Friday, April 22, 2011
Wednesday, March 23, 2011
Coevolution of Macro and Micro Organizational Environment
Introduction
The acceptance of biology as basic to and an integral part of sociology has a long and distinguished, though somewhat controversial, history. Ever since Comte set the feet of sociology upon the soil of biology, it has been more or less generally assumed, particularly by the so-called "biological school," that there it must walk. As this soil has given signs of being something of a quick-sand, protests have arisen (Tisdale, 1939).
On the other hand, there is an attractive analogy between nature and industry, based on the similarity of natural functions and certain industrial activities. For instance, animals ingest (eat) and digest food. Finally, there are metabolic wastes. Firms are analogous to organisms in several respects, insofar as they consume material resources, process (digest) them and produce output products and excrete wastes. Firms, like organisms, also compete with each other for resources (Ayres, 2004).
These contemplations first guide me to Karl Ludwig von Bertalanffy (1901-1972). Motivated by the Aristotelian worldview "the whole is more than the sum of its parts”, in the late 1920's von Bertalanffy writes; “Since the fundamental character of the living thing is its organization, the customary investigation of the single parts and processes cannot provide a complete explanation of the vital phenomena. This investigation gives us no information about the coordination of parts and processes. Thus the chief task of biology must be to discover the laws of biological systems (at all levels of organization). We believe that the attempts to find a foundation for theoretical biology point at a fundamental change in the world picture. This view, considered as a method of investigation, we shall call "organismic biology” and, as an attempt an explanation - the system theory of organism”(von Bertalanffy, 1972).
This statement was the seed of what later became known as general systems theory. Following on the footsteps of Herbert Spencer (1820-1903), who introduced the analogy of society as an organism (Spencer, 2002), if we replace the term "organism" in the above statements by other "organized entities," I envisage three key characteristics that apply to today’s highly dynamic and complex global organizations:
1. Fabric of organizations can be defined as; “a set of elements standing in interrelation among themselves and with the environment”. The set of differential factors stimulate system properties, such as wholeness and sum, stability, mechanization, growth, competition, final and equifinal behavior (von Bertalanffy, 1972).
2. These differential factors comprise both internal and environmental components, which they continuously interact. Drawing on the nucleus of Luhmann’s autopoietic social systems theory (Luhmann, 1995), for social systems (including organizations) this interaction takes place in the form of a communicative process that makes sense of their environment through autonomous functional subsystems of science, economics, politics, art, media, law, education and religion. The autonomy of these subsystems does not mean that they are completely independent of one another, but that they are mutually independent with respect to the development of the function domain of which they are in charge (Braeckman, 2006).
3. The usually accepted assumptions of the biological analogies underlying the analysis of institutionalization lend themselves to life cycle metaphor. That is to say that the institutionalization process is seen to be evolutionary, cumulative, path-dependent, leveling off at a given level of established practice and, possibly, entering a period of decline (Loveridge, 2006).
Conversely, the life cycle concept prompts a strong rebuttal for being overly simplistic, and therefore, of little predictive value by modern population ecologists, as a metaphor or "naive model”. On the other hand, it can serve as an initial framework for observation of organizations, allowing for the level of analysis, conceptualization of time, and sources of variation pose common constraints on the use of life-cycle concepts across the social sciences. This basic conceptualization provides an "ideal type" of developmental process from which its alternatives diverge (O'Rand & Krecker, 1990).
These three aspects broadly define organizational ecology by focusing on the environmental and organizational determinants of the formation and structuration of the firm, including organizational life cycle transitions and the competitive and demographic structures of industries.
This paper explores the cogency of these notions by deploying an interdisciplinary mathematical expression to facilitate a systematic analysis of the following parameters:
Where:
Ɵ = Macro (External) Environment μ = Micro (Internal) Environment
P = Political Factors Fμ = Organizational Forces
Ec = Economic Factors Cμ = Organizational Forms, Structures
S = Social Factors D = Direction
T = Technological Factors Pr = Proficiency
En = Environmental Factors Ef = Efficiency
L = Legal Factors C = Concentration
ƒ = Function I = Innovation
D = Interdependence, Δ = Delta (Change) , t = Time (life Cycle), n = Factorial
Ɵ = ƒ (P x Ec x S x T x E x L x n)
μ = (Fμ + Cμ,) x ƒ(t)
Where; Fμ = ƒ (D x Pr x Ef x C x I) + Cμ, Therefore; Δ = ƒ (Ɵ x μ)
Fundamentally, this hypothesis argues that internal and external ecological (i.e. macro and micro environmental) parameters:
§ Drive organizational actions in response to environmental factors.
§ These environmental factors and responses affect organizational forms and forces.
§ Simultaneously, historical conditions (i.e. life cycle) influence and shape organizational goals, forms, structures, configurations and activities.
§ These actions differentiate organizations and their strategies, ultimately determining why some succeed and some fail.
Macro and Micro Environment: Coevolution of Macro and Micro Organizational Environments
Macro Environment: “Ɵ = ƒ (P x Ec x S x T x E x L x n)”
Systems Perspective
From the physical point of view, the characteristic state of the living organism is that of an open system. A system is closed if no material enters or leaves it; it is open if there is import and export and, therefore, change of the components. Living systems are open systems, maintaining themselves in exchange of materials with the environment, and in continuous building up and breaking down of their components (von Bertalanffy, 1950).
Based on this natural system perspective, it can be asserted that; “In the most abstract sense, a system is a set of objects together with relationships among the objects. Such a definition implies that a system has properties, functions, and dynamics distinct from its constituent objects and relationships” (Burns, 2007).
At an organizational level, we can take this assertion one step further and think of organizations as interacting relatively freely with their ‘environment’ much in the same way we think commonsensically of biological species adapting and interacting with their surroundings in an effort to survive. Each has the capacity to influence and be influenced by the external world. Organizations are widely conceived as open but bounded systems interacting with their environments (Chia, 2005).
Communication and Self-Reference Process
These notions adapted from biology and systems theories have a subtle yet powerful implication. For example, driven by the same logic Luhmann’s “Autopoietic Social Systems Theory” also sees the social systems as living systems that are capable of self-production, self-organization and self-referencing. This viewpoint signifies that systems produce their own basic elements, create their own boundaries, internal structures and they are “closed” (i.e. they do not deal directly with their environments, but rather with representations of their environments) (Arnoldi, 2001). Thus a social system is a communicative process that makes sense of its surroundings (i.e. macro environment ) in a way rather similar to the way the world is made sense of in a conscious process (Luhmann, 1995).
In fact in this context, Luhmann considers modern society as a primarily functionally differentiated society; where law, politics, economics, technology, religion, family and so forth constitute functional domains that crystallize into autonomous subsystems (function systems) (Braeckman, 2006).
In summary;
§ We “human beings” constitute part of the micro environment of the organizations.
§ Yet, the proper unit or component of an autopoietic social system is not the individuals, their thoughts, acts, or roles but rather it is the communication (utterance) process.
§ Such communication in the form of an utterance is central to the existence of organizations and is indispensable (i.e. communication is not simply an exchange of messages; it is the very act of existing and living of organizations).
§ When organizations are confronted with environments rich with opportunities and threats, to avoid being overwhelmed by complexity, organizations borders remain open to exchange energy and information.
§ This is accomplished through the creation of subsystems consisting of political, economic, social, technologic, environmental and legal considerations.
§ Each subsystem can make different connections with other subsystems, allowing for more variation within the system in order to respond to variation in the environment.
§ This increased variation facilitated by differentiation not only allows for better responses to the environment, but also allows for faster evolution, which is defined sociologically as a process of selection from variation; the more differentiation (and thus variation) that is available, the better the selection (Ritzer, 2007).
The hypothesis of Ɵ = ƒ(P x Ec x S x T x E x L x n) provides some of the key factors in the macro-environment that will affect any organization; new laws, trade barriers, taxation changes, demographic changes, government policy changes and technological innovations are all examples of macro change.
As an analytical framework, this hypothetical equation can help to analyze the macro changes to identify different environmental dynamics that may affect business strategies to assess how they may influence organization’s performance now and in the future.
However, we cannot assume that all organizations are the same and can be managed with the same set of processes and techniques. In reality, one of the important consequences of the self-reference of meaning is that any organization can only observe, decrypt and react to environmental input according to its own code. With the functional differentiation of organizations, the existence of a central position from which universal observations can be made is impossible (Arnoldi, 2001). Even then, organization’s interpretation of the meaning not only renders things contingent but also changes through time (i.e. industrial, organizational, product life cycle).
Micro Environment: “μ = (Fμ + Cμ,) x ƒ (t), Where; Fμ = ƒ (D x Pr x Ef x C x I) + Cμ”
Life Cycle Metaphor
The influence of history on an organization is a powerful but often overlooked force. In haste, companies are built. Yet, often organizations fail to ask: Where it has been? Where it is now and what the answers to these questions mean for where it is going? Instead, the attention is fixated on the environment and forecasting the future, as if more meticulous projections will provide the organization with a new identity.
In recent years, another new protodiscipline Industrial Ecology (or Industrial Metabolism) has emerged. This new discipline has been built, to a large extent, based on perceived analogies between economic and ecological systems. One perceived analogy is the ‘life cycle’: “All higher organisms exhibit a life cycle, beginning with conception, birth, adolescence, maturity, senescence and finally death. Interestingly enough, similar cycles have been observed for products, firms and even industries” (Ayres, 2004).
For instance, in his HBR Classic “Evolution and Revolutions as Organizations Grow[1]” (Greiner, 1998), Larry Greiner identifies a series of developmental phases that organizations tend to pass through as they grow. He distinguishes the phases by their dominant themes: creativity, direction, delegation, coordination, and collaboration. Each phase begins with a period of evolution, steady growth, and stability, and ends with a revolutionary period of organizational turmoil and change (figure 1).
For Greiner the critical task for an organization in each revolutionary period is to find a new set of organizational practices that will become the basis for managing the next period of evolutionary growth. Those new practices eventually outlast their usefulness and lead to another period of revolution. Organization therefore experience the irony of seeing a major solution in one period become a major problem in a later period (Greiner, 1998).
Organizational Forms and Forces
Theories of the stages of organizational development go beyond these ideas. For example, based on his model of “Pentagon of Forces and Forms” (i.e. configuration theory), some years ago Henry Mintzberg argued that effective organizations "got it all together" (Figure 2).
Mintzberg’s configuration theory describes seven basic forces which act on an organization;
1. Direction
2. Proficiency
3. Efficiency
4. Innovation
5. Concentration
6. Cooperation
7. Competition
When any one of these forces dominates an organization, it drives it towards the corresponding form, entrepreneurial; professional; machine; adhocracy; diversified; ideological; and political (Table 1).
By choosing "configuration", organizations bring their various characteristics of structure, strategy, and context into natural co-alignment with their environment (Mintzberg, Quinn, & Ghoshal, 1998).
Based on this assumption, Mintzberg thought he had the answer to “how some organizations are able to sustain viability and excellence in the face of change?” He argued that some organizations achieve integration as efficient machines, while others coalesce around product innovation. In a sense, these organizations play a jigsaw puzzle, fitting all the pieces of their operations into one neat image (Mintzberg, 1991).
However, Mintzberg too begun to wonder about this hypothesis of “configurations”, since some rather effective organizations of today[1] do not, and even those that do sometimes confound things (e.g. how does that big blue machine come up with critical adaptations when it has to, and why does 3M have those tight financial controls?). Thus Mintzberg had to consider another view of organizational effectiveness, in which organizations do not slot themselves into established images so much as build their own unique solutions to problems, i.e. LEGO metaphor; “The effective organizations play LEGO as well as a jigsaw puzzle. The pieces of the game are the forces that organizations experience; the integrating images are the forms that organizations take. Together, they constitute a powerful framework by which to diagnose and deal with the problems organizations face”. Mintzberg also adds that, “much of this process is driven by the interplay of seven basic forces (Mintzberg, 1991).
Therefore, the hypothesis of μ = (Fμ + Cμ,) x ƒ(t) suggests that as organizations survive, adopt and develop over time in their environment, their forms, forces, structures and configurations also tend to change. An awareness of this effect should help organizations to evaluate their problems (i.e. intrinsic strengths and weaknesses to manage extrinsic opportunities and threats) with a historical understanding instead of pinning the blame on a current development. Better yet, it should place organizations in a position to predict problems and thereby to prepare solutions and develop strategies before a revolution gets out of hand.
On the other hand, these models (e.g. hypothesis of μ = (Fμ + Cμ,) x ƒ (t) ) are only presented to suggest leading tendencies in some organizations, not definite occurrences in all of them. Reality is always more complex than its description on paper. Such description, labels, and thereby oversimplifies and distorts, but that should not detract from the help it offers in comprehending reality (Mintzberg, 1984).
X Factor for Organizational and Environmental Change: Coevolution of Macro and Micro Organizational Environments
X Factor for Organizational and Environmental Change: “Δ = ƒ (Ɵ x μ)”
Adaptation Perspective and Luhmannian Autopoietic Social Systems
I believe, both Greiner’s and Mintzberg’s arguments and insights remain cohesive to Luhmann’s Autopoietic Social Systems theory by way of Hannan & Freeman’s “Adaptation Perspective”, i.e. “According to the adaptation perspective, subunits of the organization, scan the relevant environment (and decrypt information based on the self-reference of meaning) for opportunities and threats, formulate strategic responses, and adjust organizational structure appropriately (Hannan & Freeman, 1977). Based on this reasoning, Greiner’s dominant themes (i.e. creativity, direction, delegation, coordination, and collaboration) and Mintzberg’s seven driving forces of organizations (i.e. direction; proficiency; efficiency; innovation; concentration; cooperation; and competition) and their corresponding forms (i.e. entrepreneurial; professional; machine; adhocracy; diversified; ideological; and political) are all actionable corollaries of meaning processing of organizational subsystems as defined by Luhmannian Autopoietic Social Systems.
Institutionalism
However, thus far the macro and micro environmental models this paper hypothesized (i.e. Ɵ = ƒ (P x Ec x S x T x E x L x n), μ = (Fμ + Cμ,) x ƒ (t)) overly simplifies and does not comprehensively define the integral correlation in-between. Despite the fact that these philosophizes emphasize organizational adaptation, variation and the role of environmental factors as catalytic forces influencing organizational behavior (Kraatz & Zajac, 1996), consciously (or subconsciously) they lean towards classical institutionalism, where the focus of attention is upon the overreliance of environmental forces to drive organizational change (Jacoby, 1990).
Furthermore, this growing business literature view on organizational behavior, characterizes organizational environments as the sources of norms and values that permeated organizations and influenced action, in particular by informing the ‘‘taken-for-granted’’ assumptions regarding the behaviors, organizational forms, and processes that are seen as legitimate (Ashworth, Boyne, & Delbridge, 2009).
In sharp contrast to the empiricism of classical institutionalism, neo-institutionalism takes a more holistic approach to understanding organizational behaviors. It moves beyond environmental and technical forces with a more inclusive approach that seeks to understand the role of actors within institutional systems (Lawrence & Suddaby, 2006). In effect, the new institutionalism – the institutionalism of Oliver Williamson and of Douglass North – rejects a view of mankind as a 'cultural puppet' in favor of a view of mankind as mankind as a 'rational chooser' (Mayhew, 1989).
For example consider Google, provider of the internet’s most popular search engine, which continues to adapt and evolve along with the Internet. Rather than being a rigid service, Google is continually adding technological features that create a better service by accretion. At any time, Google’s site features several technologies in development so that engineers can get ideas and feedback from users. Some large businesses have entire departments charged with monitoring the external environment and find ways to adapt to or influence that environment (Daft, 1992).
Institutional isomorphism and Environmental Evolution
Although, most scholars in strategy and organization theory employ a single theme for describing how and why organizations tend to become isomorphic with their environments through processes of either adaptation or selection; they less frequently examine how organizations systematically influence their environments and how organizational environments (comprised of other organizations and populations) influence those organizations in turn (Lewin & Volberda, 2005). Yet, ever so increasingly todays organizations are creating value for their shareholders, customers and employers, while well informed- managers shaping their organizations and organizations are shaping all our lives (Daft, 1992).
Here, institutional isomorphism becomes the master bridging process at the center of this proposition by incorporating institutional rules within their own structures, organizations become more homogeneous, more similar in structure, over time" (primarily within a particular institutional environment and context) (Scott, 1998). This process results from coercive (i.e. when an organization is compelled to adopt structures or rules), mimetic (i.e. when one organization copies another, often because of uncertainty ) and normative (i.e. when the organization adopts forms because professionals in the organization claim they are superior) isomorphic pressures perceived to be legitimate (DiMaggio & Powell, 1983).
Ultimately, coercive, mimetic and normative isomorphic pressures drive institutional change by means of following five propositions (North, 2004);
1. The continuous interaction between institutions and organizations in the economic setting of scarcity and hence competition becomes the key to institutional change.
2. Competition forces organizations to continually invest in technologies, innovation skills and knowledge to survive. The kinds of skills and knowledge individuals and their organizations acquire will shape evolving perceptions about opportunities and hence choices that will incrementally alter institutions.
3. The institutional framework provides the incentives that dictate the kinds of skills and knowledge perceived to have the maximum pay-off.
4. Perceptions are derived from the mental constructs of the players (i.e. self-referencing).
5. The economies of scope, complementarities, and network externalities of an institutional matrix make institutional change overwhelmingly incremental (i.e. improvements are realized slowly and incrementally) and path dependent (i.e. yesterday's choices are the initial starting point for today’s).
The implications of these principles are that organizations replicate and retain successful routines, benchmark competitors’ best practices and actively manage the updating of internal routines (micro-macro coevolution), leverage and extend past competencies and develop a coherent path-dependent strategy.
However, in highly competitive environments a core competence can become a core rigidity hindering survival, change and growth. Therefore, successful organizations must be designed and managed as dynamic, agile and learning organizations;
§ While safeguarding unique competencies to achieve a ‘good fit’ with the environment and
§ Maintaining the discretion and the strategic capacity to select, enact, and shape their environments.
Determined by this logic, hypothesis of “Δ = ƒ (Ɵ x μ)” elaborates the critical functional interdependence and coevolution between the macro and micro environments. Figure 3 illustrates this interdependence that is impelled by dynamism of time.
In summary, interdependence and coevolution of macro and micro environments is a dynamic process subject to both organizational action and environmental forces. There are multiple ways in which organizations interact with their environments through the process of mutual adaptation between the organization and its environmental domain. Specifically, organizations select the environment in which they should compete, design the organization structure that best fits this environment, actively shape and enact this environment, determine the performance criteria for measuring success, and design the strategies which will maximize organization performance (Lewin & Volberda, 2005).
Conclusion: Coevolution of Macro and Micro Organizational Environments
In this article I attempted to answer what seemed to be a rudimentary question of “how organizations coevolve with their environment through time”. In doing so, organizations were conceived as members of interdependent species in an ecological community as a system of interrelated parts, where a change in any part leads to a certain degree of imbalance, which in turn results in changes in other parts of the system and to some extent to a reorganization of the system as a whole (Wallace & Wolf, 1999).
The proliferation of the paper also reflected the many different theoretical lenses and empirical methods to understand the role of the adaptation of organizations and their environments. Yet, in reality I observed that existing studies of simultaneous evolution or coevolution of organizations and their environments are sporadic and the prevailing empirical research is based on relatively short term events and single cases. Furthermore, the magnitude of the impact represented by organizational and social informatics[1] that is transforming today’s societies and institutions will influence many of the prominent organizational ecology theories of today. These transformative technological evolutions and revolutions are sowing the seeds of “the Internet society", and are already epitomizing the global informational capitalism.
For instance, as of January 2011 neither any government nor private agency predicted a sudden regime change and people movement in the Arab nations. The failure of such intelligence and strategic assessment to predict this expeditious revolution was because of the nature of the trigger that moved the people rapidly (i.e. cyber social networking). Nevertheless, these local events created a larger global political, social, economic reaction causing a tail risk event both for public and private sectors. Therefore, we can no longer avoid the potentials of the progresses in social informatics for advancing new forms of co-operation and competition in the various subsystems of society such as the ecological, the economic, the political, and the cultural systems. These environmental systems are becoming more fluid and dynamic, enlarging their borders to a transnational scale (Fuchs, 2008).
Inherently, in the contemporary “information society” immaterial labor[2] is becoming a singular global logic of capitalist domination and "the fundamental sources of productivity and power" (Castells, 2000), where the power is derived from a most proficient estimate of uncertain consequences of possible actions and an estimate of uncertain future preferences for those consequences (Feldman & March, 1981).
As a conclusive remark, for organizations the hypothesis:
Ɵ = ƒ(P x Ec x S x T x E x L x n)
μ = (Fμ + Cμ,) x ƒ(t)
Where; Fμ = ƒ (D x Pr x Ef x C x I) + Cμ, Therefore; Δ = ƒ (Ɵ x μ)
is not a theorem that legitimizes the existence of a unified model - a principle - a law that can consistently apply to all organizations to address the entirety of environmental conditions. Nonetheless “it is far better to foresee even without certainty than not to foresee at all”, even “the use of hypotheses carries risk, yet often prove fruitful even if, perhaps especially if, they turn out to be flawed” (Poincaré, 1952).
[1]A serviceable working conception of ' organizational and social Informatics’ is that it identifies a body of research that examines the social aspects of computerization. A more formal definition is it he interdisciplinary study of the design, uses and consequences off, information technologies that takes into account their interaction with institutional and cultural contexts (Sawyer & Rosenbaum, 2000).
[2] Immaterial labor would be labor "that creates immaterial products, such as knowledge, information, communication, a relationship, or an emotional response", or services, cultural products, knowledge (Hardt & Negri, 2005).
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