Strategic Management Journal, Vol. 14, 131-142 (1 993)

7 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 comparathe advantage. Strategic phn ing 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 straegy requires their exposure to the basic postulates that underlie strategic plans.

The study of strategy is that part of the study of decision making which, in the words of Igor Ansoff, is ‘primarily concerned with external, rather than internal, problems of the firm and specifically with selection of the product-mix which the firm will produce and the markets to which it will sell. (Ansoff, 1%5: 5 ) ‘Strategy, one might say, is decision making that deals with the ‘Big Questions.’

However, it would be misleading to suppose that strategy has nothing to do with the internal problems of the firm because, as Ansoff goes on to observe, ‘the strategic problem is concerned with establishing an ‘impedance match between the firm and its environment’. (1%5: 5 ) Correct decisions about a firm’s products and markets must necessarily take into account the character- istics of the finn-in terms of its human, organizational, physical and financial resources- that constitute its comparative advantage. Each individual business firm faces its strategic

Key words: Strategy, comparative advantage, atten- tion focus in planning, design of alternatives

decisions against the background of its history and what its history had made of it (Chandler, 1962). Consequently, it is natural to view strategic questions within the framework of evolutionary theory (Nelson and Winter, 1982; Nelson, 1991).

In this paper I should like to begin with some observations about how business firms evolve, and about the role of strategic decisions in their evolution. My evidence will be anecdotal rather than systematic, and since the bulk of my management experience has been in educational institutions, and somewhat less in government and business organizations, I will draw some of my examples from Carnegie Mellon University. I will also use examples of strategic planning for public policy at the societal level.

It is easy to exaggerate the difference between profit-making and nonprofit private organiza- tions. One difference there is: While the profit- making corporation must make certain, at least over any protracted period of time, that income exceeds expenditures; the nonprofit organization must make certain that income and expenditure come out exactly equal. Clearly, managing a nonprofit is more difficult than managing a

CCC 0143-2095/93/100131-12 @ 1993 by John Wiley & Sons, Ltd.

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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 litera- ture 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(l 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 sues. In fact, we would expect rate of

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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 Cyear 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

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 competi- tors 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 con- ditions exist; another interpretation is that chang- ing 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

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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 com- petitive, 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 compet- ing 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 I1 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 hand- held 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., auto- mobiles, radio and TV) was caused not merely by the innovative new products they manufac- tured 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) inno- vation 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.

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Anticipatiog 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 sigxuficantly 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 mana- gerial, 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

warming is usually thought of as a topic for public policy consideration, but if considerable warming 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 hand- held 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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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 manufac- turers survived into the automobile era. Estab- lished 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 opportuni- ties 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 oper- ation 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 depen- dence 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 depen- dence 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 develop- ments 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 illus- trates 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 meta- strategy-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 busi- ness 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

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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 asubstantial 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 adminis- trations 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

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.’

Generating 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 courses of action, taking as raw materials already- available principles or components. As I observed

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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 algo- rithms, select optimal alternatives from a prede- fined 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 pro- grams, 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 materials and energy and 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 an electric circuit, Black’s law of 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

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 1 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

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

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organization has not been assimilated successfully until he or she has acquired the conccpt 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 cmtiiiually, 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- 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 idcntifios with the o r g a n h i o w n o t 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 Eccmomic Cooperation Administration was created in Wash- ington in 1948 to administer the Marshall Plan, there was initially great confusion about thc central focus of the agency. Was it aimed at remedying the unfavorable trade balances of the European countries? or at filling thcir needs for essential goods? or at reestablishing the viability of their economies? And was the action to bc primarily bilateral, between the United States and individuat European nations, or multilateral. encouraging European initiatives in devrloping joint plans? The initial confusion was reflected in a cc>mplex

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.

"hiis 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

of its raison d'etrc and goals. It was especially important that the review of client nations' requests for assistance be handled by persons whose professional expertise and (even morc important) basic decision premises were consist- ent with the organization's mission as top management defined it. As increasing consensus was reached about ECAs basic policies, tho formal organization gradually modified itself ro fit them; that is to say, the policies that had heen disseminated themselves became major influences upon decisions about organization.

~ Z a t i o n a I colrjidcrrrtioas in @Inning

Large organizations are plagued by a kind o f Gresham's Law: the pressurcs of everyday activities and of crises drives out planning. Short- term concerns create priorities and deadlines that ahsorb managerial attention and energy at the expense of long-range concerns. The. obvious remedy for this universal problem is to creittc: special organizational units whose sole responsi- bility 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 he diverted.

Would that matters wcre so simple! There iire two r e m n s why creating specialized planning units does not automatically rcpeal Gresham's Law of Planning. First, if the planners are sagacious and effective, they are sure to experi- cncc increasing demands on their time for advisory services to top managemenl and to other divisions of the organization. They will have to be very strong-minded indecd to ward off these interruptions of thcir mainstream activitks, and not to find themselves increasingly cntangled in short-run deadlines.

Second, the more tightly a planning group is sealed off from the day-today 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 wry 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 o f 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 pro- duction 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 con- straints 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.

Institutionalizing 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, infor- mation 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 end- use 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 black- boards (collections of journals and books, pro- fessional meetings) on which the discoveries of all of the participants are recorded. Only a tiny fraction of the knowledge that any one scientist holds, including very new knowledge, was pro- duced by his or her research or the research 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 14 1

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 pharmaceu- ticals 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 capabili- ties, they are unlikely to be successful at this.

CONCLUSIONS

Strategic planning is aimed at dealing with the enormous uncertainty and constant change that modem 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

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, Depart- ment 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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