Differentiation, Integration, and Performance in the Three Environments

Before exploring how well the organizations in the container and food industries met the requirements of their environments, and how they compared with the plastics organizations described earlier, we shall briefly describe the four organizations investigated in this phase of the study and their relative performance.

1. Container and Food Organizations and Their Performance

Both the container and the food organizations were major product segments of larger corporations. In each industry the two organizations studied were direct competitors, producing similar, if not identical, products, which were sold to the same markets. The two container organizations had the same basic functional units as plastics firms (research, production, and sales), except that there was only one research unit in each container organization. One of the container organizations (the low performer) also had an integrating unit, which had the prescribed responsibility of integrating sales and production around scheduling and customer service issues. The high-performing organization had no formal integrating unit.

Each of the two food organizations had a production unit and only one research unit, but each had two units assigned the responsibility of coping with market matters. One of these, which we have labeled the marketing department, was involved in formulating and executing new product, pricing, promotional, and advertising plans. The other, which we call the sales unit, was involved in distribution—calling on wholesale and retail stores to insure proper product display and to encourage the stores to maintain adequate stocks. Since the marketing department was the unit primarily involved in product innovation, we shall focus our attention on it. The fact that the managements had made this further division of labor to deal with the market seems to be one result of the dominance and uncertainty of this phase of the environment in the foods industry. In contrast, the plastics organizations elaborated additional units to deal with scientific problems —the most uncertain aspect of their environment. This suggests, perhaps, that organizations will tend to elaborate and subdivide units that cope with the more problematic or uncertain sectors of their environments.

The high-performing food organization had no integrating unit, while the low-performing company had one, which was assigned the responsibility of integrating the activities of marketing and research and production and research around issues related to product innovation.

As the nomenclature above suggests, we have attempted to obtain contrasts between an economically successful organization and a lower-performing one in each of these environments. In the container industry we were able to find the clear contrast we were seeking. The high-performing organization had a higher rate of growth in profits and sales than the low performer. The managers’ subjective appraisal of the performance of each organization was in the same direction. The chief executive of the high-performing organization rated his company as closer to his performance ideal than did the chief executive of the low-performing firm.

The clear difference in performance between these two organizations was also evident from interviews with other top managers in both organizations. The executives in the high- performing organization were highly satisfied with their ability to compete in this industry. They felt that all parts of their organization were effectively performing their tasks. In contrast, the top executives interviewed in the low-performing organization were concerned about their present level of performance. They saw a need for improvement in customer service and meeting delivery schedules in order to raise their competitive position.

The contrast in performance between the two food organ- izations was not so clear. Our two organizations were initially selected for study because of the differences in their general reputations for effectiveness. However, a closer investigation of their relative growth in sales and profits indicated that the low- performing organization was currently growing faster than the high performer. The reason for this was that the low-performing organization had recently had a dramatic success with a new product. In other conventional measures of economic performance (market share, return on investment, number of new products introduced over a five-year period), however, the high performer was doing better than the low performer.

After looking more carefully at these performance data of the food organizations, we recognized that we had chosen as the low performer an organization that had been doing poorly for a number of years, but that was now doing better. While its effectiveness was still not so high as that of the higher performer, it was improving rapidly. This conclusion was borne out by both the subjective evaluations of the chief executives and interviews with other top managers in each organization. The two chief executives’ appraisals indicated that the organization selected as the high performer was more effective, but that the difference was not so great as that between the container organizations. The top executives in the high-performing food organization, we learned, were well satisfied with their present level of performance, but were still anxious to improve it (partly because they were concerned about the improving performance of competitors like the low performer) . The top executives in the low-performing organization indicated that while they were highly pleased with their recent progress, they were still not satisfied and saw the need for greater effort if they were to match the performance of more effective organizations.

As we discuss the differentiation and integration achieved by the two food organizations, then, we will want to bear in mind that the differences in their performance records were not so dramatic as those between the high- and low-performing container or plastics organizations. In fact, their relative performance more nearly matched that of the high- and medium- performing plastics firms.

2. Organizational States and Environmental Demands

In examining the actual states of differentiation and integration achieved in these four organizations, we shall make a two-way comparison. We shall compare the high-performing organizations in all three environments to learn whether the actual differences in the states of differentiation and integra-tion matched the environmental requirements.7 Are there differences among these organizations that are related to the varying environmental demands? Also, we shall compare the high- and low-performing container and food organizations to see whether our findings from the plastics environment were confirmed in these other two industries. Do the high- performing organizations conform more nearly to the demands of the environment than the low-performing ones?

As we had expected from the variations in required differ- entiation in these environments, we found that the high- performing plastics organization was most highly differentiated of the three high performers (Table IV-6). Similarly, the high- performing food organization was more highly differentiated than the high-performing container organization.

This same pattern is also evident among the low-performing organizations in the three industries. Not only were these differences reflected in these average differentiation scores, but the differentiation between each pair of units in the plastics organizations was greater than that of the comparable pairs in the two food organizations, which were more highly differentiated than their counterparts in the container organization.

As a further check on whether the high-performing organ- izations actually met the requirements for differentiation, we also found that there was a significant rank-order relationship between the actual and the required degree of differentiation for each pair of units in the three high-performing organizations.* The more the parts of the environment differed in certainty and timespan of feedback, and the less dominant any one part was, the more differentiated were the pairs of units in the high-performing organizations.

This particular relationship between actual and required differentiation did not hold for the three low-performing or- ganizations. This suggests that the low-performing organizations did not meet the requirements imposed by their respective environments so well as their high-performing competitors. This conclusion is supported, at least for the plastics and food industries, by two other pieces of evidence. In these two industries, the high-performing organizations were in total more highly differentiated than their less effective competitors (Table IV-6). Further, there was a significantly closer fit between the attributes of each unit and the demands of its relevant part of the environment in the high-performing food organization than in the low performer (Table IV-7). This corroborates similar findings for the plastics organization (see Chapter II). Thus in both of these industries the high-performing organizations had units whose members’ ways of thinking and organizational practices were consistent with the demands of their particular part of the environment. This did not seem to be so true in the low-performing organizations in these two industries.

In the container industry the two organizations were more nearly similar in their states of differentiation. There is, however, some evidence (Table IV-7) that the high-performing organization’s units more closely fitted their part of the envi- ronment than did the units in the low-performing organization. Although this difference is not significant, it is in the predicted direction.

Thus the high-performing organizations in the container and food industries, like those in plastics, had achieved states of differentiation that met the demands of their particular environments. While the low-performing organizations (with the exception of the low-performing container organization) had not attained this close a match, the variations between their states of differentiation suggest that they were responding to some extent to their particular environments. But, as we suggested in Chapter II, their failure to realize the required state of differentiation was probably reducing the ability of each unit to deal with its own part of the environment.

In more concrete terms this means that in the high-performing container organization sales, production, and research managers were more similar in their ways of thinking, and their departments tended to follow organizational practices that were not much different. In contrast, as we saw in Chapter II, the functional managers in the high-performing plastics organizations were quite different in their ways of thinking, and their units’ structures varied to fit the differences in their tasks. Thus each high-performing organization was differentiated according to the demands of its environment, and this seemed to contribute to its effectiveness.

The high-performing organizations also seem to have achieved states of integration consistent with environmental requirements. In all three industries the high-performing organizations had better integration than their low-performing competitors (Table IV-6). Not only were the effective organizations more nearly achieving the required states of differentiation, but they were also generally obtaining more effective working relationships among their units. The one partial qualification to this statement is found in the high-performing food organization.

Since the environmental requirements for closeness of inte- gration were the same in all three industries, we expected that the high-performing organizations would also have to achieve approximately the same states of integration. The high-per- forming container and plastics organizations were almost identical in this respect. While the more successful food organ- ization was achieving better integration than the low performer, it was not integrating its units so well as the high- performing organizations in the other industries. Moreover, there is evidence from interview comments as well as from the integration scores that this organization faced some problems in achieving integration the other two high performers did not have. In particular, the relations between research and marketing were posing some problems. As one research executive described the situation:

I don’t show these products to marketing. In fact, I never show it to marketing until all our own people have seen it. I couldn’t care less about marketing. They more or less like what we tell them to like. . . .

Another research executive said:

When some ideas come from marketing, I kind of wonder about these things, and I don’t trust the ideas. They aren t as well established as we are, and we aren’t as tolerant of their mistakes as we are of our own.

Marketing personnel made similar comments about the re- lationship with research. One marketing manager expressed the general concern that research and marketing did not work closely enough together:

The basic dilemma we have is the separation of research and marketing. However, we have been steadily hacking away at this as far as research is concerned, and I think we are beginning to make some progress.

Another marketing manager expressed the view that the problems between marketing and research were often at the upper echelons:

I would say the biggest problem is the feeling that nobody [from outside] is going to direct research. This gets in the way of most spontaneous cooperation between research and marketing This is not so much a problem at the working level, but at the higher administrative levels.

While the problems of achieving integration were more serious at the upper levels of the managerial hierarchy, there was some evidence of difficulty at several levels.

These and similar comments, together with the integration scores, suggest that while this organization was achieving a more satisfactory state of integration than its low-performing competitor, it was not so well integrated as the high performers in other industries. In spite of this it seems clear that all the high- performing organizations maintained states of integration that more clearly met the demands of their specific environments than those of their low-performing competitors.

The findings reported in this chapter suggest that the states of differentiation and integration in effective organizations will differ, depending on the demands of the particular environment. In a more diverse and dynamic field, such as the plastics industry, effective organizations have to be highly differentiated and highly integrated. In a more stable and less diverse environment, like the container industry, effective organizations have to be less differentiated, but they must still achieve a high degree of integration.

From these findings we begin to get a partial answer to our basic research question of what organizational characteristics fit different environmental conditions. These differences in states of differentiation and integration are, however, only part of the answer, because these two states are antagonistic. The more differentiated an organization, the more difficult it is to resolve conflicting points of view and achieve effective collaboration. This suggests that organizations in the plastics industry would have more problems in achieving integration than those in the food industry, and that both of these would have a harder time than the container organizations.

The problems of achieving integration in the plastics or food organizations would be further complicated by the relative uncertainty of their environment compared with that of the container industry, and by the fact that, as we mentioned earlier, they have to integrate around complex issues of innovation while the container organizations cope with more certain operational issues. This suggests that the devices and practices used to resolve conflict and achieve integration might differ among the organizations in these three environments. The way these methods and practices varied among these organizations throws further light on our central research question. It is to these differences that we now turn.

Source: Lawrence Paul R., Lorsch Jay W. (1967), Organization and Environment: Managing Differentiation and Integration, Harvard Business School.

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