Management Research News

Simplicity/complexity as a dimension of strategic focus: effect on performance in different

organisational domains
William A. Drago
Article information:
To cite this document:
William A. Drago, (1999),"Simplicity/complexity as a dimension of strategic focus: effect on performance in different
organisational domains", Management Research News, Vol. 22 Iss 7 pp. 12 - 20
Permanent link to this document:
http://dx.doi.org/10.1108/01409179910781724
Downloaded on: 21 October 2016, At: 23:25 (PT)
References: this document contains references to 0 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 315 times since 2006*
Users who downloaded this article also downloaded:
(2012),"A model to determine complexity in supply networks", Journal of Manufacturing Technology Management, Vol. 23 Iss
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

8 pp. 1015-1037 http://dx.doi.org/10.1108/17410381211276853

(2010),"Requirements of complexity for complex organizational conceptions", Kybernetes, Vol. 39 Iss 7 pp. 1112-1127 http://
dx.doi.org/10.1108/03684921011062737

Access to this document was granted through an Emerald subscription provided by emerald-srm:394461 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please
visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication
Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

 Management Research News

Biographical Note

William A. Drago is
Associate Professor of
Simplicity/Complexity as a
Dimension of Strategic Focus:
Management, College of
Business & Economics,
University of Wisconsin -
Whitewater, Whitewater,
Wisconsin 53190, USA.
Effect on Performance in
Different Organisational Domains
By William A. Drago

Introduction

For years, strategic management scholars have emphasised the need to develop
strong focus. In fact, much of the push for use of strategic planning has been based
on the belief that organisations with strong focus will be more effective. Often, an
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

emphasis on a narrow focus or limited strategic scope is also recommended. How-

ever, according to Miller (1993) organisations can develop too narrow a focus and
can enter into decline as a result. Firms may develop too sharp of an edge by em-
phasising a particular strength or function while neglecting others. This ‘simplic-
ity’ while perhaps helpful when organisations are small and undeveloped may be
harmful as the organisation becomes more complex.

This study empirically investigates the link between strategic simplicity and its
opposite, strategic complexity, with organisational domain and performance.
Two general research questions are addressed: 1) Is strategic simplicity/complex-
ity a function of organisational domain?, and 2) Does the level of strategic sim-
plicity/complexity effect the performance of firms. Three dimensions of
organisational domain are considered in this study including vertical integration,
product diversification and international scope. Level of strategic simplicity/com-
plexity is determined through an assessment of the strengths of participating firms
in five functional areas and three resource areas. Strategic simplicity/complexity
is determined as the sum total of the functional and resource areas respondents de-
scribe as being strong in their organisations.

Review

According to Drago (1996a, 1996b) an important contribution or benefit of the

use of strategic planning is to provide improved focus for the organisation. Yet
there continues to be a lack of strong, empirical evidence supporting a link be-
tween strategic planning use and improved organisational performance. One
cause of this may be lack of knowledge concerning the appropriate breadth of
strategic focus.

Researchers and writers in strategic management have emphasised the need to

develop simple, well-defined strategies that focus the organisation on a single dis-
tinctive competence (Porter, 1980; Quinn, 1992). The argument offered by these
writers for poor performance or for organisations in decline is a failure to develop
a distinctive competence or organisational skill with which the organisation can
effectively compete. Miller (1993) offers an intriguing counter argument. He be-
lieves that poor performance may be due to an over emphasis on a narrow set of

12
 Volume 22 Number 7 1999

competencies or skills at the exclusion of other important skills. In other words an

organisation can become excessively ‘simple’ by concentrating on a single
strength or function (perhaps one given most credit for the organisation’s past suc-
cess) and excluding development of other strengths or competencies. This phe-
nomenon Miller (1993) termed organisational simplicity. Miller further
suggested that simplicity may be most dangerous to organisations competing in
complex environments. According to the law of requisite variety, “the variety
within a system must be at least as great as the environmental variety against
which it is attempting to regulate itself” (Buckley, 1968:495). In other words, or-
ganisations competing in complex environments must be complex as well if they
hope to ‘fit’ that environment.

Miller (1993) offered several possibilities for why organisations are likely to
move toward simplicity. Some of these include:
1) Managerial learning and the successes that it brings can lead to a narrow
perspective on what works and why. This can lead to greater depend-
ence on past behaviours and past strategies.
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

2) Further, success not only narrows an executive’s perceptions, it also

can lead to overconfidence in how an organisation competes or in one
element of strategy.

3) There may be a natural selection process at work inside organisations,

reinforcing values and behaviours that were thought to lead to success
and eliminating those tied to failures. Over time this can lead to a more
narrow set of values and beliefs centered on maintaining or increasing
past ‘strengths’ of the organisation.

4) Increasing dominance of a department associated with past success

may also lead to simplification, as that department’s goals, values and
mission become increasingly interpreted as the organisation’s goals,
values and mission.

5) It has been argued that an organisation’s technologies become more

specialised over time (Clark, 1988). This is due to a shift in emphasis by
the organisation from comprehension or understanding of the unknown
to refining what is already known (March, 1991).
Lumpkin and Dess (1995) have provided one of the few empirical studies of or-
ganisational simplicity. Through a factor analysis of items targeted at assessing
firms’ strategy, structure, culture and processes these authors discovered one set
of variables, a factor, they believed was consistent with arguments Miller (1993)
used to describe the tendency of firms to be pushed toward simplicity. This factor
suggested use of a stable, long-term strategy, clear and consistent values, a com-
mon management style and consistent management practices, uniform treatment
of individuals and a strong organisation-environment fit. Results of this study
suggested that use of this simplistic strategy-making process was positively asso-
ciated with performance at early stages of an organisation’s development but
could be damaging to company performance as organisations grew and matured.

As noted, the Lumpkin and Dess (1995) study concentrated on the process of
strategy-making and the factor uncovered by these authors emphasised stability

13
 Management Research News

and consistency of organisational strategy and member behaviours. Breadth of

strategic focus was not a primary focus in the study.

This study is directed more toward the actual focus being taken by organisa-
tions in terms of the competencies being maintained. Two general propositions
are put forth:
1) The increasing development and maturity of an organisation will lead
to greater complexity of strategic focus.
This proposition is consistent with the ‘law of requisite variety’ (Buckley,
1968). As an organisation develops, often identified by moves of vertical integra-
tion, market expansion and/or product diversification, its environment becomes
more complex. Greater organisational complexity and along with it greater com-
plexity of strategic focus is required by the organisation to maintain appropriate
‘fit’ with that environment.
2) Strategic simplicity (fewer competencies) will lead to improved per-
formance in undeveloped organisations while strategic complexity is
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

required for improved performance in developed organisations.

This proposition is consistent with Miller (1993) as well as the results presented
by Lumpkin and Dess (1995).

Research Design and Preliminary Results

Data for this study was obtained from a questionnaire sent to the CEOs of 156
firms that had participated in an earlier investigation of the interactions between
organisations, environment, strategy and performance. In the initial study, poten-
tial participants were randomly selected from Standard and Poor’s Industrial
Compustat. Ninety-one firms responded to this second request for information.
Additional data on these firms was obtained from Industrial Compustat and Dis-
closure. A financial comparison of these firms with all firms listed in Industrial
Compustat can be found in Table I. As can be seen from the table, participating
firms were generally larger, in terms of both sales and assets, and more profitable
than the population of firms represented in Industrial Compustat.

Table I
Statistical Comparison of Sample with Compustat Population
Date Item Compustat(7341 firms) Sample (91 firms)
Total Sales:
Minimum -4,482,000 88,000
Maximum 126,131,000,000 120,387,700,000
Mean 871,919,000 3,128,090,000
Std. Dev. 4,369,633,000 14,074,850,000
Total Assets:
Minimum 0 21,000
Maximum 349,574,000,000 164,063,100,000
Mean 1,604,513,000 5,128,350,000
Std. Dev. 8,929,244,000 20,031,240,000
Return on Assets:
Minimum -111.000 -0.5762
Maximum 304.500 0.4623
Mean -0.091 0.0193
Std. Dev. 4.106 0.1544

14
 Volume 22 Number 7 1999

To determine the number of competencies of an organisation, respondents were

asked to describe the strength of various resources and functional areas in their or-
ganisation. A seven-point Likert scale was provided to guide responses with a ‘1’
representing low strength and a ‘7’ representing high strength. A score of ‘6’ or ‘7’
on a particular resource or functional area was defined as a competence of the par-
ticipating firm. Resources for which ‘strengths’ were determined included finan-
cial resources, managerial talent and employee skills. Functional areas assessed
included production/operations, marketing, finance, human resources and re-
search. Total number of competencies of an organisation was determined by sum-
ming the number of resource areas and functional areas with strengths equal to or
greater than six. The distribution of total competencies by participating firms is
Table II
Strategic Simplicity/Complexity Distribution
Number of ‘6’ or ‘7’ Scores Reported Frequency of Firms
0 12
1 13
2 13
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

3 21
4 9
5 7
6 8
7 1
8 1
Total 85

provided in Table II.

Organisation domain was assessed across three dimensions; vertical integra-

tion, product diversity and international scope. Vertical integration was deter-
mined by asking respondents to describe the level of their organisation’s control
over:

1. sources of raw materials

2. production of goods sold
3. process, product and market research
4. distribution of goods to buyers
5. retailing of goods to consumers

A seven point Likert scale was provided to guide responses with a ‘1’ indicating
low control and a ‘7’ indicating high control over that particular activity. An index
was developed by summing scores across all activities listed above to provide a
measure of each firm’s level of vertical integration. Product diversity was meas-
ured in terms of the number of product lines produced and or sold by the firm as re-
ported by the CEO. International scope was measured in terms of the percentage
of revenues of the organisation coming from international markets as reported by
the CEOs. Reported number of product lines was found to be positively associated
with number of products produced and/or sold by the organisation (again, as re-
ported by the CEO) at the p<.001 level of significance and positively associated
with the number of SIC codes associated with each organisation (from Disclosure)
at the 0.10 level of significance. International scope as the percentage of interna-
tional sales to overall company sales was positively associated with the number of
international subsidiaries listed with that company (in Disclosure) at the p<.05
level of significance.

15
 Management Research News

Table III provides basic statistics and Pearson Correlation Coefficients on or-
ganisational competencies and the organisational domain variables examined in
this study. Significant associations between diversity and integration and between
international scope and diversity suggest that the assumption of independence
across these variables is highly suspect. This should be kept in mind when assess-
ing the results of the regression analysis to determine the predictive ability of or-
ganisational domain on strategic simplicity/complexity. It should also be noted
that both level of integration and product diversity were strongly associated with

Table III
Strategic Simplicity/Complexity and Organisation Domain:
Basic Statistics and Pearson Correlation Coefficients
Mean Std.Dev. 1 2 3
1) Simplicity/Complexity 2.78 1.95
2) Integration 15.1 5.3 0.33**
3) Diversity 49.4 191.8 -0.25** -0.20*
4) International 15.6 21.5 0.06 0.00 0.23**
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

*p<.10
**p<.05
***p<.01
****p<.001

the simplicity/complexity variable. However, while vertical integration led to

greater complexity product diversity tended to lead toward greater strategic sim-
plicity. The association between international scope and strategic simplicity/com-
plexity, while positive, failed to be highly significant.

Regression analysis was used to predict level of strategic simplicity/complexity

based on organisational domain. The vertical integration index, reported number
of product lines and the ratio of international sales to overall sales were used as in-
dependent variables in the model. Results of this analysis can be found in Table IV
in the ‘Results’ section of the paper.

Table IV
Predicting Strategic Simplicity/Complexity
Regression Analysis
Independent Variables Parameter Estimate
Intercept 1.02
Diversity -0.00*
International 0.01
Integration 0.11***
F 5.01***
R sq. 0.15
*p<.10
**p<.05
***p<.01
****p<.001

Regression analyses were used to determine the predictive power of strategic

simplicity/complexity on performance in different organisational domains. These
included; high and low levels of product diversity, high and low levels of interna-
tional scope and high and low levels of vertical integration. The mean level of ver-

16
 Volume 22 Number 7 1999

tical integration and international scope were used as dividing lines between high
and low categories. For product diversity, less than 4 product lines made up the
low category and 4 or more product lines were considered high diversity. While
this dividing line was some what arbitrary, the mean of 48 seemed excessively
high as a dividing line between categories. Results of these analyses can be found
in Table V in the following section.

Table V
Using Strategic Simplicity/Complexity to Predict Performance:
Regression Analyses
All Non-diverse Diverse Non- International Non- Integrated
(n=59) (N=34) (n=25) International (n=19) Integrated (n=31)
(n=40) (n=28)
Intercept 0.03 0.04 0.26 0.01 0.07 0.03 0.03
Simplicity/ 0.01 0.01* -0.01 0.01* 0.00 0.01 0.01
Complexity
F 1.25 3.70* 0.07 2.93* 0.05 0.67 0.24
R sq. 0.02 0.07 0.02 0.07 0.00 0.02 0.01
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

*p<.10
**p<.05
***p<.01
****p<.001

Results

Table IV provides the results of the regression analysis to determine the predictive
ability of organisational domain on strategic simplicity/complexity. The model
formed explained approximately 15% of the variance in the dependent variable
across firms and was significant at the p<.01 level. Two dimensions of organisa-
tion domain were significant in the model. Product diversity was found to be
strongly and negatively associated with number of competencies while vertical in-
tegration had a strong positive association.

Table V provides results of the regression analyses to determine the predictive

power of number of organisational competencies on performance in different or-
ganisational domains. As can be seen from the table two significant models were
formed. Number of competencies was a significant predictor of performance for
firms with low diversity and firms with low levels of international scope. In both
instances the model formed explained approximately 7% of the variance in per-
formance across firms.

Discussion

It was proposed that as organisations became more developed their strategic focus
would become more complex. Results of this study suggest that type of develop-
ment may impact the scope of strategic focus.

Vertical integration was strongly associated with increased strategic complex-

ity. As organisations gain more control over important activities along the busi-
ness system there is a strong tendency to expand competencies of the organisation.
Certainly the potential for expanded competencies or a broader strategic scope in-
creases as the organisation expands along the business system. Since organisa-
tions must often compete with other firms along each step of the business system

17
 Management Research News

there is also a competitive push toward increasing competencies. This, in fact, is

the law of requisite variety at work.

Product diversity led to a decrease in strategic complexity or to greater ‘sim -

plicity’. This finding goes against Proposition I. While product diversity increases
the complexity of an organisation’s environment a corresponding decrease in the
breadth of strategic scope seems to occur. Because product diversity often leads an
organisation into numerous and often diverse technologies, firms may reduce stra-
tegic scope to a limited set of competencies that can provide synergistic effects
across multiple product divisions. It may be unfeasible to expect a broad strategic
scope (in terms of competencies) across a number of diverse technologies due to
the dispersion of resources and diverse needs of functional areas for different
product lines.

The association between international scope and strategic complexity was posi-
tive but not highly significant. Simply expanding operations outside of national
borders apparently has little effect on strategic simplicity/complexity. Of course
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

there are different means of international expansion. Exporting may not increase
environmental complexity greatly and thus not cause a need for increased organ-
isational complexity and similarly, increased strategic complexity. On the other
hand, moves by the organisation to set up research, production and marketing fa-
cilities throughout the world would increase environmental complexity greatly
and, according to the law of requisite variety, increase the need for greater organ-
isational complexity and with it strategic complexity. These options available to
organisations in how they develop international operations may be the cause of the
lack of significance between this dimension of organisation domain and strategic
simplicity/complexity.

It was also proposed that strategic complexity would be associated with per-
formance in developed firms but strategic simplicity would be associated with
performance in undeveloped firms. No support for this proposition was obtained.
In fact, in four of six domain cells strategic simplicity/complexity was an insig-
nificant predictor of performance (at the p<.10 level). In the two cells or domains
where it was significant, for non-diversified firms and for non-international firms,
the direction of association with performance was opposite that proposed. In these
two cells representing lack of development along that aspect of organisation do-
main, increased strategic complexity, not simplicity, led to increased perform-
ance. Number of product lines and international scope both are measures of
diversity and lead to lack of dependence on one demand curve. Without diversity,
the importance of maintaining competitiveness continuously is enhanced. This
may lead non-product diversified and non-international companies to focus on
multiple organisational skills.

Conclusion

This study has shown that an organisation’s domain does tend to impact strategic
simplicity/complexity. The actual effect on simplicity/complexity is found to be
contingent on the dimension of the organisation’s domain being considered. Re-
sults suggest that vertical integration leads to greater strategic complexity while
product diversification leads to greater strategic simplicity. International scope
was found to have little effect on level of strategic simplicity/complexity.

18
 Volume 22 Number 7 1999

This study has also shown that increased strategic complexity effects perform-
ance in certain organisational domains. When firms are non-diverse, in terms of
both products and international markets served, increased strategic complexity
led to improved performance. Increased strategic simplicity did not lead to im-
proved performance in undeveloped firms. Nor did increased strategic complexity
lead to improved performance in more developed firms.

There are a number of limitations to this study. The small sample size and fi-
nancial differences between firms in the sample and the population of firms in
Standard and Poor’s Industrial Compustat make generalisability to this larger set
of companies suspect. Resources and functional areas assessed should not be con-
sidered an all-encompassing determination of potential skills or competencies
available to organisations. There are undoubtedly other competencies that could
and should be considered in future research.

This author believes that there is a potential for creating a strong positive link
between strategic planning and organisation performance. It is up to strategic
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

management researchers and scholars to help make this link. Miller’s (1993) iden-
tification of ‘simplicity’ and its counterpart ‘complexity’ as a dimension of strate-
gic scope offers further insight into strategy formulation for firms. This study
provides a small step in understanding how strategic simplicity/complexity
changes for different organisational domains and offers guidance to improved
performance for certain domains. It is hoped that this research will encourage oth-
ers to investigate this dimension of strategy.

19
 Management Research News

References

Buckley, W. (1968). “Society as a complex adaptive system” In W. Buckley (Ed.),

Modern System Research for the Behavioral Scientist: Chicago Aldine. pp.490-
513.

Clark, K. (1988). “Product development and competitiveness”. In A.M. Spence

and H. Hazard (Eds.), International Competitiveness: Cambridge, MA: Ballinger.
pp.150-176.

Drago, W. (1996a). “Strategic plan intensity: Effectiveness in different contexts”.

Management Research News, V.19, No.1/2: pp.1-13.

Drago, W. (1996b). “Strategic plan intensity and competitive strategy”. Manage-

ment Research News, V. 19, No. 11: pp.13-25.

Lumpkin, G.T. and Dess, Gregory G. (1995). “Simplicity as a strategy-making

Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)

process: The effects of stage of organisational development and environment on

performance”. Academy of Management Journal, V. 38. No. 5: pp.1386-1407.

March, J.G. (1991). “Exploration and exploitation in organisational learning”.

Organization Science, 2: pp.71-87.

Miller, D. (1993). “The architecture of simplicity. Academy of Management Re-

view. Vol. 18, No.1: pp.116-138.

Porter, M. (1980). Competitive Strategy, New York: Free Press.

Quinn, J.B. (1992). Intelligent Enterprise, New York: Free Press.

20
 This article has been cited by:

1. Judy HunterCanadian School of Management, Toronto, Ontario, Canada. 2002. Improving organizational performance
through the use of effective elements of organizational structure. Leadership in Health Services 15:3, 12-21. [Abstract] [Full
Text] [PDF] [PDF]
Downloaded by Universiti Putra Malaysia At 23:25 21 October 2016 (PT)