Fit, Failure and the Hall of Fame: How Companies Succeed or Fail

Fit, Failure and the Hall of Fame: How Companies Succeed or Fail

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ISBN-13: 9780743233224
Publisher: Free Press
Publication date: 10/29/2001
Pages: 224
Product dimensions: 0.51(w) x 6.00(h) x 9.00(d)

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Chapter 1 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 world-class 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. 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.

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 cost-conscious, 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 efficiency-oriented 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 ill-conceived 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 of Fit

Given the difficulty of creating and maintaining strong connections among strategy, structure, and process, it is not surprising that companies differ widely in the degree of fit they have achieved. Some lose or never find fit and may fail as a result. Many achieve only limited fit and survive, but never enjoy real success. A few companies have tight fit and rise to the peak of performance, landing on lists of the "most admired" or "excellent" firms. Even fewer firms achieve a new and unique fit well ahead of their peers -- making a new strategy work by creating a new way of arranging and managing resources. The few companies that do find this early, tight fit are potential Hall of Famers.

MISFIT AND FAILURE

One can usually sense, from either within or outside the organization, the degree of fit a firm has achieved. If the lack of internal and/or external fit is sufficient, the firm falls further and further behind its competitors until its advertising becomes desperate, its stores begin to look shabby or they close, managers are replaced, its debt burden drags it under, and so on. Once in a downward spiral, it becomes very difficult to reverse course. Some of these misfit companies are well-known -- Penn Central, A&P, People's Express, and Wang Laboratories come quickly to mind -- but these highly visible failures are only a small minority of all organizations.

MINIMAL FIT AND SURVIVAL

Most firms experience neither major misfit nor tight fit. Instead, they achieve a limited alignment with the marketplace, a limited fit between their strategy and structure, or both. Firms that achieve only minimal fit struggle to make mediocre returns. Their expenses tend to be high because of heavy coordination costs -- the price of making a structure work that wasn't designed for the job. The proportion of "problem solvers" (liaisons, integrators, and troubleshooters) is persistently large, and the time it takes to respond to environmental demands is inordinately long. Almost nothing comes easily in the minimal-fit firm. Hard work may be rewarded, but never by the expected level of success. The minimal-fit firm seems to create its own continuing stream of crises and near disasters.

TIGHT FIT AND EXCELLENCE

In contrast to firms struggling with minimal fit, the much smaller number of companies that achieve tight fit appears to have it easy. Externally, customers are happy with the new product designs or with the high-quality services offered at excellent prices. Internally, things seem to work correctly. Because the structure and processes fit the strategy, resources are located where they ought to be, and information and criteria are available at the point where decisions need to be made. Moreover, troubleshooting and rework are not regularly required. The resources saved by doing work right the first time are available to invest in new activities and/or to improve current practice. Hard work usually pays off, and returns -- to the company and its people -- are high. Morale and confidence are also high because everyone can see clearly how and why things work as they do. Tight fit squeezes out uncertainty and confusion, and it gives complex processes the feel of simplicity.

ARTICULATING THE RATIONALE OF FIT

One of the key roles of management is to help organization members continue to understand the firm's strategy, structure, and processes. In a firm with tight fit, the task of articulation is easy The organization has not become laden with bureaucratic procedures or unnecessary units. Therefore, everyone can see clearly how and why things work as they do. Well-understood strategies can usually be captured in a sentence or two, perhaps even in a catchy phrase such as GM's early vision of "a product for every pocketbook" or IBM's "service is our business." Of course, mottos and advertising slogans do not make successful strategies -- but widespread understanding and consistent action surely do.

Similarly, tight fit gives complex organizational structures clear tasks and responsibilities as well as decision-making authority. In the tight-fit firm, the new member is quickly oriented, and the "rightness" of the way things are done is apparent. Everyone is a tutor because everyone understands explanations that are consistent, and a set of metaphors, myths, and examples is widely owned and commonly used.

The appearance and feeling of simplicity, as well as the broad understanding of purpose and mechanisms in organizations with tight fit, are strikingly visible to the outside observer. Peter Drucker, for example, was impressed with the clarity of goals and understanding at all levels at Sears and GM when he studied those companies in the 1940s and 1950s, as were Tom Peters and Robert Waterman when they observed "excellent" American firms in the late 1970s and early 1980s. Moreover, the more successful a firm becomes, the easier it is for management to articulate why the organization is effective. We simply get better at telling others -- and, perhaps even more important, ourselves -- exactly what the operating logic of our organizational package is. This deep understanding is, in fact, "knowing that it's the box." Understanding allows the firm to make strategic adjustments to market shifts and social changes while making certain that changes to one piece of the organization are accompanied by proper changes to the rest.

In the minimal-fit company, on the other hand, managers struggle to articulate its strategy-structure-process package. Strategies employ more words and generate less clarity, largely because past experience has not provided assurance that intended performance will occur. Structures and processes, surrounded by an atmosphere of crisis and confusion, do not lend themselves to easy explanation. Departmental responsibilities are not clear. Second-guessing of decisions is commonplace. Crises occur.

In explaining their organizational package and how it works, managers may have difficulty even when the problem is not caused by the firm's intended strategy or its chosen structure. Difficulty arises when the problem is the lack of fit between strategy and structure. Sometimes, as we will discuss later, this lack of fit occurs because managers themselves have not yet fully grasped the operating logic they are attempting to explain. Perhaps the firm has gradually broadened its service base beyond what the structure can handle by adding more and different people. The structure ought to work, these managers believe, but it may need a bit more tweeking. Or, in other instances, the structural repairs made to solve earlier problems have caused new ones that management has not yet recognized. After all, many of the ingredients of the overall package -- rewards, controls, information systems, training and development programs -- are the province of several different departments. In short, management cannot for long create the impression of fit when fit does not exist.

OVERCOMING IDEOLOGICAL BARRIERS

Another common reason that managers find it difficult to communicate the package of strategy, structure, and process their firm is seeking to construct is that some pieces of the framework are at odds with managers' deeply held views about people and how they should be managed. For example, a strategy requiring simultaneous, quick responses in several product areas may never receive the decentralized structure it requires to succeed, because corporate managers cannot bring themselves to grant sufficient decision authority to local operating units. No amount of explanation can make such a glaring incongruity disappear. Conversely, in companies with tight fit, managerial ideologies tie controls, rewards, and leadership style to strategy and structure in a widely understood and accepted manner. The concept of "bringing the university laboratory to the workplace" that underlay the founding of Hewlett-Packard led to a management ideology reflecting collegial values and respect for individual abilities and methods. In turn, it was relatively easy to construct reward systems for creativity and performance that paid off by returning profits directly back to their divisional sources, allowing the latter to engage in unfettered research on new ideas. Ultimately, as we will show in Part Three, a complete organizational package must include a managerial ideology that not only complements strategy and structure but also guides job design, team building, decision-making systems, and so on. In fact, existing managerial philosophies are the most difficult barrier for many firms to overcome as they search for new strategies and structures to meet the challenges posed by tomorrow's markets and competitors.

EARLY TIGHT FIT AND THE HALL OF FAME

Again, we believe that tight fit gives a company a decided competitive advantage. Firms that have it get more done with less and can use their slack resources in various ways to sharpen their approach and maintain their lead. An even larger advantage, however, is enjoyed by those firms that first put together the new strategy-structure-process package demanded by major changes in markets and/or technology. Usually, the firms that make these breakthroughs do so not just by finding new strategies -- market opportunities may be visible to many firms -- but by being clever and far-sighted in designing new structures and processes that make the required strategies work. Moreover, these new structures and processes may be in conflict with existing managerial ideologies, and managers in the pioneering firms have to work their way through to new views about people and leadership. Thus, a key part of designing and understanding a new organizational package is for managers to grasp and then articulate, to themselves and to others, the new operating logic and particularly the new way of managing people required.

Not surprisingly, because of the fundamental changes required by a new organizational form, competitors usually find it difficult to understand and copy. As a result, firms that achieve early tight fit not only do more with less -- often much more with much less -- but their lead increases as their competitors struggle with half-hearted or partial imitations that may provide them with limited gains but more likely with frustrating confusion. When the lead becomes large and the track record of accomplishment long and widely acknowledged, a firm, like an outstanding athlete, may well deserve Hall of Fame recognition. However, unlike athletes, who ultimately move beyond their periods of peak physical capability into retirement, some firms with Hall of Fame achievements (but by no means all) appear to be able to adapt to new demands and perform at peak levels almost indefinitely. Others, as we shall see in later sections, discover that fit is fragile and never easy to sustain.

In Chapter 2, we will describe in detail the manner in which Hall of Fame companies have created early tight fit at various points of major market change over the last 100 years or so. In Chapter 3, we will describe some companies that both are currently enjoying tight fit and are perhaps on their way to even greater recognition. We will then use the past and current accomplishments of all these companies to outline a package of strategy, structure, and process that the global economy is increasingly demanding.

Copyright © 1994 by Raymond E. Miles and Charles C. Snow

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