Organizational Theory Final Exam, March 2013 International Business and Politics
3/13/2013 STU Count: 22631
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Contents Introduction........................................................................................................................................ 2
Analyzing the external environment ..................................................................................................... 3
The processes behind organizational change and the influences of knowledge management ..................... 5
Communities of practice, or a strategic modernist tool in disguise? ........................................................ 8
Conclusion ......................................................................................................................................... 9
Bibliography ......................................................................................................................................11
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Introduction
After many highly successful decades, the American technology and consulting corporation, IBM,
went from being the second-most profitable company in the world in 1990, to experiencing
substantial losses in the first quarter of 1991. The new market for PC’s and client/server solutions
completely revolutionized core aspects of the technology industry, and IBM, finding themselves
unable to fully cope with the changes, experienced a crisis in the early 90s. The issue, however, was
not that IBM was technically inferior to their competitors. Instead, their difficulties were due to the
fact that they faced vast organizational inefficiencies, which in turn made them unable to properly
react to market and customer demands, while making their operations very costly.
Recognizing the need for organizational change, Louis V. Gerstner Jr. was brought in in 1993 as the
first external CEO in the company’s history. What followed was a significant transformation of the
organizational structure, which coincided with a gradual implementation of a number of knowledge
management initiatives. In spite of initial doubts from employees and managers, Gerstner’s ideas
and implementations eventually led to IBM’s recovery from its crisis, which opens up to the main
research question of this paper: How can the implementation of knowledge management initiatives
from 1994 and onwards help to explain IBM’s recovery from its crisis in the early 90s?
In order to understand how IBM recovered from its crisis, this paper argues that it is necessary to
first understand why IBM’s organizational form became incompatible with its external
environment. This is due to the idea that the purpose of implementing knowledge management
initiatives was to counteract the conflicting aspects between IBM’s organizational form and its
surroundings. By first using the modernist theory of environmental contingency by Burns and
Stalker, along with Lawrence and Lorch’s discussions on the concepts of requisite variety and
isomorphism, the paper will present an explanation as to why IBM’s organizational form
progressively became incompatible with its external environment. Second, the paper will use
Lewin’s normative model of planned organizational change, and examine how this incompatibility
created pressures toward an organizational transformation, in which the adoption of knowledge
management initiatives created balance between IBM’s organizational form and its external
environment. Last, the paper will take a symbolic approach in form of Wenger and Lave’s concept
of communities of practice, in order to present an alternative analysis of and, using multiple
perspectives, to discuss IBM’s use of knowledge management initiatives as strategic modernist
tools.
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Analyzing the external environment
The main idea behind contingency theories is to maximize performance. This is done by first
identifying key contingencies in particular situations, and then organizing your organization
accordingly1. In the case of environmental contingency theory, developed by Burns and Stalker, the
key contingency is environmental uncertainty2. In other words, the way one should choose to
structure an organization depends on the amount of uncertainty in the external environment, which
is a result of both the number of diversity of elements (complexity), and the rate at which the
environment and its elements are changing (rate of change). In actuality, everyone does not perceive
the environment in the same way due to perceptual uncertainty. Consequently, a manager’s
perception of environment uncertainty determines whether he or she should strive towards an
organic form of organization (in case of high uncertainty), or mechanic form of organization (in
case of low uncertainty). This theory is complemented by the concepts of requisite variety and
isomorphism, as discussed by Lawrence and Lorch. The law of requisite variety states that for one
system to deal effectively with another, it must be at least of the same complexity. This leads to the
logical conclusion of isomorphism, stating that simple and complex environments respectively
favor simple and complex organizations3.
In the case of IBM, the level of environmental uncertainty had not remained constant during the 20th
century. Their groundbreaking innovations within the field of mainframe computers during the 60s,
along with other inventions such as the floppy disk during the 70s, had firmly established them as a
dominant player on the market4. Given that they had been behind the major revolutions of the
industry, there had not been too much of a requirement of adapting to changes caused by external
forces. Furthermore, given that IBM’s core business was within the field of mainframe computers, a
sizeable part of their revenue was generated from long-term contracts with businesses, thus making
them less volatile toward changes in demand. However, during the 80s and early 90s, the industry
went through a rapid transformation with the PC- and client/server revolution, as well as movement
away from integrated solutions, and towards piece-part technology5.
1 Hatch and Cunliffe, 2013, p. 32
2 Hatch and Cunliffe, 2013, p. 68
3 Hatch and Cunliffe, 2013, p. 69
4 IBM company website
5 IBM company website
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In terms of Burns and Stalker, IBM had perceived a relatively low degree of environmental
uncertainty during the 60s and 70s6. But given the first gradual and eventually rapid increase in
perception of both rate of change and complexity, IBM found it necessary to make the
organizational form more adaptive to its increasingly unstable environment, and thereby approach a
more organic and differentiated form. Similarly, this tendency can be examined by applying the
concepts of requisite variety and isomorphism: IBM was forced to gradually move towards a more
complex form of organization, in order to deal with the increasing complexity of the external
environment. As discussed by Lawrence and Lorch, organizations may face conditions and
elements in the environment, adding pressure towards differentiation inside the organization7.
Because the new era of the IT industry was characterized by a move towards piece-part technology,
IBM decided to decentralize into specialized business units, in an attempt to tackle the increasing
complexity of the environment through a complex organizational structure. As predicted by the
theoretical discussion of Lawrence and Lorch, this led to a high degree of structural complexity, and
thereby inefficiencies due to lack of integration and coordination: “The company had 125 separate
data centers worldwide and 128 CIOs. There were 31 private and separate networks and literally
hundreds of different configurations of PC installations. Data processing costs were a dramatic
three times the industry average”8. While IBM was not technologically inferior to its competitors,
they were hurt by deep levels of hierarchy, a focus on teaming rather than collaboration, heavy
reliance on corporate staff, and knowledge management inefficiencies9,10. Correspondingly, while
their competitors were capturing the benefits of the PC revolution, IBM’s inefficiencies led to
massive fixed costs, combined with an inability to properly satisfy customer demands, which
presented itself in form of an annual net loss of $8 billion in 199311.
As Lawrence and Lorsch would have predicted, the increase in environmental complexity had led to
an increase in structural complexity, which coincided with an increasing pressure to integrate across
the differentiated tasks. Even though the integration had not yet occurred, the annual losses of the
corporation had continually added more and more pressure on its happening. In order to explain the
6 This paper is not arguing that IBM faced a low degree of uncertainty during the 60s and 70s, but merely that the
environment became even more uncertain during the 80s and early 90s. 7 Hatch and Cunliffe, 2013, p.69
8 Applegate, Austin and Collins, 2009, p. 4
9 Powers, 2006, p 1
10 Applegate, Austin and Collins, 2009, p. 4
11 IBM company website
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integration process, this study will now present Lewin’s normative model of planned organizational
change.
The processes behind organizational change and the influences of knowledge management
The normative model of planned organizational change presented by Lewin is an equilibrium
model, which assumes that stability within an organization is merely a stalemate maintained by
oppressing forces for and against change12. In order for change to occur within an organization,
unbalance of the equilibrium has to be created through some kind of destabilization. If either the
forces encouraging change become stronger, or if the forces resisting change are weakened, the
organization will destabilize to the point where change can occur. This is known as unfreezing the
organization, which then allows for movement towards a new state of balance. Once a new
equilibrium has been found between the forces for and against change, the organization will
refreeze with its new behavioral patterns institutionalized.
As examined in the previous section, IBM was facing an increasing complexity with regard to their
external environment and customers, and the corporation had consequently been divided into
specialized units. Due to a lack of integration and collaboration, this development eventually
resulted in annual losses, causing IBM to bring in Gerstner as an external CEO in 1993. Using the
terms of Lewin’s normative model, the increasing pressure to integrate across the differentiated
tasks of the organization had created a disequilibrium between the forces for and against change,
with the force for chance prevailing. As Gerstner said it himself during a talk at Harvard Business
School: “Transformation of an enterprise begins with a sense of crisis or urgency[…]No institution
will go through fundamental change unless it believes it is in deep trouble and needs to do
something different to survive”13 In conclusion, IBM was operating in an unfrozen stage, and the
decision to bring in Gerstner as CEO was thus a decisive move by the shareholders, in an attempt to
determine which direction of change the destabilized system should move in.
Before analyzing which initiatives Gerstner implemented during the next stage of the model, the
paper will briefly explain the rationale underlying Gerstner’s decisions. Although the development
of increasing complexity for IBM was fueled by specific industry developments, the increase in
complexity is something we generally expect to face globalized corporations in the globalized
world. Likewise, the pressure towards a higher degree of integration across the differentiated tasks
12
Hatch and Cunliffe 2013, p. 290 13
Lagace, 2002
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is in no way unique for IBM. There has been and still is a gradual shift away from “old-fashioned”
resources such as materials, capital and labor, and a much higher emphasis on knowledge resources
within the firm14. Given its relative importance, corporations somehow need to manage their
knowledge, in order to stay competitive in the globalized world. In 1990, IBM had almost 375.000
employees working in different teams and on different projects15, and yet there was no efficient way
for them to reuse the knowledge created. Instead of benefiting from the vast amount of knowledge
existing within various part of the corporation through collective teamwork, autonomous divisions
found themselves engaging in turf battles, and seeking solutions consisting of compromise rather
than collaboration16. These inefficiencies emphasize the lack of proper knowledge management
within IBM during the 90s, and it is these exact inefficiencies that Gerstner sought to eradicate as
CEO of the company.
Blackwell defines knowledge management as “[…]the systematic, explicit, and deliberate process
of creating, identifying, and organizing important information and expertise within the
organization, disseminating and applying it to wherever it is needed to enhance organizational
effectiveness and achieve organizational objectives”17, which serves as a great way of explaining
what Gerstner sought to accomplish within IBM. As previously mentioned, IBM did not suffer from
technical inferiority to their competitors, but simply failed to collaboratively reuse the massive
amounts of knowledge already existing within the corporation. Thus the challenge was to identify
and organize information and expertise, and then to make it available to other parts of the
organization. By doing this, Gerstner would be enhancing organizational effectiveness and
achieving organizational objectives, that is, he would bring down costs, and reestablish customer
satisfaction. In spite of being directed towards another company, the popularized quote “If only HP
knew what HP knows, we’d be three times as effective” by Leo Platt, former CEO of HP, is quite
fitting for IBM’s situation during the early 90s.
Having explained the general tendencies within organizational management for globalized
corporations, as well as the benefits of implementing knowledge management initiatives, this paper
will now return to Lewin’s model. As newly chosen CEO of the recently unfrozen corporation of
IBM, Gerstner was able to heavily influence the direction of organizational change. The
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14
Tatiana, Athanassiou and Berdrow, 2004 15
IBM company website 16
Applegate, Austin and Collins, 2009, p. 4 17
Tatiana, Athanassiou and Berdrow, 2004
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organizational structure underwent significant reorganization, with the intention of driving common
processes across all the businesses, and bringing IBM together as a single collaborative
organization. To name a few examples, divisions were split up and divided into large groups, the
previously regional sales organization was organized in global sales teams, and a Corporate
Executive Community, consisting of a dozen senior managers, were to meet every other week to
discuss strategy.18 This approach is closely related to theory regarding knowledge management in
global organizations: “Coordination, control and communication under conditions of dynamic
complexity cannot be structured and formalized, but instead have to be guided in a more much fluid
and evolving way”19. The goal was to break down the individualistic and competitive organizational
silos, and instead foster an environment and culture that enabled innovation and team work. These
initiatives, along with many others, were implemented as an attempt to move away from traditional
mechanisms, and instead encourage both employees and managers to draw on each other’s
expertise. In order for these initiatives to take effect, an appropriate mindset, culture, and
organizational environment was required20. Likewise, in terms of Lewin’s normative model, in
order to have an organization refreeze, the new behavioral patterns need to be institutionalized21.
In order to support this institutionalization, IBM implemented a number of asset management
solutions, such as KnowledgeView directed at IBM’s Business Consulting Services, which
contained intellectual capital, key resources, and discussion forums22. During the 90s and 00s, IBM
generally introduced a variety of different portals, which all more or less had the same purpose: To
set the stage for improving knowledge sharing and thereby productivity, collaboration and
employee skills. By providing an integrated framework which is linking people, processes, and
knowledge, corporations can successfully simplify the managerial complexity of their organization,
and thus increase operational productivity, while making sure that information is transferred in a
timely manner.23 Not only has the measurable economic effects of these tools been tremendous, but
after some initial reluctance or suspicion, the technological advancements have made (at least some)
employees more comfortable with the knowledge management in general: “When you have these
virtual tools and capabilities, they’ve helped make IBM feel smaller[…]It’s a place that feels like
18
Applegate, Austin and Collins, 2009 p. 5-8 19
Tatiana, Athanassiou and Berdrow, 2004 20
Tatiana, Athanassiou and Berdrow, 2004 21
Hatch and Cunliffe 2013, 291 22
Powers, 2006, p. 1 23
Awad and Ghaziri, 2004, p. 356
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you’re dealing with colleagues on a more personal level”24. Naturally, in terms of Lewin, it is hard
to determine exactly when the behavioral patterns are fully institutionalized, and one might even
consider if corporations such as IBM ever truly stabilize, as a result of the high rate of change in the
global environment25. Nonetheless, by using Lewin’s model, this employee reaction can be
interpreted as an institutionalization of new behavioral patterns, which shows how the
implementation of technological knowledge management initiatives may be able to push the
mindset and culture of the employees in the direction envisioned by management.
From this section, the paper concludes that knowledge management initiatives played a significant
role in IBM’s recovery from the crisis, by counteracting the conflicting aspects between IBM’s
organizational form and its external environment. Likewise, it shows that the implementation of
technological knowledge management initiatives may have been able to impact the culture of the
employees, in a direction chosen by management. However, not all scholars would agree on IBM’s
management decision in trying to shape the corporate culture to their advantage. In the following
section, the paper will analyze how the symbolic concept of communities of practice can be used to
interpret and discuss IBM’s knowledge management initiatives as strategic modernist tools.
Communities of practice, or a strategic modernist tool in disguise?
Wenger and Lave’s symbolic concept of a community of practice is defined as: “[…]a group of
people, informally bound together by common interests in learning and the development of
knowledge, who share repertoires[…]These self-designing and self-managing communities form
when a group of people collectively develop ideas, knowledge, and practices as they learn
together.”26 There are striking similarities between this definition and the organizational culture
which Gerstner tried to establish through knowledge management initiatives. One of his eight
operating principles was that outstanding, dedicated people make it all happen, especially when
they work together in a team27. He also acknowledged the fact that the employees of IBM were very
smart and highly capable individuals, and that his job as a manager was to kick-start the
transformation process28. From a symbolic perspective, the idea of management setting expectations
for the formation of communities of practice goes against the idea of the communities being self-
designing and self-managing. Instead, communities of practice are supposed to emerge from the 24
Powers, 2006, p. 2 25
Hatch and Cunliffe 2013, p. 289 26
Hatch and Cunliffe 2013, p. 116 27
Applegate, Austin and Collins, 2009 p.22 28
Lagace, 2002
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problems and interests that employees recognize and take responsibility for29. In the case of IBM, it
was definitely not the case that all employers supported the newly created teams from the
beginning: “At the top of the organization was a leadership team that really wanted to speed up the
pace of change[…]But there was a group of people who just wanted it to go away. They wanted it
to be the way it used to always be.”30. Scholars of the symbolic perspective would argue that this
sort of resistance is both to be expected and highly understandable. It exemplifies what can happen
if one attempts to apply a symbolic concept in a modernist way of managing, and this arguably
undermines the effectiveness of the communities.
On the other hand, one can argue that from management’s perspective, it does not matter that the
first communities are established in an unnatural way, because the alternative to having these,
supposedly inefficient, communities of practice would be to have none at all. Moreover, while it
may be that the first communities of practice were inefficient due to the influences of management,
it is important to note that IBM continually developed a number of different platforms, which
employees actively use for online collaboration31. One can imagine that by establishing a culture
that encourages the creation of communities of practice, employees could have become inspired and
motivated to explore the platforms on their own initiative, and thus ensuring the communities of
practice their natural efficiency.
Still, scholars of symbolic perspective, with some inspiration from postmodernists, could argue that
management, by attempting to institutionalize communities of practice in the first place, could
influence how employees perceive and handle the creation of “voluntary” communities of practice
in the future. As a result, all communities of practice created within IBM could arguably be seen as
involuntary, and as disguised modernist tools in attempting to make profits32, thus “reducing” the
knowledge management initiatives of IBM to a modernist strategy by management. As can be seen
by this discussion, the interpretation of knowledge management initiatives used by IBM depends on
which theoretical school of thought is used as a foundation for understanding.
Conclusion
This paper has analyzed how the implementation of knowledge management initiatives from 1994
and onwards helped IBM to recover from its crisis in the early 90s. First, the paper analyzed why 29
Hatch and Cunliffe 2013, p.116 30
Applegate, Austin and Collins, 2009 p. 7 31
Powers, 2006, p. 2 32
Hatch and Cunliffe 2013, p. 119
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IBM’s organizational form gradually became incompatible with its environment. It was found that
the environmental rate of change which IBM had experienced during the century had been
continually increasing. Likewise, their external environment had gradually become more complex,
thus forcing IBM to undertake a more complex form of organization. This had been done by
splitting up the corporation into separated specialized units, which had created pressures toward a
need for integration.
Next, the paper used Lewin’s normative model of planned organization change, combined with
theoretical aspects of knowledge sharing systems, to determine how these pressures toward a need
for integration had initiated a transformation of the corporation by the use of knowledge
management initiatives. Here, the paper concluded that knowledge management initiatives played a
significant role in IBM’s recovery from the crisis, by counteracting the conflicting aspects between
IBM’s organizational form and its external environment. Moreover, the paper suggested that
technological management initiatives might be able to impact the corporate culture in a direction
envisioned by management.
Last, the paper used the symbolic concept of communities of practices, to present an alternative
interpretation and to discuss IBM’s use of knowledge management initiatives as from multiple
theoretical perspectives. The paper concluded that, depending on which school of perspective it
took into account, there were several conflicting interpretations of IBM’s use of the initiatives.
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