STRATEGY SMALL BUSINESS TRANSFORMATION: THE MEDS APPROACH Ravi S. Behara David E. Gundersen Stephen F. Austin State University ABSTRACT ln today s rap(lily chculglng huslnc'ss cnl'llvnnicnt, .I'nlatl Ituslnesses Inn st gclln a deeper understandiiig of lhe fillure to develop srrategies tlult will provide them with sustat'nable competitl've cali'ailtage. The traditional approaches tv strategy fvnnulativn are inadequate in an eni'iromnent thur is complex and dynamic. This paper investigates a "new" approach that helps small busi nesses "see the fiaure." Ir dismisses an applicativn of rhe multi- eqliilibrinm dissipative strucrures (MFDS) approach lo strategy formulation II ithin the comert of a small Inisiness involved in medical mclilageirlenl softuvlre dei e(opment. The dissipative sysrems approach can be used ro evaluate the critical discrmtinuilies that a small business faces in deahng with us changing enviromnenl. The apprlulch also provides an opportunity fur researchers to further develop theory in strutegr fvrnmllilivn in small bnsinesses, especially those directly 'tnvoli ed in rhe rapidly chonging areas of global operations und technology I I I I I V V II I I 0 I I S. SMALL BUSINESS TRANSFORMATION: THE MEDS APPROACH The complexity of thc cunent economic, technical and political environments continues to increase at an accclcratcd pace. This has resulted in a dramatic growth in the number of interactions we must consider when mal ing decisions. ln addition. the predictability of thc future is becoming morc dilTlcult as the types ol'hanges taking place continue. to increase. Three of these changes that wc face today include increased structural complexity, an increasing global free market, and a focus on mass customization made possible duc to advanced technology. The contemporary business environment is becoming upward integrated by the I'onnation of'strong interacting industry and inter-industry clusters at national and international lcvcls, while it is becoming downward difl'erentiated with an increased locus on autonomous work-teams and individual customers. This is analogous to the structural changes taking place in society. A growing diversification tnggered by ethnic and cultural I'orccs coexists within an environment that is seeing simultaneous convergent integration of existing systems at higher lcvcls of organizations as cxcmplified by regional economic and commonwealth systems. Surprisingly, many small busincsscs show very httle evidence of heing adaptable and flexible in an environment that is changing so dramatically. 69 Many countries have cntcred or increased their participation in thc I'rcc-market global &rading village during the lirst hall'o&'his decade. The developing nations of'sia and Latin America are now recognized as thc growth-engines of the world econlnny. In I'act, exports are ihc largest growth area in &hc Unit&xi States. The interconnccicdncss and interd«pcndcncy of major capital markets only strcngthcn this trend. In addition, improvcmcnts in quality and productivity arc heing actively sought in both leading and developing economics ul'hc world. Yct many U.S. small businesses continue to believe that globalization of the economy is more rclcvant to large manuf'acturing firms than it is to them. Nothing can bc further from business I'Cal&t)'. As customer nccds change. processes and organizations need to be reinvmited again. Consider thc approach ol'ass custmnization thai some fir&ns have adopted. Thcsc firms arc now beginning to focus on providing individual customization ol'ow cost, high quality and high variety products and scrviccs. Businesses rcquirc Ilexible aml rcsponsivc processes to he able to provide this dynamic variety. Small businesses cannot continue to claim that their size provides them with thc unique advantage of'prov&d&ng "personal" attention and value to their custolnc&'s. Managing small busincsscs in such a tu&bulent and unpredictable cnvil'onnlcnt rcquu'cs a sigmlicant change in the way wc view and understand them. Thc primary &basis of'his paper is that a "new" way of thinking about strategy formulation in small husincsscs can hc achieved through thc development ol' systems pcrspcctivc. Current aucntion in thc area ol small business strategy formulation is typically limited to thc synoptic pcrspcctivc as rcprcscntcd by thc SWOT (Strengths, Wcaknesscs. Opportunities, Threats) model. Iimcrging noncquilibrium I'orans ol'systems thinking, howcvcr, dn provide alternat&vcs that nccd &o be invcstigatcd. Such approaches do not assume equilihrium to hc &he normal state of'a: ysicm, anil arc therefore &nore aligned to the current reality. Thcsc thcorics say that while &ulativc stability may bc common, and even desired hy organizatilu&s, equilibrium does no& clmractcrizc the basic nature of'organizations. This paper i&lentil'ics and dcvclops strategy I'ormulation based on such a theory in a small business involved in sof'twarc development. THE EQUII.IBRIUM PERSPECTIVE Strategy B&rmulation has tradiiionally been viewed as a I'onnal planning process that outlines courses ol'action I'or managing an organization. This formal process should result in a written business plan that stimulates critical thinking, enhances communication to internal and cxtcrnal constituents, and provides a control &nechanism I'ur corrcctivc action (Baker, Addams, k Davis, 1993). Typically, a firm must establish or sclcct thc directional signals that provide thc understanding ol'n organization's scope and insight into how to conduct its operations. I ormally dcvelopcd and wriucn strategic plans arc prcfcrrcd (Baker, Addams, &I'z. Davis, 1993), however, the formality oi'he process in developing thc strategic plan varies across organizations. As I yles, Baird, Orris and Kuratko (1993) suggest, &hc process of planning is very inguen&ial in determining thc content of the plan. Thc strategic planmng process has a direct nfl'cct on dimensions of'strategic decision making such as scanning and setting objectives. More importantly is thc range of considered alternatives that can bc greatly influenced by the process used. It is ihis point that directly supports thc nccd for considering 70 new approaches in strategy formulation. It is understood that this blueprint, or strategic plan, is assumed to be forward looking because ideally, it establishes organizational direction through mission statements, goals and objectives, and a strategy Dcvcloping the widest range ol'easible alternatives providing the greatest performance potential is what a new strategy formulation process can deliver. Literature abounds showing strategic planning positively correlated to small business success (Bracker, Keats, & Pearson, 1988; Kopf & Beam. 1992; Shrader, Mull'ord, & Blackburn, 1989; Shuman & Seager, 1986; Robinson & Pearce, 1983; Ackelsberg & Arlow, 1985). Despite strong evidence showing links between strategic planning and successful performance, many small firins are at best sporadic in their usc of such processes (Sexton & Van Auken, 1985). Small businesses. due to their lack ol'strategic human capital, are often restricted to thc "muddling through" approach. Even small businesses with cspccially astute executives feel constrained for intellectual capital that can bc committed to the strategy forinulation process because managers invariably wear more hats. Aggravating the situation for some small businesses is the mind-set that strategy formulation is the easy part of strategic manageinent. Small businesses with an "implementation mentality" are consequently unable to take advantage of opportunities that may be on the organization's horizon. Strategy is a fundamental tool that helps orgamzations manage thc complex interf'acc with their environment. It helps idcntif'y opportunities that promote growth and promote long- term stability, thereby developing a sustained relationship between thc organization and its environment Two major aspects of strategy, strategy content and strategy making, need to be considered. The former helps identity successful and unsuccesslul straicgies in a given environment through the development of a typology. Miles and Snow (1978) and Porter (1980) provide the two classic strategy content models. Strategy making, however, deals with lonnulation and ultimately the implementation of a successful strategy, thc main focus of this paper. It is strategy making that is the indispensable process that defines the path of orgamzational growth. In today's dynamic cnviromncnt, small business inanagcrs should know how to create ncw and innovativc directions for their firms. Mintzberg and Waters (1985) identify two different, and nearly contradictory, approaches to strategy formulation, a synoptic perspective and an incrcmcntal strategy-making process. The synoptic perspective is a dclibcrate and planned process represented by acronym OSWOTS (Ob)ectivcs, Strengths, Weaknesses, Opportunities, Threats, Strategy). In this process the strategic objectives ol an organization arc defined from the desired state that the finn wants to achieve. This is I'ollowed by developing a prol'ile of organizational capabilities, making an environmental assessment in terms ol'hreats and opportuni ties, and li nally selecting a strategy that ensures the firm's ob)ecttves are attained while taking advantage of the finn's strengths and environmental opportunitics. The central weakness of this approach is the reliance on a planned strategy that is dependent on the purely rational approach to decision making (Stopford &. Baden-Fuller, 1990). Managers have a limited rationality due to limitations in their ability to process information that is especially constrained when dealing with small business. Quinn (1980) proposed that firms often develop strategies on an increinental basis. This incremental perspective suggests that managers proceed with full commitment to their strategies from some initial implementations. This approach provides 71 opportunities to make suitable adjustmcnts over titne rather than I'ollowing a predesignate route. While being pragmatic, thc incrcmcntal approach is typically initiated in rcsponsc to current problems and is therclirrc limited in its ability to dcvclop a comprchcnsrve view of thc I'uture. Thc synoptic and incrcmcntal approaches to strategy I'ormulation do not eff'ectively address the dynamic nature ol'hc current business environment, nor cf'I'ectively explain thc way in which lirms should adapt to such changes. The concept rrf'ransl'ormation is morc appealing in its ability to explain how organizations change (Loyc k Eisler, 19g7). Transformation is a process that prcscrvcs order, interspersed with periods of'haos, resulting in I'undamental change. Such change is made possible bccausc thc organization can sells organize, reconltgure itself'based on an internal refercncc on what thc firm should become. This internal refcrencc is Irmtly entrenched bccausc I'ttrsightcd o(ganizations have a prof'ound set of'tf(lecsses (ital I'csult in "I'uturc state visioning" or knowing whcrc the I'irm should hc hy a I'uturc date (Stcwan, 1993). Such dynamic behavior of'organizations, moving hctwr:r:n chaus and order, can he explained using thc I)issipativc Structures I'ramcwrrrk. Thc I'ollowing sections ot'hc paper discuss strategy I'onnulation at a small business based on this approach. SEEING THF. FUTURE Thc critical significance ol'strategy formulation is again taking a ncw turn in managcmcnt litcraturc thanks to the work ol'amcl and Prahalad (1994). They hclicve that no compuny exists which can gct along without a well-articulated point rrf'iew about tomorrow's threats at«i rrpportunities. Thc kcy to success is in crea«ng thc I'uturc, not preserving the past. In a(klition, they I'eel that a well-aniculatcd view hy ttsclf, docs not;Illtr)111(I(le'rlly result in sccing thc I'uture. Organizations must establish cfl'cctivc I'orcsight which not only sets direction, but hres the potential to transform imlustry boundaries and crcatc ncw competitive spaces. I.inns that scc thc future gct to opponunities bc(ore competitors and have hc«e( chances at securing Icadcrship positions in their rcspectivc industries. As Hamcl aml I'rahalad (1994) sce it, " .. , thc trick is to see thc future hcl'orc it arrives," and then be preitrrrcd to take advantage ol't. Seeing the future rcquircs a deep understanding ol'rcnrls that have thc potential to radically change the compctitivc mlcs of the industry. Combining crcativc uses of inf'ormation that trends provide with consistent capability-building qualities of'hc I'irm provides thc p(rtelttrtrl to el'et(le ultsel'll opp(llarlltitics. Cftartges rlt technology, dcm((graphics, lil'cstylcs or regulations may olTcr openings that competitors do not sec and thus, are ill-prepared to take advantage of: According to Hamcl and Prahalad (1994), understanding trends means the organization has affirtnativc answers to; "...understanding how fast thc trend is emerging in dilTcrcnt markets around the world, thc technologies propelling it, choices competitors arc making, which companies arc in thc lead, who has the most to gain and lose,... and how this will influence customer dcmamls and needs'?" Thc idea ol'seeing thc future goes well beymtd being custnmcr led or cust(nncr driven. In fact, customers arc sorely lacking in I'orcsight and cannot articulate unserved needs. Fi mrs th;u choose to hc lcd hy custrmtcrs miss all opportunitics associated with unserved customers and unarticulated ncc(fs. Thcsc I'irms cnd up heing relcgatcd to market I'ollowers rathm than 72 market leaders. Market leaders with I'orcsight create products that I'ullill needs customers do not know they have and follow that by educating customers about the benefits of'hc products created. Market followers rush to create products that I'ulfill aniculated needs of already served customers. In short, followers fall into the trap ol'aking insignificant changes to product offerings already articulated in thc market. While these arguments are intuitively appealing, there is a nccd to develop an appropriate theoretical foundation. Thc dissipative structures approach provides a suitable model. Ii is briefly described below, and some strategies of HealthWare. Inc. are discussed on this basis. MEDS: MULTI-EQUILIBRIUM DISSIPATIVE STRUCTURES Traditional methods of explaining ihc working ol'rganizations are built on the premise that stability and equilibrium arc thc "normal'onditions. Contemporary systems thinking, on the other hand, suggests that change is thc natural condition of a system, especially in a complex environment thai changes rapidly and in quantum leaps. Thc dissipative structures approach is one such non-i:quilibrium theory in contemporary systems thinking. It says that systems continually evolve thri&ugh a scrics i&l'equilibrium levels by relimng their adaptive abilities and improving their chances ol'survival. This results &n a metamorphosis or transformation ol'hc ol'galiization that involves a significant alteration ol'ts structures and processes. The soc&al. political. and cultural aspects ol'he organization arc also af'fectcd. The dissipative structures model considers such regularly occurring chiu&gc as a natural response to internal and cnvi&onmental conditions (Shcldon. 1980). Such regularly occurring translormation was dcscribcd by thc theory ol dissipativc structures initially in the fields of physics and biochemistry. lier which Prigoginc received a Nobel Prize in 1977 (Prigogine A. Stengcrs, 1984). The model was then shown to hc applicable to social systems (Zeleny. 1980). According to Jactsch (1980) there arc three types ol'ssumptions about organizational change. These are the dctenninistic, equilibrium. and the dissipative approaches. From the deterininistic perspcctivc, ihcrc is an underlying order to thc environment. Management thcrcl'ore should understand ibis order and design their organizations to cause ever-increasing order. This deter&ninistic "Newionian" model then gave way to the equilibriu&n perspective. This approach cmphasizcs order and regularity while recognizing that external orderliness can change. Managcmcnt's rulc according to this approach is io continuously find an equilibrium between thc organization anil its cnvironmcnt. The typical strategic management models, such as thc OSWOTS model, adopt this underlying approach to organizational change. These models are dcrivcd from an open systems pcrspcctive with an assumption of adaptation to environmental conditions. Thc equilibrium approach does noi describe transl'ormational. discontinuous change in the structural and cultural systems of an organization because of uncontrollable enviromncntal turbulcncc (Tichy 8; Ulr&ch. 1984). Leifer (1989) discusses two basic consequences that arise from the equilibrium approach to explaining organizational change. The first is that the organization is viewed as distinct from its cnvironmcnt. The organizati&m is also considered to often be at odds with its environment, which is also a source of disturbance to hc adapted to. The second consequence is that thc goals of organizations arc, dcterminatcncss and ccnainty. These can be achieved ! only when there exists an cnvirnmncntal order, however complex, which organizat&ons auempt io match. The c&mccpts of dctenninatencss, certainty, and the distinciion hctwccn organization and enviromncnt, may not accurately describe today's world. Limits to growth, scarcity, decay, and conflict have crcatcd persistent problems of randomncss, indeterminacy. and ambiguity in the cnvironmcnt (Scott, 1987). Rifkin (1981)explains this situation using thc concept ol'mropy. Entropy in orgamzations is the tendency I'r sell'-destruction. It is thc tcndcncy I'r usable energy in closed systems to become less available as work in thc system continues. This would ultimately lead to the destruction of thc system, unless thcrc is an exchange of'cncrgy I'rom thc cnviromncnt that changes thc structure of the organization. Tltc calx&city ol'an organization to adapt depends on its tcchnical and human rcsourccs, atul its ability to le&&Ill I lola cxpcllcnccs. Howcvcl', ol'guilt z lt in&1 s I'lilch il f1&)litt whet) illtcl 11al or cxtcrnal 11uctuati&ms arc cxtrcmc, resultmg in unstable structuius aml scaicc ics&mrccs. 'I'his critical c&mdition is called a bif'urcation point, and is an opportunity I'oi;in organization to transl'ortn itself, lt is thc point at which thc organization's coping mechanisms are just cxcecded (Lcif'er, 1989).According to the dissipative structures model, instability at thc hif'urcation point could lead to entropic behavior m tmnsfortn the organization and result in ncw conf'igurations. That is, beyond ihc hif'urcaiion point the system may cithcr collapse or may reestablish itself'ith a ncw stable I'orm and a morc evolved structure. Thc. internal nitioiuilc ol'he organization. and not thc cxtcrnal cnvironmcnt, is considernl the primary governing lector in this change. Thc kcy concept of'thc dissipativc structures model is that upon rex&ching thc bil'urcation point, ihc organization needs to opcratc in a manner that rcf1ects a transformation in style and behavior (Lcifcr, 1989). A transl'ormcd system is amble until the next bifurcation point is rcachcd, and the transl'ortnation or dcclinc ol'hc system happens. Organizati&ins arc thcicforc guided I'rom chaos to order to chaos again. Out ol'his 1)uctuation arises an increase&1 ability t&i cope with grcatcr complexity. The organizations whose managcmcnt have superior abilities in understanding thc I'uturc enviromnent and succeed in articulating values and principles t&1 guide actions which lead to thc I'uture will find sustainahle c&unpctitive a&Ivan&:igcs (Stewart, 1 &793). 'fhc kcy assuinptions of'hc dissipativc structures paradigm ate (I cil'cr, 1989). (a) Thc cnvironmcnt is not munificent, docs not pr&nnotc gi&iwth, is not stable. &&lid is Iiot &ll'dCI'Cd. (b) The normal evolution ol'rganizations goes I'rom transl'ormation to tr;lilslorl11ati&)n. (c) Order hy fluctuatimi means that an organization's order is transf'ormcd when it cxpcriences I'ar-I'rom-equilibrium conditions. Thc small business discussed next faces an increasingly turhulcm healthcarc, software, an&I technological environment. The recent transfonnations that this company undcrwcnt, and those that it I'aces in thc future, are discussed within the framework ol'hc multi-equilibrium dissipative structures model (MEDS). These illustrations can bc gcncralizcd:u:cording to I eifcr (1989) by idcntil'ying I'our stages of transf'ormation dcrivcd from thc MEDS approach. They arc: 74 (a) The first stage is to be able to identif'y currratt events or I'uture requirements that arc/will overwhelm the normal capacity of thc finn to adapt ikscll'ffectively, II required, the linn should dcvclop the skills io "sce the future." Another prcrequisitc at this stage is that thc system participants should hc cducatcd io dccommit themselves I'rom existing processes and values so that thc finn can transform itself when requirnl. (b) The second stage involves using radical strategies driven by the finn's need to restructure. The structural changes are made internally to effect thc transfomtation. This helps reframe whai is considered true by reestahlishing the I'irm's sense of'ts I'uture. (c) Thc I'inn is involved in establishing thc ncw structure in thc third phase. Herc the I'irm has to simultaneously cstahlish its structure and carry on its operations. In doing so, the firm continues to maintain continuous entropy production as it continues to work, hut slit&uld also dissipate the accruing entropy through cxchangc with thc environment in restructuring. The inner non-equilibrium is thus inaintained, and this in-turn maintains the exchange plocess ivith tile cllvironment. A (dissipativc) structure of thc lirm is thercf'orc constantly renewing itself to maintain a transformed and morc cfl'ective way ot'operating. (d) In thc I'ounh phase. thc ncw stmcture is operationally stabilized, and the ncw charactcrisiics ol'I'unctioning are cstablishcd with the understanding that this new structure ol'he I'inn is to he held lightly to enable the next cycle ol'ranslonnaiion.In addition, the firin can mal'c subsequent transfonnatiims more clficient as it learns from past trans('ormation proccsscs. As previously stated, systems undergoing such change gcncratc a high amount of internal activity. and are characterized by a high dcgrcc of cncrgy cxchangc with the cnviromnent to fuel this internal activity (Lcifcr. 19g9). Such systems are called dissipativc as they auract resource frmn thc cnviromncnt to crcatc ncw inner anangements ol their elcmcnts. olid hy that avoid the potential ol'ecay or disintegration. For HealthWare (the small business discussed in the case below), stagnating sales and inability to understand thc market lcd to change. A new marketing manager was hired and charged with thc responsibility of'nalyzing market potential. This person brought in new approaches in m;maging and identified critical inf'omtation that helped to cxplaill eulreltt pcrformancc. A hcttcr understanding of'hc, current situation increased thc acccptancc for change and provided opportunity consideraiions that previously would have been considered unthinkable. The kcy to redefining direction is to position thc organization to take ailvantage of the opportunity when it finally appears. not to select opponunities that currently exist. The entropy that has accumulated in the organization is dissipated through this cxchangc with the environmeni, hy that giving this systems perspective its name. COMPANY PROFILE HcalthWare, Inc. is a small software developer that provides products to small oflice health service organizations such as physicians and dentists. Thc company has been in business live years and has twenty-thrcc cmployecs. The facility currently used to house all operations 75 is a leased small suite of ol'I'ice( located in a small rural community. Thc current oflice space i)f'fcrs no room I'or expansion Ihal nmkcs further h&nng difficult. Thc mosl rcccnt annual sales Icvcl was $ 1,750,000 I'rom an Iissct hase ol'$242,000. Sales growth was 14% over thc prcvioUs year and thc company may hc profitable I'r the Iirst time. HcalthWarc initially had two products and w(as considering expansion into one or morc additional lines of business. One currcn& sol'&ware product, an oflice practice system, helps olT&cc managers of heal&hcare prof'cssionals opcratc their OITicc systems. Typical customers include physicians who run their own small clinics and have few cmployecs. This product provides computcrixcd accounts reccivablc tracking, computcrixed medical claims processing and ofTcrs a variety of of'fice practice applications, such as paticm accoum management. which can climinute thc nccd I'iir paper I'iling systems. Thc second product linc is a claims management system that clcctronicully tfiulsnlils nlcdical elai&ns I'ro&n physicians to scrvicc bureaus and billing ccnlcrs. Thi» service is sold to physicians who pay I'or claims numagcmcnt (m a pcr claim charge basis. Consequently, physicians or their off'iccs do nol hi&vc Io aclivlfv nl(lniigc collections I'rom patients and third party paycrs such ns insurance carriers. Both products arc sold primarily through rcscllcrs who scil multiple product lines to physici;ms and small clinics. Tcchnical ilss&s&Uocc Io cUslolncfs Is doflc pf)Ill&if&l)'vcf thc lch'phonlx Thl'fgilfilxallons t(u'g(',I customer hase is considcrcd nationwide. Thc managcmcnt at HcalthWU&e. Inc. believed that thcsc p&(xlucts werc unique and that competition was l&mitcd. Conscqucntly. they focused «xtcnsively on pnxIUcl dcvclopnlcl'n and generally ncglectcd all aspects ol'cnvironmcnml scanning. A "scat of'thc punts" approach was used io assess competition and market potential. Thc general I'ccling was that HcalthWarc products werc superior and custimlcrs would purchase superior products. Thc kcy to success was hclicvcd to rest with getting enough of a physician's time t(i cxprcss thc hcncl'its of thc pr(xluct that would scil itself'. Industry assessment was generally lacking in all aspects of'peratingthc liml and thc tnp-level management team committed most rcsourccs. I&nancial and human. to product dcvclopmcnt. HealthWaixfs sales pcrf'onnancc was stagnating u& under $ 1.500,000 annually dcspitc improved product fcaturcs I'or both primary products. I ollowing intcnsc analysis of the firm hy thc CEO of HcalthWarc. a markc&ing manager was hired to lmlp promote &hc linus products. 1'his manager immcdiatcly c(mductcd a Ihorough market analysis for HcallhWarc as pl'cscl'ihed hy traditional strategic planning with thc following results: (a) Market saturation was approaching 1&0 pc&Cent for both the finn's products. (b) Many compctiiors existed, most with a primary emphasis on marketing and pn)1&lola)n. (c) Prrxluct huyvrs werc price conscious tmd gaining in sophistication about products. (d) Less than two perccni of'the physicians in any given year were in thc market to purchase thc Iirm's current products. Despite limited incrcascs in sales (dollar and unit), thc long tenn outlook for HcalthWare was marginal a& hest. Having a wealth of'cchnical cxpcnisc and h&gh quality products, Inanagcment re;&lixed thnt it nccdcd a ncw view of whcic the company was heading. 76 ATTEMPTING TO REACH EQUILIBRIUM AT HEALTHWARE Following an agomzmg process of challenging the current thinking about HealthWare as a firm, several alternatives werc developed which might ultimately impact the company's direction. All alternatives take advantage ol'he high quality technical capability of the firm. This was based on an application of a synoptic perspective (OSWOTS Model) in HealthWare's strategy formulation, and has resulted in decisions to develop the I'ollowing products and services: Phurnuicy Claims Management Option: The company decided to produce a sof'tware system for pharmacies that would provide clcctromc claims transmission for collections from third party payers. An environmental study found that no other company is currently providing this service. Thcrclorc. an opportunity was identified. The company's technical strengths and experience in dcvcloping similar products Ior medical practitioners provided a sound basis for deciding to t'ollow such a strategy. Also, an added strength was that a distribution channel I'or the product was already in place. Hrxrpirrtl Claims: It was dccidcd that HealthWare crcute an electronic clearinghouse receiving claims Irom hospitals. The process would involve tracking claims, collecting claim data, forwarding claims to third party paycrs (such as Insurance companies) and receiving payments for claims for distribution back to hospitals. It can he seen that this concept is an extension ol'he one described above, and is made leasiblc because ol'similar strengths that the company currently possesses. Following this strategy is only un extension of providing a claims management service that is already being provided I'or individual medical doctors and dentists. It exploits an opportunity that exists. hut one that is heing pursued by other coirlpctltol s. E(ecrrrutic Dommient Inrerc(innge (ED)); HealthWarc proposes to create and market a software program to upload data from competing medical management systems for usc with any of the claims processing systems available to primary healthcarc providers. This approach is an attempt to seize an opportunity created by the fact that many indcpcndent sol'tware developers have been creating standalone products with little emphasis on system integration from ihe perspective of the customer. While HealthWare's technical strengths are again the basis, there are a couple of existing threats. These are thc existence of'other established FDI software developers, and the I'act that many other orgamzations arc established in the I'ield of system integration. Create Wimlows I ersivn ized Et(sting Prrirluciin HealthWarc would like to exploit its technical strengths and focus on enhancing existing products. A current weakness is that their products are based on the DOS operating system I'or personal computers. With most users moving their other applications to a Windows operating systems environment, new and existing customers want windows based medical sol'tware systems. Thc company's technical strength can be channeled toward the development of'such products. If HcalthWare can deliver such a product ahead of its competitors, it can gain some competitive advantage. However, a significant threat is the development of'dvanced personal computer operating systems such as MicroSof't's Chicago and thc development of alternate operating systems for the FowerPC 77 microproccssnr that is jointly being developed by IBM. Apple, and Motorola. Such a rapidly changing technological landscape makes it essential lo be able to "sec thc I'uturc," rather than just &uspond to Ihc current situations. All thc above strategies I'ocuscd on developing new products and scrviccs based on thc existing tcchnical strengths of thc c&m&pany. Such a devclopmcnt effort will place an undue strain on the company's existing technical resources. This is cspccially true because thc proposed products nccd to hc developed and marketed rapidly to sustain any advantage that &hcy may produce. The company is taking advantage of existing opportunities that arc already apparent to industry ob(crvcrs and consequently, major players already in the market will nlso hc pursuing these opponunitics. An additional weakness is thc I;&ct that all these strutegics for dcvcloping ncw products are based &m exploiting the existing cnviromnent. Such an approach is inl&cren&ly limited bccausc thc existing cnvironmcn& is also dynamic, and w&ll have changed hy thc time HcalthWare implements the above strategies. Thcrcl'(uu, while thc above slrutegic initiatives appear "logical," they arc unlil'cly to produce a significant and sustained compel&tive advantage I'r HcalthWarc. A dif'&brunt approach &o strategy formulation should hc pursued. BIFURCA'I'ION POINTS AT HEAI.THWARE Hamcl and Prahalad (l9(94) consider that "today's implcmcntuti&&n I'ailurcs are really ycstcrday's failures of''oresight in disguise." This I'orcsight is based on an organization's insights into the implications of the trends in areas such as technology. rcgulntion, lil'estylc preferences, and demographics. S«nior managcmcnt nccds to hc concerned with distinctive and I &rsightcd views about Ihc I'utu&c:&s «pposcd lo heing conventional aml rc;u:tive. Firms nccd lo I'ocus on how to gct in I'runt ol'Ihc competition rather than on ho(v I&) catch up. To hc able to achieve this, these strategy gurus suggest (&uno&lg olhcl'hings) thc ability to &dentify "discontinuities" and to have prolonged intelligent dchatcs on cun cnt &narkct related &rends and crcativc implementations on how to gain a&Ivan&ages. They ala&& say that &hc I'uture is to bc g)und in thc intersecti(m ol'changes at each of the critical discontinuities. Those organizations that can develop I'orcsight will lead, while Ihc rest can (mly hope &o hc good followers. Thc dissipativc structures app&oach can provide a thcorctical basis in strategy I'ormulation that helps &nanagcrs understand discontinuities that occur in their organizations. The unique feature of'hi» process is to see implications of u'(.'luis that may result in oppo&'Iunitics il Ihe organization is positioned appropriately at tlml Iutu&c point in t)mc. Figurc I illustrates a I'inn's ability to a(klrcss thc discontinuities c&ca(cd at thc dif'Icrcnt hif'u&uation points within thc context ol'anaging global trade oppo&tunities. As previously stated, HealthW(&rc is facing stagnating growth and in&cnsivc competition. Umler thc traditional OSWOTS process, opportunitics arc primarily gencratcd I'ro&n currcn& strengths where managers limit their scope when generating potential opportunitics. Incremental strategy I'om&ulation is also limiting hccausc numagers are hesitant lo dramatically alter direction aml I'cel that an anchoring and adjustment proccdurc reduces risks associated with developing opportunitics. While these approaches to strategy formulation arc not inhcrcntly wrong, the possibility of limiting th&''ange ol'opponunilics does exist. On thc other hand, the dissipalivc structures oricntati&m recognizes &hat organizations reach a point whcrc thc organizati&&n's cof)lng n&cch&uuslns &n'c exceeded (u)d II'lls &s no&'Ir)&d (Lcllcf, 19(&9). Consequently, n)conge& s 78 need to recognize that these situations oft'cr the chance I'or redefining what the organization can do. Therefore, thc need to see options that may become opportunities il'he organization is appropnately positioned comes from an effective understanding of seeing the I'uture (Stewart, 1993k FIGURE 1 BIFURCATION POINTS AND STRATEGY stark I t.eaderr i'label Zr:ale Omnrrnmrrer starker rnlinnerr starker 1 r r rr Incr arrng Emrmnmemal Cb.rnge One cntical dimension of straicgy formulation is thc direction in which global irade agreements, domestic legislation, and demographics are headed. As new opportunities are heing developed, even bcl'ore they become business realities, org;mizations I'acc discominuity. A discontinuity may bc viewed as the bil'urcation point that an or anization has rcachcd along a specific dimension. Those fiona that can dcvclop creative protlucts and services from the opportunities that do not ycl exist, have a strong possibihty ol becoming the market Icadcrs. Those that hcsitatc or are not capable of such innovation lace a second discontinuity or bifurcation point when they have the possibility to effectively follow the leaders. If they fail again, the organizations face a real threat ol'eing marginal ized or removed I'rom their market 79 All thc critical discontinuities that I'ncc a company can be evaluated in this manner using the dissipativc structures approach. HcalthWare adopted this approach in developing strategies that would have been difficult to gcncratc under the previous formulation process. In other words, hiring thc ncw manager, more accurate asscssmcnt of'current market potential, and understanding implications ol'external inl'ormation trends not previously considcrcd, allowed HealthWarc to cxpan&l thc list ol'lternativesto take advantage of opportunities not yet materialized. Thc organization's CEO realized that the technical strengths of current products were not enough to cnsurc success, by that, minimizing resistance to considering new alternatives. HcalthWarc has begun to adopt the MEDS approach to strategy formulation. It has recognized one bifurcation point and has acted to address thc chal lcngc it I'aces in marketing. Other hil'urea&ion points may also he identif'ied when thc finn cim "sce the I'uture." Thc possible situations are discussedl below, with initiatives that thc I'irm could take to adapt i[s internal structure and make successful transfonnations. Mnrke&ingi This situation has been discussed above but is rcpcatcd for completion. Thc CFO has been thc ma&n decision-maker, as is typical in many small businesses. Thc increasing complexity ol'hc business environment placed insurmountable constraints on thc effective decision-making capability t&l'his individual, and ensured that thc existing approach to managing &he linn was inelfcctivc. A marketing manager position was crea&cd to provide the company with relevant cxpcrtisc and guidance. This has structurally altered the makeup of'thc l&nn providing ncw adaptive mechanisms [o deal with its business cnviromnent. It has also allowed the firm to behave in a qualitatively dil'fcrcnt mimner as illustrated by thc development and execution ol'cffcctivc marketing strategies. Teel&nologylfnnovr&rir&n: The marketing expert cnsurcd that ihe firm devclopcd capabilities in this I'acct of doing business. The iechnological cnvironmen[, to [he contrary, has continued to develop at a radical pace. While thc firm has sof'tware pioduct dcvclopment experts, the CEO was [he primary source for dcvclopmcntal ideas. This was adcquatc in thc I'irst fcw years ol'operating thc business when thc primary I'ocus was dcvcloping application sogwarc for standnlone personal computers. Th&s arrangcmcnt hccamc a significant problem, typical of many small busincsscs. Today thc I'irm lacks the technic:il cxpcrtisc to cl'I'cciively evaluate the current and I'uturc directions that technnlogy will take. For instance, thc rapidly emerging client-server technology is hound to r ulically change the way in which professionals could use their small olTicc computers in thc lu[urc. h could bc cnvisagcd that indcpcndent medical practitioners could bc linked to server machines I'rom which they could run thc required application sol'tware I'or their husiness. This would result in the licensing of software according [o usage, and not necessarily the sale of'individual liccnscs as is currently heing practiced. It would also require HealthWare or other providcrs to setup servers that provide services to many networked individual med&cal practitioners. Such innovations cannot bc gcncrated and carried out without the leadersh&p of individuals with cxpcrtise in the management ol'innovation and technology. HealthWare faces such a bifurcation point today and will need to restructure themsclvcs accordingly. The hiring ol a technical innovation management cxpcrt would bc appropriate at this juncture. 80 Customer Service: Current methods of customer service arc primarily based on a telephone help-line. This structure is not adequate to service customers in the future, as customers are becoming more educated in technology and morc demanding in quality of service with respect to response time and technical-quality ol'ervice In addition, il the company product-line is enhanced as discussed above, on-line computer-based methods would be required. This will require a significant restructuring of hardware and technical-skills inix of existing customer service personnel. Product Distribution: Current product distnbution is pnmarily through resellers who also deal with competitors'roducts. As the traditional medical software (for independent physicians) market is saturated, such methods will not continue to be effective. Also, if the nature of the products (licensing of services on client-server architecture) or the types of customers (other health-care providers such as home-heahh professional) change, the use of different distribution channels may become essential. This would lead to the restructuring ol'roduct distnbution channels such as thc development ol'n-house approaches like direct marketing. New Customers: An increase in family practice and home-healthcare could result m the need to dcvclop products for health-care professionals on the go. That is, a variety ol'roducts ihai can be used on lap-top computers, on patients'ome computers, or through other technology medium such as the evolving concept of electronic commerce on the internet. HcalthWare should significantly change the technical skill-mix of'ts current software development staff to be able to produce products for this future. Other examples of issues under consideration by lhe company in building new structures to develop ncw customers are brieliy discussed below. Cfeurirtg House fnr Honte Heufrb Agencies: HealthWare proposes to crcalc an electronic cleannghouse receiving claims, collecting claim data, forwarding claims to third party paycrs (such as Insurance companies) and rccciving payments for claims for distnbution back to providers. This requires thc devclopmcnl of alliances with firms that have thc required hardware configurations. It is an example of'positioning the company to develop a leadership position based on demographic trends and changes in healthcare policy that will lead to a sigmficant growth in home-based healthcare. fuieiviurionuf Veurure HealthWare intends to develop and market accounts receivable sol'lwarc for thc Mexican medical market. This alternative would entail working with venture partners familiar with the Mexican market. Currently HcalthWare is working with a major accounting/ctonsuftmg finn in Mexico City. This illustrates how a small business can develop a strategy to lake advantage ol'pportunities crcaied by global trade agreements, the North American Free Trade Agreement (NAFTA) in this instance. NAFTA represents a bifurcation point in global iradc that HealthWare is addressing positively, an approach that could lead the fimi to a market leadership position in the field of medical management software in Mexico. It could eventually place thc company in an established position to expand into the growing Latin American market where no competitors currently exist. ft I These examples ol strategy I'ormulation by HealthWare illustrate thc signif'icancc of'li'vclopingan ability to "scc the future" and provide real-world applications ol'it'urcation points and the dissipative structures approach to strategy I'ormulation. The primary emphasis is on restructuring the company on a continuous basis to provide it with mechanisms to cope with an ever changing business context. It also de-emphasizes the notion that thc primary objective I'or the company is to reach an cquilibnum with its cnvironmcnt. Thc dissipative structures approach provides a I'rimicwork in which a I'irm can continually develop its ability to deal with increased complexity. CONCI.USIONS This paper discusses an application of the dissipativc systctns approach to strategy I'onnulation within the context of'a small business involved in medical management software dcvelopmcnt. Thc limitations of thc traditional synoptic approach to I'onnulating strategy arc also discussctl. The dissipativc systems approach can be used to evaluate thc cntical discontinuities that a small business I'aces in dealing with its changing environment. This would enable organizations to develop a I'orcsight that will help thc successl'ul I'onnulutions ol strategic iiiiltalivcs. Dissipativc structure models take on an increasingly significant role as wc continue to realize that tratlitional coping mechanisms are not serving organizuums I'acing rapid and intense environmental-induced changes. Thc difl'iculty in applying such models is that they arc I'oreign to thc way most managers arc trained (Leil'cr, 1989). Small business managers, however, may be moiv. open to ncw thinking on siratcgic issues because they are less conslruined hy company history and bureaucracy. Considerations of systems thinking is also moving I'rom theory to application as illustraled hy applicatiims to rcsistancc to change (Goldstein, 1988), organizational scil'-renewal (Nonaka, l988), and gcncral management concerns (Pctcrs, l987). The approach could bc I'unhcr reseurched as an appropriate framework in which to further dcvclop theory in strategy formulatitms in small businesses, especially in thc rapidly changing areas of global operations and technology innovations. Thc purpose of this paper is to illustrate thc applicability of this contemporary model to small husi ncsscs. 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