Lecture notes on Miles and Snow PDF

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Lecture Notes on the Miles and Snow Typology of Strategic Firm Types...

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Lecture notes: The Miles and Snow Typology of Strategic Firm Types This text is based on Miles & Snow: Organisational Strategy, Structure, and Process (1979) and... Barney & Griffin The management of organizations: Strategy, structure, behavior (1992).

Introduction In 1978, Raymond E. Miles and Charles C. Snow proposed a strategic typlogy of firms. They argued that firms follow different company strategies. The strategic problems that firms need to deal with can be found in the following areas:

• entrepreneurial problem: how to find the right market • engineering/ operational problem: how to design the best products and produce them

• and the administrative problem: how to set up the organization of the company, so that it can serve costumers in the best possible way The entrepreneurial problem is is concerned about which market to choose and how to act there once it has taken a position. The engineering problem is concerned about innovation to give support for solving the entrepreneurial problem. At the level of the administrative problem, a company needs to find ways and a structure to manage a running business organisation to give support for solving the entrepreneurial and the engineering problem. For tackling these complexities, firms have the option to persue different types of strategies. In their framework, Miles and Snow proposed that firms find generic ways for solving the problem as they identify different strategic type behaviours of firms: the prospector, the defender, the analyzer, and the reactor organizations.

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Source: Miles and Snow: Based on Organisational Strategy, Structure, and Process (1979)

Prospector type of firm Raymond Miles and Charles Snow suggest that business level strategies generally fall into one of four categories: prospector, defender, analyzer, and reactor. An organization that follows a prospector strategy is a highly innovative firm that is constantly seeking out new markets and new opportunities and is oriented toward growth and risk taking. 3M is an excellent example of a firm that uses prospector strategies. Over the years, it has prided itself on being one of the most innovative major corporations in the world. Employees at 3M are constantly encouraged to develop new products and ideas in a creative and entrepreneurial way. This focus on innovation have led 3M to develop a wide range of products and markets, including invisible tape and antistain fabric treatments. Another example: Johnson & Johnson links decentralization with a prospector strategy. Each of the firm’s different businesses is organized into a separate unit, and the managers of these units hold full decision-making responsibility and authority. Often, these businesses develop new products for new markets. As the new products develop, and sales grow, Johnson & Johnson reorganizes so that each new product is managed in a separate unit. ”Prospector” First to market Strategy

• Strategic problem: How to locate and exploit new product and market opportunities.

• Solutions: Creating change in the industry, growth through product and market development, monitors wide range of environmental conditions and events. 2

Organic Structure

• Structural problem: How to facilitate and coordinate numerous and diverse operations.

• Solutions: Tendency toward product structure with low division of labor and a low degree of formalization; decentralized control and short-looped horizontal information systems; complex coordination mechanisms and conflict resolved through integrators. Flexible, prototypical technologies

• Technological problem: How to avoid long-term commitments to a single technological process.

• Solutions: low degree of routinization and mechanization; technology embedded in people.

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Source: Miles and Snow: Based on Organisational Strategy, Structure, and Process (1979)

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Defender type of firm Rather than seeking new growth opportunities and innovation, an organization that follows a defender strategy concentrates on protecting its current markets, maintaining stable growth, and serving its current customers. BIC Corporation used defender strategies, despite its history as an innovative firm (the original BIC ”crystal” and the BIC ”biro” pen were significant innovations in the writing instruments industry). Since the late 1970’s, with the maturity of the market for writing instruments, BIC has adopted a less aggressive, less entrepreneurial style of management and has chosen to defend its substantial market share in the industry. It has done this by emphasizing efficient manufacturing and customer satisfaction. Another example: Often a firm implementing a prospector strategy will switch to a defender strategy. This happens when the firm successfully creates a new market or business and then attempts to protect its market from competition. Mrs. Fields Inc. was one of the first firms to introduce high quality, high-priced cookies. Mrs. Fields sold its product in special cookie stores and grew very rapidly. This success, however, encouraged numerous other companies to enter the market. Increased competition, plus reduced demand for high-priced cookies, has threatened Mrs. Fields’s market position. To maintain its profitability, the firm has slowed its growth and is now focusing on making its current cookie operation more profitable. An organisation that follows the strategy of a defender takes a defensive stance by protecting existing markets and serve existing costumers. Growth is stable and focuses on established segements. Production processes change little or not at all, a defender focuses on increasing the efficiency of existing operations. There is a tendency to ignore all developments which are taking place outside the domain of the defender firm. ”Defender” Seal off stable set of products & customers

• Strategic problem: How to ”seal off” a portion of the total market to create a stable set of products and customers.

• Solutions: Focus on narrow and stable domain, aggressive maintenance of domain (e.g., competitive pricing and excellent customer service); cautious and incremental growth primarily through market penetration; some product development but closely related to current goods and services. Mechanistic Structure

• Structural problem: How to maintain strict control of the organization in order to ensure efficiency.

• Solutions: Tendency toward functional structure with extensive division of labor and high degree of formalization; centralized control and long-looped vertical information systems; simple coordination mechanisms and conflict resolved through hierarchical channels. 5

Single core cost-efficient technology

• Technological problem: How to produce and distribute goods or services as efficiently as possible.

• Solutions: Cost-efficient technology; single core technology; continuous improvements in technology to maintain efficiency.

Source: Miles and Snow: Based on Organisational Strategy, Structure, and Process (1979)

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Analyzer type of firm An organization that follows an analyzer strategy both maintains market share and seeks to be innovative, although usually not as innovative as an organization that uses a prospector strategy. Most large companies fall into the third category, because they want both to protect their base of operations and to create new market opportunities. IBM uses analyzer strategies. Thousands of customers have purchased IBM computers over the last several decades. It is in IBM’s interest to keep these customers satisfied and to introduce new products and services that update their computer facilities. Whenever IBM introduces a new computer system, for example, it develops procedures that help its customers to move from the older system to the new system. In this way IBM maintains its customer base. However, IBM also tries to create new markets. Its line of personal computers represents an effort to expand beyond its traditional base of mainframe computers.* IBM has also invested in biotechnology, superconductivity technology, and other projects which are very innovative. Analyzers largely pursue a ”second-in” strategy and improve upon the product/service offerings of their competitors. IBM, therefore, did not innovate personal computers from scratch but, instead, imitated the innovations of small personal computer manufacturers such as Apple Computer Another example: As a major food products company, Proctor & Gamble (P&G) has established numerous name brand products, such as Crest toothpaste, Tide laundry detergent, and Sure deodorant. It is important for P&G to continue to invest in its successful products, in order to maintain financial performance. But P&G also needs to encourage the development of new products and brand names. In this way, it can continue to expand its market presence and have new products to replace those whose market falls off. Through these efforts P&G can continue to grow. Analyzer Second-in strategy

• Strategic problem: How to locate and exploit new product and market opportunities while simultaneously maintaining a firm base of traditional products and customers.

• Solutions: Low investment in research and development, combined with imitation of demonstrably successful products; surveillance mechanisms mostly limited to marketing, some research and development Matrix structure

• Structural problem: How to differentiate the organization’s structure and processes to accommodate both stable and dynamic areas of operation.

• Solutions: Loose matrix structure combining both functions and product groups; moderately centralized control system with vertical and horizontal feedback 7

loops; some conflict resolution through product managers, some through normal hierarchical channels. Dual technological core

• Technological problem: How to be efficient in stable portions of the domain and flexible in changing portions.

• Solutions: Stable and flexible technological components; influential applied engineering group; moderate degree of technical rationality (technology can never be completely effective or efficient)/

Source: Miles and Snow: Based on Organisational Strategy, Structure, and Process (1979) 8

Reactor type of firm According to Miles and Snow, an organization that follows a reactor strategy has no consistent strategic approach; it drifts with environmental events, reacting to but failing to anticipate or influence those events. Not surprisingly, these organizations usually do not perform as well as organizations that implement prospector, defender, or analyzer strategies. Most organizations would probably deny using reactor strategies. However, International Harvester (IH) during the 1960s and 1970s followed this approach. At a time when IH’s market for trucks, construction equipment, and agricultural equipment was booming, IH failed to invest in research and development, in improvements in manufacturing, or in improvements in distribution. By the time a recession cut demand for its products, it was too late for IH to respond, and the company lost millions of dollars. Indeed, at one time IH had the largest annual loss of any company in the history of the world. In the last ten years, IH has had to sell off virtually all of its businesses, except its truck manufacturing business. IH has moved from being a dominant firm in trucking, agriculture, and construction to a medium-sized truck manufacturer because it failed to anticipate changes in its environment. Another example: During the 1970s and 1980s the Large Information Systems division of Honeywell seemed to follow a reactor strategy. As a relatively small manufacturer of mainframe computers, Honeywell sometimes tried to be very innovative in its research and development efforts and sometimes tried to reduce its costs as much as possible. Sometimes it focused on very innovative software, and sometimes it laid off hundreds of skilled workers. Not until Honeywell entered into joint ventures with some Japanese and European firms did it begin to focus its strategic efforts.

The reactor follows no clear pattern. Therefore there is no graphical way to clearly conceptualize the strategic behaviour of reactor types of firms.

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Some examples: Table 1 Strategy Type Prospector

Defender

Analyzer

Reactor

Definition Orientation towards growth and innovation, identification of new market opportunities, risk friendly Preserves and defends own markets, orientation towards stability, focus on existing costumers Limited innovation, oriented towards maintaining and satisfying existing markets and costumers Following of existing trends without strategy, passive and inconsistent

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Examples 3M

BIC

IBM

International Harvester in the 1960s and 1970s...