306 Int. J. Business Environment, Vol. 4, No. 4, 2011

Copyright © 2011 Inderscience Enterprises Ltd.

Organisational identity and the business environment: the strategic connection

John C. Camillus Katz Graduate School of Business, University of Pittsburgh, 338 Mervis Hall, Pittsburgh, PA 15260, USA E-mail: camillus@katz.pitt.edu

Abstract: In fast changing business environments, the domains in which organisations function often transform causing competitive strategies to become obsolete and requiring that the organisations’ missions evolve. Strategies and missions consequently are shifting and ephemeral bases for defining organisations and their relevant business environments. A potentially more enduring and evocative basis for defining organisations and their relevant business environment is their identity. The articles in this special issue focus on the development, composition and evolution of organisations’ identities, the interaction of their identities with changing business environments, and the correspondence of these dynamics with business strategies and organisational capabilities.

Keywords: aspirations; business domain; business environment; business strategy; core competency; dynamic capabilities; mission; organisational capability; organisational identity.

Reference to this paper should be made as follows: Camillus, J.C. (2011) ‘Organisational identity and the business environment: the strategic connection’, Int. J. Business Environment, Vol. 4, No. 4, pp.306–314.

Biographical notes: John C. Camillus has held the Donald R. Beall Endowed Chair in Strategic Management at the Katz Graduate School of Business since 1991. He received his Doctoral degree in Business Administration from Harvard University, his Master’s in Management from the Indian Institute of Management, Ahmedabad and his Bachelor’s in Mechanical Engineering from the Indian Institute of Technology, Madras.

1 Introduction

Strategy as the construct that links organisations with their environments (Andrews, 1971) has evolved over time. This evolution has been driven by the increasing dynamism of the business context (D’Aveni, 1994) and the growing complexity (Camillus, 2008) and increasing uncertainty (Courtney et al., 1997) that characterise strategic issues. The consequences of these developments are substantial. The ways in which organisations are defined, business environments are viewed and strategy itself understood need to be refined.

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Definitions of the organisation, managerial perceptions of business environments and the content of strategy can evolve in response to these developments in a variety of ways. This and the other papers in this special issue argue that the direction of evolution of:

1 the organisational definition

2 managerial perceptions and choices of the relevant business environment

3 the focus of strategic decision making can all be effectively guided by utilising the construct of ‘identity’.

2 The nature and importance of organisational identity

Depending on the disciplinary perspective adopted, organisations can be defined in very different ways. Traditionally, in the strategy domain, organisations have been defined in terms of their structure (Chandler, 1962; Rumelt, 1974) and the boundaries set by their activities and the interdependence of their activities (Thompson, 1967) or transaction costs (Williamson, 1981). Another approach to defining organisations is to articulate their missions or concept of business (Abell, 1980). These traditional approaches to defining organisations in ways that are useful to inform strategic decision making are becoming less constructive and meaningful in light of developments in recent years.

For instance, organisational structures are no longer viewed as long-standing choices. The enduring character of organisational structures is implicit in traditional literature such as Greiner’s (1972) framework. Today, organisations such as Honeywell and Royal Dutch Shell view their structures as variables to be manipulated in the search for higher performance (APQC, 1999). Mills (1991) offers a novel alternative of organisation structures, cluster organisations, which are designed to be flexible and dynamic.

Not only are structures and boundaries of organisations transient, but recent experience offers dramatic evidence of the changing character of organisational missions or concepts of business. IBM for instance is no longer a mainframe computer company focusing primarily on the USA but is now a global consulting company which has given up even the personal computer business that followed its focus on mainframes. PPG Industries which began as a glass manufacturer in the USA has long given up its original name of ‘Pittsburgh Plate Glass’. PPG’s automotive replacement glass business redefined itself as a ‘logistics’ company that also manufactured glass, abandoning its decades-old concept of business as a ‘low-cost manufacturer’ of replacement glass for automobiles. PPG’s current primary source of profits is its global architectural and automotive coatings business. The coatings business now overshadows not only the original glass business but also the chemicals business, which all glass companies naturally get into as an offshoot of the need to control their supplies of raw materials for glass manufacture. USX, for a period, became dominantly an oil company despite still being the largest steel producer in the USA.

Strategists would certainly benefit from a stable organisational definition, without which strategies would be ephemeral. It would appear to be desirable to identify what is core, unique and lasting about an organisation in order to provide a firm and durable

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foundation for strategy development. Albert and Whetten (1985) offered such a ‘central, distinctive and enduring’ concept, namely that of ‘identity’. The concept of organisational identity has gained considerable traction of late (Lok, 2010; Nag et al., 2007; Santos and Eisenhardt, 2005). For instance, Livengood and Reger (2010) posit that organisational identity has great practical significance and affects managerial perceptions and decisions about the domain in which the business operates.

Three elements of organisations have been proposed as central, distinctive and enduring. These three elements are:

1 the values embraced by the organisation

2 the competencies it possesses (Prahalad and Hamel, 1990)

3 the aspirations that are espoused (Cyert and March, 1963; Camillus, 2008).

I propose that these three central, distinctive and enduring elements constitute the essence of an organisation’s identity.

The fact that values are the raison d’être of firms and of sublime importance is evidenced by the assertion that firms are founded on a ‘logic of values’ [Freeman et al., (2007), p.6]. The importance and lasting nature of competencies has been brought home by the growing emphasis on the resource-based view of the organisation (Barney, 1991) and the compelling concept of core competency (Prahalad and Hamel, 1990). Similarly, the importance of aspirations and their impact on performance has long been recognised (Cyert and March, 1963).

The connections that values, competencies and aspirations have with strategy are apodictic. There are clear choices to be made in each of these elements of identity which profoundly impact strategy. For instance, in the case of values, choices need to be made about the relative importance of shareholders, customers and employees (Simons, 2010). Simons (2010) suggests that the relative importance to be given to any one of these three stakeholders is a matter of choice on the part of the key decision maker. This choice has a major impact on the organisation’s strategy and performance. For instance, it has been proposed and demonstrated that a focus on employees leads to both higher profits and greater sustainability (Nayar, 2010; Pfeffer, 2010). This focus on employees is significantly based on the understanding that much of the knowledge, in particular the tacit knowledge, on which organisational competencies are based reside in people rather than in manuals or databases that incorporate codified explicit knowledge. Pfeffer (2010) indeed goes further and derives support for his recommended focus on employees by describing the extreme physical and emotional toll of layoffs and downsizing in search of profits.

Cyert and March (1963) have asserted that a higher degree of stretch or reach in an organisation’s aspirations can motivate a more concerted search for innovative alternatives, hence affecting the organisation’s strategy. Also, an organisation’s aspirations tend to encompass goals beyond profits following from the recognition of the organisation’s responsibility toward multiple stakeholders articulated by Freeman et al. (2007). Khurana (2007) makes a powerful argument that giving primacy if not sole attention to shareholder value delegitimises management as a profession. The ‘balanced scorecard’ (Kaplan and Norton, 1996) that has achieved wide recognition is based on the understanding that goals other than just financial performance need to be addressed if an organisation is to achieve economic sustainability. These additional goals will certainly colour the organisation’s strategy.

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3 Organisational identity and the business environment

Strategy is influenced by the organisation’s identity. And strategy is the construct that harmonises the organisation and the environment. It follows that the organisation’s strategy links organisational identity and the environment. There are other connections between identity and the environment. The articles in this issue, cited below, describe some of these connections and explore the dynamic interactions between organisational identity and the business environment.

In this issue, Few develops a framework of competitor identification that adds organisational identity to traditionally employed factors such as market commonality and competence similarity. Competitor identification, a critically important process that defines the organisation’s business environment, is presented as a sensemaking process that is influenced by organisational identity. Dhalla describes another strong link between organisational identity and the environment. The link between organisational identity and the institutional component of the business environment is examined through the lens of Corporate Social Responsibility, suggesting the need for congruence between identity, image and reputation.

Ketola offers a longitudinal view of the development and establishment of organisational identity for a metal company and the interaction of organisational identity with the business environment. Ketola’s construct of organisational identity is based on approaches derived from models of identity development and crisis responses in individuals. The case study suggests that organisational identities may be stable and have a therapeutic effect on the organisational culture and strategy. However, Ketola’s case study also demonstrates the impact of conscious and intended processes and the influence of environmental crises on the evolution of organisational identity. This raises challenging questions and possibilities regarding the dynamic development of organisational capabilities and strategies.

Along these lines, Lipinski, Walsh and Crothers propose a symbiosis of identity and environment in their exploration of brand communities and their contribution to organisation’s perceptions of their business environment and their market orientation. Madhavan and Iriyama take a global and timely view of the impact of international communities, knowledge transfer and networks on organisational identities. Their observations on the merging of individual identities and organisational identities add richness and complexity to the organisation’s perception of the business environment and the possibilities of strategy.

4 Sustainability strategies, identity and the business environment

The economic sustainability of organisations is challenged by the uncertainty and complexity characterising the changing business environment faced by organisations today. Earlier in this paper it was argued that the ever-changing domains, boundaries, missions, strategies and structures of organisations, caused in part by the changing business environment necessitate the development and use of the organisation’s identity.

Growth is an aspiration that is universally held by businesses with the possible exception of a few closely-held, relatively-small organisations (Charan, 2004). Cost-reduction strategies can increase profits but often sacrifice growth. Increases in market share and growth can be achieved in some situations by sacrificing profits. A

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major strategic challenge is to achieve both profits and growth. Organisational identity is a meaningful touchstone to employ in evaluating strategies that focus on long-term economic sustainability for three reasons:

1 the unreliability of profit projections that are the estimated results of new strategies

2 the identity statement is a driver of value creation

3 the tension between organisational performance and organisational transformation; with a performance focus required to respond to current realities and expectations, and a transformation focus dictated by the often unpredictable but certainly changing business environment.

The unreliability of profit projections is a consequence of inevitable uncertainties and of the projections being based on accounting numbers. Accounting numbers and profits are not naturally aligned with economic numbers and profits. Accounting numbers recognise historic costs and are based on rules such as those for capitalising expenditures and depreciating and amortising tangible and intangible assets. Economic numbers recognise opportunity costs and are based on the reality of rent-earning capability. The major shortcomings of accounting profits have been discussed (Dearden, 1968, 1969) in detail for close to half a century.

Projecting profits in the context of the kinds of uncertainties (Courtney et al., 1997) that businesses face today is a difficult and questionable exercise. The many assumptions that are made, the variety of possible futures that could be encountered, the potential for manipulation and the difficulty of determining cause-effect relationships make projections of profit quite suspect. Given the unreliability of profit projections, the alignment of the strategic alternatives with the values, competencies and aspirations articulated and espoused in the identity statement is an affirmation of the likely sustainability of the strategy.

The identity statement is a driver of value creation because the alignment of new strategies with the values espoused by the organisation can, in many cases, be argued to possess intrinsic economic advantage. There is an increasing recognition that values that embrace considerations such as:

• integrity (Becker, 2009)

• safety (Oxenburgh et al., 2004)

• quality (Levine and Toffel, 2010)

• environmental sustainability (Esty and Winston, 2006; Klassen and McLaughlin, 1996; O’Keefe, 2010; Russo and Fouts, 1997; Siegel, 2009)

• diversity (Herring, 2009)

• gender equality (Campbell and Minguez-Vera, 2008; Sequino, 2000),

can engender dividends for the bottom line if they are employed to assess the relative attractiveness of strategic alternatives.

Successful companies such as Alcoa affirm safety as their unquestioned and primary strategic consideration. Ford, the only major US automobile company that did not undergo bankruptcy or receive a government bailout in the recent recession, not only

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gives importance to safety but also describes quality as ‘Job 1’. Walmart has profited immensely from its commitment to environmental sustainability. Ernst and Young explicitly recognises multicultural diversity as a business imperative that both attracts and serves clients. Michael Jensen, the doyen of finance professors in the 1990s posits a link between integrity and financial performance. According to him, “integrity is a necessary condition for maximum performance” [Christensen, (2009), p.18]. These corporate stances and statements are not just public-relations-oriented gestures but are accepted and working criteria that affect both strategic and operational decisions and practices.

The tension between organisational performance and organisational transformation can be meaningfully resolved by a well-articulated organisational identity. There is a potential conflict between enhanced and efficient organisational performance focusing on current realities on the one hand, and the organisational transformation dictated by the changing business environment. Performance and transformation require different skills and perspectives. Performance enhancement requires single-loop learning while transformation requires double-loop learning (Argyris, 1992).

This complex challenge is also reflected in the aspirations to achieve both profits and growth (Charan, 2004). Growth is an aspiration that is universally held by businesses, with the possible exception of a few closely-held, relatively small organisations. Cost-reduction strategies can increase profits but often sacrifice growth. Increases in market share and growth can be achieved in some situations by sacrificing profits. A major strategic challenge is to achieve both profits and growth.

In order to achieve both profits and growth it is necessary for organisations to introduce new products, enter new markets, embrace disruptive technologies or develop new business models. How to meet the demands of innovation and transformation and simultaneously respond to the pressures for increasing efficiency in existing operations is the issue. Chakravarthy and Lorange (2008, p.13) evocatively described this paradoxical task as one of “protecting and extending the current core business of the firm and transforming the firm in search of opportunities and capabilities that are distant from the core”.

Extending the core, commercialising disruptive technologies and functioning in new domains are likely to require the development or acquisition of new capabilities and also require a rethinking of aspirations. In the context of such quantum changes the organisation’s values may be the only beacon or touchstone that may apply to, guide and transcend transformational change.

Transformation compels a change in both the organisation’s core – its identity – and in the domain– the business environment – in which it operates. While a symbiotic, in-phase, simultaneous change in identity and environment may be the desired ideal, what may be necessary is a recursive, experimental approach that combines the internal, reflective processes described in this issue by Ketola and the responsiveness to crises and external developments described by Lipinski, Walsh and Crothers and by Madhavan and Iriyama.

Transformation may involve both:

1 entering new domains

2 embracing disruptive changes in business models or technology.

GE is an iconic example (Immelt et al., 2009) of an organisation consciously and courageously choosing to change:

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• the domains in which it operates (focusing on growth (Wilson and Purushothaman, 2003) in the emerging economies)

• the technologies it employs (disruptive technologies stimulated by price point pressures in the low income but large segments (Prahalad, 2006) of emerging markets)

• elements of its identity (shifting its competencies away from glocalisation to reverse innovation and its aspirations away from market share in the developed economies (Ohmae, 1985) to responsiveness to basic needs (Prahalad and Hammond, 2002) of developing economies such as water, energy and infrastructure).

The symbiotic transformation of its business environment and its identity is GE’s goal.

5 Conclusions

To provide some degree of constancy and steadiness in strategic decision making in the context of changing and turbulent environments, organisations need to define themselves employing enduring constructs such as identity to replace transient concepts of businesses, changing boundaries and shifting organisational structures. Identities which are based on values that guide strategy selection, which recognise existing and needed core competencies, and which express ambitious aspirations, provide a basis for both social and economic sustainability.

The strategic challenge posed by increasing uncertainty in the business environment and the imperative of seeking both profit and growth encountered by organisations in today’s world, demand that organisations evolve their identities and change their business environments, while maintaining a symbiotic relationship between identity and environment. In response to this challenge, the papers in this issue explore the constructs of identity and environment and the processes by which dynamic harmony between the two may be realised and enhanced so as to achieve economic success and sustainability.

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