Competitive Advantage Through Consistent Routines

Published October 11, 2014

Three Types of Problems: Entrepreneurial, Engineering & Administrative

When the external environment changes, firms must adapt or die off. Remember when the price of hops rose in 2008 due to a worldwide shortage? Without having adaptive routines to purchase hops differently, use them differently or find substitutes, small breweries would never have survived such a price increase. Businesses must constantly adapt and usually this is done in small increments. All businesses must solve three types of problems: (a) the entrepreneurial problem, (b) the engineering problem and (c) the administrative problem. These problems must be solved in such a way that the functional results are rationally consistent with each other and consonant (fit) with the larger external industry value chain within which the business operates. That means that it won’t work if we solve our entrepreneurial problem in a way that creates big difficulties in the way we solve the engineering problem, or in a way that is inconsistent with the way we solve the administrative problem. Coordination matters and your firm’s internal routines must address all three problems in a coordinated fashion.

The entrepreneurial problem involves deciding what services or products, and what target market or market segments, management needs to concentrate on within the bounds of feasible solutions to the engineering problem (below). Management needs to concentrate resources because (a) they have to commit sufficient resources to achieve their objectives in those target markets and to produce valuable products and services, and (b) there are never enough resources to do everything for everyone. So we concentrate our forces to achieve our entrepreneurial objectives.

The engineering problem involves deciding what are the most appropriate feasible technologies and processes for producing and distributing the products and services dictated by the solution to the entrepreneurial problem within the bounds of guidance and controls set when solving the administrative problem (below). The organization also needs to solve the issue of how to provide effective and efficient information and control links between different business functions to ensure proper operations.

The administrative problem is mostly about (a) setting decision and behavioral guidance and (b) figuring out how to reduce uncertainty within the organization; within and between its people, parts and pieces. It requires providing policies and procedures, coordinating mechanisms, decision frameworks, values, missions, behavioral controls and culture. It also involves implementing processes that will help the organization survive and evolve while adapting to external change and addressing the entrepreneurial and engineering problems.

It’s not easy. It almost seems too complicated to pull off. That is what makes Miles’ et al.’s (1978) ideas so revolutionary. They are elegant, specific, and have stood the test of time!

How to Solve the Three Problem Types in a Coordinated Fashion: Adaptive Routines and Cycles

Miles et al. (1978) pointed out that organizations must try to consistently evaluate and modify the mechanisms by which they achieve their purpose. The problem of adjusting to environmental changes and environmental uncertainty, while also keeping all those internal routines consistent with each other is complex. However, this complexity and ensuing confusion can be greatly reduced by leaning on roles and routines – tight patterns of behavior that everyone understands. When people understand routines, they can make sense of the changes in a coordinated fashion (Weick, 1995). Miles et al. (1978) took this kind of thinking further, discovering three generic sets of solutions and integrated routines, which they called “strategic orientations” that lead to success and survival. These strategic orientations are rational because they take into account the interrelationships among the company’s strategy, the company’s structure and its processes, and do an excellent job of maintaining internal and external consistency. They also allow the people working in the firm some comfort. Knowing which routines and solutions are appropriate, there is less confusion and they get efficient, effective and comfortable with those that are appropriate.

Successful Strategic Orientations: The Defender, the Prospector and the Analyzer

Defenders solve the entrepreneurial problem by deciding how to seal off a portion of the total market in order to create a stable market segment and domain. The typical solution is to produce a limited set of products that are directed at a relatively narrow segment and they use competitive pricing or high quality products to dominate that segment. Defenders tend to ignore trends outside of their domains. Defenders solve the engineering problem of how to produce and distribute goods by investing in and integrating long-term technical efficiencies. That is, they do things as efficiently as possible by adopting and developing highly cost-efficient technologies, staying committed to them over long periods of time, and continually improving upon them. Defenders in the craft beer industry usually have a flagship beer leading the way, and they fiercely defend that beer’s market segment from intrusion. A great example of a successful Defender Strategy is Widmer Bros. and their Hefeweizen from 1984 until about 2011.

Prospectors have a different entrepreneurial problem. Prospectors aim to locate and develop new products and new markets and take advantage of new opportunities. Prospectors solve the entrepreneurial problem by having an external focus. Prospectors create change externally and invest resources to monitor a wide range of events and markets and technologies, and understand emerging trends. The engineering problem for the prospector is very different than the engineering problem for the defender. The defender wants to commit to a single technology that they could get very efficient at and defend their territory by using it. On the other hand, the prospector organization must figure out how to avoid making a long-term commitment to any single technology or process. The prospector will stay out of purchasing expensive technologies meant to last a long time; they would prefer to lease technology and use it for short periods of time. Perhaps they pay more, but they hedge their risk of getting stuck with an old technology that does not allow them to take advantage of a new product or service market that they would like to pursue. The prospector organization has the administrative problem of reducing uncertainty of what paths they could take going forward and the pace of change, and they solve this problem by facilitating and coordinating numerous and diverse operations, and keeping options open. Marketing experts that are good at forecasting and planning coupled savvy research and development experts typically dominate top management at Prospector firms. Their core adaptive routines revolve around fast ‘go to market’ strategies. Sticking with the Widmer Bros; their introduction of the Rotator IPA series in 2011 is a textbook shift from a Defender to a Prospector. Boston Beer Company is the quintessential prospector. They push new beers into the market and have a marketing and R&D expertise that is housed internal to the firm, while they contract brew their beers so as not to tie up large amounts of assets in technologies designed to produce only one type of beer (like Widmer’s Hefeweizen). It is worth noting that Boston Beer Company also has a flagship beer – their delicious Boston Lager – but they exhibit prospector tendencies with over 60 other beer styles in their various programs.

Analyzers lay somewhere in between prospectors and defenders in their routines and the way they work through the adaptive cycle. For analyzers the entrepreneurial problem is how to exploit and find new product and market opportunities while at the same time maintaining a firm base in their traditional products and with their existing customers. Analyzer strategies will have limited scope coupled with a high quality research and development capability. Analyzers have a marketing intelligence mechanism that views the markets and recommends market entry only when it seems like a really sure bet, and it will not jeopardize existing operations. The analyzers administrative solution is to be ambidextrous. Administratively, the firm has to accommodate both stable areas of their internal organization and dynamic areas of the external environment. Analyzer organizations will usually use some kind of project-based structure dominated by marketing and engineering experts. Some scholars claim that all successful organizations are to some extent analyzers, it’s just that some businesses are much more toward the defender side of a continuum and others are on the prospector side. Oakshire Brewing’s balance between Single Batch, Seasonal, Brewer’s Reserve, Hellshire (barrel aged), and Year Round beer programs models the typical product portfolio of an Analyzer firm.

Failures

Miles and Snow had one final category, Reactors. Reactor firms do not have consistent patterns and processes through which everybody knows how the three problems are dealt with. Reactors do not anticipate changes and they do not develop adaptive routines. Reactors tend to go out of business.

Conclusion

The take away here is that in your brewery, distillery, or cidery, each department must have its own processes and routines so that everybody in that department has the correct pace and rhythm. Value is created within the firm when internal routines are coordinated and consistent with the external mentality of a Defender, Prospector, or Analyzer. Remember, your firm’s top management dictates the outward looking strategic type (Defender, Prospector, or Analyzer); then the employees align their routines to solve the three kinds of internal problems. Defenders solve the internal engineering problem through efficiency, while Prospectors solve the internal engineering problem through flexibility. Likewise, they solve the entrepreneurial problems and administrative problems differently, depending on the top management’s strategic type. This way, the value added by individual department efforts won’t be whittled away by poor transitions and high transaction costs between departments. Finally, your business needs a macro level set of routines for adapting as the environment changes so that solutions to the three problems may be formulated and implemented in a timely and expected way. Like a ship at sea, we must have an effective and carefully coordinated way of repairing holes in the ship while it is still afloat at sea and functioning. There is no dry dock, time-out for a business.

References

Miles, R. E., Snow, C. C., Meyer, A. D., & Coleman, H. J.,Jr. (1978). Organizational strategy, structure, and process. The Academy of Management Review, 3(3), pp. 546-562.

Weick, K. (1995). Sensemaking in organizations. USA: Sage Publications.