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How does your organization compete within its industry?
Do you constantly look for new opportunities? Do you prefer to focus on the same market and improve efficiency? Or maybe you sit back, and react to changes in the marketplace?
Organizations show incredible diversity in the ways that they operate and compete. For example, consider the various restaurants in your area. Each has its unique way of attracting new customers. Some frequently change their menus, based on the latest trends (think of wheatgrass juice and protein shakes), while others have offered the same menus for years.
Neither approach is necessarily right or wrong – each restaurant may be successful in doing different things. Similarly, your organization may choose to launch a new product every quarter, or you may focus all your energies on one 'star' product. What's important, however, is that the type of competitive strategy you choose needs to be aligned with how your organization is structured.
Raymond Miles and Charles Snow studied the relationship between structure and strategy. In 1978, they published "Organizational Strategy, Structure, and Process," which identified four types of organizations – defenders, prospectors, analyzers, and reactors. Collectively, these types show us how companies compete.
Once you understand which type fits your organization, the Miles and Snow typology offers insights into how to improve your company's industry position by answering three key questions:
- What functional strategies should you pursue?
- What type of structure should you adopt?
- How should you make strategic decisions?
Miles and Snow's theory has been supported by a wide range of managerial studies, and it has become a useful concept in the field of strategic management.
The Four Strategic Types
Miles and Snow classified organizations based on the rate at which the companies change their products or markets. The types of organization that they identified are shown below:
Headings reproduced from "Organizational Strategy, Structure & Process" by Raymond E. Miles & Charles Curtis Snow. © 1978. Reproduced with permission of Stanford University Press.
Defenders
These organizations seek stability by producing a limited set of products, directed at a narrow segment of the total potential market. These companies tend to ignore developments and trends outside their defined area, and they choose to grow through market penetration.
Within this niche or narrow area, defender organizations aggressively try to prevent other companies from entering their territory. They don't spend time examining the environment or planning for changes. Instead, they use long-term planning to improve efficiencies and reduce costs. Tactics include competitive pricing, integrating vertically to control costs, and producing superior products.
Organizational elements that support this strategy include the following:
- Centralized control of strategic decisions.
- Formal hierarchy.
- Horizontal differentiation (lots of specialists).
Defenders function best in stable business environments where change isn't necessary for success. Producers of high-priced goods – like carmaker Rolls-Royce, or luxury watch brand Rolex – are examples of companies that defend their current niches, and aren't particularly interested in serving a different market.
Prospectors
At the other end of the spectrum, prospectors respond well to change. Their strength is in finding and taking advantage of new product and market opportunities. For many of these companies, innovation is just as important as profitability. One example of a highly successful prospector is technology company 3M.
The success of prospector organizations depends on developing and maintaining the ability to monitor a wide range of environmental conditions, trends, and events. They end up with a broad range of products and services, and they continually try to keep up with consumer demand.
Prospectors need a lot of flexibility, and their organizational structure typically uses the following elements:
- Decentralized control of strategic decisions.
- Low formalization (lots of generalists).
- Flat structure (few layers of management).
Typical prospectors can seem inefficient, because they're always changing. However, their success is determined not by efficiency, but by their ability to be flexible, and respond to the needs of tomorrow.
Analyzers
This type of organization tries to capitalize on the strengths of both defenders and prospectors. Analyzers look for ways to maximize their opportunities while minimizing their risks. They won't be the first to move into a new market – they wait until a prospector has proven that the market can be profitable.
Analyzers live by imitating and copying – using the successful ideas of prospectors. Clothing manufacturers that copy designer fashions are a great example. They follow smaller, more innovative competitors that produce superior products. Because analyzers are slower to change, they have time to build efficiencies in their stable product and market areas.
To support both flexibility and stability, the analyzer organization needs these elements:
- High standardization and routinization to control costs.
- Moderate centralized control of strategic decisions – tighter for stable products/areas, and looser for new products/areas.
- A structure that allows collaboration across departments.
Analyzers are forced to make compromises, while seeking a structure that balances both stable and dynamic areas of operation. If the external environment changes dramatically, demanding a switch to one side or the other, the analyzer cannot switch quickly.
Reactors
This type of organization doesn't have a set strategy, design, or structure. The reactor category essentially describes the inconsistent and unstable patterns seen when one of the other three strategies is pursued ineffectively.
Reactors respond poorly to environmental change, their performance suffers, and they aren't able to commit to long-term plans. Because these companies can't decide how they want to position themselves, they simply react to what's happening. This inadequate response to a changing environment causes them either to (a) formally adopt one of the other strategies, or (b) go out of business.
Failing to communicate a strategy clearly – or not fully shaping a strategy in the first place – is often at the root of reactor organizations. Also, attempting to avoid change, despite overwhelming changes in the market, is another characteristic.
Although Miles and Snow's work focused on for-profit companies, it can apply to the not-for-profit sector as well. The key is how management assesses and perceives environmental uncertainty.
Environment/Strategy Continuum
Miles and Snow's Defender, Analyzer and Prospector strategies are all good approaches, when used in the appropriate environment. The Reactor strategy, however, is more or less doomed to failure as it relies on the environment remaining unchanged – which is unrealistic.
The more uncertainty and change that management predicts, the more flexible the strategy must be. And as strategies move toward higher flexibility, the organization's structure has to move with those strategies to remain adaptive.
Figure 1 below shows which strategy is generally the best one to use at different points on the environmental uncertainty continuum. You'll note we omitted the Reactor Strategy as it is clearly an ineffective means of dealing with change.
Key Points
Miles and Snow's research shows that organizations fundamentally need to understand the environment in which they operate, and adapt their structure to the level of uncertainty in these environments.
While there's no single "right" strategy, the correct approach to strategic management is to align your strategies, your business environment, and your structure.
