After revisiting the research results on over 200 small and medium size companies I thought it useful to provide a presentation of the central focus of the research.—the Dynamic System Model (DSM)—and how the model and the research results relate to other work in strategic management and entrepreneurship.
This presentation, due to its length, will be published in 4 Parts in two week intervals each.
This is the 2nd part of a 4 part article on Dynamic Management of Growing Firms.
The Seven DSM Issues are a Direct Result of the Previously Stated Open Systems Theory Assumptions
Let us recap our presentation to this point. View your company as a powerful tool, to realize your vision and objectives. But realize that it is also bound by certain natural laws. To overcome entropy, you must develop a reliable and effective input-transformation-output (I-T-O) cycle for your company. Also, you must recognize that your company is part of a dynamic network, affected by multiple layers of people, groups, organizations, societies and global forces, all interacting dynamically, and at times, unpredictably with one another.
These three assumptions help us to define the core challenges you face as the leader of a dynamic enterprise. First, you must have a vision for your company. Just as every tool has a purpose, you must always keep clearly in mind why your organization exists. You may have personal objectives, such as making money or gaining a sense of accomplishment. But to grow, the organization needs its own reason for being. Sometimes the vision in a new enterprise is inseparable from the products or services offered (e.g. to develop a profitable web site). But growing companies often benefit from a broader vision. For example, from the start, the mission at Apple Computer was not just to make and sell computers—it was also to produce an affordable, user-friendly computer. Steven Wozniak’s personal dream, carried into the fledging company, was to make personal computer ownership affordable at a time when most computers cost as much as a new car, or even a house. Steven Jobs’ added inspiration, guided by visits to Xerox Research Park in Palo Alto, California, was to make a computer simple enough for a child to use. In addition to their own contributions, Wozniak and Jobs adopted and modified existing technologies from other Silicon Valley inventors to realize that vision.
The second and third assumptions underlying the DSM define the seven issues you must manage effectively to realize your company mission or vision. They include:
- Resource acquisition
- Resource allocation
- Work flow
- Human relations
- Technical mastery
- Market strategy, and
- Public relations.
To survive, grow, and remain profitable, your company must develop an effective strategy and action plan at any one point in time for each of seven issues, regardless of your company’s stage of development (infancy or maturity) or its market niche.
Each of the first six listed issues is necessary to assure smooth functioning of the I-T-O cycle. Ignoring any will thwart your efforts to fight off entropy although when your company is young and small, some issues, such as work flow and human relations, are apt to be relatively easy to resolve. Ignoring the seventh issue, public relations, may threaten the survival of your firm, not so much from entropy, but from other outside elements potentially opposed to your company’s existence. Or stated in a more positive light, the inclusion of public relations as a strategy acknowledges that your eventual success depends not only your successful struggle with entropy but also the degree to which your company exists in harmony with its outside physical and social environment.
To be most effective, the approach you take in managing all seven issues should contribute toward, and be consistent with, the overall vision you have for your company. The more consistent each of these strategies are with one another and with your overall vision, the more powerful the synergy you will be able to achieve among them. They need not be expensive, and they need not change every day. But ignoring any one area may eventually create a breakdown in the I-T-O cycle, or even your survival within a sphere of other social systems. Although you are responsible for managing each issue appropriately, others in your company (or outside) may actually carry out the work.
Let’s consider each of these issues now in a little more detail:
- Resource acquisition—You must make sure that your company obtains needed money, people, materials and external information. Strategies for recruitment, investor relations, purchasing, and research and development are all part of this issue.
- Resource allocation—Once inputs are obtained and enter your company, as a first step in the transformation process, you must assign or allocate those resources appropriately throughout the organization, whether by budgeting and corporate planning, the squeaky wheel, or plain intuition. Adequate cash flow, and having the right material at the right place in the organization, are two indicators of effective resource allocation.
- Work flow— As part of the transformation process, you must also decide how to assign or divide and coordinate work to be done. If work slips through cracks, work is delayed, or too many people are saying, “That’s not my job,” you need to rethink your approach to work flow. Think of your company as a giant jigsaw puzzle with each individual standing on a piece. Overall realization of your vision and objectives require the smooth and timely fit of these pieces into the whole picture.
- Human relations—As another aspect of the transformation process, you must make sure that employees meet their own needs and wants while fulfilling company goals at the same time. Loyal, satisfied, motivated employees are more likely to help you meet your company’s goals than alienated employees. Low absenteeism and turnover (especially of your better employees) are signs that you are effectively managing the human relations issue.15
- Technical mastery—At the interface between the transformation process and the output part of the I-T-O cycle, technical mastery requires that you produce your output with adequate quality, speed, quantity and with the appropriate technical features—all consistent with your company’s overall mission and objectives. Hiring and training people with the right technical skills, investing in appropriate tools and materials, and in-house product testing and development are just a few of the strategies you might use to enhance technical mastery.16
- Market strategy—Finally, as products and services exit the company, you must assure that you have adequate customer interest—Enough customers willing to pay the right price to cover your costs, in order to generate sufficient revenues to keep your company (and the I-T-O cycle) going. Market strategy involves decisions about which products or services to offer, with what benefits, the customers and markets to target, and at what prices. Effective market strategy is reflected in total sales, rate of sales growth and steadiness of sales growth.
- Public Relations— The seventh and final strategy issue requires that you relate effectively with any systems in your company’s external environment, apart from those external groups—customers, suppliers, investors— directly involved with the I-T-O cycle. Other groups of relevance include different government entities, the communities in physical proximity to each company location, and in many companies, the family from which ownership may draw. Litigation, fines, tax delinquency and bad publicity are all signs of inadequate management of this area. Positive public image, general goodwill, and community acceptance of your company’s existence are positive signs.17
In our book, we refer to financial viability as an eighth issue, although this might be slightly misleading. In our view, survival and profitability result from effective management of the other seven DSM issues already described, but cannot itself be directly managed.18
Just as a system is more than the sum of its parts, the list of seven issues only partially captures the overall intent of the DSM. The effective management of each issue changes dynamically over time, as the company changes internally, and as the world outside changes. Further, the strategies pursued to handle each issue should stem from an overall picture or vision of the company.
The DSM can Provide a Cross-Functional Perspective
The DSM addresses the key functional challenges faced by managers in most companies while providing a more cross-functional perspective. For instance, consider the human-resource function. At first blush, you might figure that the human resource function and human relations issue are one and the same. But they are not. Consider the following ways in which a human resource department potentially impacts each of the DSM issues.
- Recruitment is a type of resource acquisition strategy
- Administration of compensation and benefits and compensation planning may be viewed as resource allocation strategies.
- Job description and job design development affect work flow.
- Employee involvement and team building may affect both work flow and human relations.
- Planning company meetings, preparing employee manuals and writing newsletters help to communicate the company’s vision and corporate culture to employees (aspects of human relations).
- Design and execution of managerial, technical and supervisory training and development programs may affect a variety of DSM issues depending upon the content of the program. Sales training programs may boost sales (market strategy), technical training may improve product quality (technical mastery) management and supervisory training may clarify work role expectations and improve a manager’s skill at motivating and leading employees (work flow and employee relations).
- Tracking and enforcing affirmative action requirements or OSHA requirements are aspects of the public relations issue.
So what? You might ask. First of all, in a functionally-structured company, people from many departments may contribute (or potentially thwart) your company’s ability to operate as an effective open system. To manage each of the DSM issues effectively, you may need to coordinate the efforts of those across several departments. The automobile industry recognized this in restructuring the manner in which new products are developed. To improve its technical mastery (the speed, cost, and time in which new products are developed), Toyota and other automobile manufacturers have moved to a cross-functional approach, placing experts from each of the functional areas onto one product team, reducing development costs and cutting product development time from five years down to three or less. Integration of functions may produce economies in management of the other DSM issues.
How the DSM can be Used in more Familiar Strategic Planning Methodologies
In the original edition of our book (described in chap. 3), we present the DS Model as a simplified management planning tool. Clarify your company’s vision. Then consider your current strategy for each of the seven DSM issues: How do you manage each issue now and how well is that strategy working out? Take market strategy for instance. First consider the products or services offered, your target market, and how you set market direction. Then consider your current sales: Are they steadily growing, cyclical or flat? How about your market share? Consider some of the other internal or external factors affecting the strategy. If you are not satisfied with the results obtained from your current strategy, consider the changes you would like to make.
If you run a small company in a slowly changing industry you understand well, tend not to introduce new product changes frequently, are generally satisfied with your overall firm performance, and just want to “tweak” it a bit, our simplified approach may be more than adequate. However, as your firm grows, your approach to strategic management may benefit from a more formal, sophisticated approach, as taught in strategic management courses at most universities. If so, the DSM can also be easily incorporated into more familiar strategic planning methodologies. The standard approach described in most modern Strategic Management texts involves three phases:
Phase 1: Assessment of the current situation
In the first phase, you review your company’s current situation: its mission and/or vision, strategies, objectives, strengths, weaknesses, and environmental opportunities and threats. You might also want to identify the company’s core competencies (skill sets underlying its ability to make competitive products and services) and competitive advantage (why customers buy from you instead of your competitors).
Phase 2: Development of a new vision and/or strategy
Once you assess your current situation, you decide what changes are needed, if any, in your overall mission or vision, objectives and key supporting strategy(ies).
Phase 3: Development of an action plan.
Finally, to execute your strategy successfully, you need to develop a detailed action plan.
The DSM can be very helpful in all three phases::
- In Phase I, use the DSM to identify your company’s current strengths, weaknesses, core competencies, and competitive advantages.
- In Phase II, use the DSM to revise your overall mission and objectives, and key strategies to achieve those objectives.
- In Phase III, use the DSM to develop a comprehensive action plan.
Let’s look at each of these three applications, briefly, in turn.
DSM as a Tool to Identify Strengths, Weaknesses, Core Competencies, and Competitive Advantage
Most strategic planning guidelines for identifying your company’s key strengths and weaknesses are organized along functional lines. They provide a good beginning, but important ideas may also slip between the cracks. The DSM quickly helps both novice and professional to pinpoint strengths or weaknesses that might have been overlooked using the functional approach. Because the DSM is theory-driven and cross-functional, it can provide a working framework for assessing the important aspects of your business, either as a supplement, or as a replacement to the functional approach, especially if your company does not fit the functional categories (e.g. marketing, production, accounting, design, etc.) very well. Our students have used the DSM for strategic planning case analysis in well over a hundred companies, with generally satisfactory results. Companies with strengths in all seven areas tend to be successful, growing companies.
For an issue to serve as a strength you must be at least as good as everyone else. But to have a competitive advantage, you must be better. Further, to be a competitive advantage, a strategy needs to make your product or service more desirable to your customer than that of your competitors. Again, the DSM may provide fresh insights as to your company’s real competitive advantage. The core competency approach can also fit into the DSM. You may have sets of capabilities relating to one particular DSM issue. Further, the DSM may help you to locate those technical skill sets or capabilities that underlie your greatest or most unique strengths.19 Some of the big corporate successes since the 1980s came from companies gaining new markets by developing a core competency around a certain organizational capability.
As an illustration, consider Wal-Mart. From the marketing perspective, it is true that Wal-Mart grew in the 1980s and early 1990s by entering small town markets ignored by other large discounters. But Wal-Mart could not have implemented this strategy successfully without a parallel organizational strategy. Wal-Mart controlled its inventory costs—a major determinant of profitability in retailing—by designing and implementing a unique regional distribution system tied by computer to each of its stores. This system allowed Wal-Mart to track and inventory its products more rapidly, accurately, and cheaply than any of its competitors, using a point-of-sale information system. By knowing instantly what had sold (or what had not), and by keeping backup inventory in warehouses instead of expensive retail shelves, Wal-Mart had created the means to create smaller stores, affordably moving into smaller communities that competing discounters such as K-Mart or Sears, Roebuck, and Company had to pass over. In short, Wal-Mart’s capabilities or competencies in distribution, an aspect of resource allocation within the DSM framework, is arguably the cornerstone of its competitive advantage.
Note that you use the DSM primarily to analyze the situation inside your firm. Before designing an appropriate direction for your firm, you also need to consider environmental trends. Then from these trends, you need to infer what threats or opportunities does the environment provide for your company? Most modern strategic management texts outline three categories of trends you should track: The general environment; your industry; and your immediate competition. To begin your analysis, you might use some or all of the commonly-used environmental analysis tools.
- STEPE (social-technological-economic-political-ecological) analysis to consider general environmental trends;
- Porter’s Five Forces competitive analysis and profile of industry economic characteristics to structure information about the industry;
- Competitor matrix and strategic group mapping to describe the immediate competition.20
Note that once these analyses are complete, a lot of intuition and luck is required to identify those trends most important to your company’s future, and in turn to figure out what the implications might be (positively or negatively) for your own company—especially when changes are in early stages of development. Tom Watson, Jr. spied the right trend when he realized that computers would eventually replace the office machines being made at his father’s company, International Business Machines. The internet provides another good example. In the early to mid-1990s, start-up companies such as Netscape Communications observed the internet’s potential and jumped in to develop the market well before such computer monoliths as Intel or Microsoft Corporation.
To sum up, the DSM, together with environmental analysis tools, provides a fairly simple-to-learn analysis of both internal and external factors that can be used to describe the current situation. By reviewing the strengths and weaknesses inside, using the DSP model, and the opportunities and threats outside, with the help of some of the previously described analytical tools, you may develop new ideas about the direction you should take. Hamel and Prahalad caution that you should not constrain your strategic thinking totally based on the current strengths within your company. You might be able to “stretch” current resources and capabilities rather than “fit” strategy into your existing repertoire, especially if you identify a really timely opportunity. 21 But whether you decide to stretch or fit strategy to your company’s current situation, a clear assessment of your strengths and weaknesses is a useful starting point for consideration of your overall strategy or direction.
DSM as a Tool to Recommend New Strategic Directions
In the world of business, nothing ever stays the same. Today’s competitive advantage may be copied by competitors and rendered useless tomorrow. Developing new products or entering new markets are two ways to maintain a competitive edge. But in a fast-paced market, competitors can often quickly follow: Even patented items are frequently difficult to defend in a global market. The globalization of commerce has stimulated a shift in thinking about competitive advantage. In many industries, more enduring advantage can come from development of new, underlying organizational capabilities, as we have already seen in the Wal-Mart example. Once you have assessed your company’s current strengths the DSM may help you to identify areas around which you can develop a new or stronger advantage.
Consider the Japanese automobile manufacturers. In the 1980s, they gained significant global market share for two key reasons: a) their ability to deliver high quality goods (with the lowest recall rates in the industry); and b) their ability to churn out new product in almost half the time of their American counterparts—bringing new platform development time down from five to three years. Key to success in executing these strategies were competencies tied to both technical mastery and work flow. Much has been written about how they achieved quality improvements. We also now know that it was their use of a cross-functional semiautonomous team design—a work flow strategy— that provided the key to moving new product to market at breakneck speed, relative to American manufacturers, giving them an edge in responding to customer desires.
Wal-Mart and the Japanese automobile makers provide just two examples of how companies tapped into organizational capabilities to provide competitive advantage. The key point is this: Depending upon your own industry, immediate competition, and company, any one of the DSM issues could serve as a potential source of competitive advantage. In an era when product, service and retailing ideas can be quickly mimicked and rolled out to market, building unique organizational capabilities into your company may provide you with a competitive advantage that assures more rapid sales growth or profitability.
References and Footnotes-Part 2:
15. In naming this issue, we were seeking a shorter phrase and more familiar words to replace the rather technically-sounding term, “social-psychological integration,” used by Basil Georgopoulos and his colleagues (See Georgopoulos, Organization Structure). We drew upon the familiarity of the Human Relations movement of the 1950s, stressing the importance of employee commitment, satisfaction, and motivation. But for many of our readers, the term, human relations, was mistakenly thought to include relationships with all constituents, within or outside the company, overlapping with aspects of other issues (e.g. resource acquisition, market strategy, and public relations). An alternative label, “employee relations,” was thus used in some of our more recent publications: Lorraine Uhlaner Hendrickson and Nesa L’abbe Wu, “Technical Mastery: Basis for Strategic Manufacturing Management, Productivity, 34, no. 2 (1993), pp. 199-207; and Lorraine Uhlaner Hendrickson and Dale B. Tuttle, “Dynamic Management of the Environmental Enterprise: A Qualitative Analysis,” Journal of Organizational Change Management, 10, no. 4 (1997), pp. 363-82.
16. The technical mastery issue is more fully described in Hendrickson and L’abbe Wu, “Technical Mastery.” In our original research project, we inadvertently overlook the importance of new product development strategy, admittedly a major oversight that is corrected in subsequent publications and in the introduction to the second edition.
17. As with the term, human relations, we have had second thoughts about the term, public relations. The same term has been used in marketing to refer to strategies and tactics to create awareness among potential customers, or more broadly to refer to relationships with any internal or external constituencies, neither of which captures our intended meaning (See Samuel Dyer, “Public Relations Strategies for Small Business Growth,” Public Relations Quarterly, 41, no. 3 (1996) pp. 43-7.) In more recent publications, we have chosen to refer to this DSP issue as “community/government relations (See Hendrickson and L’abbe Wu, “Technical Mastery.” And Hendrickson and Tuttle, “Dynamic Management of the Environmental Enterprise.”) But based on recent discussion with colleagues, it is apparent that this label may be too narrow in focus, since another important external constituency outside the I-T-O cycle in many organizations is the owner’s family—not really a part of the company, but having tremendous impact, potentially, on its effective functioning.
18. In our research, we include adequate cash flow, or liquidity as a dimension of financial viability. However, unlike with profitability, management can take several actions to dramatically modify cash flow including: Appropriately allocating funds; instituting good collection policies; and negotiating favorable payment terms, just to name a few examples. Although in this book, liquidity is treated, along with profitability, as part of the eighth issue of financial viability, Hendrickson and Tuttle, “Dynamic Management,” p. 376 suggest that the topic of cash flow management be included within the resource allocation issue. Future work is likely to incorporate adequate cash flow into the resource allocation issue.
19. For the classic presentation of the core competency concept, refer to Prahalad and Hamel, “The Core Competence of the Corporation,” pp.79-91. See also James Brian Quinn and Frederick G. Hilmer, “Reading 3.3 Core Competencies and Strategic Outsourcing,” in Henry Mintzberg and James Brian Quinn, The Strategy Process: Concepts, Contexts, Cases, 3rd ed. (Upper Saddle River, NJ: Prentice-Hall, 1996), pp. 63-73.
20. See for instance, Fred R. David, “Chapter 4: The External Assessment,” in Strategic Management, 5th ed. (Englewood Cliffs, NJ: Prentice Hall, 1995), pp. 113-47 for a more detailed description of environmental tools to analyze the general environment, industry, and immediate competitors. Also, see John A. Pearce and Richard B. Robinson, Jr., Strategic Management: Formulation, Implementation, and Control , 5th ed. (Burr Ridge, Ill: Irwin, 1994), pp. 183-88, for an excellent description of the value-chain approach. They also provide a detailed description of environmental analysis tools, and an overall introduction to strategic management.
21. Gary Hamel and C.K. Prahalad, “Strategy as Stretch and Leverage,” Harvard Business Review, 71, no. 2 (1993), pp. 75-84.
The research was conducted by Dr. Lorraine Uhlaner with guidance from Dr. John Psarouthakis in the College of Business, Eastern Michigan University. An outcome of the research was the book “Dynamic Management of Growing Firms”, by Lorraine (Hendrickson) Uhlaner and John Psarouthakis, published by the University of Michigan Press in 1998. Upon reviewing recent literature, John Psarouthakis, given his experience in entrepreneurial management on how such companies are managed he thought it useful also to make the research results and analysis available through this magazine after we concluded that the management model described is still valid.
Lorraine Uhlaner is Professor of Entrepreneurship at EDHEC Business School, France and
Visiting Professor of Entrepreneurship at Nyenrode Business University, The Netherlands
She was a member of the faculty at the College of Business, EMU prior to her engagements above.
An academic researcher and teacher. In research, Prof. Uhlaner currently focuses on ownership and governance issues in the privately-held firm, especially responsibilities of ownership in firms with multiple ownership. Extensive research on SMEs as well as larger family-owned firms.
Extensive teaching experience in entrepreneurship, family business and organization behavior. She specializes in Family governance, responsibilities of ownership, knowledge management and structure in SMEs, Business transfer in the privately held firm.
Prof. Uhlaner received her PhD in Organization Psychology from the University of Michigan.
Her prior studies were at Harvard University, and at the University of Leiden, The Netherlands.