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A stability-adaptation model
DON HELLRIEGEL AND J O H N W. SLOCUM, JR.
INTEGRATING SYSTEMS CONCEPTS AND ORGANIZATIONAL STRATEGY A stabilityadaptation model Both authors are faculty m e m b e r s at Pennsylvania State University in the area o f organizational behavior.
Organizational adaptability and stability are often viewed as opposites, ft is the authors' view that they should be treated as independent concepts and that the relative effectiveness of organizations depends upon their ability to operationalize both. A simplified model makes it possible to view stability and adaptability as separate but interrelated dimensions of organizational systems and suggests some of the consequences for the system with different combinations o f the two variables. Short case studies o f International Telephone and Telegraph and Penn Central illustrate how their behavior can be partially explained by the stability-adaptation model. Maximal effectiveness is seen as achieved by the organization characterized by high stability and high adaptation. A commonly expressed view is that organizations should become more adaptive and less committed to the maintenance of stability.
APRIL, 1972
This perspective suggests adaptation must occur at the expense of stability. In other words, these concepts are often viewed as opposite ends of a single continuum. For example, Labovitz has suggested the need to pursue one set of organizational strategies when the environment is stable and another when it is changing. Thus, in a stable environment, it is claimed that the appropriate organizational features include formal vertical organizational structures, specialization of goal orientations, and a high task orientation in the interpersonal styles of managers. In a changing environment, on the other hand, the desirable organizational features are identified as informal and flat organizational structures, diffuse goal orientations (job enlargement), and a high person orientation in the interpersonal styles of managers. 1 While we do not deny there are potential strains and tensions between adaptation and stability, we would like to suggest a way out of the mental set of viewing them as polar opposites. The thesis of this article is that stability and adaptation should be treated as independent concepts and that the relative effectiveness of organizations depends upon their ability to operationalize both of these concepts. This thesis is developed in the following steps: a brief explanation of each of these systems concepts; development of a stability-adaptation model, which suggests the possible domain of behavior for organizations in terms of these two variables; a description of the implications of this domain of behavior
1. George H. Labovitz, "Organizing for Adaptation: the Case for a Behavioral View," Busingss Horizons, XIV (June, 1970), pp. 19-26.
DON HELLRIEGEL AND JOHN W. SLOCUM,JR.
in terms o f d e a t h , survival, or g r o w t h for organizations; and the p r e s e n t a t i o n o f short case studies o f I n t e r n a t i o n a l T e l e p h o n e and Telegraph and Penn Central in terms o f h o w their b e h a v i o r can be partially e x p l a i n e d t h r o u g h the use o f the s t a b i l i t y - a d a p t a t i o n m o d e l . T h e last step should be especially useful for those w h o d e c r y the i n o r d i n a t e gulf b e t w e e n " t h e o r y " and " r e a l i t y " and the n e e d to show h o w systems t h e o r y can explain reality.
TWO SYSTEMS CONCEPTS Stability o r i e n t e d systems can b e e x p l a i n e d as follows: Every stable system h'as the property that if displaced from a state of equilibrium and released, the subsequent movement is so matched to the initial displacement that the system is brought back to the state of equilibrium. A variety of disturbances will therefore evoke a variety of matched reactions. 2 72
E x a m p l e s o f stability o r i e n t e d (selfregulating) systems w o u l d be t h e r m o s t a t s , physiological r e g u l a t i o n o f b o d y t e m p e r a t u r e , and a u t o m a t i c steering devices. T h e meaning of stability o r i e n t a t i o n for h u m a n and organizational systems has b e e n e x p l a i n e d this way: . . . the system's main characteristic is its functioning to maintain the given structure of the system within pre-established limits. It involves feedback loops with its environment, and possibly information as well as pure energy interchanges, but these are geared principally to self-regulation (structure maintenance) rather than adaptation (change of system structure) .3 In sum, the stability o r i e n t a t i o n of system means that, w h e n the system d i s t u r b e d , it will actively a t t e m p t to r e t u r n its previous state. Thus, there is an a t t e m p t
a is to to
2. Ross Ashby, Design for a Brain (New York: John Wiley & Sons, Inc., 1960), p. 80. "The words 'stability,' 'steady state,' and 'equilibrium' are used by a variety of authors with a variety of meanings, though there is always the same underlying theme," p. 44. 3. Walter Buckley, "Society as a Complex Adaptive System," in Walter Buckley, ed., Modern Systems Research for the Behavioral Scientist (Chicago: Aldine Publishing Company, 1968), p. 490.
maintain (1) the f u n c t i o n s a n d / o r s t r u c t u r e o f the organization, (2) the relationships b e t w e e n these factors, and (3) the interd e p e n d e n c i e s b e t w e e n these factors and the total organizational system. A d a p t a t i o n , o n the o t h e r h a n d , is conc e r n e d with significant changes in each o f the three previously m e n t i o n e d relationships and the possibility o f f u r t h e r g r o w t h in the s y s t e m t h r o u g h the c r e a t i o n o f new and d i f f e r e n t parts, relationships, and i n t e r d e p e n d e n c i e s . This includes activities such as m a r k e t research, research and d e v e l o p m e n t , planning systems, or even equal e m p l o y m e n t o p p o r t u n i t y programs. A d a p t a t i o n also implies t h a t " f e e d b a c k c o n t r o l l o o p s m a k e possible n o t o n l y self-regulation, b u t self-direction or at least a d a p t a t i o n to a changing environm e n t . . . . ,4 A l t h o u g h the stability and adaptive orientations o f h u m a n or organizational systems m a y o f t e n b e in conflict, it w o u l d b e inappropriate to view these t w o c o n c e p t s as o p p o s i t e ends o f a single c o n t i n u u m . T h e choice is n o t stability or a d a p t a t i o n . T h e p r o b a b i l i t y t h a t a system will survive and grow d e p e n d s u p o n b o t h o f these o r i e n t a t i o n s being operational. F o r e x a m p l e , K a t z and K a h n have n o t e d : The adaptive function, like the maintenance [stability] function, is directed toward the survival of the organization. Although the maintenanceffunction faces inward and the adaptive function faces outward, they are similar with respect to another basic tendency. Both move in the direction of preserving constancy and predictability in the conditions of organizational life. s
A STABI LITY-ADAPTATION MODE L T h e a c c o m p a n y i n g figure is a simplified m o d e l f o r viewing stability and a d a p t a t i o n as separate, a l t h o u g h i n t e r r e l a t e d , dimensions o f organizational systems. T h e t e n d e n c y and ability o f the systems t o m a i n t a i n stability are
4. Buckley,Modem Systems Research, p. 490. 5. Daniel Katz and Robert L. Kahn, The Social Psychology o f Organization (New York: John Wiley& Sons, Inc., 1966), p. 91.
BUSINESS H O R I Z O N S
Systems Concepts and Organizational Strategy
Stability-Adaptation Model HIGH
(1)
(2)
(3)
STABILITY
(4)
(5)
LOW
LOW "=¢'-'~ A D A P T A T I O N (1) (2) (3) (4) (5)
= = = = =
-'---'~'-HIGH
High death probability (slow) High survival probability High survival and growth probability Certainty o f death (quick) Certainty o f death (quick)
shown as varying from low to high on the vertical axis. Their tendency and ability to maintain adaptability are shown as varying from low to high on the horizontal axis. By dichotimizing and cross-classifying these two variables, the possible ways in which an organization can vary in terms of stability and adaptation can be revealed. The ke~? at the b o t t o m of the figure suggests some of the consequences for the system with different combinations of the two variables. Of course, it needs to be emphasized that these are deductive inferences, although the two case studies to be introduced provide at least indirect verification that the consequences presented occur in large and complex organizations. The five consequences are only illustrative of the possibilities. Further, any given organization can shift on this grid over a period of time. For instance, ITT seems to have experienced possibilities (1), (2), and (3), whereas
APRIL, 1972
Penn Central went through possibilities (4) and (5). Organizations in the upper left-hand c o m e r (1) would be characterized by high stability and low adaptation characteristics. They would tend to be rigid in terms of structure, leadership practices, planning systems, control of procedures, and so on, and, over the long run, we would expect a high probability of death. Their failure is likely to be a slow process if their environments are not changing too rapidly and if they have built up resources from earlier periods, for example, cash reserves or inventory. The second possibility (2) portrays an organization which tends to react to, rather than anticipate, changes which require adjustments. But these organizations have a strong survival probability. Organizations with high stability and adaptation orientations (3) are thought of as having a high probability of both survival and growth. They make the most of feed-back systems, tend to react quickly, and anticipate changes both internally and externally. This is probably the ideal which m a n y business firms claim to be striving toward. The fourth possibility, low stability and low adaptation (4), implies virtually certain and rapid death. Of course, the rapidity of death for an ongoing organization will depend upon the amount of its stored resources when it moves into possibility (4). These organizations would tend to be rigid and apathetic. Their feed-back mechanisms tend to be slow and inadequate, resulting in wasted resources, spent long after adjustments are needed. Finally, systems falling into region (5) also face certain death. But, instead of lapsing into rigidity and apathy, they attempt to adapt in a state of chaos and confusion. Here, there might be active change efforts, but there are inadequate or nonexistent feed-back mechanisms concerning the consequences of these changes as well as confusion about the direction and purpose of the changes. The discussion of the following two
73
DON HELLRIEGEL AND JOHN W. SLOCUlVl, JR.
organizations will attempt to show how their behavior can be partially explained through the use of the stability-adaptation model.
THE ITT CASE Period of Stability
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The ITT seems to have approximated possibilities (1), (2), and (3) in the figure within the short time period between 1940 and 1971. In 1940, ITT was a major telephone company with its primary activities and assets residing with 75 subsidiaries and affiliates in 26 foreign countries. Then came World War II. Rumania, Spain, and Argentina, among others, were considering the expropriation of ITT subsidiaries. ITT became more survival c o n s c i o u s - t h a t is, stability oriented ( 1 ) - t h a n growth oriented. During the war, the decision structure of the organization was decentralized, and each subsidiary was assigned the task of maintaining its own survival. The local management needed the power to make quick decisions in response to changes in its highly uncertain external environment. The subsidiaries were expected to carry out standardized goals and were generally left alone so long as they broke even or added profits to ITT. While environmental conditions played a role in influencing ITT's goal orientation in this period, the personality and values of its leader seemed to have a considerable impact as well. Sosthenes Behn, the president and founder of ITT, felt y o u had to work hard for what y o u got, and that y o u also had to work hard to protect it. Bebn's strategy at ITT emphasized a stability goal orientation when its operations were put in jeopardy. After the war, he continued with a stability oriented strategy, whereas many other organizations perceived the opportunity to grow. Conflict over this strategy developed, which eventually led to the removal of Behn as president in 1954. Between 1954 and 1958, two
presidents came and went; neither was able to rid the organization of its stability orientation.
Adaptation and Stability In 1959, after Harold Geneen became president, the behavior of ITT was completely changed. Adaptation and growth was the rule, and the c o m p a n y became proactive in its environment. A comprehensive plan for acquisitions and mergers was created and implemented. Some of the firms had products related to ITT's communications expertise, but most were in consumer oriented service firms such as Avis-Rent-A-Car and Sheraton. Internally, there was a major restructuring of the organization. Geneen accomplished this by eliminating much of the a u t o n o m y of operating managers; initiating a comprehensive control system which was centrally monitored at the New York headquarters; making massive inputs of new managerial personnel; and implementing a major research and development program for the explicit purpose of creating new and improved products and services. These efforts can be translated into tangible results. Between 1960 and 1970, sales grew from $811 million to $6.4 billion, and profits increased from $31 million to $353 million. It is apparent ITT had leaped from possibility (1) to possibility (3)--high adaptation and high stability-as shown in the figure. Geneen was instrumental in bringing about this changed outlook and orientation. His influence on ITT has been summarized this way: "His vision of a company is one tautly efficient, unfettered b y the past, international in its impact, and agile at converting problems into o p p o r t u n i t i e s - a company, in short, modeled very much after Geneen himself.'6
6. Stanley H. Brown, "How One Man Can Move a Corporate Mountain," Fortune (July, 1966), p. 81.
BUSINESS HORIZONS
Systems Concepts and Organizational Strategy
In about 1969, environmental forces were again gathering to influence the behavior of the organization. Increased government surveillance and control, at least in the United States, was not permitting the rapid expansion of the past. For instance, to gain the right to purchase Hartford Fire Insurance Company, ITT has had to divest itself of Avis, Leavitt, and some lesser companies. It appears that ITT has had to shift to possibility (2)-high stability and moderate adaptation-as shown in the figure. It is too early to determine whether this shift is temporary or if ITT will engage in rapid adaptation through its international environments or by internal expansion.
THE PENN C E N T R A L CASE
To illustrate possibilities (4) and (5) in the figure, we can examine another organiz a t i o n - t h e Penn Central Railroad. Certainty of death within a relatively short period of time was predicted as the o u t c o m e under either set of conditions. It is important to note that "quickness of d e a t h " as a consequence of these possibilities is a relative condition, being highly dependent upon the amount of resources stored in the organization at the time it moves into possibilities (4) or (5). In J u n e of 1970, the Penn Central declared bankruptcy. Losses during fiscal 1970, estimated at $500 million, had been preceded by two years of losses. The Penn Central was formed in February, 1968, out of a merger between the New York Central Railroad and the Pennsylvania Railroad. The road to the merger had been a long and confused one starting in 1957.
Environmental Factors
Several environmental factors m a y have contributed to the Penn Central failure. First, in 1969, the economic system of the United
APRIL, 1972
States peaked, then began its slow decline toward recession, resulting in more than proportionate decreases in traffic for railroads. Despite the recession, inflation continued unchecked, a new experience for the economic system. This contributed to the spiraling wage demands and work stoppages experienced by most railroads. Thus, the railroads managed to merge just prior to a substantial economic slowdown. As a consequence, the anticipated heavy "reorganization" costs could not be offset by increasing revenues; in fact, they were aggravated by decreasing revenues. A second external factor was the continuing shift in customer preferences. In the past, m a n y bulk shippers were concerned only if the goods were received by the purchaser. But in the 1950's, shippers became also concerned with speed of service. Penn Central, by deemphasizing rail operations and concentrating on horizontal diversification into real estate development, failed-almost completely-to meet this increasingly important market requirement. For instance, freight service from New York to Chicago (about 800 miles), once a matter of two to three days, came to require seven or eight in 1968 and 1969. This is only one manifestation of the breakdown in the company's ability to maintain organizational stability.
I nternal Factors
Meanwhile, a number of other internal factors were affecting Penn CentraI's operation. These factors might be divided into four categories: diversification, technology, organization, and planning.
Diversification--In 1963, the decision was made by Stuart Saunders (then president of the Pennsylvania Railroad) to begin diversifying, especially into real estate. The rationale behind this strategy was that such a policy would create a balance mechanism to offset
75
DON HELLRIEGEL AND JOHN W. SLOCUM, JR.
"Having funneled all its earnings into the real estate strategy, Penn Central divested itself of any slack that it could rely on in crisis periods."
76
the railroad's cyclical pattern of income. At the time, the railroad was generating enough cash to enable the real estate developers to continue growing. However, Saunders and David Bevan (who became the finance chairman of the merged roads) seemed to ignore or discount three important points that would influence the long-run viability of such a diversification strategy. First, the real estate developers were highly dependent on the railroad for capital to maintain growth. In prosperous times, this was no problem. But during economic slumps the railroad, being affected by a "negative accelerator," would also be cash starved. Having funneled all its earnings into the real estate strategy, Penn Central divested itself of any slack that it could rely on in crisis periods. Second, the real estate developers were highly dependent upon fluctuations in the stock market. Instead of operating as a damper on railroad earnings, the real estate holdings served only to increase the magnitude of possible fluctuations. Third, the earning power of the railroad operations of Penn Central was limited by the amount of capital improvements made over time. As the drain of capital into the diversification plan continued, maintenance programs on vital rolling equipment were deferred. As repairs and replacements were postponed, the earning potential of Penn Central was decreased even further. Saunders and Bevan seemed to have failed to sufficiently assess the risks involved in such a major policy decision, which was mechanically carried over to the merged organization. It appears that the alternatives available to the PRR in 1963 were not really analyzed in
depth. The full implications of the real estate alternative vis-a-vis future environmental conditions and the competitive posture of the railroad appear to have been given little consideration.
Technology--In at least two areas, the technological aspects of the merger seem to have been miscalculated. First, the compatibility of the computer systems between the two railroads was evidently taken for granted. Computers were virtually indispensable to the Penn Central because they should have provided a means of scheduling hundreds of extremely complex and highly dependent train movements as well as a means of control for over 100,000 pieces of rolling stock. Although planning for the eventual linkup of the computers should have logically been initiated well before the actual merger, it was not until 1970 that the units were operating as a system. This lack of awareness of the problems involved with highly sophisticated technology obviously cost the c o m p a n y operating efficiency. The second major technological problem was concerned with the integration of the physical plant. The basic premise behind the merger was that an increase in combined efficiency would result from elimination of costly, antiquated, duplicate facilities. However, because of computer breakdowns and a pervasive lack of communication throughout the organization, line managers had little knowledge of the operations outside the regions with which they were formerly familiar. Therefore, the older and outdated yards and terminal areas were kept "on-line" to prevent a total breakdown in the system.
Organizational Factors--Several organi: zational factors can be considered to have had an important influence upon the ultimate failure of Penn Central: goals, structure, and control. The corporate goals were ambiguous and inconsistent during the 1968-70 crisis years. The Pennsylvania Railroad faction, led by Saunders and heavily influenced by Bevan,
BUSINESS HORIZONS
Systems Concepts and Organizational Strategy
seemed intent on liquidating the railroad and investing the proceeds in other ventures. The New York Central group, however, determinedly attempted to improve the service of the railroad, although w i t h o u t much success. Adding to the confusion was the attitude of the board of directors; it provided little corporate direction or guidance. Thus a situation of corporate limbo developed, with each group's objectives diametrically opposed to the objectives of the other. Within this context, the portents for disaster were increased. Top management structure was organized with Saunders as chief executive officer with the responsibility for making most of the final decisions. Bevan, as chief financial officer, reported directly to Saunders. Alfred Perlman (previously president of the New York Central) was president and reported directly to Saunders. He was responsible for the railroad's operations. Because of the belief in opposing strategies, communication b e t w e e n the chairman (Saunders) and the president (Perlman) was generally inadequate. In addition, most of Perlman's vicepresidents were former P R R men and were often antagonistic toward his ideas. The New York Central personnel were usually far down the hierarchical ladder, and had little influence. It was hardly a true merger; more realistically, the NYC was "acquired" b y the PRR. Communications networks were inadequate for full transmission of ideas and information, and the power/influence systems were clearly controlled b y former P R R personnel. The lack of control (stability) was clearly evident at all levels within the organization. At the lower levels, trains were often delayed and/or cancelled; freight cars, lost; and service, erratic. Several hundred boxcars were "stolen" during the spring of 1971, yet the c o m p a n y was unaware of this fact for many weeks. At higher levels, the lack of control was even more evident. The subsidiary units operated with almost complete discretion. At
APRIL, 1972
"Thus a situation of corporate limbo developed, with each group's objectives diametrically opposed to the objectives of the other."
the highest level, the board, as noted previously, had little influence upon the major decisions. Thus, Saunders and Bevan were free to follow the course of rapid diversification without the constraint of the normal checks and balances which exists in most large corporations. The ineffectiveness of the control function was further exacerbated b y the ambiguous and undefined corporate goals. Without standards b y which to compare performance, corrective measures became arbitrary and misdirected. The general feeling of indifference (and in some cases, hostility) served only to aggravate the retrogradation of the control mechanisms.
Planning--Although the
merger plans were formally announced as early as 1962, most of the effort expended until 1967 was directed toward legal considerations of the merger. There is little evidence to indicate that extensive planning was ever conducted jointly b y both companies, except at the very highest levels. Apparently, little emphasis Was given to coordinating and integrating the daily operating activities of the two firms. The lack of adequate forecasting of changing economic conditions was reflected in rapidly declining revenues when they were not anticipated. Reaction to external change (for example, shifting customer preferences) was also slow because of the rigidities and inflexibilities of the merger plan. Finally, merger savings were generally overestimated and reorganization and start-up costs grossly underestimated. For instance, severance pay was estimated at $3 million for 1968, when, in fact, it amounted to $35
77
DON HELLRIEGEL AND JOHN W. SLOCUM, JR.
million. In addition, labor wage increases were underestimated by about 15 percent in 1969. After failing to obtain a guarantee from the federal government for a $200 million emergency loan, the Penn Central filed for bankruptcy on Sunday, J u n e 13, 1970. Following this action, Saunders, Bevan, and Perlman resigned, and the company was placed under the direction of four courtappointed trustees. J]]
][I Hopefully, the ITT and Penn Central cases have provided a number of concrete examples of the consequences that stability and adaptation orien-
I[lld
tations can have for organizational effectiveness. Maximal effectiveness is' viewed as the result of organization which is characterized by both high stability and high adaptation. It is our contention that these concepts have too often been viewed as polar opposites; the stability-adaptation model should serve to reduce such a bias. It might also be useful to managers as a "mental m a p " for diagnosing the present state of their organization or its subsystems. Finally, it is hoped this presentation has demonstrated how systems theory can provide the manager with a framework for explaining and diagnosing reality in virtually any type of setting.
78 OtJL~O~(3ODE~)O[3~OOOrl-IDOODOOOOE~JOODO~OE)OOOOO~ODOOOOOD~~D~O
The essential task of modern management is to deal with change. Management is the agency through which most changes enter our society, and it is the agency that then must cope with the environment it has set in turbulent motion. To carry out its active social role of adaptation, management itself, therefore, must be adaptable. Already the nature of management has undergone drastic alterations. As it stands today on the threshold of the final third of its first century, m o d e m management seems pregnant with another metamorphosis. It is now possible to see in outline the shapes toward which the next generation of management will tend. - M a x Ways, " T o m o r r o w ' s Management" in Readings in Management Strategy and Tactics
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BUSINESS HORIZONS
INTEGRATING SYSTEMS CONCEPTS AND ORGANIZATIONAL STRATEGY A stabilityadaptation model Both authors are faculty m e m b e r s at Pennsylvania State University in the area o f organizational behavior.
Organizational adaptability and stability are often viewed as opposites, ft is the authors' view that they should be treated as independent concepts and that the relative effectiveness of organizations depends upon their ability to operationalize both. A simplified model makes it possible to view stability and adaptability as separate but interrelated dimensions of organizational systems and suggests some of the consequences for the system with different combinations o f the two variables. Short case studies o f International Telephone and Telegraph and Penn Central illustrate how their behavior can be partially explained by the stability-adaptation model. Maximal effectiveness is seen as achieved by the organization characterized by high stability and high adaptation. A commonly expressed view is that organizations should become more adaptive and less committed to the maintenance of stability.
APRIL, 1972
This perspective suggests adaptation must occur at the expense of stability. In other words, these concepts are often viewed as opposite ends of a single continuum. For example, Labovitz has suggested the need to pursue one set of organizational strategies when the environment is stable and another when it is changing. Thus, in a stable environment, it is claimed that the appropriate organizational features include formal vertical organizational structures, specialization of goal orientations, and a high task orientation in the interpersonal styles of managers. In a changing environment, on the other hand, the desirable organizational features are identified as informal and flat organizational structures, diffuse goal orientations (job enlargement), and a high person orientation in the interpersonal styles of managers. 1 While we do not deny there are potential strains and tensions between adaptation and stability, we would like to suggest a way out of the mental set of viewing them as polar opposites. The thesis of this article is that stability and adaptation should be treated as independent concepts and that the relative effectiveness of organizations depends upon their ability to operationalize both of these concepts. This thesis is developed in the following steps: a brief explanation of each of these systems concepts; development of a stability-adaptation model, which suggests the possible domain of behavior for organizations in terms of these two variables; a description of the implications of this domain of behavior
1. George H. Labovitz, "Organizing for Adaptation: the Case for a Behavioral View," Busingss Horizons, XIV (June, 1970), pp. 19-26.
DON HELLRIEGEL AND JOHN W. SLOCUM,JR.
in terms o f d e a t h , survival, or g r o w t h for organizations; and the p r e s e n t a t i o n o f short case studies o f I n t e r n a t i o n a l T e l e p h o n e and Telegraph and Penn Central in terms o f h o w their b e h a v i o r can be partially e x p l a i n e d t h r o u g h the use o f the s t a b i l i t y - a d a p t a t i o n m o d e l . T h e last step should be especially useful for those w h o d e c r y the i n o r d i n a t e gulf b e t w e e n " t h e o r y " and " r e a l i t y " and the n e e d to show h o w systems t h e o r y can explain reality.
TWO SYSTEMS CONCEPTS Stability o r i e n t e d systems can b e e x p l a i n e d as follows: Every stable system h'as the property that if displaced from a state of equilibrium and released, the subsequent movement is so matched to the initial displacement that the system is brought back to the state of equilibrium. A variety of disturbances will therefore evoke a variety of matched reactions. 2 72
E x a m p l e s o f stability o r i e n t e d (selfregulating) systems w o u l d be t h e r m o s t a t s , physiological r e g u l a t i o n o f b o d y t e m p e r a t u r e , and a u t o m a t i c steering devices. T h e meaning of stability o r i e n t a t i o n for h u m a n and organizational systems has b e e n e x p l a i n e d this way: . . . the system's main characteristic is its functioning to maintain the given structure of the system within pre-established limits. It involves feedback loops with its environment, and possibly information as well as pure energy interchanges, but these are geared principally to self-regulation (structure maintenance) rather than adaptation (change of system structure) .3 In sum, the stability o r i e n t a t i o n of system means that, w h e n the system d i s t u r b e d , it will actively a t t e m p t to r e t u r n its previous state. Thus, there is an a t t e m p t
a is to to
2. Ross Ashby, Design for a Brain (New York: John Wiley & Sons, Inc., 1960), p. 80. "The words 'stability,' 'steady state,' and 'equilibrium' are used by a variety of authors with a variety of meanings, though there is always the same underlying theme," p. 44. 3. Walter Buckley, "Society as a Complex Adaptive System," in Walter Buckley, ed., Modern Systems Research for the Behavioral Scientist (Chicago: Aldine Publishing Company, 1968), p. 490.
maintain (1) the f u n c t i o n s a n d / o r s t r u c t u r e o f the organization, (2) the relationships b e t w e e n these factors, and (3) the interd e p e n d e n c i e s b e t w e e n these factors and the total organizational system. A d a p t a t i o n , o n the o t h e r h a n d , is conc e r n e d with significant changes in each o f the three previously m e n t i o n e d relationships and the possibility o f f u r t h e r g r o w t h in the s y s t e m t h r o u g h the c r e a t i o n o f new and d i f f e r e n t parts, relationships, and i n t e r d e p e n d e n c i e s . This includes activities such as m a r k e t research, research and d e v e l o p m e n t , planning systems, or even equal e m p l o y m e n t o p p o r t u n i t y programs. A d a p t a t i o n also implies t h a t " f e e d b a c k c o n t r o l l o o p s m a k e possible n o t o n l y self-regulation, b u t self-direction or at least a d a p t a t i o n to a changing environm e n t . . . . ,4 A l t h o u g h the stability and adaptive orientations o f h u m a n or organizational systems m a y o f t e n b e in conflict, it w o u l d b e inappropriate to view these t w o c o n c e p t s as o p p o s i t e ends o f a single c o n t i n u u m . T h e choice is n o t stability or a d a p t a t i o n . T h e p r o b a b i l i t y t h a t a system will survive and grow d e p e n d s u p o n b o t h o f these o r i e n t a t i o n s being operational. F o r e x a m p l e , K a t z and K a h n have n o t e d : The adaptive function, like the maintenance [stability] function, is directed toward the survival of the organization. Although the maintenanceffunction faces inward and the adaptive function faces outward, they are similar with respect to another basic tendency. Both move in the direction of preserving constancy and predictability in the conditions of organizational life. s
A STABI LITY-ADAPTATION MODE L T h e a c c o m p a n y i n g figure is a simplified m o d e l f o r viewing stability and a d a p t a t i o n as separate, a l t h o u g h i n t e r r e l a t e d , dimensions o f organizational systems. T h e t e n d e n c y and ability o f the systems t o m a i n t a i n stability are
4. Buckley,Modem Systems Research, p. 490. 5. Daniel Katz and Robert L. Kahn, The Social Psychology o f Organization (New York: John Wiley& Sons, Inc., 1966), p. 91.
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Systems Concepts and Organizational Strategy
Stability-Adaptation Model HIGH
(1)
(2)
(3)
STABILITY
(4)
(5)
LOW
LOW "=¢'-'~ A D A P T A T I O N (1) (2) (3) (4) (5)
= = = = =
-'---'~'-HIGH
High death probability (slow) High survival probability High survival and growth probability Certainty o f death (quick) Certainty o f death (quick)
shown as varying from low to high on the vertical axis. Their tendency and ability to maintain adaptability are shown as varying from low to high on the horizontal axis. By dichotimizing and cross-classifying these two variables, the possible ways in which an organization can vary in terms of stability and adaptation can be revealed. The ke~? at the b o t t o m of the figure suggests some of the consequences for the system with different combinations of the two variables. Of course, it needs to be emphasized that these are deductive inferences, although the two case studies to be introduced provide at least indirect verification that the consequences presented occur in large and complex organizations. The five consequences are only illustrative of the possibilities. Further, any given organization can shift on this grid over a period of time. For instance, ITT seems to have experienced possibilities (1), (2), and (3), whereas
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Penn Central went through possibilities (4) and (5). Organizations in the upper left-hand c o m e r (1) would be characterized by high stability and low adaptation characteristics. They would tend to be rigid in terms of structure, leadership practices, planning systems, control of procedures, and so on, and, over the long run, we would expect a high probability of death. Their failure is likely to be a slow process if their environments are not changing too rapidly and if they have built up resources from earlier periods, for example, cash reserves or inventory. The second possibility (2) portrays an organization which tends to react to, rather than anticipate, changes which require adjustments. But these organizations have a strong survival probability. Organizations with high stability and adaptation orientations (3) are thought of as having a high probability of both survival and growth. They make the most of feed-back systems, tend to react quickly, and anticipate changes both internally and externally. This is probably the ideal which m a n y business firms claim to be striving toward. The fourth possibility, low stability and low adaptation (4), implies virtually certain and rapid death. Of course, the rapidity of death for an ongoing organization will depend upon the amount of its stored resources when it moves into possibility (4). These organizations would tend to be rigid and apathetic. Their feed-back mechanisms tend to be slow and inadequate, resulting in wasted resources, spent long after adjustments are needed. Finally, systems falling into region (5) also face certain death. But, instead of lapsing into rigidity and apathy, they attempt to adapt in a state of chaos and confusion. Here, there might be active change efforts, but there are inadequate or nonexistent feed-back mechanisms concerning the consequences of these changes as well as confusion about the direction and purpose of the changes. The discussion of the following two
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DON HELLRIEGEL AND JOHN W. SLOCUlVl, JR.
organizations will attempt to show how their behavior can be partially explained through the use of the stability-adaptation model.
THE ITT CASE Period of Stability
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The ITT seems to have approximated possibilities (1), (2), and (3) in the figure within the short time period between 1940 and 1971. In 1940, ITT was a major telephone company with its primary activities and assets residing with 75 subsidiaries and affiliates in 26 foreign countries. Then came World War II. Rumania, Spain, and Argentina, among others, were considering the expropriation of ITT subsidiaries. ITT became more survival c o n s c i o u s - t h a t is, stability oriented ( 1 ) - t h a n growth oriented. During the war, the decision structure of the organization was decentralized, and each subsidiary was assigned the task of maintaining its own survival. The local management needed the power to make quick decisions in response to changes in its highly uncertain external environment. The subsidiaries were expected to carry out standardized goals and were generally left alone so long as they broke even or added profits to ITT. While environmental conditions played a role in influencing ITT's goal orientation in this period, the personality and values of its leader seemed to have a considerable impact as well. Sosthenes Behn, the president and founder of ITT, felt y o u had to work hard for what y o u got, and that y o u also had to work hard to protect it. Bebn's strategy at ITT emphasized a stability goal orientation when its operations were put in jeopardy. After the war, he continued with a stability oriented strategy, whereas many other organizations perceived the opportunity to grow. Conflict over this strategy developed, which eventually led to the removal of Behn as president in 1954. Between 1954 and 1958, two
presidents came and went; neither was able to rid the organization of its stability orientation.
Adaptation and Stability In 1959, after Harold Geneen became president, the behavior of ITT was completely changed. Adaptation and growth was the rule, and the c o m p a n y became proactive in its environment. A comprehensive plan for acquisitions and mergers was created and implemented. Some of the firms had products related to ITT's communications expertise, but most were in consumer oriented service firms such as Avis-Rent-A-Car and Sheraton. Internally, there was a major restructuring of the organization. Geneen accomplished this by eliminating much of the a u t o n o m y of operating managers; initiating a comprehensive control system which was centrally monitored at the New York headquarters; making massive inputs of new managerial personnel; and implementing a major research and development program for the explicit purpose of creating new and improved products and services. These efforts can be translated into tangible results. Between 1960 and 1970, sales grew from $811 million to $6.4 billion, and profits increased from $31 million to $353 million. It is apparent ITT had leaped from possibility (1) to possibility (3)--high adaptation and high stability-as shown in the figure. Geneen was instrumental in bringing about this changed outlook and orientation. His influence on ITT has been summarized this way: "His vision of a company is one tautly efficient, unfettered b y the past, international in its impact, and agile at converting problems into o p p o r t u n i t i e s - a company, in short, modeled very much after Geneen himself.'6
6. Stanley H. Brown, "How One Man Can Move a Corporate Mountain," Fortune (July, 1966), p. 81.
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Systems Concepts and Organizational Strategy
In about 1969, environmental forces were again gathering to influence the behavior of the organization. Increased government surveillance and control, at least in the United States, was not permitting the rapid expansion of the past. For instance, to gain the right to purchase Hartford Fire Insurance Company, ITT has had to divest itself of Avis, Leavitt, and some lesser companies. It appears that ITT has had to shift to possibility (2)-high stability and moderate adaptation-as shown in the figure. It is too early to determine whether this shift is temporary or if ITT will engage in rapid adaptation through its international environments or by internal expansion.
THE PENN C E N T R A L CASE
To illustrate possibilities (4) and (5) in the figure, we can examine another organiz a t i o n - t h e Penn Central Railroad. Certainty of death within a relatively short period of time was predicted as the o u t c o m e under either set of conditions. It is important to note that "quickness of d e a t h " as a consequence of these possibilities is a relative condition, being highly dependent upon the amount of resources stored in the organization at the time it moves into possibilities (4) or (5). In J u n e of 1970, the Penn Central declared bankruptcy. Losses during fiscal 1970, estimated at $500 million, had been preceded by two years of losses. The Penn Central was formed in February, 1968, out of a merger between the New York Central Railroad and the Pennsylvania Railroad. The road to the merger had been a long and confused one starting in 1957.
Environmental Factors
Several environmental factors m a y have contributed to the Penn Central failure. First, in 1969, the economic system of the United
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States peaked, then began its slow decline toward recession, resulting in more than proportionate decreases in traffic for railroads. Despite the recession, inflation continued unchecked, a new experience for the economic system. This contributed to the spiraling wage demands and work stoppages experienced by most railroads. Thus, the railroads managed to merge just prior to a substantial economic slowdown. As a consequence, the anticipated heavy "reorganization" costs could not be offset by increasing revenues; in fact, they were aggravated by decreasing revenues. A second external factor was the continuing shift in customer preferences. In the past, m a n y bulk shippers were concerned only if the goods were received by the purchaser. But in the 1950's, shippers became also concerned with speed of service. Penn Central, by deemphasizing rail operations and concentrating on horizontal diversification into real estate development, failed-almost completely-to meet this increasingly important market requirement. For instance, freight service from New York to Chicago (about 800 miles), once a matter of two to three days, came to require seven or eight in 1968 and 1969. This is only one manifestation of the breakdown in the company's ability to maintain organizational stability.
I nternal Factors
Meanwhile, a number of other internal factors were affecting Penn CentraI's operation. These factors might be divided into four categories: diversification, technology, organization, and planning.
Diversification--In 1963, the decision was made by Stuart Saunders (then president of the Pennsylvania Railroad) to begin diversifying, especially into real estate. The rationale behind this strategy was that such a policy would create a balance mechanism to offset
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DON HELLRIEGEL AND JOHN W. SLOCUM, JR.
"Having funneled all its earnings into the real estate strategy, Penn Central divested itself of any slack that it could rely on in crisis periods."
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the railroad's cyclical pattern of income. At the time, the railroad was generating enough cash to enable the real estate developers to continue growing. However, Saunders and David Bevan (who became the finance chairman of the merged roads) seemed to ignore or discount three important points that would influence the long-run viability of such a diversification strategy. First, the real estate developers were highly dependent on the railroad for capital to maintain growth. In prosperous times, this was no problem. But during economic slumps the railroad, being affected by a "negative accelerator," would also be cash starved. Having funneled all its earnings into the real estate strategy, Penn Central divested itself of any slack that it could rely on in crisis periods. Second, the real estate developers were highly dependent upon fluctuations in the stock market. Instead of operating as a damper on railroad earnings, the real estate holdings served only to increase the magnitude of possible fluctuations. Third, the earning power of the railroad operations of Penn Central was limited by the amount of capital improvements made over time. As the drain of capital into the diversification plan continued, maintenance programs on vital rolling equipment were deferred. As repairs and replacements were postponed, the earning potential of Penn Central was decreased even further. Saunders and Bevan seemed to have failed to sufficiently assess the risks involved in such a major policy decision, which was mechanically carried over to the merged organization. It appears that the alternatives available to the PRR in 1963 were not really analyzed in
depth. The full implications of the real estate alternative vis-a-vis future environmental conditions and the competitive posture of the railroad appear to have been given little consideration.
Technology--In at least two areas, the technological aspects of the merger seem to have been miscalculated. First, the compatibility of the computer systems between the two railroads was evidently taken for granted. Computers were virtually indispensable to the Penn Central because they should have provided a means of scheduling hundreds of extremely complex and highly dependent train movements as well as a means of control for over 100,000 pieces of rolling stock. Although planning for the eventual linkup of the computers should have logically been initiated well before the actual merger, it was not until 1970 that the units were operating as a system. This lack of awareness of the problems involved with highly sophisticated technology obviously cost the c o m p a n y operating efficiency. The second major technological problem was concerned with the integration of the physical plant. The basic premise behind the merger was that an increase in combined efficiency would result from elimination of costly, antiquated, duplicate facilities. However, because of computer breakdowns and a pervasive lack of communication throughout the organization, line managers had little knowledge of the operations outside the regions with which they were formerly familiar. Therefore, the older and outdated yards and terminal areas were kept "on-line" to prevent a total breakdown in the system.
Organizational Factors--Several organi: zational factors can be considered to have had an important influence upon the ultimate failure of Penn Central: goals, structure, and control. The corporate goals were ambiguous and inconsistent during the 1968-70 crisis years. The Pennsylvania Railroad faction, led by Saunders and heavily influenced by Bevan,
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Systems Concepts and Organizational Strategy
seemed intent on liquidating the railroad and investing the proceeds in other ventures. The New York Central group, however, determinedly attempted to improve the service of the railroad, although w i t h o u t much success. Adding to the confusion was the attitude of the board of directors; it provided little corporate direction or guidance. Thus a situation of corporate limbo developed, with each group's objectives diametrically opposed to the objectives of the other. Within this context, the portents for disaster were increased. Top management structure was organized with Saunders as chief executive officer with the responsibility for making most of the final decisions. Bevan, as chief financial officer, reported directly to Saunders. Alfred Perlman (previously president of the New York Central) was president and reported directly to Saunders. He was responsible for the railroad's operations. Because of the belief in opposing strategies, communication b e t w e e n the chairman (Saunders) and the president (Perlman) was generally inadequate. In addition, most of Perlman's vicepresidents were former P R R men and were often antagonistic toward his ideas. The New York Central personnel were usually far down the hierarchical ladder, and had little influence. It was hardly a true merger; more realistically, the NYC was "acquired" b y the PRR. Communications networks were inadequate for full transmission of ideas and information, and the power/influence systems were clearly controlled b y former P R R personnel. The lack of control (stability) was clearly evident at all levels within the organization. At the lower levels, trains were often delayed and/or cancelled; freight cars, lost; and service, erratic. Several hundred boxcars were "stolen" during the spring of 1971, yet the c o m p a n y was unaware of this fact for many weeks. At higher levels, the lack of control was even more evident. The subsidiary units operated with almost complete discretion. At
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"Thus a situation of corporate limbo developed, with each group's objectives diametrically opposed to the objectives of the other."
the highest level, the board, as noted previously, had little influence upon the major decisions. Thus, Saunders and Bevan were free to follow the course of rapid diversification without the constraint of the normal checks and balances which exists in most large corporations. The ineffectiveness of the control function was further exacerbated b y the ambiguous and undefined corporate goals. Without standards b y which to compare performance, corrective measures became arbitrary and misdirected. The general feeling of indifference (and in some cases, hostility) served only to aggravate the retrogradation of the control mechanisms.
Planning--Although the
merger plans were formally announced as early as 1962, most of the effort expended until 1967 was directed toward legal considerations of the merger. There is little evidence to indicate that extensive planning was ever conducted jointly b y both companies, except at the very highest levels. Apparently, little emphasis Was given to coordinating and integrating the daily operating activities of the two firms. The lack of adequate forecasting of changing economic conditions was reflected in rapidly declining revenues when they were not anticipated. Reaction to external change (for example, shifting customer preferences) was also slow because of the rigidities and inflexibilities of the merger plan. Finally, merger savings were generally overestimated and reorganization and start-up costs grossly underestimated. For instance, severance pay was estimated at $3 million for 1968, when, in fact, it amounted to $35
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DON HELLRIEGEL AND JOHN W. SLOCUM, JR.
million. In addition, labor wage increases were underestimated by about 15 percent in 1969. After failing to obtain a guarantee from the federal government for a $200 million emergency loan, the Penn Central filed for bankruptcy on Sunday, J u n e 13, 1970. Following this action, Saunders, Bevan, and Perlman resigned, and the company was placed under the direction of four courtappointed trustees. J]]
][I Hopefully, the ITT and Penn Central cases have provided a number of concrete examples of the consequences that stability and adaptation orien-
I[lld
tations can have for organizational effectiveness. Maximal effectiveness is' viewed as the result of organization which is characterized by both high stability and high adaptation. It is our contention that these concepts have too often been viewed as polar opposites; the stability-adaptation model should serve to reduce such a bias. It might also be useful to managers as a "mental m a p " for diagnosing the present state of their organization or its subsystems. Finally, it is hoped this presentation has demonstrated how systems theory can provide the manager with a framework for explaining and diagnosing reality in virtually any type of setting.
78 OtJL~O~(3ODE~)O[3~OOOrl-IDOODOOOOE~JOODO~OE)OOOOO~ODOOOOOD~~D~O
The essential task of modern management is to deal with change. Management is the agency through which most changes enter our society, and it is the agency that then must cope with the environment it has set in turbulent motion. To carry out its active social role of adaptation, management itself, therefore, must be adaptable. Already the nature of management has undergone drastic alterations. As it stands today on the threshold of the final third of its first century, m o d e m management seems pregnant with another metamorphosis. It is now possible to see in outline the shapes toward which the next generation of management will tend. - M a x Ways, " T o m o r r o w ' s Management" in Readings in Management Strategy and Tactics
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