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Long summary articles and lectures Changing business Strategically
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Content module 1 - Changing competitive landscape and incumbentsIn this session we will focus on:
➔ How new technologies and/ business models change the competitive landscape in
an industry;
➔ Why incumbents (established companies in an industry) are badly hit by these
changes;
➔ How incumbents can embrace new developments and stay competitive.
First read the first article for a general view of the concept of inertia. Then watch this short
video about a small specific example of addressing issues created by organizational inertia.
Then read the other two academic articles that offer a detailed view and of companies can
overcome it. Then read the case and think critically in light of these articles about why
Polaroid lost its competitive position and what it could have done differently to maintain it.
Sull DN. 1999. Why good companies go bad. Harvard Business Review 77(4): 42-+.
Unable to defend against competitors armed with new products, technologies, or
strategies, they watch their sales (customers) and profits erode, best workers leave, and
stock valuations (investors) tumble, (competitors stop imitating). Some recover after
downsizing and restructuring.
Executives assume the enemy is paralysis (freeze) and the best defense is action, but the
action itself can be the enemy. Reasons for the problem: managerial stubbornness, sheer
incompetence, most common: active inertia. Inertia is usually associated with inaction, but
also use the term to describe a moving object’s tendency to persist in its current
trajectory (grows from success). Active inertia is an organization’s tendency to follow
established patterns of behavior even in response to dramatic environmental shifts - stuck
in the modes of thinking and working that brought success in the past.
Firestone: Michelin introduced radial tire to the U.S. market based on a breakthrough in
design. Firestone already expected this and invested in radial production, building a new
plant. The response was quick, but even as they invested in a new product, they clung to old
ways of working. Rather than redesign the production process, just tinkered with them
(prutsen) and delayed closing factories bias tires despite indications of their obsolescence.
Laura Ashley women’s apparel: when Laura died, Bernard kept the company on the course
his wife had set, fashion, however, changed. As more women entered the workforce, they
increasingly chose practical, professional attire; and production was outsourced as trade
barriers were falling. 7 CEOs in a decade, but remained unclear whether it was a brand,
manufacturer, retailer or integrated fashion company.
The fresh thinking that led to initial success is often replaced by a rigid devotion to
the status quo. Origin of success: fresh competitive formula = distinctive combination of
strategies, processes, relationships, and values that sets them apart from the crowd. The
formula that brought success instead brings failure.
The four hallmarks of Active inertia - the dynamic of failure
,1. Strategic frames become blinders
Strategic frames: the set of assumptions that determine how managers view the business -
provide answers to key strategic questions, what is important. → focus attention on certain
things, seduce them into believing these are the only things that matter = peripheral vision;
prevents from noticing new options and opportunities. As strategic frames grow more rigid,
managers often force surprising information into existing shema or ignore it. France’s military
fixed defences from WWI were blinder WW2; Xerox saw IBM and Kodak as enemy but new
threat posed by Canon and Ricoh which distracted from emerging of personal computers.
2. Processes harden into routines
Processes: the way things are done. Once found a way that works well, lock into chosen
process and stop searching for alternatives. It leads to productivity and experience and
coordination; but follow not because effective or efficient but because well known and
comfortable, once routine it prevents from considering new ways of working. McDonalds
was slow to respond because of standardization, single-minded focus mass-production.
3. Relationships become shackles (boeien/belemmeringen)
Relationships: the ties to employees, customers, suppliers, distributors, and shareholders.
They limit flexibility which leads to active inertia, need to maintain existing relas can hinder
companies in developing new products and focusing on new markets. Apple engineers
refused to change their ways, enabled early growth but hindered responding to
environmental changes. Banc One uncommon partnerships motivated managers to act as
entrepreneurs and respond to local market conditions; but consolidation and deregulation
changed in industry with customers stolen and high costs of decentralized operations. Also
relations distributors Dell and travel agents KLM.
4. Values harden into dogmas (onbetwistbare leerstelling)
Values: the set of shared beliefs that determine corporate culture, unify and inspire people,
how employees see themselves and employer. Values harden into rigid rules and regulations
- no longer inspire. Shell distaste for central control - decentralization → not quickly
rationalizing operations and cutting costs when oil prices fell.
Polaroid: once vibrant values ossified; success was pioneering exciting technologies - R&D
leadership, but devotion to excellent research turned into disdain other business activities
like marketing and finance.
“What hinders us?” instead of “What should we do?”, focus on strategic frames,
processes, relationships, and values - how old formulas for success hinder in responding to
changes. Active inertia exists because the pull of the past is so strong. Trying to break that
pull through a radical act of organizational revolution leaves people disoriented and
disenfranchised, cut off from the past but unprepared to enter the future. It’s better to respect
a company's heritage and build on its foundation. Outsiders are often quick to throw out all
old ways of working - look for new leaders from within the company but outside the core
business = inside-outsiders.
Gilbert CG. 2005. Unbundling the Structure of Inertia: Resource Versus Routine
Rigidity. Academy of Management Journal 48(5): 741-763.
,Unbundle the structure of inertia into two distinct categories: resource rigidity (failure to
change resource investment patterns) and routine rigidity (failure to change organizational
processes that use those resources). Given discontinuous change, a researcher's failure
to recognize these distinctions can generate conflicting findings regarding effects of threat
perception on inertia. Using field data on the response of newspaper organizations to the
rise of digital media, I show that a strong perception of threat helps overcome resource
rigidity but simultaneously amplifies routine rigidity. I develop an interpretive model exploring
mechanisms for overcoming these divergent behaviors. Failure to differentiate between
two forms of inertia important when exploring the role of threat perception under conditions
of discontinuous change. Threat perception can enable response and constrain response -
two forms help explain contradiction. How managers perceive the threat of discontinuous
change (external changes that require internal adaptation along a path that is
nonlinear relative to traditional innovation trajectory) creates paradoxical links between
resource and routine rigidity.
Resource rigidity: of the many reasons that firms might underinvest/unwillingness to
invest (motivation to respond) in discontinuous change, resource dependency and
incumbent reinvestment incentives are two important ones.
1. Resource dependency theory: firm's external resource providers (capital and customer
markets) shape and constrain its internal strategic choices. Customers can penetrate
internal resource allocation systems: initial price/performance of emerging
technologies render them competitive only in emerging market segments, and not current
customers, resource allocation mechanisms typically deny resources to such
technologies.
2. Market power: do firms that are strong positioned with given technology invest sufficient
resources in discontinuous change? → If entry to new technology is blocked, incumbent
firms have strong incentives to reinvest in their current market positions and not in the
new technology.
Constraints stem from desire to preserve market power or blinders created by resource
dependence → inertial
Routine rigidity: even when incumbent firms invest, persistence and inflexibility of firm
routines (repeated patterns of response involving interdependent activities that become
reinforced through structural embeddedness and repeated use). → Inability to change
the patterns and logic that underlie investments (structure of response).
1. Processes tightly aligned with one environment can be difficult to change because
self-reinforcing and not built to adapt to discontinuities.
2. Exploitation processes can drive out exploration processes, making it difficult to
develop new capabilities.
3. Motivation designing organizational routine can be separated from people executing
routine, related to deeply ingrained cognition (tacit) - difficult to recognize sources
within routines are creating difficulties → managers rely on a learned pattern of response
that is structurally and cognitively reinforced, instead of employing new search efforts.
Effect of threat perception on inertia: deep sense of vulnerability that is assumed to be
negative, likely to result in loss, and largely out of one’s control. SM literature: catalyst in
reducing inertia, management literature: three intermediate behaviours that increase inertia:
, contraction of authority, reduced experimentation, focus on existing resources. Threat
can lead to increased centralization of authority, more extensive formalization, and
standardization of procedures; or contraction of authority in crisis situations; or narrow
number alternatives leaders willing to consider and level of experimentation →
threat-induced behaviour directed toward preserving current resources rather than toward
creating new opportunities.
1. How does threat perception affect incumbent inertia in the face of discontinuous change?
2. Is the effect of threat perception different for resource rigidity and routine rigidity?
Resource rigidity is concerned with movement along a line, while routine rigidity deals
with the trajectory of the line. Threat decreases resource rigidity but increases routine
rigidity in a predictable = repeated pattern across previous studies. Perception of threat
can lead to intense resource commitment even in the absence of core customer
demand. Ability to overcome one type of inertia appears to increase problems with the
other. The observed increase in routine rigidity stems from three intermediate behaviors
that arise from threat-induced response - contraction of authority, reduced
experimentation, and focus on existing resources. These behaviors were shown to be
self-reinforcing.
Structural differentiation: previous research links structural autonomy and innovation.
Outside influence shapes the choice to structurally differentiate and that structural
differentiation cultivates an environment in which managers are more likely to turn their
attention to the independent opportunity associated with a discontinuity. Link between
structural choice and outside influence from external networks: outside friend of CEO;
board member and new hire; comparative successes with outside partners; outside advisor
→ influence as a function of status or intensity of interaction. Outside influence, structural
independence, and opportunity orientation combine to relax routine rigidity and encourage
innovation.
Structural autonomy allows threat and opportunity cognition to have different impacts on
different parts of an organization simultaneously. Threat framing overcomes resource rigidity
in the parent, while opportunity framing eases routine rigidity in the autonomous venture
Although previous studies have shown the benefits of structural autonomy for innovation, the
current research broadens knowledge of what leads firms to structurally differentiate by
making links to outside influence and external networks. Moreover, the benefit of structural
autonomy is more than simply providing a separate setting for innovation. Structural
autonomy helps decouple the effects of cognition on different types of inertia - separate
structure allows threat perception to overcome resource rigidity in a parent company, while
opportunity perception relaxes routine rigidity in a new venture. Distinguishing between
resource and routine rigidity not only helps explain response to discontinuous change, but
also opens up future research exploration of the differences and interactions between these
categories of inertia.
Kapoor R, Klueter T. 2015. Decoding the Adaptability–Rigidity Puzzle: Evidence from
Pharmaceutical Incumbents’ Pursuit of Gene Therapy and Monoclonal Antibodies.
Academy of Management Journal 58(4): 1180-1207.
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