Strategic Management Journal, Vol. 14, 131-142 (1993)
STRATEGY AND ORGANIZATIONAL EVOLUTION
HERBERT A. SIMON
Department of Psychology, Carnegie Mellon University, Pittsburgh, Pennsylvania,
U.S.A.
A business firm's 'niche' or comparative advantage typically has a half-life of years rather
than decades. Strategic planning must assure a stream of new ideas that allow the firm to
find new sources of comparative advantage. Strategic planning must focus attention on the
initial stages of the decision-making processes opportunities and occasions for choice, and
the design of new action strategies for products, marketing, and financing. Product
identification and alternative generation are crucial components of strategy. Strategic thinking
must permeate the entire organization. Effective identification of employees with the
organization's strategy requires their exposure to the basic postulates that underlie strategic
plans.
The study of strategy is that part of the study of decisions against the background of its history
decision making which, in the words of Igor and what its history had made of it (Chandler,
Ansoff, is 'primarily concerned with external, 1962). Consequently, it is natural to view strategic
rather than internal, problems of the firm and questions within the framework of evolutionary
specifically with selection of the product-mix theory (Nelson and Winter, 1982; Nelson, 1991).
which the firm will produce and the markets to
In this paper I should like to begin with some
which it will sell. (Ansoff, 1965: 5) 'Strategy, observations about how business firms evolve,
one might say, is decision making that deals with and about the role of strategic decisions in their
the 'Big Questions.'
evolution. My evidence will be anecdotal rather
However, it would be misleading to suppose than systematic, and since the bulk of my
that strategy has nothing to do with the internal management experience has been in educational
problems of the firm because, as Ansoff goes on institutions, and somewhat less in government
to observe, 'the strategic problem is concerned and business organizations, I will draw some of
with establishing an 'impedance match' between my examples from Carnegie Mellon University,
the firm and its environment'. (1965: 5) Correct I will also use examples of strategic planning for
decisions about a firm's products and markets public policy at the societal level,
must necessarily take into account the characterIt is easy to exaggerate the difference between
istics of the firm in terms of its human, profit-making and nonprofit private organizaorganizational, physical and financial resources tions. One difference there is: While the profitthat constitute its comparative advantage. Each making corporation must make certain, at least
individual business firm faces its strategic over any protracted period of time, that income
exceeds expenditures; the nonprofit organization
______
must make certain that income and expenditure
Key words: Strategy, comparative advantage, attention focus in planning, design of alternatives
CCC 0143-2095/93/100131-12
© 1993 by John Wiley & Sons, Ltd.
come out exactly equal. Clearly, managing a
nonprofit is more difficult than managing a
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H. A. Simon
corporation, as it is easier to satisfy an inequality
than to achieve an exact equality. Profits can be
paid out as dividends, reinvested or invested in
other enterprises. The surpluses (if any) of a
nonprofit organization are usually immediately
reapplied to expanding its commitments, hence
to increasing the difficulty of maintaining the
equilibrium of income with expense in the future,
But it is not my purpose here to compare these
two kinds of organizations in detail: I mention
this point lest readers might think that my
examples are not relevant to business strategy.
Anyone familiar with the contemporary literature on business strategy will not find either
my definition or my approach surprising. (See
Rumelt, Schendel, and Teece, 1991; Nelson,
1991.) Therefore, I will not feel obliged to give
a balanced account of the whole subject, but will
focus on topics that seem to me to deserve
somewhat greater emphasis than they usually
get, and that are especially related to the
evolutionary viewpoint I am adopting.
THE EVOLUTION OF ORGANIZATIONS
It is natural to think of the history of organizations
in evolutionary terms, for each organization
competes with the others for scarce resources,
and their fates must consequently be decided by
some combination of natural selection and
rational adaptation. An evolutionary approach
to business firm growth was developed in some
detail by Richard R. Nelson and Sidney G.
Winter (Nelson and Winter, 1982), where the
interested reader will also find references to
the earlier literature. The historical studies of
Chandler (e.g., 1962, 1990, 1991) also fit well
into an evolutionary framework.
As has been known for a long time, the
aggregate statistics of organizational size and
growth fit a very simple family of probability
models that have a straightforward evolutionary
interpretation. In almost every industry, and
even in the whole of an economy, the size
distributions of firms approximate a Pareto
distribution, or a distribution closely resembling
the Pareto. That is to say, if we arrange the
firms in order of size, the logarithm of the size
of the firm decreases linearly with its rank in
the distribution (Ijiri and Simon, 1977). If a
firm's rank is N(\ being the largest firm), then
its size, S, will be given (approximately) by log
S = a - b log N, where b is usually less than 1.
It is not hard to construct stochastic models
that approach the Pareto distribution or one of
its close relatives (e.g., the Yule distribution) in
the steady state. The key assumption, usually
called the Gibrat Assumption, is that the growth
of a firm over a period of time, and measured
in absolute terms, is proportional to the size that
the firm has already attained. Or, synonymously,
the growth rate is independent of size. This
assumption can be weakened without altering
the steady-state distribution: it is required only
that the average growth rate of all firms of a
given size be independent of size. Many studies
have shown that size independence of growth on
average generally holds to a close approximation,
What is the economic significance of this
regularity, which is seen again and again in firm
size distributions, whether they describe the firms
in a single industry or the whole collection of
firms in an economy? The Gibrat assumption
asserts that the rate of growth of firms is not
influenced, on the average, by their present size.
Of course, this is consistent with some firms in
each size group growing very rapidly while others
in the group grow slowly or even shrink in size,
All that the distributions show is that the averages
are approximately size-independent. Moreover,
we would not expect these average growth rates
to be the same in different industries. There are,
at any time, growth industries, mature industries
and declining industries.
Of course, growth and share of market are
not synonymous with profit, but for our present
purposes, we may use growth rates as surrogates
for opportunities to increase profits. If we
regress total profits of firms as functions of size
(measured, say, by total sales) and profit margin,
we find that size accounts for most of the
variance. The amounts of cream in bottles of
widely differing volumes are likely to bear, on
average, a strong relation to the amounts of milk
in them.
From a common-sense standpoint, the size
independence of growth rates is wholly plausible,
Larger firms have access to larger loans and
other investment funds, have larger marketing
organizations and production facilities, are visible
to more actual and potential customers than are
smaller firms roughly in proportion to their
relative sizes. In fact, we would expect rate of
Strategy and Organizational Evolution
growth to be subject to diminishing returns: the
attempt to grow more rapidly than the average
would incur increasing costs of undertaking the
new activities and investments that would be
entailed. More interesting, therefore, than this
average constancy is the departure of individual
firms from the average.
Ijiri and I examined the growth rates of large
American firms (the 96 largest) during the period
from 1954 to 1962. The rates are divisible into
two factors: a rate for the economy as a whole,
and a rate for the individual firm relative to the
economy; the total growth rate of each firm is
the product of these two components. We
compared the growth rate of each firm relative
to the economy over the first 4-year period,
1954-58, with the rate over the second 4-year
period, 1958-62. These data are not necessarily
representative of what has happened or might
happen at other times and places, but they will
give us some feel for the transient nature, even
in a strong economy, of unusual growth rates.
We found that 'a firm that experienced an
unusually rapid growth in the first 4-year period
could expect a greater-than-average growth in
the second 4-year period. But the logarithm of
the ratio measuring the excess would be, on the
average, only one third as large during the
second period as during the first. Thus, a firm
that doubled its share of market ... in the first
4 years could be expected, on the average, to
increase its share of market by about 28 percent
in the second 4-year period ... Rapidly growing
firms 'regress' relatively rapidly to the average
growth rate of the economy. (Ijiri and Simon,
1977: 181) In this case, the "half life" of rapid
growth is much less than 4 years.'
Most sustained rapid long-term growth of firms
occurs in industries that are themselves growing
rapidly (e.g., automobiles, airplanes, computers
in their respective heydays). Rapid growth of an
industry relative to the economy as a whole may
persist over a generation or more. However, if
we measure the growth of firms within such
industries during the period of rapid expansion
of the industry, we find that growth relative to
the industry (i.e., growth in industry market
share) generally occurs in rather short bursts,
usually only a few years in duration rather than
a generation.
Of course there are exceptions to the transience
of growth. Some firms have maintained a
133
dominant position in a growth industry (but not
necessarily a steady increase in market share)
over many years, and their ability to do so has
attracted a good deal of attention (Rumelt et aL,
1991: 12). But these are exceptions, and not the
rule. The transience of high relative growth rates
holds even for firms like IBM (a statement that
is more obvious today than even a few years
ago. From the early days of computers, IBM
continued to grow at a rapid rate for about 30
years, but during only the first third or half of
that period was it increasing substantially its
market share in the industry. Review of the
history of the automobile industry shows that
even the relatively successful firms did not sustain
growths in market shares for more than a few
years at a time.
Of course there is a certain element of
tautology in this observation, as a firm cannot
continue to increase its market share indefinitely
without encountering a ceiling the share cannot
exceed 100 per cent! But if the ceiling is part of
the story, it is not the whole story. Firms
seem to experience great difficulty in retaining
substantial comparative advantages over competitors after brief periods of unusual success,
(Business firms are not at all unlike football and
baseball teams in this respect.) Notice that our
data for large firms, reported above, demonstrate
the transience, on average, of unusual growth
even when it is measured relative to the entire
economy, hence includes industry growth,
One interpretation of the short half-life of rapid
growth is that business firms make innovations of
many different kinds that are gradually copied,
or that only have value over a period during
which certain industry or environmental conditions exist; another interpretation is that changing circumstances in an industry's environment
give a company a sudden burst in growth. The
former is likely to be due in considerable part
to policies pursued by the company, the latter
to the advantages of being already established in
an industry when some important external event
occurs that expands the market for its products
or reduces its costs.
But even in the case of growth that accompanies
rapid expansion of the industry, not all firms in
the industry (to put it mildly) share that growth
equally. In fact, the trail of a growth industry
(automobiles and computers are again excellent
examples) is typically strewn with the skeletons
134
H. A. Simon
of the firms that didn't make it. Effective strategic
planning is as necessary for capturing the gains
available in a growth industry as for achieving
normal growth in stable industries. The attraction
to potential entrants of possible large profits
generally makes growth industries intensely competitive, shortening the lives of the windfalls that
the growth would otherwise present to industry
members.
Similar comments about unusually rapid change
apply to downward movements in firm size and
profitability, except that the ownership of fixed
assets, not easily turned in new directions, may
prolong the period of decline and even cause the
firm's bankruptcy and demise. In general, we
would expect rapid declines to continue longer
than unusually rapid growth, although I am
unaware of systematic studies that verify this
claim.
In any case, rapid growth means either
participation in a market that is growing, or
increase in share of market. What are the
usual ways in which this comes about? Product
innovation is the most obvious. Likewise loss of
market share (e.g., meat-packaging companies)
may result from innovations that make a compeling product more attractive than the industry's
present products or another organizational form
more efficient. Thus, changes in the technology
of slaughtering after World War II removed the
comparative advantage of very large meat packers
with centralized facilities, and caused them to
lose a substantial share of their markets to
smaller and more decentralized firms. Even
more spectacular was the almost instantaneous
decimation of the slide-rule market when handheld electronic calculators appeared on the scene
about 1970.
Changes in per capita real income in an
economy can also produce major changes in
relative size among industries, hence in the sizes
of constituent firms. The spectacular growth of
some of the consumer industries (e.g., automobiles, radio and TV) was caused not merely
by the innovative new products they manufactured and sold but also by the economy-wide
growth in productivity that gave consumers
sufficient income to buy them.
Less obvious, but probably at least as
important, as the kinds of changes mentioned
above are changes in the structure of the firm
itself, such as the movement of large corporations
toward divisionalization and the subsequent
emergence of conglomerates (Chandler, 1991).
As Chandler points out, this particular innovation
did not always work to the benefits of the
innovators; but policy decisions that change the
firm's internal structure, the skills and knowledge
that it embraces, and its definition of its mission
and sources of comparative advantage are crucial
elements of strategy.
STRATEGIC DECISION PROCESSES
Strategic decision making takes place against the
background that I have just sketched. In order
to grow, or even to maintain their current sizes,
business firms have to seek continually (or invent)
new marketable products, new methods of
marketing them or even new ways of financing
their activities. They have to invest in new
facilities and adapt their organization structures
and staffing to the new activities. They have to
try to anticipate changes in the environment
the economy and the industry that will affect
the profitability of current and contemplated
operations. As both product (and other) innovation and the unfolding of economic events
are fraught with uncertainty, strategic decision
making is a chapter in the topic of decision
making under uncertainty in fact, massive and
unending uncertainty.
The classical formal theory of decision making
analyzes decisions as a process of choosing among
alternatives that are known in advance. (The
very recent textbook by Kleindorfer, Kunruether,
and Schoemaker, 1993 is a welcome exception.)
In the standard theory, uncertainty is generally
represented by probability distributions of future
outcomes, the dimensions in terms of which the
future is described also being specified in advance,
This is a wholly unsatisfactory framework for the
study of strategic decision, and one that is
gradually being reconsidered (Rumelt et al.,
1991; Nelson, 1991). The most important skills
required for survival and success in the kind of
uncertain, rapidly evolving world in which we
live are (1) skill in anticipating the shape of an
uncertain future, (2) skill in generating alternatives
for operating effectively in changed environments,
and (3) skill in implementing new plans rapidly
and efficiently. These skills have to take a central
place in the strategic planning process.
Strategy and Organizational Evolution
Anticipating the future
By 'anticipating the future' I do not mean
estimating joint probability distributions, for the
most important kind of futurology is to anticipate,
qualitatively more than quantitatively, changes
in the important dimensions of the space in
which the firm will operate. Anticipating the
future means detecting, preferably prospectively,
novel features in the environment that may
affect the firm significantly in the future, and
determining at what point in time attention
should be focused on them and energy devoted
to dealing with them. The available management
time and attention is never sufficient to deal
with all the contingencies that may arise; relative
priorities for attention, planning and action need
to be revised continually. A major function of
strategic planning is to conserve scarce managerial, engineering and science attention for the
things that matter.
Anticipating the future is less like forecasting,
as that term is usually used, than it is like
carrying out what the military calls intelligence
operations. Where are the 'enemy' (i.e., the
present and prospective competitors)? What
appear to be their plans and directions? What
novelties within the industry need attention, and,
even more important (and difficult to detect),
what novelties outside the industry show prospects
of impacting it? In the military, anticipating the
future and planning for it begins with the Estimate
of the Situation and the intelligence activities that
are necessary for constructing it.
Effective strategic planning seldom calls for
accurate estimates of the time paths of new
trends. It calls for approximate estimates of time
horizons in order to provide adequate lead time
for planning responses. If a prospective major
new factor is detected early, and monitored as
it approaches closer to realization, estimates of
lead times can be modified, and planning and
preparation times changed accordingly. In an
uncertain world, forecasting must always be
yoked with feedback so that as the passage of
time squeezes out uncertainty, attention can be
focused on the issues that really matter and the
timing of responses can be adjusted.
Consider the topic of global warming. What
attention should a business firm devote to it at
the present time as a part of strategic planning?
Should it be on the agenda at all? Global
135
warming is usually thought of as a topic for
public policy consideration, but if considerable
wanning takes place, it will require a multitude
of adjustments at the level of the business firm
as well. What is needed at the present time at
the level of the firm is little more than an
awareness of the time scale on which this
phenomenon might occur. If it does begin to
produce significant climate changes, firms will
need to acquire more information to assess
whether it will have any direct or indirect impacts
on them (e.g., plant location, prices and sources
of supply of materials including water, markets for
remedial products, heating and air conditioning
costs, just to mention some obvious items that
come to mind). At this point, intelligence
will begin to be transformed into design of
alternatives.
Meanwhile, at the societal level, a continuing
effort is needed to obtain increasingly accurate
estimates of the rate of warming (if any) so that
time horizons can be set for responses that may
be required. Broad classes of possible responses
may be identified so that the research needed to
evaluate them and to bring them to practical
fruition, if they appear promising, can be planned
and completed by the time they may be needed,
In the early stages of a long-term development
like this one, strategic planning need not extend
beyond these kinds of intelligence activities,
The most difficult task in the intelligence
operation is to identify events and trends outside
the industry that will affect it in vital ways. It is
not too difficult for computer manufacturers to
keep informed about developments in their
industry; but at what point in time would we
have expected slide-rule manufacturers to be
aware of the threat to their markets from handheld calculators? They would have to know
something about the prospects for miniaturization
of computer chips, and about prospects for
manufacturing them at low cost. Their awareness
that there were room-filling computers in the
world, each costing hundreds of thousands of
dollars, would hardly, without additional insights,
alert them to the danger,
Even if the danger were detected, what skills
would they possess to envisage the prospects for
entering the electronic calculator industry by
purchase or by starting a new activity? What
comparative advantage could they rely upon to
give them an edge in such a venture? This
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H. A. Simon
example suggests why radically new products so
often call forth new industries, instead of being
absorbed by the industries whose products'
functions they replace. Few carriage manufacturers survived into the automobile era. Established electrical manufacturers did not have much
success in the new computer industry.
Of course there have been instances of
successful adaptation, IBM being one of the
most spectacular. It was, in fact, a close thing,
Not until Rand's Univac was well on its way to
market did IBM decide that electronic computers
offered a threat to its business in punched-card
equipment, and perhaps even offered opportunities beyond that business. Its difficulty in reaching
that conclusion stemmed in considerable part
from its deficiency in electronic (as contrasted
with electrical) know-how; its intelligence operation was faulty. When the decision to go
electronic had been taken, the situation was
saved by hiring members of the R&D group
that had produced Whirlwind at MIT, thereby
providing the expertise required for rapid entry,
Further, IBM considered that its comparative
advantage over others lay in its strong customer
relations in user industries, where the new
computers would replace IBM punched-card
equipment, and where it could assure customers
that, with IBM service, they did not need
to acquire much expertise in the electronic
technology. In general, IBM obtained its largest
market share in 'paper-processing' operations
like finance and insurance, or in accounting
departments, organizations with great dependence on their suppliers for the technical support
of these operations, rather than in the engineering
divisions of high-tech industries that had their
own internal competence in electronics. IBM
relied again on its customers' technical dependence when it delayed its entry into the personal
computer market but this time with less than
full success.
It is exceedingly difficult to conduct an effective
intelligence program in domains where a company
has no expertise. For many companies, the most
important consequence of acquiring its first
computer was that it thereby acquired, as a
byproduct, its first injection of know-how in
electronic computing, facilitating its ability to
plan its subsequent involvement in that domain,
Acquiring expertise in order to follow developments in a volatile domain and to begin planning
for the impact of these developments is typically
an essential initial step in adapting to changes
that originate outside the firm's industry. It
is an important consideration in all strategic
planning.
In intelligence activities directed toward the
future, the same strictures apply as apply in all
competitive markets: anticipation is of value to
the degree that it is as accurate as, or more
accurate than, the anticipations of the other
players, and accompanied by implementation as
effective as theirs or more effective. It is of little
competitive advantage to know only what others
know (but better than not knowing even that),
Conversely, even inaccurate anticipation is of
great value as long as it less inaccurate than the
anticipations of the other players. The symmetry
is not quite complete however. Failure to
anticipate a drought can ruin a farmer regardless
of whether other farmers predict it.
The earlier example of global warming illustrates that anticipating future events may or may
not imply the need for current action to deal
with them. In many situations, the advice given
by Trollope is valid: 'Be not the first by whom
the new is tried, nor yet the last to lay the old
aside.' Being the first often incurs research and
development costs that are avoided by those who
follow and imitate. On the other hand, being
the first may establish a market position that is
hard to challenge. Hence, the decision of whether
one wishes to be an 'innovating' organization
(that is, to be the first) is often a strategic decision
of great importance, requiring identification of
any comparative advantages for innovation that
the organization may have or lack. A strategy
of innovation is perhaps best regarded as a metastrategy a strategy of organizing for speed
and effectiveness in discovering promising new
activities and policies.
Carnegie Mellon University is an organization
that has ignored Trollope, having adopted this
meta-strategy, some decades ago, of competing
by innovation. Once having consciously adopted
the strategy (after successful innovations in
engineering education, particle physics and business education), it has endeavored to create and
preserve a comparative advantage in innovating
that makes the strategy viable. One component
of its advantage is relatively small size, which
facilitates rapid adoption and implementation
of new initiatives; another is a tradition of
Strategy and Organizational Evolution
interdisciplinary collaboration and permeable
boundaries between departments and colleges
supported by the administrative structure and
hiring and promotion policies and practices.
A third source of advantage in innovating is a
policy of not dissipating resources to achieve
'coverage;' using these resources, instead, to
build areas of special strength. Existing areas
of strength are sometimes used as launching
platforms for related new areas. A fourth
is institutionalizing frequent surveys of new
developments in research and education, both in
domains where the university has strength and
in those where it does not. Without a strong
intelligence activity, the strategy of competition
by innovation would not be viable.
Of course these potential sources of advantage
in innovating are not proprietary: there is
nothing that prevents competing universities from
adopting them. But adoption calls for a substantial
investment in human resources and organizational
sophistication, a sophistication that Carnegie
Mellon has devoted more than 50 years to
attaining. Implementing such a meta-strategy
entails designing, constructing and maintaining a
complex organizational culture, and transfering
it to a new faculty as they join the university.
Experience has shown that imitating particular
innovations introduced into a university is easier
than imitating the innovation process. The
innovating meta-strategy has been pursued and
refined at Carnegie Mellon through the administrations of five presidents.
There is nothing peculiar in this respect about
an organization that seeks to adopt innovation
as its central mission its meta-strategy. Bringing
about any other kind of substantial change in
the character of an organization is equally difficult
and resource-consuming. Much less is known
today about how such organizational cultures are
created and maintained than is known, for
example, about new product development.
An organizational culture is a set (possibly a
large set) of premises that resides in the minds
of the decision makers in the organization (which
means most of its members), and which is
invoked when they encounter a decision-making
situation. Members must be motivated to embrace
and incorporate the culture, but we should not
identify motivation exclusively, or even primarily,
with direct economic rewards. The tendency of
people to identify with the organizations in which
137
they work is a major basis for their acceptance
of the organizational structure, and although
identification (often called 'organizational
loyalty') is affected by rewards, it has a much
broader psychological base (Simon, 1991).
Identification with an organization not only
determines what goals will be sought, but also
has major cognitive effects: it focuses attention
on matters relevant to the goals at the expense
of other possible matters, defines a context or
framework for viewing situations, and strongly
influences what information will be brought to
bear upon decisions.
Creatures of bounded rationality like ourselves
have no choice but to attend selectively to the
environment in which we operate and information
about it. Identification with groups is the major
selective mechanism controlling human attention
in organizations (and elsewhere), and no theory
of organizational motivation or decision-making
that omits it can capture the key phenomena of
strategic planning. This is a major deficiency of
current theories of the business organization
deriving from economics, where 'reward' tends
to be identified with 'monetary reward.'
Genera|i
alternatives
Identifying new matters that require attention is
just the first step in the strategic planning process,
The second is discovering possible directions of
response. It was pointed out in The Behavioral
Theory of the Firm (Cyert and March, 1992)
that companies frequently begin to search for
alternatives only when the results of their current
operations fall short of expectations. But a time
of crisis, when prompt action may be imperative,
is not the ideal time to undertake strategic
planning for change. In the continuing presence
of the kinds of intelligence activities described
in the last section, attention can be directed in
timely fashion to new needs and opportunities,
and the search for new courses of action need
not be postponed until a company is in trouble,
The search for new alternatives is not primarily
a search for ready-made solutions to problems or
ready-made opportunities, although occasionally
these may be found. Much more commonly it is
a problem-solving process that seeks to discover,
invent, design or assemble new products or
coursesof action, taking as raw materials alreadyavailable principles or components. As I observed
138
H. A. Simon
earlier, classical decision theory does not
encompass the generation of new alternatives,
but takes the set of alternatives for choice
as given. However, in recent years, cognitive
psychology has provided us with an extensive,
empirically based theory of problem solving that
has been shown to be applicable to those
particular classes of problems we call 'synthesis
problems' or 'design problems'. The construction
of new alternatives as one stage in strategic
planning is a chapter in the theory of design
(Simon, 1981, chpts. 5 and 6).
One severe test of a theory of alternative
generation or design is to see whether the theory
can be converted into a computer program
that carries out the process automatically and
successfully. Such programs exist in a number of
domains. They should be distinguished from
programs that, like linear programming algorithms, select optimal alternatives from a predefined set of possibilities. Design programs do not
simply select; they synthesize.
E.B. Corey, 1991 Nobel Laureate in chemistry,
pioneered in developing automatic and interactive
computer programs for synthesizing new chemical
substances, and uses such systems extensively in
his own work. They are problem-solving programs, which use heuristic search guided by
means-ends analysis to find suitable reagents and
suitable reactions for producing the desired
molecules, taking into account the costs of
* • i andj energy andA *u
ec. •
materials
the efficiency
of£
reactions in terms of yield. The programs, like
most programs for solving problems in complex
irregular domains, do not optimize but satisfice,
finding 'satisfactory' or 'good' solutions. The
chemical industry has also developed programs
for automatic design of manufacturing processes
that can implement desired reaction sequences.
Finding a scientific law that describes a body
of data accurately (e.g., Ohm's law to describe
the relation between current and resistance in
, . .
-.011)1
*u *
*
an electric
circuit, Black s law ofr the
temperature
equilibrium of mixtures of liquids) is also a
design process. It requires generating plausible
candidate functions and fitting them to the data,
Programs that can do this (e.g., BACON (Langley,
Simon, Bradshaw and Zytkow, 1987)) are quite
similar to Corey's programs, relying on selective
search and feedback (means-ends analysis) as
primary heuristics.
Design has also been studied extensively in
the domain of architecture, where the processors
that expert designers employ again reveal a highly
selective heuristic search among components in
order to choose them and assemble them into a
composite product.
In the domain of corporate strategy, design
enters at several levels. At the most general level,
defining the company mission and identifying its
sources of comparative advantage are themselves
design activities. At a more concrete level, the
search for new products, the search for new
markets and the interactions of products with
markets are all design activities. None of them
is simply a matter of choosing among available
alternatives; all require discovering and fashioning
new alternatives.
From our earlier discussion of the transiency
of the comparative advantage produced by single
innovations or single environmental events, we
can conclude that strategy design must go on
continually. The time when a company is enjoying
its most recent success is the time when it needs
to be planning its next initiatives. This is
understood in industries whose products have a
short life and whose firms live by innovation. It
is perhaps less well understood in industries
where life is more stable. It implies that
strategy planning needs to be organized and
institutionalized as a continuing responsibility,
_ .
..
.
Implementing
plans
r
&r
Except for the longer time horizons that may be
involved, implementing strategic plans is not
particularly different from implementing other
managerial intentions in an organization, and I
will not discuss it here at any length. One point
does, however, deserve brief mention: the need
to disseminate widely the basic premises on
which organizational plans rest,
_.
...
, . , . .
Dissemination of strategic
plans
^ r
To be effective, a mission statement or a
description of the organization's comparative
advantage must become part of the mind-set
of every member of the organization who is
responsible for making or helping to make
decisions of any consequence. Only if this
conception of mission and guidelines is evoked
whenever the occasion for decision arises, will
decisions be shaped by it. A new member of the
Strategy and Organizational Evolution
organization has not been assimilated successfully
until he or she has acquired the concept of what
the organization is seeking to accomplish and
how it proposes to go about it. But entrance
training is not enough; the shared picture of the
organization must be reinforced continually,
especially by checking that it is in fact entering
into the decision making process.
To return to my earlier example: Carnegie
Mellon University reminds itself continually that
its comparative advantage lies in innovating. Its
leadership seeks opportunities to refer to its
history of successful innovation, and to recall
and reinforce the practices (for example, inter.
. ,.
,,
, * ' N AU .
departmental and inter-college collaboration)
that
have contributed to its success in innovating. By
word and deed the administration publicizes its
willingness to provide seed money for new
initiatives. These are just a few of the steps
that help to assure that not only the central
administration but the entire campus identifies
with the organization not just in a nominal way
but with its culture, and is actively involved in
developing and implementing its strategic plans,
The American program of economic aid to
Europe after World War II provides a different
kind of example of the creation and dissemination
of an organizational culture. When the Economic
Cooperation Administration was created in Washington in 1948 to administer the Marshall Plan,
there was initially great confusion about the
central focus of the agency. Was it aimed at
remedying the unfavorable trade balances of the
European countries? or at filling their needs for
essential goods? or at reestablishing the viability
of their economies? And was the action to be
primarily bilateral, between the United States
and individual European nations, or multilateral,
encouraging European initiatives in developing
joint plans?
The initial confusion was reflected in a complex
burgeoning organization and the conflicting
visions of its various units. Reaching decisions
about goals and then securing consensus on
policies and emplanting them firmly in the
hundreds of heads involved in the agency's
decisions was an essential step in putting the
agency into effective operation.
This was accomplished initially less through
direct shaping of the formal organization than
by using a few concise documents to communicate
throughout the agency the fundamental concepts
139
of its raison d'etre and goals. It was especially
important that the review of client nations'
requests for assistance be handled by persons
whose professional expertise and (even more
important) basic decision premises were consistent with the organization's mission as top
management defined it. As increasing consensus
was reached about ECA's basic policies, the
formal organization gradually modified itself to
fit them; that is to say, the policies that had
been disseminated themselves became major
influences upon decisions about organization,
_
. .. .
., ..
...
Organizational
considerations
in planning
B
Large organizations are plagued by a kind of
Gresham's Law: the pressures of everyday
activities and of crises drives out planning. Shortterm concerns create priorities and deadlines that
absorb managerial attention and energy at the
expense of long-range concerns. The obvious
remedy for this universal problem is to create
special organizational units whose sole responsibility is to handle various facets of the strategic
planning activity. With such a definition of its
basic function, such a unit has no excuse to be
diverted.
Would that matters were so simple! There are
two reasons why creating specialized planning
units does not automatically repeal Gresham's
Law of Planning. First, if the planners are
sagacious and effective, they are sure to experience increasing demands on their time for
advisory services to top management and to
other divisions of the organization. They will
have to be very strong-minded indeed to ward
off these interruptions of their mainstream
activities, and not to find themselves increasingly
entangled in short-run deadlines,
Second, the more tightly a planning group is
sealed off from the day-to-day affairs of an
organization, the more difficult it becomes
for its plans to influence company operations,
Participation of many organization members in
the strategic planning process is the surest way
of securing the dissemination of ideas that is the
basis for implementation; and isolation of the
planning activity from the rest of the organization
greatly complicates the process of dissemination,
among other reasons because those who have
not participated in the process will find it hard
both to understand and to accept its product.
140
H. A. Simon
The problem of isolation of the planning unit
arises not only in general strategic planning but
in the development and introduction of new
products as well. One of the advantages that
Japanese manufacturing firms have exploited in
their international competition is the speed
with which ideas for new products or product
improvements are converted into actual production lines. Observation has shown that this
speed is possible because manufacturing engineers
and even sales engineers participate in the design
process almost from the beginning. This enables
design engineers to take manufacturing constraints and convenience into account in the
designs. Conversely, it involves the manufacturing
staff in the product from the outset, secures their
commitment to it, and enables them to begin
planning the manufacturing operations while
design is still going on. At the same time, of
course, this procedure does shift some of the
attention of design engineers to manufacturing
problems and perhaps creates a danger that they
will be diverted from their basic responsibility
for product innovation.
As in most matters of organization, what is
called for, in order to secure a proper attention
to strategic planning but at the same time
maintaining strong communication links between
planning and operating units, is balance, and
top management attention to maintaining that
balance. On the whole, it is probably unwise to
allow specialists to make their whole careers in
planning, while others spend their careers in line
responsibilities. Some rotation, even at some
short-run expense to expertise, can do a great
deal to disseminate the products of strategic
planning, while keeping planning units in touch
with the realities of the world of operations.
¥Institutionalizmg
... .. ... . . ...
.. ...
intelligence activities
How can a firm organize so that it will scan
the horizons with sufficient vigor, identifying
potential problems and potential opportunities?
It is no accident that the eyes and ears are
located on the surface of the body and not in its
interior. Intelligence requires continual contact
with the relevant environments, and in the case
of business firms two of the most relevant
and important environments are the end-use
(customer) environment and the science and
technology (research and development) environ-
ment. Other parts of the firm should not be
excluded from the search for information, but
these are perhaps the two most important in it.
The marketing function is not simply a function
of selling and distributing products to customers,
It is equally a function of acquiring, through
contact with the end-use environment, information about the future of the firm's markets
and of markets into which it might enter,
Salesmen and sales engineers may play an
important role in this intelligence activity, but
only to the extent that it is an explicit part of
their function, they are trained to do so and
they are linked effectively in communication with
top management, planning and design units,
Specialized units may also provide various kinds
of intelligence products of customer polls, for
example. I shall not attempt to describe in detail
how one organizes intelligence about the enduse environment, but simply call attention to its
importance.
Research and development organizations are
commonly thought of as aimed at inventing and
developing new products, but this is only a small
part of the function they should perform. Just
as sales organizations are windows on the world
of customers, so R&D organizations are (or
should be) windows on both the world of nature
and the scientific and engineering communities
that are engaged in examining nature. A scientist
or R&D engineer is not merely an inventor but
also a channel of communication between the
company and the discipline in which he or she
works.
Scientific disciplines operate as huge blackboards (collections of journals and books, professional meetings) on which the discoveries of
all of the participants are recorded. Only a tiny
fraction of the knowledge that any one scientist
holds,j •_including very new knowledge, was proLi_
.
,
duced by his or her research or the researchT*
of
the home laboratory. Most of it was read off the
blackboard. Thus, the knowledge that a company
R&D department produces should be not only
the product of its own laboratory effort, but also
the whole body of relevant knowledge that it
obtains from the blackboards belonging to is
professional domains.
Too great a preoccupation with the patentable
products invented by the R&D department will
obscure its broader intelligence function, and
restrict its contribution to the strategic planning
Strategy and Organizational Evolution
effort. The NIH ('not invented here') syndrome
is endemic in R&D organizations that do not
understand that their intelligence responsibilities
extend far beyond their laboratory research
programs.
Companies in industries where there is a rapid
turnover of products (clothing and pharmaceuticals are salient examples) usually take conscious
pains to organize their intelligence activities. If
they did not, they would not survive long. They
are prime examples of organizations where
success at a particular time will be short-lived
unless it is followed continually by new successes.
To the extent that they can patent new products
or develop brand-name loyalties, they may be
able to buffer to some extent the volatility of
their environments. But basically they live, not
by making isolated innovations, but by organizing
to produce a steady stream of innovations.
Without strongly developed intelligence capabilities, they are unlikely to be successful at this.
CONCLUSIONS
Strategic planning is aimed at dealing with the
enormous uncertainty and constant change that
modern organizations find in the environments
to which they must adapt. A market 'niche' is
typically a transient thing. Statistics of firm
growth show that special firm advantages typically
have half-lives measured in a few years rather
than in decades or generations. The task of
strategic planning is to assure a stream of new
ideas that will allow the organization to continue
to adapt to its uncertain outside world.
In my remarks, I have tried to view the
strategic planning function in its broader setting
of the whole decision-making process in an
organization. Making choices and evaluating
them are simply the final stages in the decision
process, and seldom the most important stages.
Before choices are made, the occasions for choice
must be identified, effort must be focused on
problems or opportunities and possible courses
of action must be designed. Classical decision
theory has relatively little to say about these
crucial initial stages of decision but students of
strategic planning have become increasingly
aware that problem identification and alternative
generation are crucial components of strategy.
Cognitive science and artificial intelligence have
141
learned a great deal about these processes in
recent years, and are becoming important sources
of ideas for planning theory and practice.
Strategic planning will not happen by itself, or
even if we simply set up organization units
formally charged with doing it. The planning
effort will be effective only to the extent that it
permeates the entire organization and only if its
products are disseminated effectively. A central
idea (call it a 'mission' or a 'company goal' or
'basic principles'), embedded in many heads
where it is evoked on the occasion of decisions,
is more crucial than an elaborate written list of
things that are somehow supposed to happen.
Organizational identification, essential to the
implementation of strategic plans, is a good deal
more than simple loyalty. Identification implies
absorption of strategic plans into the minds of
organization members where they can have direct
effect upon the entire decision-making process,
starting with the identification of problems,
continuing with the design of alternative courses
of action, and leading ultimately to effective
implementation.
ACKNOWLEDGMENTS
This research was supported by the Defense
Advanced Research Projects Agency, Department of Defense, ARPA Order 3597, monitored
by the Air Force Avionics Laboratory under
contract F33615-81-K-1539. Reproduction in
whole or in part is permitted for any purpose of
the United States Government. Approved for
public release; distribution unlimited.
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