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Equifinality and Organizational Design for Improving Pricing Decisions

December 2013 Pricing

What decisions should the pricing function be making?   Where should a corporation position the pricing function?  How should the pricing function be structured?  We have been asking this question for past two decades but still don’t have a definitive answer nor a standard template.  Why?  What is so odd about pricing decisions that makes organizational design choices regarding the pricing function difficult?

Christopher Gresov and Robert Drazin may have clarified the nature of the organizational design challenge in their 1997 Academy of Management Review paper “Equifinality: Functional Equivalence in Organizational Design”.  In this article, we will review the key insights equifinality provides regarding organizational design and apply the resultant thinking to the issue of designing an organization for pricing excellence.

What is Equifinality?

Equifinality in an organizational setting “has come to mean that the final state, or performance of an organization, can be achieved through multiple different organizational structures even if the contingencies the organization faces are the same” (Gresov & Drazin).

That is, for some organizational design decisions, there may be no single optimal choice.  Different organizational designs will achieve the same performance level in both decision accuracy and efficiency for some organizational functions.

This is very different from the standard thinking regarding organizational design.  For instance, consider the functions of accounting, operations, or marketing and sales in large corporations.  At a high level, each of these functions are typically defined and structured in a relatively cross-corporation-consistent manner and can be performed somewhat independently of one another.

  • Accounting typically manages accounts payable and accounts receivable, keeps the books, and reports up to Chief Financial Officer.
  • Operations typically manages production and/or logistics and reports to the Chief Operations Officer.
  • Marketing and sales typically manage customer interactions while detecting and fulfilling demand, and reports up to the Chief Marketing Officer and sometimes its compatriot, the Chief Sales Officer.

Before I get hate mail, please note that I used qualifiers in stating relatively consistent and somewhat independent.  There are myriad viable variations in organizational design and structure, and corporations work better when organizational silos are crossed or broken.  Yet when we compare these functions against that of the pricing function, differences become glaring.

What does pricing do?  Where does pricing report?  Can it operate as a self-contained function?

  • It might seem obvious that pricing manages pricing strategy, but does that mean pricing decisions at the customer transaction level, the market positioning level, the industry strategy level, or all three simultaneously?
  • Similarly when it comes to reporting, research of the members of the Professional Pricing Society reveal that pricing professionals alternatively sit under marketing, finance, sales, and other senior management functions while airlines and hotels typically place pricing under operations.  Even in terms of pricing education, universities are unsure if pricing should be in the domain of accounting, finance, economics, marketing, or operations and all too often it falls under the domain of “not here”.
  • And, as far as pricing operating as a strictly self-contained function, that appears to be a relative non-starter as pricing decisions are shown to improve through cross-functional engagement according to research by Hamburg, Jensen, and Hahn.

Comparing the organizational design consistency of the pricing function against the accounting, operations, or sales and marketing functions reveals significant differences.  Corporations are performing the pricing function through multiple organizational structures, perhaps even when the contingencies are the same.  That is, the pricing function may exhibit the property of equifinality.  It may just be that the pricing function can be organized in different manners while achieving the same relative level of performance.

When does Equifinality apply?

Gresov and Drazin examined the conditions in which equifinality may arise and suspected they differ along two dominant dimensions: (1) the degree of conflict in functional demands, (2) the latitude in structural options.

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The degree of conflict in functional demands (vertical axis) refers to the requirements an organization may have of a specific function.  For instance, an organization may require the firm to be both innovative in product design and flexible in customer relations.  These two functional demands are relatively congruous and present a low level of conflict in functional demand.  In contrast, a corporation serving a mature market may strive for both superb product innovation and superb manufacturing efficiency.  These two functional demands are inconsistent and may create a high level of functional conflict.

For the pricing function, we find a relatively high degree of conflict in functional demands.

  • On one hand, every transaction with every customer has to be priced, and the price may differ by customer and customer situation, and it has to be priced relatively quickly to match the decision timeframe of the customer.  This calls for a pricing function that strives for operational efficiency and excellence in price variance, discounting, and promotional management.  These are areas where many pricing experts have promoted the use of continuous improvement and Six-Sigma methodologies to drive pricing excellence.
  • On the other hand, every product or product line has to be priced to the market overall.  This calls for a pricing function that aims for excellence in detecting the drivers to customer value and identifying means to segment customers at a granular level according to the value an offer delivers.  These are areas where many pricing experts have promoted a combination of market research and creativity in pricing design.
  • If balancing the organizational design requirements for both creativity and efficiency were not enough, we can also add the demands for the pricing function to address competitive, legal, social, and corporate challenges—some of which may be in conflict themselves.

The latitude of structural options (horizontal axis) refers to “the structural flexibility or latitude available to the organizational designer” (Gresov & Drazin).  For instance, in a highly unionized organization there may be little design latitude regarding rewards, job classification, or specialization, resulting in a highly constrained set of structural choices.  In contrast, a newly formed entrepreneurial organization may find it is designing itself from a blank sheet of paper without guidelines—that is, it has relatively unconstrained structural options.

For the pricing function, we suspect there are relatively few structural constraints.  This suspicion is grounded in observation: (1) pricing is observed to report to many different executive functions, (2) executives across the differing organizational structures tend to defend their individual structural choice as optimal for their organization, and (3) we lack definitive evidence that these claims by executives are false.

We said “few”, not zero, structural constraints.  It is clear that one structural constraint must be managed by every corporation when it comes to organizational design and the pricing function: politics.  Pricing decisions are high-impact decisions affecting the corporation and the corporate organization broadly.  As such, owning the pricing function confers to the owner a tremendous amount of power.  Politics, at a fundamental level, is about power.  This specific structural constraint fortunately can be mitigated and managed through leadership and the application of rationality with respect to tradeoffs.  So politics may not have any special relevance with respect to the outcomes of good organization design for the pricing function other than be acknowledged as an issue to be managed.

These two dimensions naturally lead to the management consultant’s favorite communication tool:  a four quadrant matrix, as summarized below.

Equifinality in Organization Design

Degree of Conflict in Functional Demand

Latitude of Structural Options

Equifinal Situation

Nature of Organizational Design Decision

Low

Constrained

Ideal Profiles

One organizational structure dominates all others.

Low

Unconstrained

Suboptimal Equifinality

A dominant singular or consistent set of functional demands will inform the organizational design decision at the expense of other design requirements, and performance will be suboptimal.

High

Constrained

Tradeoff Equifinality

More than one organizational structure work equally well and the choice between the various structures reflects managerial knowledge of the tradeoffs and personal preferences.

High

Unconstrained

Configurational  Equifinality

More than one organizational structure work equally well and the choice between various structures reflects organizational goals and personal preferences.

 

Applying this paradigm to the pricing function, the suspected high level of conflict in functional demands coupled with the relatively unconstrained latitude of structural options leads to the situation of configurational equifinality.  That is, for the pricing function to operate well, there may be several “optimal” ways to structure the effort, and the optimal structure for a specific corporation will depend on the goals and preferences of that corporation.

What is the value of applying Equifinality to the issue of Pricing?

Pricing may be really different from sales, accounting, operations, and product management.  This difference may be reflected in the differences between corporations in how they structure and position the pricing function.  And hence, for designing your organization for pricing excellence, we are returned to the original question with one alteration: What decisions should the pricing function be making to help your organization reach its goals?   Since your organization’s goals will differ from your competitors, you are likely to find that your pricing organization will also be different.

Applying the concept of equifinality to the pricing function implies that crafting a standard-template organizational design for the pricing function is a fool’s errand.  But it doesn’t leave us empty-handed.  Instead, it highlights the importance of doing the hard work of customizing the organizational design and structure for the pricing function for companies at the individual-firm level.  Thus we return to the more standard core actions in organizational development: clarifying goals, mapping workflows, closing gaps, reducing errors, and creating solutions all by using the right skill sets at the right moments for the right questions.

References



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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