Deciphering Environments

September 18th, 2006

In 1986, BankAmerica, once the largest bank in the world, was in danger of decaying into oblivion, having accumulated $1.8 billion in losses in just one year. Much of the blame was laid at the California bank’s encrusted systems and inertia in the face of mounting rivarly and declining margins. A paternalistic culture that coddled employees and guaranteed job contributed to ballooning expenses across its 850-branch network. Where competing firms like Wells-Fargo and Pacific showed great aggressiveness in redeploying assets and going after new customers, BankAmerica had come to resemble a listless, bloated Third World administration. Anxious about the bank’s performance, BankAmerica’s board asked former chairman and CEO A. W. Clausen to return from his five-year stint at the World Bank to spearhead a strategic change. After hiring a new top team of ex-Fargo executives, he urged a culture-busting effort, achieved by laying off employees, freezing salaries, introducing incentive pay schemes, and consolidating the structure. Selling became the centerpiece of a more competitive culture, the basic capability in dire need of reconstruction. Top managers instituted weekly sales meetings and bestowed awards on those responsible for the most sales of the week. The result: By 1991, BankAmerica appeared to be among the strongest of the leading U.S. commercial banks, with solid earnings, a steadily rising stock , and good press. It came as no surprise, therefore, when the bank announced in mid-1991 an aggressive merger with rival Pacific designed to consolidate its West Coast strengths and propel it to the number two position in the United States, behind giant Citicorp.

More than ever, firms like BankAmerica, IBM, AT&T, and General Electric face environments that command radical change but are difficult to interpret. For BankAmerica, uncertainty abounds about the shape of things to come in financial services. Will lingering regulatory restraints on commercial banks be removed or, following the savings and loan debacle, might they be strengthened? For AT&T, will technological changes facilitate or hamper the integration of and computers, and so its ability to capitalize on its merger with NCR? For IBM, will Akers’ efforts to carry out decentralization prove sufficient to overcome the glorious history and mainframe orientation that will doubtless hold back change? And will GE’s reputation recover from the scandals and media battles that have depreciated its acquisitions of Kidder Peabody and NBC?

Such questions are difficult to answer. Fundamentally, firms’ environments are cloudy and difficult to read. They often operate in paradoxical, contradictory ways. For instance:

• Efficiency vs. innovation: Increasing rivalry places short-run stress on increasing efficiency. At the same time, however, rapid technological change compels managers to spend heavily on innovation-generating research to remain competitive in the long run.

• Competitiveness vs. institutional effectiveness: Attending to rivalry means streamlining functions, paying for performance, and eliminating dead-weight costs. Societal demands for fairness and conformity to ethical standards, however, place greater stress on equalizing rewards, monitoring work, and policing employees, thus adding to overhead.

• Globalization vs. nationalism: Economic forces shape increasing levels of interdependence between countries, compelling businesses to globalize. At the same time, in many countries, national and regional protectionism also looms larger, making economies of scale and globalization difficult to realize.

Take Whirlpool, the world’s largest manufacturer of major appliances. In the search for global economies of scale, the U.S.-based company recently acquired Phillips’ European appliance business. Yet uncertainties abound. It remains unclear whether the fragmented European can be supplied from centralized manufacturing facilities like those in the United States. The company also has limited brand awareness abroad. Multiple national standards hamper the standardization of parts, and patriotic sentiments prevails.

So seemingly simple changes in environments require considerable interpretation of how economic, social, and political forces will combine. They remind us that, fundamentally, to conceive a strategic change is a deeply subjective process. In fact, although environments appear to have changed rapidly in recent years, few managers actually perceived them as doing so: Just as people generally do not notice small changes in ambient room temperatures, so many managers were desensitized to the piecemeal changes occuring in their firms’ environments. By itself, globalization progressed incrementally since the mid-1970s, as did stakeholder activism, the end of the Cold War, and other contemporary pressures on firms for more efficient, entrepreneurial, ethical, and equitable structures.9 Although these forces were building up slowly and independently in historical time, they have come together suddenly in our own lifetimes, creating cataclysmic pressure for radical change.

The heady successes of the postwar era also fostered close ties between managers within firms and within the island-like business communities to which firms belong. 10 Managers’ relationships with one another and with institutions such as governments, financial , universities, professional associations, and the media helped to insulate firms from their broader environments, blinding them and their firms to the gathering clouds of global competition.

Extraordinary as it now seems, the big three auto manufacturers, for instance, became fully aware of their dependency on oil only after the OPEC embargo of 1973. They then took a decade to acknowledge it. Similarly, large military contractors like General Dynamics, Northrop, Lockheed, and Grumman waited for the collapse of the Soviet empire before recognizing how extreme was their dependence on the Cold War for continued growth. Although the Pentagon’s budget is expected to decrease by some 25 percent by 1996, weapons makers have done little to prune their operations. I 1

If, as managers, we initiate change only when our backs are to the proverbial wall, then the process by which particular issues reach a threshold of attention should prove central in generating strategic change. Many studies document how managers actively select that confirms the merits of their pet projects, and downplay alternatives, thereby giving politically motivated decisions a rational interpretation. Concerned managers use formal planning as one way to overcome basic biases that dampen their ability to attend rationally to environmental trends. Still, in turbulent environments, planning itself proves insufficient, and biases threaten to overwhelm their ability to respond rationally. Researchers point out how readily managers fall victim to processes of escalation in which they become wedded to preferred positions long after they have unproductive. Large public programs are notorious for this-the space program, for one. In 1984, the U.S. Congress committed itself to the planned space station as an $8 billion project Seven years later, having already spent over $4 billion, estimates placed the cost of the station closer to $120 billion. Experts call it a case study in cost escalation, a demonstration of how psychological commitment combines with political interests to bias the decisions that our leaders make.

In the planning stages, advocates argued that the station would keep NASA in business after the windup of the Apollo program.

As James M. Beggs, NASA’s director in the early 1980s, conceded, “the feeling was that unless we could get a station, the manned activities would truncate and we’d run out of mission.” In other words, rather than adopt a program of building modules, NASA opted for a single large unit that would function only when fully assembled. In bargaining for funds, negotiators were forced to make the station appealing to all constituents. So its purpose was continually enlarged to encompass first research, then employment, then commercial possibilities-thereby escalating the station’s size and the required.

Whether at NASA, among military contractors, or in everyday firms, these processes are pervasive. Since strategic issues tend to be ambiguous, background features of managers themselves and of their firms’ cultures, controls, and capabilities, often lead managers to make very different interpretations of circumstances. If coping with revolutionary circumstances requires shared understandings among all of a firm’s key employees, then in coming years managers are likely to grow increasingly concerned about how and know-how are acquired, processed, and transmitted inside their firms.

Simultaneously, firms belong to larger business communities and so have relationships with rivals, suppliers, distributors, regulators, business schools, trade associations, and so on. Managers develop an understanding of what is hot and what’s not partly through the networks of personal contacts that link them to one another. The strategic change that they conceive and initiate therefore derive not only from personal characteristics, but also from features of firms and their inclusion in these larger business communities. So to encourage radical change is to explore avenues for emancipating managers from the closed mind sets that tend routinely to propagate within business communities.

Related posts:

  1. Energizing The Strategic Change A strategic change and a strategic planning is not enough: Much is required to get there. After all, old habits die hard. Current resource deployments constitute commitments around which employees and shareholders form work and career expectations. Previously announced goals, pay practices, recruitment systems, and administrative procedures place firms on strategic trajectories that create both [...]...
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Posted in Economy, Finance, Investment | Comments (1)

One Response to “Deciphering Environments”

  1. Jamie Says:
    September 18th, 2006 at 12:10 pm

    A Tenant’s Guide to Renting

    The first challenge every tenant faces is finding an apartment for rent that suits their individual needs. For today’s tenant, the most effective apartment search can be done using an online apartment finder. Tenants should decide what they require in an apartment or house rental before beginning their search. For example: the number of bedrooms, location or distance from public transportation and how much the tenant can afford to pay in rent, furnished or unfurnished apartment, etc. By making these important decisions first, tenants can avoid renting an apartment or house only to regret it later. Many tenants today are taking advantage of the convenience of the internet to locate apartments for rent as opposed to the traditional print publications.

    Once a possible apartment or home has been found, it is the tenant’s duty to thoroughly inspect the premises making a commitment in the form of a security deposit. A tenant should not rely on the landlord or the landlord’s agent to tell the tenant if anything is wrong with the property. The tenant must inspect the property carefully and ask questions about it.
    Inspecting the condition and functionality of the following areas/features of the apartment before committing yourself as a tenant is highly recommended.
    1. Kitchen appliances in working order.
    2. Water pressure strong, plumbing without leaks.
    3. Electrical outlets and wiring working.
    4. Walls and ceiling painted or papered without cracks
    5. Ventilation or air conditioning accessible.
    6. Floors, railings and bathrooms in good repair.
    7. Fire escape easy to use.
    8. Stairs safe and well-lighted.
    9. No rodents or insects.
    10. Heating system in working order.
    11. If furnished, check and write down condition of all furniture.
    12. Windows and doors operable and weather-tight; screens provided.
    The tenant should also check the security of the building to find out if there is a dead-bolt lock, security chain, or through-the-door viewer.
    BEWARE OF EXISTING DAMAGES: In order to avoid being blamed for damages that already exist in the rental unit, the cautious tenant should take every step for self-protection. Before moving in (or as soon as possible thereafter), the tenant should make a list of all existing damages and repairs that need to be made. A copy of the list should he presented to the landlord and attached to the lease This way the landlord cannot blame the tenant for damages caused by others and the tenant will know what the landlord intends to repair. If the tenant keeps good records the landlord will not be able to keep the tenant’s security deposit for damages that were actually caused by others. Taking pictures before moving in is also strongly recommended.

    ABOUT THE AUTHOR: Paul Rossano, associated with http://www.AllSpaces.com who “Conveniently Connects All People with All Spaces in All Places” has been dedicated to the Real Estate rental market for over 8 years. He has assisted over 25,000 tenants with their renting needs. Any questions about renting apartments, houses or other rentals, feel free to visit http://www.AllSpaces.com or email him at Paul@AllSpaces.com.

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