Comparing Balanced Scorecard(BSC) with Traditional Performance Measurement

Traditional Performance Measurement Systems

Traditional Performance measurement system tracks only the financial performance of the organization relating to profit earned from selling to the capital required. They focus solely on financial measures based on internal accounting reports such as profitability, revenue, cash flows, earnings per share (EPS), return on assets (ROA),economic value added, etc. These measures are known as lag indicators as they only reflect the past data and represent historical performance (Kaplan and Norton 1992, 1996). Even-though such quantitative performance metrics can control and improve the internal performance of the organization, they can result in incorrect decision-making in the long-term.

First, relying solely on financial metrics can motivate managers to make decisions that sacrifice long-term value creation for the benefit of short term performance (Anthony & Govindarajan, 2007; Porter, 1996). For example; cost reduction can increase profit in the short-run, but only at the expense of loss of quality, loss of expertise and/or loss of customer base which all have long-term impacts. The traditional performance measurement systems were designed and appropriate to be used in the industrial age, a case of 50 years ago where the majority of companies were mass-production based having tangible assets like plant, property, equipment. In such cased financial performance based on past historical data was sufficient for decision making purposes. However, the modern business environment has moved from mass-production based industrial era to knowledge based era. This transformation has brought about a shift from relying solely on measuring tangible assets towards the valuing of intangible assets such as customer relationship, human capital, intellectual capital,etc. So, in today's competitive environment, sole reliance on the financial measures is inappropriate as these quantitative measures do not measure intangible assets, do not address the issue of competitive rivalry, are too aggregate, not timely and are backward looking to help managers to root cause performance problem and initiate timely corrective actions .

Secondly, traditional performance measures are not linked to the organizational strategy. Strategy is relates to the long-term goals of the organization, the scope of the organization’s activities, the allocation and matching of organizational activities to its resource capabilities and business needs, and consideration of the organization’s stakeholders' values and expectations (Anthony & Govindarajan, 2007 ; Porter, 1996). Traditional performance systems focus on short-term financial performance, resulting in a disconnect between organizations' long-term strategy and its short-term actions. Organizations must measure performance in ways that not only replicate past positive performance, but also encourage positive future results. Today's business environment is characterized by intense competitive rivalry and as a result businesses have to be flexible and adaptable to gain and sustain a competitive advantage (Porter, 1996). Organization must excel in other critical areas such as product or service quality, organizational flexibility, customers relationships, relationships with suppliers, relationships with employees, processes and technology know-hows, and innovation in order to survive in the current competitive environment. Therefore, modern organization must invest in intangible assets that create future value such as Customer relationship, employee development and intellectual capital. These intangible assets drive value creation, are linked to the long term growth of the company and have become a major source of competitive advantage (Kaplan and Norton, 1996). Therefore, it is critical that these intangible assets are measured as they are leading indicators of organizational performance. However, traditional performance systems do not measure such non-financial performance. By focusing only on lag indicators and ignoring lead indicators, managers tend to have the problem of shortsightedness at the expense of long term benefits.

Therefore, traditional performance measures which predominately focusses on financial performance measures are not appropriate in this dynamic and changing environment. Focussing just on financial-measures is inadequate because one-type of performance metric, cannot realistically capture the entire organization's performance. Organizations need to link performance measurement to strategy, and therefore, the performance measurement system must include both financial and non-financial measures in order to get a complete snapshot of organizational performance to succeed in the modern dynamic environment. A performance measurement system that aligns performance measurement to strategy by linking short-term actions with long-term goals such as customer relationships, employee and organizational capabilities are critical for success.

Balanced Scorecard

The Balanced Scorecard (BSC) is a performance measurement system that addresses the weaknesses of the traditional performance measurement systems. It has added strategic non-financial performance metrics to traditional financial metrics, thus, providing a ‘balanced’ view of an organizational performance (Anthony & Govindarajan, 2007; Kaplan and Norton 1992;1996). BSC reflects changes in the modern competitive environment by taking into account the intangible assets that have became a major source of competitive advantage (Kaplan and Norton, 1996).

BSC is an integrated strategic management system that aligns business activities to the strategy of the organization by linking performance measurement with the company’s strategic objectives. It provides a framework to translate the organization's strategy into specific quantifiable performance objectives that can be measured (Kaplan & Norton,1996).The performance objectives are measured using the four inter-connected perspectives, i.e., the financial perspective, customer perspective, learning and growth perspective and internal business processes perspective (Kaplan and Norton, 1996).

• Financial Perspective
  The financial perspective focuses primarily on the financial objectives of the organization. It deals with the tracking and monitoring of financial success and how the company look to the shareholders (Kaplan and Norton, 1996). The typical financial measures are the profitability, revenue, Return on Investments, Return on Capital Employed ,cash flows, and sales growth.
• Customer Perspective
  The Customer Perspective perspective deals with how the customers see the company (Kaplan and Norton, 1992). This perspective focuses primarily on customer satisfaction since customer satisfaction and retention is linked to the long term growth and survival of the company. This perspective helps in the long-term planning of the company. The goal is to measure the value delivered to the customers by meeting customer demands and needs. Measures selected for this perspective include customer satisfaction rate, customer retention rate, delivery performance, quality performance, existing market share, and percentage sales to new customers, and so forth.

• Learning and Growth Perspective
  Learning and Growth Perspective focuses primarily on intangible drivers of future growth such as human capital and operational capital . This perspective deals with objectives such as the capability of the company to continue to grow, improve and create value (Kaplan and Norton, 1992). In the modern dynamic and intensely competitive business environment, the organization must constantly change, adapt, learn, improve and innovate to create future value and survival. Measures selected for this perspective include Job satisfaction, employee turnover, employee training, and development,the rate of innovation, etc.

• Internal Business Processes Perspective
  Internal Process Perspective focuses primarily into the area of internal operational objectives that the company must achieve at in order to survive (Kaplan and Norton, 1992). This internal focus perspective gives an understanding of how well the organization is operating and helps to determine which activities are meeting the real needs of the customers. Organization will have to excel in the key processes necessary to deliver the customer’s need such as producing value adding products or services, improving internal resource and asset utilization.The measures that are used to assess Internal Business Processes Perspective include efficiency levels, value analysis of unit costs, and process alignment.

BSC analyzes the company performance from the above four perspectives where performance metrics are designed, collected and analyzed relative to each of these four perspectives. The measurements of the four perspectives have inter-dependent relationship between them (Kaplan and Norton, 1996). The learning and growth perspectives leads to delivering high quality internal business processes as employees would have developed right competencies. By having good internal business processes, the company would be able to meet their customer’s needs and will gain market share and customer loyalty for future business. The higher customer’s satisfaction can lead to improvement in the company’s financial performance. This highlights that the objectives in the four perspectives are inter-linked. Therefore, if an organization can excel in all the perspectives of the BSC scorecard, the organization would have a better long-term financial success (Kaplan and Norton,1992).

Thus, the BSC measures organization performance by balancing between financial and non-financial measures. Progress is measured with traditional financial measures, such as profit and loss, along with contemporary non-financial measures such as customer satisfaction, employee retention, brand equity, intellectual capital and market share. BSC includes both lag indicators and lead indicators in the four perspectives and links the strategic objectives of an organization to the day-to-day actions of managers

Conclusion

In conclusion, organizations need to link performance measurement to strategy. Strategic decisions occur at many levels of managerial activity. Therefore, it is crucial that the organization’s performance measurement system must be linked to the objectives of business units, functional units, groups and individuals (Kaplan and Norton ,1996). The traditional performance measurement systems are said to be no longer appropriate in this dynamic and changing environment, as they do not reflect the organization strategy, nor the uncertainty in the competitive environmental, nor addresses organization improvement and capabilities. Organizations need to link performance measurement to strategy, and must measure performance such that they encourage both, positive future results and replicate past positive performance .

Balanced scorecard is an integrated strategic management system, which has overcome the limitations of the traditional performance measurement systems. The BSC provides a balanced view of the company’s overall performance by aligning organizational activities with the company's strategy and vision. The main advantage of the balanced scorecard methodology is that it created the basis for forward-thinking performance measurement by linking “what the organizations wants to achieve” (financial and customer objectives) with “ How the organizations can achieve this” (internal process and learning and growth objectives). In order to successfully execute organization vision and strategy organizations must monitor and control that all business units, functional units, groups and individuals are all pursuing strategic goals. BSC links strategy to operational activities and creates a strategy focused organization. It monitors different business processes to determine which metrics are most effective in measuring performance and provides feedback to internal business & external business process in order to continuously track and improve strategic performance and results. Performance issues are discovered early, giving managers opportunity to take corrective action, identify the company’s value drivers and ensure correct strategies have been adopted. Thus, the BSC aids managers to shift from a reactive management approach to a proactive management approach. By linking strategy to operational objectives to organization strategy, BSC enforces managers to look at the long-term view of the organization, promoting managers to think about the future and not focus on the past. This is in contrast to the drawbacks of the traditional performance measurement systems, which are too aggregate, not timely and are backward looking to help managers to root cause performance problem and initiate timely corrective actions.

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Comparing Strategic Management Accounting with Traditional Management Accounting

“Strategy is the direction in which the organization plans to move to attain its long-term goal” (Anthony & Govindarajan, 2007). Strategy is concerned with the long-term direction of the business organization, the scope of its operational activities, the matching of operational activities to its resource capabilities and its competitive environment, giving consideration its stakeholders values and expectations (Porter, 1996 ; Anthony & Govindarajan, 2007).

Traditional Management Accounting has tended to concentrate on the tactical and operational decisions in the organization by focussing strictly on financial measures for monitoring and controlling short term activities. It predominately emphasizes on allocating business costs to goods or services and prepare accounting reports using historical and quantitative financial data for internal management business decisions. It is inward-looking with short-term outlook and focussing too much on internal organizational efficiency. In the new competitive environment, for a business to remain healthy there are other aspects that need to be considered such as information on competitors, human resources, customers, suppliers and technologies for developing and monitoring a business strategy.

By focussing only on the cost side of things more heavily than other aspects of the business,traditional management accounting has tended to neglect to provide information to support and attain strategic goals of organizations. Therefore traditional management accounting is considered to be inadequate due to its failure to generate relevant and futuristic non-financial information required to support strategic decision-making (Bromwich, 1990).

Strategic management accounting (SMA) is a newer version of management accounting which adds the strategic perspective to traditional management accounting. SMA is defined as “The provision and analysis of financial information on the firm’s markets ,competitors’ costs, cost structures and the monitoring of the organization's strategies and those of its competitors in these markets over a number of periods” (Bromwich, 1990) . SMA attempts to rectify the weakness of Traditional management Accounting by including (i) Both financial and non-financial indicators and (ii) Both internal and external information.

According to Porter (1996) business strategy, involves (i) Competitive advantage, which focusses on choices and trade-offs between alternatives based on external industry analysis , and (ii) “operational effectiveness,” which focuses on cost minimization based on internal value chain analysis. Thus, SMA can be compared to Traditional Management Accounting from these two perspectives of external competitive environment and internal strategic costing ;

External competitive environment perspective

For an organization to be successful, it is important to gain or sustain its competitive advantage. According to Porter 's (1996) strategy framework, for businesses to generate a sustainable competitive advantage, they have three strategies to choose from. They are the low cost leadership strategy, product or service differentiation strategy, and focussed strategy. A low cost leadership strategy involves seeking to become the lowest cost producer of a product or service in order to earn above-average profits. A differentiation strategy seeks to create a customer perception that a product or service is superior compared to that of the competitor's products or services, based on brand, quality, and performance. A focus strategy involves either a differentiation or cost leadership strategy, but seeks to provide a high perceived value product or service to customers in a niche segment of the market, justifying a price premium. In order to gain competitive advantage, an organization requires constant monitoring of the external competitive environment and must be flexible, adaptable and needs continuous improvement (Porter, 1996).

SMA incorporates strategic thinking into management accounting by including non-financial measures to capture the qualitative attributes and aspects of competitive management. A key component of SMA is analyzing and incorporating external factors such as industry competition to determine the organization's biggest competitors, competitor's positions in the market, threat of new competition in the market, and the cost of entering the market, the threat of substitute products or services which can obsolete the existing product. SMA conveys an externally oriented perspective and helps in the development of long-term plans by collecting and analyzing information on competitors costs, market shares, sales volumes, and resource utilization for comparison against its own internal information. Such competitor data helps business to protect its strategic position or make strategic changes to improve future competitiveness. Thus , SMA looks to the future by measuring trends in the external environment and supports positive longer-term decision makings rather than short-term reactive ones.

Traditional Management Accounting does not offer a full understanding of the external competitive situation. Its focus is on determining costs and financial control, by using methodologies such as budgeting and cost accounting, thus making the organization rigid and not adaptable to the dynamic nature of the external competitive markets. Traditional Management Accounting is inward looking as it focuses largely on accounting functions within internal business units to meet the requirements of the business unit managers. While greater emphasis is given to the internal operations side of the organization, it overlooks potential external competitive threats and external opportunities. Traditional Management Accounting excludes information about competitors, without the information of competition taking advantage of them is impossible. By focussing purely on financial information, Traditional Management Accounting coveys on short-term outlook. Thus, traditional management accounting is considered to be too limited to provide necessary and meaningful information for long-term planning .

Compared to Traditional Management Accounting, Strategic Management Accounting (SMA) is outward looking and helps businesses to evaluate its relative competitive position in industry it operates in. By providing strategic competitive data, SMA helps businesses to analyze the actions of its customers and competitors. In the absence of such information, businesses will be incapacitated in formulation and implementation of business strategies for competitive advantage. Therefore, Strategic Management Accounting (SMA) entails providing management accounting in the context of planning and implementing business strategies.

Internal Strategic Costing perspective

From Porter's (1996) strategy framework, businesses have three strategies at their disposal : product or service differentiation, low-cost leadership and focus strategy . However, to implement any of these strategies , the management must manage costs strictly . Therefore cost management system is a critical source of building a competitive advantage. The 21^st century business environment is characterized by intense competitive rivalry and as a result, businesses have to constantly adapt and change their internal operations in order to maintain or gain a competitive advantage . Successful organizations are those that are able to (i) lower costs and (ii) improve the quality and efficiency of operations. Therefore, an organization's internal cost management system must be aligned to its business strategy

Traditional Management accounting features management control techniques such as budget control and standard costing. Such costing models incorporates arbitrary allocation instead of the cause-and-effect allocations of indirect costs, and they do not provide accurate product cost information in a multi-product organization. Such techniques could lead to accurate product costs in mass-production organizations where direct costs are considerably high and indirect costs are typically low. This was appropriate in mass-production industries which were dominant around 50 years ago, however, the current organizations are characterized with having lower direct costs and higher indirect costs. This makes accurate calculation of product profitability in a modern organization not possible. It is impossible to establish and/or sustain competitiveness without an actual cost calculation mechanism. Also, traditional management accounting has failed to adapt to the modern competitive environment that requires continuous improvement in the entire value chain. The value chain is the set of all the activities involved in the product, from the beginning with the extraction of raw materials to the end with the post-delivery customer support activities (Anthony & Govindarajan, 2007).Traditional Management Accounting does not analyze non-manufacturing costs or the costs of pre-conversion and post-conversion activities. Thus, it fails to evaluate the relative cost positions of competitors as it is concerned more with the internal cost position of the company such as focussing on existing activities and managing the internal resources of the organization. This makes traditionally management accounting backward-looking and reactive to competitive pressure.

For this reason management accounting processes shifted to using costing models under SMA such as activity-based costing methodology. The Activity-Based Costing (ABC) is costing system methodology that reflects the modern complex business environment and facilitates the organization to allocate costs more accurately. ABC assesses and identifies activities in the value chain of the organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each of them (Anthony and Govindarajan, 2007). Therefore, an organization can accurately estimate the cost elements of the entire range of its product and/or service and to help in management decisions. By identifying and allocating costs to each activity, ABC helps the company to determine whether to lower or raise the activities cost based on the relative cost position. Also, ABC model offers valuable insights toward the strategic planning process (Anthony and Govindarajan, 2007) . ABC focus is not just on the costs of the activities but also value added by these activities from both internal and external positions. SMA views cost drivers by looking at the value they provide to achieve the company's strategic/long-term objectives. In areas where opportunities for lowering costs exists, the long-term impact are addressed, such as the possibility of declining market demand and/or quality. In areas where investment opportunities exists, long-term advantages and/or disadvantages are evaluated, such as whether increasing value-adding activities or eliminating non-value adding activities will raise the profit margin in the future. By integrating costs into strategy, SMA enhances the strategic position of the firm through the exploitation of the linkages in the value chain and optimizing cost drivers. Thus, compared to Traditional Management accounting, SMA uses cost information to formulate strategies and carry out tactics to implement those strategies (Anthony and Govindarajan, 2007).

In conclusion, today's organizations face a lot of competition due to the rapidly changing, complex and uncertain economic environment. For an organization to be successful, it is critical for it to maintain or improve its competitive advantage. By focussing too much on internal organizational efficiency , Traditional Management Accounting does not offer a full understanding of the external competitive situation. It is considered inward-looking aiming to fulfill short-term objectives rather than long-term objectives of the business. Strategic Management Accounting (SMA) looks not only at the internal efficiency of the organization in terms of its resources and operations, but also on the external business environment . SMA aims to provide relevant and both financial and non-financial information on competitors, customers, suppliers, and the external environment to the organization’s management. With such information, organizations can monitor and evaluate the changes in the external environment in which the company operates and enable them to make strategic plans and strategic decisions. SMA also integrates costing into strategy. SMA uses the cost information to improve the strategic cost position of the business and carry out long-term strategic objectives by using cost management as a tool to improve productivity, increase customer satisfactions and increase revenues. Thus, the approach of SMA is in line with the business strategy objectives that produces long-term objectives for the business, taking into consideration competitor's plans and their possible actions, as well as analyzing and improving the value chain to align with the strategic objectives of the organization.

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Analysis of US Software Industry - Part 2

Part 1 is here . 

4 Factor Inputs

4.1 Labour Supply

Software Industry is dependent on very high-skilled technical workers, and demand for these high skilled workers, remains high. The U.S software sector employs almost 2 million people that pay 195% of the national average (Holleyman 2011). Unionization is rare and the industry represents younger workforce most, with large proportions of workers in the age range of 25-to-44. The labour force in software industry is not homogeneous, i.e., workers in this category are not identical in terms of productivity (Sloman, Hinde & Garatt 2010). Software industry employees wages are based on their talent, with software engineers having specialized skills earn more compared to software engineers with generic skills. Overall employees in the US software industry are paid much higher than the US national average.

US Software companies continue facing shortage of high-skilled technical workers . Wages are expected to increase by 30 percent between 2008 and 2018. US Software companies, have responded to the shortage of skilled technical workforce by off shoring to emerging countries, especially to India. This has put downward pressure on the salaries of the U.S. Software workers, however workers holding advanced degree and expertise in critical software field command a very high salary.

4.2 Capital Supply

Physical Capital :

Software Industry do not require large factories and heavy production equipments. Physical capital requirements is limited to office spaces and computing power, like mainframe computers and servers.

Financial Capital :

U.S Software Firms typically have a clean balanced sheet as they source funds primarily through selling of preferred stocks and common stocks. They have very little, if not no debt. Start-up software firm raise capital through venture capital funds where as large established software firms raise capital and long term funds by offering common stocks and preferred stocks to public and institutional investors. It is quite common for software firms to maintain a huge cash balances for their short term funding needs.

5 Globalization of US. Software Industry

The global expansion of the US software industry started around the 1980s towards the major industrialized economies . The OECD countries accounted for nearly 97% of the world software market in the early 1980s and U.S Software Firms dominated these markets (Correa 1990).The most obvious explanation for the international competitive position of U.S. Firms is that they enjoyed a first mover advantage in all of the software industry’s market segments.

The initial international expansion of U.S Software Firms was mainly to cater global market demand. The large US software firms opened up global offices and subsidiaries in other countries to serve those markets. In the late 1990's the term “off-shoring” got lot of attention. The driving factor in off-shoring movement was to reduce cost by access to lower waged software skills. The technological development in the Internet and telecommunication infrastructure made it easier to access technical talent around the globe thus enabling global distribution of software development teams. This has enabled U.S Firms to reduce costs by exploiting wage differentials while at the same gaining access to large pool of skilled workers in countries such as India and Ireland.

US Software Industry Export and Foreign Trade :

Almost 60% of revenues for the leading US software companies are generated outside the United States (Holleyman 2011). U.S software industry has been a significant contributor to the US trade balance. In 2008, US software exports contributed a $36 billion surplus $36.4 billion to US’s balance of trade in 2008 (BSA 2012). That said, the US software export faces few critical challenges which has undercut its ability to meet its full potential.

Firstly, U.S Software's export segment faces the strict export restriction placed by the U.S Federal government as part of the national security. Some of the export control laws are outdated and U.S. Software industry has been lobbying for years as they happen to harm the legitimate export prospects of US software firms. Because of these restriction foreign software firms have gained an advantage in reaching certain global market segment first.

Secondly, it faces the problem of copyright thefts and software piracy issues in foreign countries. In 2009, more than 50 billion dollars worth of software was used illegally. The enforcement of Patent and copyright laws varies greatly among different countries. And in some developing country software piracy is common occurrence. The emerging markets of BRIC countries-Brazil,Russia,India and China has software piracy rate of 56%, 67%, 65% and 79% respectively (Holleyman, 2011).

6 US Software Industry: Potential and Prospects

In 2015, the global software market is forecast to have a value of $356.7 billion, which is an increase of 34.4% since 2010. The United States software market is forecast to have a value of $125.9 billion, an increase of 25.2% since 2010 (Datamonitor 2010).

OECD economies still is an important growth market for US Software Industries, as the increased computer sales in the United States and other developed countries will increase software demands. But economic growth and industrial development within the BRIC countries offer tremendous prospect to the US Software Industry. For example, China is the world’s second largest market for personal computers reflects a significant market potential (BSA 2012). BRIC countries and other developing countries represents an unique opportunity to sell the well established software products with minimal additional development costs. Also the Software industry is a key example of knowledge production, as the countries around the globe are transitioning towards the knowledge-based economy, software industry will see tremendous growth as these countries will continue to invest heavily in information technology.

7 References

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Analysis of US Software Industry - Part 1

1 Introduction

The Information Technology (IT) industry has experienced immense growth in the last couple of decades. It has changed the working methods in almost all other sectors in the economy and achieved an increasing economic importance. The software industry is a critical sub set within this Information Technology industry.

The United States has been the world leader in the software industry since its inception. The United States is the largest single software market representing total revenues of $100.6 billion in 2010 accounting for more than 40% of global software market revenue of $265.4 billion in the same year (Datamonitor 2011). The largest software companies in the United States are Microsoft, IBM and Oracle. Together they form the top 3 software firms in the world and out of the Top100 software companies in the world, 63 companies are US based (Software Top100 2011). The U.S software firms dominate the worldwide software market such that sixty cents of every dollar spent on software worldwide goes to US-based companies (Holleyman 2011).

2 Background

Originated with the entrepreneurial computer software companies of the 1950s and 1960s, US software sector grew dramatically through the 1970s and 1980s with the rise of personal computer. By the 1990s, internet revolution, there was also an increased demand for large system integrators , which sought to offer more complete solutions to large corporations running large computers. Most successful firms developed specialized capabilities that enabled them to prosper within their sector and by the 21st century software industry has become a market force rivaling that of the computer hardware companies.

Software market consists of customized software and packaged software. Customized software, also known as Business software is designed or modified for a specific end-user like large public agencies or private businesses and frequently installed by the vendor, who may provide extensive pre and after sale technical support. Packaged software are shrink wrapped software products sold vua retail distribution channels. These are also known as Mass Market software with minimal additional technical support.

Softwares products are always delivered within the frame of consultancy. Despite the fact that "packaged software" products more closely resemble a good in their methods of distribution and reproduction Software is classified as a "business service" (Stienmueller 1995). Software companies provide “solutions” which involves some combination of custom developed software, packaged off the- shelf software bundled with hardware products. A sale will include consulting, systems design, systems integration, contract programming and maintenance. Note that, the Software sector includes only the firms whose core business is producing and selling software i.e, their revenue is derived from the selling of software products. Firms like Apple or Sony who develop software products for their own electronic products are not included in this sector. Also not included in this sector are the entertainment software and gaming firms like Electronic Arts or Zynga.

3 Industry Structure

There are several types of businesses within the software industry. According to Campbell- Kelly (2003), a software industry can be classified into three sub-sectors based on their business models:

• Software contractors/consultants
• Producers of customized software products
• Producers of the packaged software products

All the above sub-sectors are dominated by US companies. Within one sub-sector companies compete against each other; outside of these sub-sectors there is hardly any competition because of different markets and capabilities. Each of these sub-sectors has its own business characteristics.

Software contractors/consultants :

Software contractors provide customization, installation, integration and maintenance of other firms' products, along with consulting and other services. They compete on economies of scope, cost estimation and project management. Some of the key players are IBM corporation and Accenture.

Producers of customized software products :

Producers of customized or Business software products target large businesses in retail, banking, manufacturing industries and also various government agencies. They compete on economies of scale, corporate marketing skills and and after sales support. The lead US company in this sub-sectors is Oracle Corporation.

Producers of the packaged software products :

And the producers of packages software products compete on economies of scale, marketing capabilities, and user friendliness. Some of he key players in this sub-sector are Microsoft Corporation, Adobe Systems and Symantec.

Almost all software product firms eventually provide some services and drift towards the hybrid business model. It is easy for software firms to transition from the product business model to the hybrid one because they already have a client base to whom they can market.

3.1 Cost Characteristics

The software industry is a highly competitive industry characterized by rapid technological change and high degree of uncertainty. As the knowledge and skills become outdated quickly, it is absolutely necessary for the firms to employ the latest technologies in their products. As a result, software companies tend to spend huge amounts of money on research and development and equally huge amount marketing them. Business Software Alliance’s publicly traded member companies spent nearly $43 billion on R&D in 2008, equal to 7.1% of their collective revenues (BSA 2010). The Software product development is associated with high fixed cost, but very low marginal costs. Although the software industry's R&D costs and marketing costs are very high, its operating costs are relatively low as the software is reproducible at very low costs relative to the costs of its creation. By producing multiple copies of the same software product at a very low marginal costs, software product firms can gain an economy of scale that enables them to increase revenues without substantially increasing their costs, thereby becoming very profitable within a short period of time. This is one of the reasons why companies like Microsoft and Oracle have billions of dollars in revenue and market capitalization in a relatively short period.

Another peculiar characteristic of the software industry is that software must be supported,

maintained and upgraded. Software companies will typically sign a multi-year support contracts with

its customer to support and maintain the software which they sell. It is not common for the cost of

maintenance to exceed the cost of software, and can be as high as twice or three times the purchase

price over the life of the software. Software firms thus have an established client base who provide it

with a recurring revenue stream from maintenance fees, updates, customization and other services.

Support fees are largely profit, once the product is stable. Since the support revenue stream is based

on multi-year contracts it is a very stable source of income.

3.2 Demand characteristics

The software industry is cyclical, meaning that its earnings track both the ups and downs of the business cycle with their profits benefiting from economic upturns but suffer in a downturn (Sloman, Hinde & Garatt 2010). The software industry follows the business cycle closely because the sector primarily caters to large corporations. The investment decisions of the large firms are susceptible to the global economy,during economic downturn large companies will cut back on their Information Technology spending which software sector is part of. A lack of disposable income in households will also affect sales of personal computers which in turn affects packaged software sales.

The stock prices of the large software companies has followed the broader market index, like S&P 500. When the market was yielding steady returns between 2004 and 2007, the software companies also had a steady growth. During the 2008 recession period, prices in these companies dipped. As financial institutions are by far the largest customer segment for the software industry, the credit crisis impacted software companies. After the initial decline in 2008 and 2009, the software industry is back in the upward.

3.3 Competition

The entry and exit cost for a software company is low. In principle software can be developed in small room with just a personal computer. However it is very difficult for a start-up software company to compete against large and stable software giants. These established firms work in an oligopoly structure where significant barriers come from having already locked-in bulk of the market. For example, Oracle and SAP can be considered an oligopoly in business software segment, whereas Microsoft has a virtual monopoly in personal computer software segment. These large companies create barriers to entry by “Proprietary product technology” and “Locked-In Customers”.

Proprietary product technology :

The successfully software firms differentiate their products by using innovative

technologies and/or techniques. These know-hows are either hard to replicate or are protected

by Intellectual Property and patents secrecy. Patents have a significant effect on competition

as the larger software companies stockpile patents, both as revenue earners, and as a defense

against other companies offering similar technology.

Locked-In Customers: 

It is very expensive and exponentially difficult for customers to switch from one software provider to another software provider. Switching costs’ are the psychological, physical, and economic costs that consumers face in switching between technologies (Hyun & Pae, 2005).These software switching can be so complex and time consuming that switching suppliers is virtually unthinkable. The large software companies with their established brand make it hard for competitors due to their economies of scale and ability to spend more on marketing, to attract and lock-in new customers on multi-year support contracts.

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Case Study: Apple, Inc. Strategy Analysis - Part 2

 

...continued from Part 1

4  Strategy Analysis (2007 – present)

Apple has utilized its unique resources and  core competences to obtain tremendous success over the last five years .Today it has annual revenue in excess of $125 billion compared to $20 billion in end of 2006  and in the span of  5 years between 2007 to 2012 Apple's stock value increased more than 500% from $85 to $542 per share  (wikiinvest-APPL, 2012).

 4.1  Strategic choice

Apple products follow a Focussed differentiation strategy. According to Johnson et al (2008), a focussed differentiating strategy seeks to provide high perceived product value to customers, justifying a price premium and aimed at a niche segment of the market.  Apple has been very successful in creating innovative products targeted at higher income customers who are willing to pay premium price for superior user experience.

  On the surface, it could appear that Apple's competitive advantage is solely due to product differentiation. But on a closer look, Apple's success is not entirely because of its ability to consistently create innovative products. Creating innovative products gives Apple only a temporary advantage as its competitors have imitated and launched their own versions of product in a matter of months.  Apple's success lies in its ability to create a platform around their products that drives and sustains growth.  A platform strategy is one in which third party developers and media companies can sell their contents that runs on Apple's products. 

Apple is unique in that it enters a red ocean, i.e., a highly competitive market and succeeds by changing the market paradigm. Apple combines its 'Product strategy' with a 'Platform strategy' that is free of threats and sustain long term growth. Apple's “Product+Platform” strategy can be summarized as a two phase strategy;

1. Product differentiation focussing on innovation and consumer experience to enter a new market; i.e., Product Strategy.
2. Platform development to build, adopt and then consolidate the platform that is centric to its products to achieve long term growth; i.e. , Platform Strategy.

In the last 5 years the most important products from Apple was the launch of iPhone in 2007 and launch of iPad in 2010. Both of these products were diversification to new industries and today constitutes about 70% of Apple's revenue (Apple, Inc. FY12 10-Q Form Apple).  To understand  Apple's iPhone success and subsequent iPad success, its important to understand what Apple did with iPod+iTunes business.

When iPod was launched it was a very innovative product that made technology easy to use. It was hugely successful among the early adopters  but its long term success was primarily due to iTunes music store. The iTunes music store created a platform for online music downloads and iPod was the perfect companion for this platform. This digital music platform is the reason why the iPod dominats the portable digital player market even today, in spite of its competitors coming up with digital music players that were technologically superior to iPods. For example, Microsoft's 'Zune' music player had color screen and video capabilities even before Apple introduced them in their iterations of iPods. However Microsoft's Zune was not successful because it did not have that convenient music platform like iTunes. By 2007, iTunes had evolved considerably enough that customers were locked-in to this platform due to its convenience and ease of use. As more people buy iPods, more media houses want to sell their content in iTunes and as more entertainment are available on iTunes, consumers are more likely to buy iPods.  This self-reinforcing cycle can sustain and reinforce growth by raising barriers to competitors (Lohr, 2011).  Apple repeated this same  “Product+Platform” strategy with their iPhone and iPad products.

 4.2  iPhone in 2007

In 2007, Apple entered the highly competitive mobile phone market with iPhone. iPhone was a product extension of iPod. The iPhone primarily differentiated itself from other mobile phones by its user interface which was the industry-first multi-touch screen.  From Ansoff’s Product/Market Matrix (A12), iPhone targeted both existing Apple customers and also new customers by diversification to mobile phone market.  

Apple's first movers advantage was short-lived as their competitors like Nokia and Samsung introduced their own version of iPhone-look-feel phones within few months. In 2008, Apple launched “App Store”. The word “apps”, short for applications that run on iPhones was introduced by Apple during the launch of App Store. The App Store allowed third party developers to create application to run on iOS which consumers can download onto their iPhones.  This was the beginning of Apple's mobile platform. While competitors were busy making feature-level comparisons to their products, Apple consolidated its iPhone platform and laid the foundations of a new growth engine that revolutionized mobile phone industry. 

Apple makes 30% commission on all apps revenue. On March 4th 2012, Apple announced that 25 billion Apps were downloaded from its App store (Brian, 2012).  As more 'apps' are available for people to download, Apple's mobile platform gets dominant which in turn sells more iPhones. From Ansoff’s Product/Market Matrix (A8), success of App stores along with iTunes consolidated the existing iPhone market and also developed new market as iPhone customers were introduced to other Apple products like iPods and Mac computers.

 4.3  iPad in 2010

After iPhone, the next major product launch from Apple was the iPad, a tablet computer. Apple introduced iPad in 2010, positioning it between the laptops and smart phones as a companion product in Apple's product lineup.  Apple leveraged the iPhone and iPod designs, and integrated iTunes store and the App store in iPad. iPad was a diversification towards the e-reader market as iPad presented opportunities to the publication and content industry. During the iPad launch Apple also announced “ibook store” which is an extension of its Apps store targeting media publishers. The ibook store launch was accompanied by Apple's partnership announcement with five large book publishers: Penguin Group, Harper Collins, Hachette Book Group, Simon & Schuster and McGraw-Hill. This laid the foundation of a e-reader platform with iPad.

  In January, 2012 Apple consolidated the iPad+iBook platform further by releasing the iBook2, and iBooks author which lets anyone author and create digital books on iPad. The ipad+ibook platform has potential to revolutionize educational sector  by giving teachers and any other authors the ability to create their own interactive books.

 4.4  Product Iterations & Market Expansion (2007-present)

Apple operates a very short product life cycle. Throughout the last five years Apple has continuously  updates product line with innovative features that has kept it one step ahead of its competitors and at the same time consolidating its platform adoption. Popularity of iPod, iPhone and now with iPad has strengthened Apple's brand which in turn is drawing more customers to Apple's Mac computer products. Apple reports that half of all computer sales through its retail channel are to people new to Mac computers, Mac products saw an increase of 21% in 2011 (Apple, Inc., FY12 10-Q Form).

The popularity of iPhone and iPad has penetrated the corporate business market segment which Apple had no presence before the introduction of iPhone. Adoption of iPhone among the corporate users has increased Mac computer sales among the corporate users. Apple introduced Macbook Air in 2008 targeting the corporate uses. Even though Macbook Air sales is relatively small compared to overall Apple products sales, it has seen year over year increase (Apple, Inc., FY12 10-Q Form). 

 5  Conclusion

Apple has built a culture of transforming industries by introducing innovative products. iPad is likely to become another big platform for Apple. With iPad, Apple has created a completely new market, just like they did first with the iPod and then with iPhone. Success of the iPhone, and iPad does not appear to be slowing and should continue into 2012 and beyond. Besides these products, Apple’s biggest competitive advantage is its digital content service business based on iTunes and Apps Store, which no other competitor can replicate in the short-term.  Apple remains promising because of is strong brand combined with the halo effect of iPod, iPhone and iPad products have on its other businesses.

 6  References

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Case Study: Apple, Inc. Strategy Analysis - Part 1

 1  Introduction

Apple, Inc. is a US multinational corporation that needs no introduction.  Apple Inc. with its “Think Differently" motto has been Fortune magazine's  “World's most admired company in the World” for the last 4 consecutive years (Fortune, 2012). On February 28th, 2012, Apple, Inc.'s market value toped $500 billion (Blodget, H, 2012).

'Apple Computers' as it was called prior to 2007 had primarily focused on its core computer business. In 2001, it shifted its strategy by entering the portable digital music player business with the introduction of iPod, and in 2003 entered the music business with the introduction of iTunes music store. According to Apple's FY'07 10-Q, by end of 2006, the iPod & iTunes business contributed to more than half of its revenue. In 2007, “Apple Computer” changed its name to “Apple, Inc.” This paper focuses on Apple, Inc.'s  business strategy in the last five years starting from 2007 to present and throughout this paper 'Apple, Inc.' will be simply referred as 'Apple'.

 2   External Analysis

 Apple competes in the following four industries ;

• Computer Hardware and Software – with 'Mac' line of computers, Mac OS X & iOS
• Portable media devices – iPod, iPad & appleTV
• Smart Phone – iPhone 
• Music, Media and Content Service – iTunes, iBook, App Store and Mac Store

A firm's business strategies are influenced by the forces in its external environment. PESTEL and Porter's five forces framework can be used to analyze the factors influencing the firm's macro-environmental and industry sectors respectively (Johnson et al, 2008, p.55). From Apple's PESTEL Analysis (A1) and Porter's Five Forces Analysis (A2), the key external drivers of change affecting Apple are ;

Political Threat

Apple manufactures and assembles all of its products in Asia (Apple, Inc. FY12 10-Q Form , p36). Hence it is dependent on political stability in these countries. Any political conflict between these countries and the US can have a negative effect on Apple's operations.

Legal Threat

Apple is a successful company and with success comes persistent threat of litigation from any number of sources, e.g., Apple had legal disputes with Beatles on Apple trademark which was settled in late 2006. Currently Apple is fighting Antitrust lawsuit filed against its iTunes download business (Apple, Inc. FY12 10-Q, p33)

Economic Threat

Apple is subject to global economic cycles, like inflation, GDP, interest rates and levels of disposable income. Apple products are considered premium products and puts Apple in disadvantage during economic downturns as consumers are weary of big-ticket purchases like computers, iPhones or iPads. 

Apple is a multinational company maintaining huge cash reserves which is not fully repatriated. Global interest rate fluctuation will have impact on Apple's income as the company earns interest on its cash reserves. Fluctuation in US dollar exchange rate will have significant effect on its profits as more than half of its revenue coming from outside US (Apple, Inc. FY12 10-Q Form, p18). 

Threats from Competitors 

  Apple's competitors are established companies with substantial resources. Any advantage that Apple gains by product differentiation is short lived as competitors have copied them immediately, e.g., mobile phone companies like Samsung, Nokia, Motorola released their version of touch screen smart phones and tablet computers within months after the introduction of iPhone & iPad.   

Threat of  New Entrants

Even though cost can be a significant barrier to entry, some of potential competitors with substantial resources have diversified into Apple's music and smartphone businesses. New entrants to music industry like Amazon, started their own online music business. Microsoft launched the 'Zune' music player to compete against iPod. Google entered smartphone business with Android based phones to compete  against  iPhone & iOS.

 3  Internal Analysis 

In spite of all four of these industries being highly competitive, we can see from Apple's SWOT analysis (A3), that they are all fast growing industries with huge potential. Apple has been able to successfully exploit these opportunities by entering and then creating a sustainable market for its products.

 3.1  Competitive Advantage

A firm achieves competitive advantage when it has one or more core competencies which is a combination of unique resources and capabilities (Johnson et al, 2011, p.97). From Porter’s value chain analysis (A4) and SWOT analysis (A3)  Apple's success factors can be attributed to its unique Resources and capabilities of ;

Leadership and Talented Employees

Even after Steve Job's death, who was the iconic leader of the company, Apple’s executive  management team, that was hand picked and groomed by Steve Jobs are embedded with  “Think Different” philosophy (Lee, 2011).   Tim Cook, the current CEO, took over day-to-day CEO duties from Steve Jobs since his first medical leave of absence back in 2006. Apple under the leadership of Tim Cook, has done extremely well. Apple recruits the best talents available and Apple has one of the best design team headed by Chief designer Jonathan Ive.

Cash

As of December 31, 2011 Apple has about $92 billion in cash (Apple, Inc. FY12 10-Q Form). This gives the company strategic advantage as Apple can pay in cash upfront to its suppliers and lock out crucial supply parts from the suppliers years in advance (Wingfield, 2011). Having huge cash resources protects Apple in fighting legal battles against it and also aggressively pursue legal actions on any firm that steals Apple's intellectual property. 

Brand

Apple is the world's valuable brand valued at $153 billion (Culpam, 2011). Apple brand stands for innovation and design and has a cult like following. 

Culture of Innovation

From Apple's culture web analysis (A7), an innovation culture has permeated throughout Apple's history by Steve Job's “Think Different” philosophy. This has become a self enforcing and self sustaining culture. Apple's culture of innovation is not just limited to products development, but also to its business model, innovative marketing and captivating communications. It not only boosts sales, but enhances the brand value too. This culture of innovation gives Apple a strategic advantage.

Technology with Integrated Value Chain

Apple puts consumer experience more than the technical prowess of the product. Apple is the only vertically integrated company and thus can manage all aspects of the consumer experience. Vertical integration refers to owning all parts of the product value chain. Apple designs and develops its own Hardware and Software platforms for its products, content service via iTunes and App stores, uses its own sales and service via Apple Retail store and online store. By controlling the whole value chain, Apple is in position to extract all the value from it, and also provide an outstanding value in all aspects of consumer experience. This gives Apple a strategic advantage. 

 3.2  Sustainable Competitive Advantage

An organization can attain sustainable competitive advantage if its unique resources and core competencies are rare, inimitable, valued by customers and embedded within its organization (Johnson et al, 2008, p107). Analyzing Apple's Unique Resources and Core Competencies (A5) using VRIO framework (A6) we can conclude that the above mentioned Unique resources and core competencies give Apple a sustained competitive advantage.

   ... continued in Part 2

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Managing episodic and continuous change

Introduction

Organizational change is the transitioning of an organization from its current state

towards a desired future state (Palmer, Dunfin & Akin, 2006). Weick & quinn (1999) in their article titled “ Organizational Change and Development“ discuss organizational change as either episodic or continuous. This distinction between episodic organizational change and continuous organizational change provides different ways to understand change and present different implications for implementing organizational change. Episodic organizational change is systems based macro perspective of organizational change where change is considered rare and radical whereas continuous organizational change is a process based micro perspective where change is considered ongoing or constant.

Weick & Quinn (1999) argue that the same configuration of organizational design and capabilities is best for managing both episodic and continuous forms of change. The purpose of this essay is to examine if this statement can be supported or not. In order to do this this essay will analyze and understand the processes of episodic and continuous change from two perspectives;

• Organization Readiness to Change: Is a self-organizing and continuously adaptable organization ready for any kind of change?
• Link between episodic and continuous change: Are episodic and continuous change mutually exclusive, or is there a link between these two phenomenon?

This essay will argue that the organization which is continuously changing is a “change ready” organization and therefore ready for episodic change as well, not exclusively continuous change. This essay will try to show that there is a strong link between episodic organizational change and continuous organizational change. And this is one of the reasons why the same approach works for managing both continuous and episodic changes.

Background

Episodic Organizational Change

Episodic organizational change is a systems-based approach to change. Organizations are viewed as stable and inertial and change is something that is rare. When change generally occurs in such organization, it is a planned and deliberate approach. The underlying assumption in an episodic organizational change perspective is that the organization is in a state of equilibrium, therefore must be acted upon to be changed, and then must be returned to a new state of equilibrium. Changes that are episodic are consistent with organizations that go through a planned, discontinuous and infrequent organizational change (Weick & Quinn, 1999).

Episodic change is a macro-level view of an the organization undergoing a change in its entirety . When viewed at a macro-level, change is seen as an occasional interruption and disturbance in a stable environment.with key concepts being “inertia, deep structure of interrelated parts, replacement and substitution, discontinuity, revolution” (Weick & Quinn, 1999, p. 366).

Organizational Inertia or stability or equilibrium are often created due to past organizational success and conservative organizational culture. Thus a change that is often triggered by an external event after a period of stability tends to be to be dramatic. In an episodic organizational change, the focus is on upper management or skip-level management to direct organizations with a clear vision, mission and goals to create episodic change. The role of a leader is central to a planned episodic change to develop and communicate a vision, fixed objectives and embed new approaches in the organizational culture (Kotter, 1996).

Continuous Organizational Change

Continuous organizational change is a process-based approach to change and considered as “ongoing, evolving and cumulative” (Weick & Quinn, 1999, p. 375). The underlying assumption is that

change happens all the time with small continuous adjustments and culminate to create substantial change” (Weick & Quinn, 1999, p. 375). Such organizations are viewed as self-organizing with continuous change as normal with no return to equilibrium or state of stability.

Continuous change is driven by alertness and the inability of organizations to remain stable ( Weick & Quinn, 1999, p.379). Continuous organizational change views change at a micro-level. Constant changes to organizational processes and practice are considered part of the organizational culture. When viewed from the process-related perspective, changing patterns in micro-level processes, act and amplify to reveal emerging change patterns. Key concepts are “recurrent interactions, shifting task authority, response repertoires, emergent patterns, improvisation, translation, and learning” (Weick & Quinn, 1999, p. 366).

The role of the management in continuous organizational change is very different from an episodic change perspective in that it is viewed from a micro-level, with the leadership role as a participative process with continually changing, and co-constructed organizational goals that result in emerging patterns of change.

Organizational Readiness to change

Organizations will face changes due to various forces surrounding their environment. These forces can be both internal or external to the organization. To successfully lead any kind of change, whether in a micro-level or macro-level, it is critical that the organization must be ready to change. Change readiness is one of the major components for successfully leading change (Palmer, Dunfin & Akin, 2006.p128).

According to Weick and Quinn (1999), an episodic change followed Lewin’s three-stage change model. According to Lewin's three-stage change model, a change process will follow stages of

“Unfreezing” , “Change” and “Refreezing” (Palmer, Dunford & Akin, 2006). The unfreezing stage involves moving an organization from its current state of inertia to a state where it is ready for change. This need to unfreeze is identified in Lewin's change model because human behavior is based on a stable situation with forces restraining change. During the unfreezing stage, a state of “change readiness” is created by unlearning old behaviors and focusing on the creating a motivation to change . This idea of unfreezing an organization is also behind the first six steps in Kotter’s 8-step change strategy. In Kotter's eight steps for organizational change, the management need to create an organization comprising of a group of individuals who can work together to enact change, with conscious vision that will guide the change effort. Once this is created, the organization will be ready for change. According to Isabella's (1990) process model of how change affects individuals during the implementation of organizational change, the four stages of “anticipation”,”confirmation”, “culmination” and “aftermath” describes the individual’s experiences with change. The first two stages of “anticipation”, in which individuals interpret and absorb information about the change into a perceived reality and “confirmation” stage, where perceptions and assumptions are confirmed and ingrained, are the clearest aspect to Lewin's “unfreezing” stage.

These traditional change models of Lewin, Kotter and Isabella uses a process framework for

understanding the progression of an organizational change. Each of the models presented above suggest that individuals in an organization are barriers to change because their work behaviors are fixed, requiring change models to initiate with an 'unfreeze' of the status quo before any kind of change can proceed.

Organizational readiness for change is influenced by ; (a) capacity and self-efficacy of employees to change, (b) organization appropriateness for managing change (c) management support for change . Therefore preparing or readying an Organization for change can be viewed from the perspective of an employee's commitment to change and organizational culture to support it.

• Employee commitment to Change;

Any type of organizational change involves changes to an individual's roles and responsibilities and it is natural that individuals will have reaction to these changes. Employee resistance to change and perceptions of the change process are important drivers of change success (Palmer, Dunfin & Akin, 2006. p146). Hence an examination of the human side of change is needed for the success of change initiatives. To create change, change initiative must appeal to employees cognitively, affectively, and behaviorally. For the change to take place employees must be prepared to change, therefore employee commitment to change is important for a successful change implementation.

Employees usually resist change for a multitude of reasons as an individual's predisposition toward change is personal. Negative reactions to change relate to aspects of loss like loss of job or control, fear of unknown, combined with a climate of mistrust and disruption. This is typical in a static organization where stability is the norm. When an organization is static and process driven, then any deviation from the status quo cause these negative reactions. To overcome these negative reactions, management have to support employees going through major transitions in the workplace by considering the psychological and behavioral roots of employee. According to Scott and Jaffe's model of resistance cycle people go through four phases of response to change, i.e., denial, resistance, exploration, and commitment (Palmer, Dunford & Akin, 2006). Management must communicate the objective and rationale behind the change initiative and make the individuals understand consequences to the organization if the change is not achieved. As individuals evaluate and respond to change initiatives, then change implementation can gain momentum (Isabella 1990). By making employees view the change initiatives from a perspective of an organizational strategy, will change the terms of employees' role and responsibilities towards the organization and management can secure commitments based on these revised objectives that aligns with organizational change initiatives.

Now, a flexible self-organizing and adaptable organization which considerers change as part of the routine is already at a stage where the employees understand that change really is the only constant and are thus always prepared and committed for a new change as soon as any single change is completed. Employees in a continuously changing environment would have developed change-related self-efficacy, and when large episodic changes happen they are mentally prepared and less frightened.

• Organizational Culture of Change;

Even-though employee's reaction to change is individual and personal, they are affected by the organizational climate they are constrained within. Most change models will stumble when they face organizational designs and management practices that are inherently anti-change (Worley & Lawler III, 2006). Factors significantly related to readiness for organizational change are management support, flexible policies, structures and behaviors. However, all these are directly linked to the concept of the culture of an organization and any changes which are sought will have to be effected within the constraints of the existing culture (Worley & Lawler III, 2006). Therefore effectiveness of change efforts is largely determined by the organizational culture.

The most effective way to change individual behavior, is to put individuals in an organizational culture which imposes new roles and responsibilities on them that encourages and supports change Organizational culture is more complex and hard to change as the culture is based on its members shared values and norms built up over the life of the organization. Until new behaviors and beliefs are rooted into the norms and shared values of the organization , they are subject to degradation as soon as the pressure for change is removed (Kotter, 1995). Thus the role of culture is significant in influencing organizational change . The critical task for management here is to produce and maintain an organizational culture that is able to secure the basis for the next subsequent periods of change.

In a traditional static organization, institutionalizing a new organization culture will take a long time as employees need time to adapt or cope with the change. The episodic change approach in a traditional organization setting assumes that all individuals involved in a change initiatives are willing and interested in implementing it. This assumption clearly ignores organizational politics and conflict or assumes that these can be easily identified and resolved. On the other hand in a continuously changing organization, continuous change can happen only if it is ingrained in the firm's culture, this may be a result of a deep rooted culture at all levels of the organization to continuously change. This kind of continuous change becomes the part of every-day life in the organization and manifests typically as as a change ready organizational culture. As the organization faces new realities in a changing environment, they will be able to adjust and develop an adaptive capacity into the organizational culture. This culture to adapt to continuous change is equally supportive when the organization is faced with an episodic change.Therefore, the culture of change acceptance and adaptability is an important driving force for not only continuous changes but also for episodic change as well.

Many of the principles of continuous change, i.e, embedding the flexibility to accommodate everyday contingencies, opportunities and consequences that punctuate organizational equilibrium are also needed when faced with an one-off episodic change. Brown and Eisenhardt (1997), in their study of the computer industry found that the continuous change organization had organizational structures that was flexible enough to allow various scale of change to occur and be successful, whereas organization with rigid or semi-rigid structures prevented or inhibited change. This is not limited to computer industry where innovation is vital. Tucker, A. L. and Edmondson, A. C. (2003), in their study of the hospitals showed that improvements never took place due to rigid management polices and organizational structures that prevented nurses to inform or escalate the process failures they encounter to the management, thus preventing changes from taking place . When an organization is rigid the process of change becomes too dependent on senior management or skip-level managers, who in might not have a full understanding of the timing and consequences of their decisions at the micro-level. Whereas by developing sensitivity to the change processes continuously at work within the organization, management evaluate and influence change and develop organizations that can readily adapt in a radical change.

Episodic change is driven by inertia and the inability of organizations to keep up, while continuous change is driven by alertness and the inability of organizations to remain stable (Weick & Quinn, 1999, p.379). Rather than pushing for change, organizations that build adaptive capacity has the ability to pull for change by making change, the norm within their organizations. Such organizations are truly change ready due to the organizational culture and employee commitment .

Linking Episodic change to Continuous Change

Continuous change and episodic change are not necessarily mutually exclusive, rather they both provide different views of the same phenomenon. Tsoukas and Chia (2002) suggest that the continuous change gives a more comprehensive understanding of how change is actually

“accomplished on the ground.” Episodic change provides a macro level perspective of organizational change whereas continuous change provides a micro-level perspective. The macro-level view provides measurable milestones, while the micro-level views these changes as they happen (Tsoukas & Chia, 2002).This distinction between the micro and macro levels highlights one of the limitations in perceiving episodic and continuous change as mutually exclusive. From the macro perspective, an observer might see transformational changes in strategy or operations. Whereas, when observing the same transformations from the micro level might show how dynamically interacting individuals influence these changes in strategy and operations as a series of evolutionary stages.

Organizational change is present both at an operational and strategic level.

• Operational-level Change

For macro-level operational episodic change, a CEO might alter the organizational chart, redefine operational processes to guide organizational behavior. However, to achieve this macro-level change the CEO will have to dig into the micro-level, so that he can identify and understand the deeply held values, and assumptions that may be held by the lower-level organization and its employees. This shows that organizational change is not just about changing macro-level artifacts, like charts and processes; but that it also involves digging into the micro-level phenomena that influence macro-level operational changes. For example, study by Feldman (2000) and cited by Tsoukas & Chia (2002) shows the pattern of the US university move-in routine which transformed from being a stable task of getting the students to simply move-in into their halls of residence to become a more complex coordination task involving the athletic department on football schedules, local city officials to manage traffic jams and accommodating the vendors into the move-in process .

• Strategic-level Change:

One can view the same from a strategic change perspective also. Strategy is not always formulated by top management as strategies can emerge from anywhere inside an organization. Emergent strategies which emerges from the micro-level interaction of individual throughout the organization . These strategies become organizational when the patterns developed through emergent processes are adopted by the organization as a whole . Leaders and managers at the micro-level who understand the external environment and the internal capabilities of the organization often see important trends that call for organization change before senior management does. These strategic changes that arise at the micro-level gets shared, filters upwards and over time can create organization transforming changes. For Example, Brown and Eisenhardt (1997), in their study of the computer industry found the companies like cruising, midas and titan which were were successful due to development of product portfolios by anticipating and react to the future. This study showed a link between successful product development portfolios and set of organizational structures and processes that were related to continuous change .

Another limitation of looking change as a purely episodic process is that the “freezing” stage of Lewin's model represents a new equilibrium . This new organizational equilibrium must be altered again whenever the organization faces new threats and opportunities. Throughout history, organizations have viewed change through the lens of a stable business environment—an environment in which routine and order were dominant constructs that framed business reality. Operating in an environment thought to be reliable, leaders and organizational members acted with a sense of security and certainty (Tsoukas & Chia, 2002). However today’s competitive environment is hardly static. Many of organizational paradigms and strategic thinking which assumes organization to be static were developed in the 1970swhen speed and flexibility were less relevant to organizational success than they are for con-temporary firms ( Brown and Eisenhardt 1997). In a world that is constantly changing, an organization's design must support the idea that the implementation and re-implementation of a strategy is a continuous process (Worley & Lawler III ,2006). One of the many reasons for change is that the organization needs to be in line with the changing environment in which it operates. 
As we know the environment changes continuously. If the organization does not adapt itself to the continuously changing environment there will develop a gap between the organization and its environment. If an organization tries to keep up with changing environment assuming change as an episodic process , then the high frequency of periodic episodic changes would simply not be sustainable. So adapting to continuous change is the only way to survive . Change has become a normal condition of organizational life (Tsoukas and Chia .2002 p.567) .

Further, if change is considered as being constant, then it invalidates the assumption that a change can be episodic as episodic change creates a new status quo. From the micro-level perspective this new status quo is an illusion because change is constant. When we view macro-level change as leading to stability, we are merely ignoring the subtle but continuous micro-level changes (Tsoukas & Chia, 2002) Acccording to Beer and Nohria (2000) cited by Tsoukas and Chia (2002), approach that gives priority to stability and treats change as merely a secondary part is being pragmatic. Change programs that are informed by that view often do not produce change. From the study of the computer industry conducted by Brown and Eisenhardt (1997), we can see that that the companies had developed ability to sustain continuous change by an effective combination of flexibility and preparation for multiple change scenarios. This organizational model of self-organization enable firms to prosper not only in continuous small changes but also in an era of rapid transformational change.

From this perspective, episodic change is a culmination of many continuous changes as an organization is constantly changing and multiply toward a pattern of adaption and evolution.

Discussion and Conclusion

Weick & Quinn (1999) statement that “the same configuration of organizational design and capabilities is best for managing both episodic and continuous forms of change” is certainly well supported.

It is widely believed that for the completion of any organizational change, the change readiness is fundamental to its success. The pre-requisite for any organizational change initiative is the need to advance organizations to the point of the change readiness. Managing organizational change readiness not only requires restructuring of organizational systems and processes but also It requires managing the employee reactions that accompany any organizational change. For the smooth implementation of change, the management should ready the organization to change by creating a culture of change acceptance.However, a number of traditional organizational design tend to discourage and not encourage change. Therefore, when such organization are encountered with a need of a episodic change, as the first step, they are compelled to transform themselves into organizations that are "ready to change". In relation to continuously changing organization, one thing that we cannot ignore is its agility and capacity to embrace change. A continuously changing organization may seem to be a perfect candidate for an unplanned change . Hence a flexible, self-organizing and adaptable organization who consider change as constant will do well during continuous change as well as episodic changes due to their change readiness.

Also, episodic change and continuous changes cannot be considered as mutually exclusive. Although only transformational changes characterized by episodic change is able to push organizations into the next growth stage, evolutionary change characterized by small continuous changes is vital for providing the base for any kind of transformational change. It is therefore doubtful that without appropriate evolutionary changes there is a base for the support and facilitation for the culminating transformational change . As a result, one can see that large organizational transformations are accomplished via continuous change .

To survive in today's rapidly changing environment, organizations have to develop an ability to continuously change. Thus the long-term corporate strategy to keep up with the fast-moving pace of change relies on flexible organizational structures, culture and employee commitment to continuously adapt to these small evolutionary changes, probing for opportunities which can lead to a transformational change. Both small and large organizational changes are becoming the norm within organizations. In other words, successful strategy is about managing continuous change.This does not mean the end of the occasional episodic transformations compelled purely by external forces like political crisis or an acquisition for example. However, one cannot view these two changes in isolation. Episodic change theory provides a definable and measurable processes for driving change at the macro level of the organization, whereas continuous change theory provides an understanding of the inherent dynamic processes that effect change at the macro level. Linking both perspectives provides the organization with a more complete picture of the same phenomena, not as mutually exclusive.

References

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