every three years.

The matrix organization is a structural hybrid that overlays program groups or project teams on centrally controlled groups of functional specialists. It is common to find firms that pursue an Analyzer strategy adopting the matrix structure to allow them to shift resources back and forth between project teams and functional departments as new products, services, or programs are brought on line or selected for exploration. IBM for years ran a complex, successful multinational matrix linking product and functional specialists with regional sales and service operations.

The network organization uses market and electronic mechanisms to link together independent specialist firms arrayed along the value chain—manufacturers, suppliers, designers, distributors, and so on—to produce products or offer services. This organizational form can support a variety of competitive strategies under particular circumstances. Nike, the running-shoe giant, uses a largely stable version of the network structure. Dell Computer’s network is much more changeable. Still another form of the network organization can be found at ABB Asea Brown Boveri.

At this point, it may appear that corporate success hinges on managers correctly making a few key decisions. First, they need to select a competitive strategy from the menu of generic approaches such as Prospector, Defender, or Analyzer. Then the appropriate organizational structure—functional, divisional, matrix, or network—needs to be fitted to the chosen strategy. As logical as this decision-making process sounds, however, achieving external and internal fit has eluded many companies. In the 1950s, for example, Chrysler Corporation set out to match General Motors model for model in every market, but it did not sufficiently alter its centralized, functional organizational structure. Without the full and independent resources needed to respond quickly to consumers’ desires, Chrysler’s several automobile lines were not able to keep pace with GM’s design and distribution abilities. In the 1970s and 1980s, government deregulation decisions forced numerous trucking, banking, and telecommunications companies to become more “market driven.” However, in some cases such as AT&T, it took years of reorganizing to come up with structures and management systems appropriate to a new competitive strategy.

Even when firms adopt a form of organization that is suited to their competitive strategy, they may not complete the fit by adopting all of the logically required management processes. For example, many general managers in various divisionalized firms have been told, in effect, “You’re in charge of your division, so run it your way. However, all capital expenditures have to be approved by corporate headquarters.” Or, “Get the costs at your plant below those of our competitors, but don’t stand in the way of engineering or manufacturing schedule changes.” Such contradictions are all too frequently found in otherwise well-managed companies.

In sum, companies are constantly adjusting their strategies in order to maintain an effective alignment with external conditions. However, managers frequently do not think through the implications of these strategic adjustments for organizational structure and management processes. Therefore, when altered strategies prove ineffective, it may not be because they are illconceived but rather because the organization has not been appropriately redesigned internally. On the other hand, all companies make internal adjustments from time to time to solve communication and coordination problems. However, these organizational changes are also often made without considering the impact they will have on the company’s ability to carry out its current strategy or adapt to environmental change. In short, strategy, structure, and process decisions must be made in conjunction with one another so that the organizational package has—and maintains—a logical integrity.

THE DYNAMICS ...

Table of contents

• Cover Page
• Title Page
• CONTENTS
• PART ONE WHY ORGANIZATIONS SUCCEED
• PART TWO WHY ORGANIZATIONS FAIL
• CHAPTER THREE FUTURE FIT The Twenty First Century Challenge
• PART FOUR DYNAMIC FIT THE PROCESS OF ORGANIZATIONAL RENEWAL
• ENDNOTES
• ACKNOWLEDGMENTS
• INDEX