Examining the dynamics between aligning a company’s internal processes to the external environment and the company’s performance with a temporal dimension in the aircraft and semiconductor industry

Since Bourgeois III and Eisenhardt (1988) have introduced their ground breaking study discussing the concept of environmental velocity, which describes how fast and continuous/discontinuous the organizational environment of a company changes in all the relevant dimensions which affect the company i.e. the dimensions of technology, demand, regulation and competition, much research has followed on this topic. However the research has come up short in several ways. First of it has assumed the industry to have the same type of speed for every dimension and thus termed industries as high or low velocity industries without taking into account that dimensions can differ in terms of their speed which makes it unjustified to term an industry merely as a high or low velocity industry. An example for this is the reference of the biotechnology industry as a high velocity industry even though product development times are around 10-20 years in this industry. Secondly the research only takes into account the speed of change, and mostly neglected the continuity of change measured though the concept of direction of change. However the direction of change is an important concept which can help characterize the environment and in turn enable researchers and managers alike to understand the industry in which a company is operating in better. Furthermore most of the research has been done on a conceptual level and neglected actual operationalisations and measurements of the velocities of the industries. There are only few studies that have operationalized and measured the environmental velocity, and those that have done so have neglected the direction of change. Alignment literature has found that matching internal processes and capabilities to the external environment has positive performance implications for the firm. Regarding a temporal dimension previous studies have found that matching the internal rates of change to the external rates of change is beneficial for the company and should be strived for (Kwee 2009, Ben-Menahem, Kwee et al. 2013). We aim to bring together these two research streams and build upon the theory of environmental velocity as well as the alignment literature. One research objective is to advance research about environmental velocity by taking into account the discontinuity through the concept of direction of change and operationalizing and measuring it in a comprehensive way. Another one is to challenge the predominant view in existing literature that an environment can be described with one single velocity which sums up all dimensions. This is done with the help of velocity homology, a concept which assesses how dis(similar) the different dimensions of the industry are to each other. Thus the fact that dimensions have different speeds and continuities is taken into account which results in a multidimensional conceptualization of the environmental velocity concept. In order to get a better understanding of the performance of companies in different velocity conditions this concept will then be used to see how companies have managed to align their internal actions to the environment. Furthermore an objective is to test the interrelationship of the alignment of internal and external rates and directions of change and the performance of the companies in the aircraft and the semiconductor industries, two industries which are both high technology industries and have been previously described as low and high velocity industries respectively. In order fulfil the research objective several different steps were taken. First a thorough literature review was conducted on the topic of environmental velocity with the aim of finding all possible relevant dimensions which were deemed to be product, technology, demand, regulation and competition. Subsequently the possible operationalisations and measurements for the speed and continuity of the five dimensions was assessed and the difficulties that have limited previous research highlighted. One of the main findings is that the continuity of an industry (direction of change) must be assessed through qualitative analysis which limits the possibility of researching this concept due to the required time of assessing it. Furthermore literature review on alignment theory with a temporal context revealed that alignment of internal processes and capabilities to the external environment was found to be positively related to performance and that positive misalignment is superior to negative misalignment which built the propositions for our analysis. Followingly a short introduction and informative background about the two industries and the focal companies, namely Intel and Boeing were given. Then each measure for the rate of change (speed characteristic) and direction of change (continuity characteristic) for the three chosen dimensions, namely product, technology and demand was discussed and analysed in detail. Whereas for both the aircraft and semiconductor industry the rate of changes were measured through equal indicators, namely change in number of new product generations (product), change in number of new patents (technology), change in sales (demand), the direction of change was different and customized for each industry except for the demand dimension (change in trend in sales). For the semiconductor industry this was the minimum feature size (technology) the ratio of clock speed to price (product), whereas for the aircraft industry it was the range, capacity and fuel efficiency per seat (product). For the technology dimension a purely qualitative study was undertaken which indicated that no discontinuous change had taken place over the last 25 years. As the operationalization of the direction of change requires an in depth case study of the industries it becomes clear why there has almost been no study measuring the concept of direction of change despite its relevance when analyzing an industry in terms of its velocity. On the basis of this analysis the velocity homologies of the industries were assessed. It was found that there were considerable heterogeneity in between the dimensions for both industries. Nonetheless we find that the semiconductor industry has rather high rates and directions of change in comparison with the aircraft industry. Finally the interrelation between aligning the internal rates and directions of change and the performance of the firm are assessed. For the rate of change closer alignment is connected to higher performance in the semiconductor industry. Furthermore positive misalignment is associated with better performance than negative misalignment which is in line with our expectations. For the aircraft industry at first no effect of alignment on performance could be detected. However after controlling for the extreme high fluctuations in the product dimension results are in line with the propositions. Even though further research is needed to confirm our findings we can say that in general our results show that alignment is beneficial for the company. We thus find that it is crucial for a manager to understand the environment the company is operating in taking into account all the different dimensions and then try to align the company to the external conditions. This however is connected to some challenges. If the velocities associated with the different environmental dimensions are similar (high homology environment) all organizational activities should be aligned to this uniform environmental velocity. This is rather straightforward and simpler to manage. If, on the other hand, the velocity dimensions differ significantly (low-homology environment), the firm will have to align its internal activities to these dissimilar rates and directions of change, which will lead to heterogeneous sets of paces and directions of activities within the firm. This situation can pose a real challenge since it will bring about potential incoherence among subunits. A possible solution to this are modular and flexible structures which allow room for experimentation. This can possibly help the company to be more open and flexible to change and operate at the necessary speed at all levels. Further studies should take into account the other dimensions of the environmental velocity concept. Furthermore more industries or the same industries with more data points should be studied and other factors influencing the performance should be controlled for.