Environmental Demands for Organization

To learn more about the demands of these two environments, we will follow the same practice that we did in the plastics industry, using data from both questionnaires and interviews with top executives. We will focus on four aspects of these environments as compared to the plastics environment. Were we correct in assessing the major competitive issue in each industry? How certain is knowledge in the market, techno-economic, and scientific sectors of each environment? How diverse are the characteristics of these parts of each environment? Finally, how tight is the required interdependence of activities in different parts of the environment? From the answers to these questions we hope to develop a clear understanding of the required states of differentiation and integration in each industry, as well as an understanding of the requirements for effective conflict resolution.

As we begin this examination of the environmental demands of these three industries, we should stress again that our measures of these variables are necessarily crude. They are best understood in comparative terms—how does the food industry compare with containers, and containers with plastics, and so on? The practicing manager, as a result of this type of comparison, should be able roughly to fit the organizations with which he has had experience somewhere along the spectrum from the highly dynamic plastics environment to the relatively stable container environment.

1. The Major Competitive Issues

By interviewing top executives in the food industry we very quickly confirmed our hunch that the major competitive issue in foods, as in plastics, was innovation. Similarly, interviews with container executives confirmed that their main competitive issue was the ability to provide customer service through rapid and timely deliveries and to maintain consistent product quality. Top executives in the food companies described the importance of innovation in this way:

The big thing in this industry is the almost fanatical desire for new, new, new. This has become the life blood of the business. . . . Prices don’t make any difference, and they have no relationship to volume, costs, or anything.

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This is a profitable business, which is an intensely competitive market, but not a very price-sensitive one. The top competition takes the form of a very intensive merchandising effort around new product innovations.

In contrast, container top executives discussed the importance of delivery schedules in their industry:

Our job is to shape the material and wrap it around air, and the only way you can make dollars is to keep moving the product out the door. What happens is that we get the in- ventories dumped on us, as the customers won t store con- tainers. The paradox is that you have to hold the inventories down, yet you can’t make money unless you run the machines constantly. Therefore, sales and manufacturing are constantly at each other’s throats. The integration of these conflicting circumstances is the critical management job. . . . The big issue is scheduling, and it is a matter of every day, all day. We either have too much product or too little.

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As far as this business is concerned, there is no innovation. If you really want to grow in this business, you have got to have strategically located plants, not giant ones but small ones, well placed throughout the country to give instant service. You have just got to have good delivery service to the customer, optimizing the flow of your material into his plant. Because of the importance of this service, we have become in this business the biggest warehousing industry in the world.

These same container executives also emphasized the im-portance of product quality as a competitive factor:

Prices are important in this industry only in the sense that you must meet them. Also, product specifications are stand- ardized, as your product has to be interchangeable with other suppliers’. So we are producing a very undifferentiated product. Obviously, you have to sell something else. This is where you get into the fine point of a quality container in a high-volume business. It can become rather exacting. I think whether you get new business honestly comes down to what kind of container you deliver. The customers, because of the speed at which they run their lines, are very concerned about imperfect containers. They keep detailed records of their losses and whose containers caused them.

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Even though the majority of the industry’s production is to industry-wide standards, there are still wide variations in product quality. With the customer processing upward of 850 units per minute, any failure of a container impairs their ability to operate. So you must operate with very few defects. You know you are going to have bad containers, but the question is, where do you stack up against your competitor?

As some o£ these comments suggest, the difference in the major competitive issue between the container environment and the plastics and food environment directly affects both the nature of integration and the degree of differentiation required among organizational units.

2. Required Differentiation

From our findings in the plastics industry, we expected that one environmental characteristic that would affect the required state of departmental differentiation would be the relative certainty of scientific, market, and techno-economic parts of each environment. The fact that the major issues in the container industry were delivery and quality control, while that in foods and plastics was innovation, suggests that the certainty of the parts of the container environment might be greater than in the other industries. Based on our meas-ures of environmental uncertainty, this was in fact true (Figure IV—1) .

All sectors of the container environment were as certain as or more certain than similar sectors of the other two environments. The only aspect of the container environment similar to the others in certainty was the techno-economic portion. This is not surprising, since in all three environments the technology was of a processing type, where once the process was established, knowledge about it was highly predictable.

The interviews with container executives provide further understanding of the relative environmental certainty in this industry. The remarks of one marketing executive illustrate this point with regard to the container industry market:

We and our competitors all use the same machines pro- duced by the same company. The product has got to be virtually the same as your competitor’s unless your process is off, as you produce to the same specifications. Nor is there any price competition in this industry. So all we have to know is: How many cases does the customer want, and when?

It is significant that in the container industry market information was more certain than techno-economic knowledge. In the plastics industry, it will be remembered, the situation was exactly reversed, because of the diversity of and constant changes in customer requirements. But while executives in the container industry stressed that they could readily get unambiguous information about how well they were serving their customers, food industry executives emphasized the difficulty of getting clear-cut market feedback. How well a product was performing could only be determined after lengthy test-marketing.

Similar differences existed in the scientific parts of the three environments. In the container industry the necessary scientific knowledge was relatively well understood, and causal relationships were clearly defined. As one container executive put it, most research activity involved solving immediate technical problems where results were quickly apparent:

If you really examine research in this business, it is very difficult to separate it from quality control. Most of our work is concerned with processing, not new containers. … We spend most of our time with manufacturing to keep yields up, and building and designing quality-control equipment.

In contrast, scientific knowledge in the plastics industry was, as we know, highly uncertain, with feedback often coming only after lengthy exploration and experimentation.

While these comments and the empirical data suggest that the parts of the container environment were more certain than those of either food or plastics, the contrast between the latter two industries is not so clear cut. The scientific and techno- economic parts of the environment were apparently less certain in the plastics industry than in foods (Figure IV-1). This seems attributable to the more rapidly changing scientific knowledge in plastics, which also created some technological uncertainties for the production people. Even more interesting was the higher uncertainty of the market in foods as compared with plastics. This difference is consistent with the data gathered in interviews. Plastics executives recognized a number of uncertainties in their market, but they had comparatively few customers from whom they could easily find out the results of a particular action. In the foods industry, on the other hand, there were so many customers that the only way to get very firm feedback was to test-market a new product, which took considerable time. Even the causal fac- tors underlying results of these tests were not always clear.

The most important fact that we glean from this comparison of the relative certainty of the various parts of these three environments is that the parts of the plastics and foods environment are more diverse than those in the container industry. The certainty scores are rather similar in all parts of the container environments; information is fairly clear, and causal relationships are well understood throughout this environment. In contrast, in plastics and foods the techno-economic portion of the environment is relatively certain, but the other parts are less so to varying degrees. This lack of diversity of certainty in all phases of the container environment suggests that effective organizations in this industry would not be required to be as differentiated in structure and interpersonal orientation as organizations in the other two industries. The degree of certainty, however, is only one dimension along which the environment can affect the degree of differentiation required of organizations. Let us now examine two other aspects of these three environments and relate them to the state of differentiation that we predicted would be required for effective performance in each industry.

A second factor that influences the required differentiation of units is suggested by the characteristics of the food industry. This is the extent to which one part of the environment overrides the others in importance. In an industry like the food industry, we speculated that the importance of the market could be so great that the functional units of an organization would be required to have less differentiated goal orientation than the units in an industry like plastics, where the elements of the environment are more balanced in importance. With the market so crucial to the organization’s success in the food environment, managers in all functional units, not just those in the marketing or sales departments, would be greatly concerned with market goals. As a consequence, the required differentiation among organizational units would be reduced.

The final factor in which we were interested is the required degree of differentiation in time orientation. Our findings in the plastics industry indicated that this would be related directly to the time span of feedback in the different parts of each environment. The data collected on this point clearly suggest that the required differentiation in time orientation was highest in the plastics industry, followed by foods and containers (Table IV-3). The time span of feedback in the container environment was fairly similar in all parts, ranging between just one month and one week. In con-trast, the time span of feedback in plastics ranged from one year for the scientific sector to one month for the techno-economic. Managers in the different units in a container organization, then, would all tend to be oriented toward the same short time horizons, as compared to the quite different time outlooks described in Chapter II for plastics managers. Again the food industry seemed to fall between the other two, with the required differentiation in time orientation less than in plastics but greater than in containers.

We have summarized the state of differentiation required by each environment in Table IV—4. 6 It seems quite apparent from these      data      that      the           container    environment      required         less differentiation of organizational parts than either plastics or foods, while foods required less than plastics. We therefore predicted that the actual degree of differentiation found in organizations in these three industries would vary accordingly. We were also, of course, predicting that the high- performing organizations in each industry would more clearly meet the environmental requirements for differentiation than their less effective counterparts. Before we test these predictions, we shall turn to the other major environmental demand on organizations, the required degree of integration.

3. Required Integration

In our investigation of the plastics industry we found that organizations in this environment were required to achieve a high degree of integration. Implicitly, we were assuming that the requirement for integration in this industry might be higher than that in some other industries. The data collected from top executives in the food and container industries indicated, however, that the degree of integration required among different units was virtually the same in all three environments (Table IV-5).

These scores,  however, reflect only the intensity of integra-tion required among units, i.e., how dependent one unit’s ac-tivity is on those of others. They do not reflect some impor-tant differences in the nature of the integration. In the food industry, where innovation was the major issue in a relatively uncertain environment, the integration had to be brought about in relation to some very complex and uncertain problems. This uncertainty meant that much of the integration (and conflict resolution) must be carried out at the lower levels of the organization, where the required knowledge and information were available. This is similar to the situation in the plastics industry.

In contrast, in the container industry, where uncertainties were fewer and the dominant issues were delivery and quality, the required integration centered on more routine problems and was less frequent and less complicated. This, plus the fact that scheduling decisions affected all plant and sales locations, suggests that the knowledge required for interdepartmental decisions must be centrally processed and could be effectively handled by fewer managers. Since the positional influence for such decisions rested at the top of the organizational hierarchy, it would seem most efficient to collect the required knowledge at this level so that conflicts could be resolved and integration achieved by the upper managers, who had the positional influence and could acquire all the knowledge to do so. There were, however, some other issues, particularly those dealing with product quality, that require detailed knowledge of the production process. These could be more efficiently handled by managers lower in the hierarchy. The characteristics of this environment, however, suggest that in effective organizations integration would usually take place at higher levels.

There was another important difference in required integration for containers as opposed to plastics and foods. Container companies must achieve the tightest integration, around the critical issues of delivery and quality, between sales and production units and also between production and research units. One container executive described the importance of the latter in this way:

With research and production, the cooperation has got to be very close. In fact, it is often hard to tell where one leaves off and the other begins. Those guys in research need to be as interested in the daily figures as I am.

Another container executive described the required integration between sales and production:

We know the industry is going to be in an essentially sold- out condition for the next five years. So you want to service the customers which give you the best profit margins, since you can only make so many containers. This is where the relation between sales and production is critical. If only sales interests schedule the machines, they dance to only the customer’s needs. If just the manufacturing interests are reflected, you lose all your flexibility. Both interests have to be represented and evaluated.

In contrast, in the food environment (like the plastics industry) the critical linking relationships were between production and research and between sales and research. We have discussed the reasons for this in the plastics industry; the comments of a food executive explain the importance of these relationships in his industry:

In this business new product ideas come easy. The problem is practicality from both a market and a technical standpoint. So the feasibility of a new idea has to be built in. The key guys are some of the people in research, but typically they don’t have the market information or orientation and a lot of inputs must come from [sales], who know the realities of the customer.

Scale-up problems can be tremendous also. What comes out of the commercial plants can have little relationship to what the lab has made. Consequently, a good working relationship between production engineers and the development engineers in the lab is very important.

In summary, while the degree of integration required in all environments was similar, there were important differences in its nature. In plastics and foods it revolved around the complex and uncertain problems of innovation. Thus the research unit must be closely tied in with both production and sales. In the container environment, where integration centered on more certain and programmable issues, production must be closely related to both research and marketing. Because of the differences in issues and in the certainty of the various elements of these environments, integration must usually occur at the upper levels of the container organizations, and at lower levels in the food and plastics organiza- tions.

We must also recognize that, because differentiation and integration are essentially antagonistic, the higher degree of required differentiation, particularly in the plastics environment but also in foods, suggests that the problems of achieving integration will be greater in these industries than in the container industry. The importance of this fact will become more evident after we have examined the actual states of differentiation and integration that we found in the two food organizations and the two container organizations.

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

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