Part 1: Why Good Companies Go Bad
How do new technologies and business models change the competitive landscape in an industry?
- They create new needs, cost savings, etc (e.g. photos no longer for storing, but for sending to
other people, etc.).
- Companies need to adapt to customers’ changing value perceptions to remain competitive.
Why do good companies go bad? (E.g. Nokia being late to realize that the future of mobile phones is
in touchscreen. They invested in R&D a lot, but no commercialization of touch screen, did not
embrace Android).
- Inertia: A tendency to do nothing or to remain unchanged. A tendency to follow established
patterns of behavior – even in response to dramatic environmental shifts.
o Stuck in the modes of thinking and working that brought success in the past.
- When successful companies face big changes in their environment, they often fail to respond
effectively. Unable to defend themselves against competitors armed with new products,
technologies, or strategies.
Incumbents are too fixated on how they learned to create customer value, and struggle when
new technologies or business models require them to revise the way they create value.
- The problem is not an inability to take action, but an inability to take appropriate action.
o E.g. due to managerial stubbornness or incompetence.
Sources of inertia:
- Strategic frames: The mindsets that shape how managers see the world.
o What business are we in? How do we create value? Who are our competitors? Which
customers are crucial? Which can we safely ignore?
o For managers who have been successful by relying on their strategic frames to make
decisions, it is difficult to accept that they need a new mindset.
- Routine rigidity
o Organizational routines: Established procedures to carry out organizational tasks or the way
things work in an organization.
o Organizations learn how to deal with situations and develop practices and procedures.
o Over time these practices and procedures are perfected and become automated responses
to business situations => so they become organizational routines.
o Routines are useful because they enable efficient operations (no longer have to think about
every single step).
o But they are also hard to change, or rigid.
- Resource rigidity
o Incumbents tend to invest in resources that have been useful to develop a competitive
advantage.
o They hesitate investing in new resources that have become important as a result of new
technologies and business models.
o (1) Failure to realize the importance of new resources
o (2) Fear of losing current customers
o (3) Constraints placed by investors and capital markets
Stock of incumbents lose value when they invest in new technologies
o E.g. polaroid also partly: they did invest in R&D, but kept e.g. using their old sales force.
,How to overcome inertia?
- A new business unit with decision-making authority focusing on new technology or business
model that works separately from the rest of the organization.
- Open innovation: Getting input for innovation processes form outside of the organization.
- Strategic alliances with other organizations to develop new products based on the new
technology or business model.
The Four Hallmarks of Active Inertia
The fresh thinking that led to a company’s initial success is often replaced by a
rigid devotion to the status quo (imitation, etc. reinforces managers’
confidence that they have found the one best way).
The dynamic of failure/sources of inertia - Four things happen:
1. Strategic frames become blinders. By focusing managers’ attention repeatedly on
certain things, frames can seduce them into believing that these are the only things that
matter, preventing them from noticing new opportunities and options
a. Strategic frames concentrate managers’ attention on what is important among all
data.
b. (e.g. Firestone did not sea Michelin as a huge competitor).
2. Processes harden into routines. People end up following the processes not because
they’re effective or efficient but because they’re well known and comfortable. Once it
becomes a routine, it prevents employees from considering new ways of working.
Alternative processes never get considered and active inertia sets in.
3. Relationships become shackles, limiting their flexibility and leading them
into active inertia. The need to maintain existing relationships with customers/employees/distributors (e.g. slow
to promote direct sales over the Internet because don’t want to antagonize distributors) can hinder companies in
developing new products or focusing on new markets.
4. Values harden into dogmas. As companies mature, however, their values often harden into rigid rules and
regulations that have legitimacy simply because they’re enshrined in precedent. As this happens, the values no longer
inspire, and their unifying power degenerates into a reactionary tendency to circle the wagons in the face of threats.
Renewal, Not Revolution
Successful companies can avoid or overcome active inertia: First, they need to break free from the
assumption that their worst enemy is paralysis. Action alone does not solve anything. Should focus
on: “What hinders us?”, focusing attention on the proper things: the strategic frames, processes,
relationships, and values that can subvert action by channelling it in the wrong direction.
- Often they have a good sense of what they need to do. Their problem is that they lack a clear understanding of how
their old formulas for success would hinder them in responding to the changes.
- Even after a company has come to understand the obstacles it faces, it should resist the impulse to rush forward.
Some business gurus exhort managers to change every aspect of their companies simultaneously, to foment
revolution within their organizations. The assumption is that the old formulas need to be thrown to the wind. But by
trying to change everything all at once, managers often destroy crucial competencies, tear the fabric of social
relationships that took years to weave, and disorient customers and employees alike.
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 for managers to respect the company’s
heritage. They should build on the foundations of the past even as they teach employees that old
strategic frames, processes, relationships, and values need to be recast to meet new challenges.
One of the cures:
,- Innovative culture to which all employees are engaged.
- Senior executives should role-model this
- “You take the risk, I take the blame”.
Unbundling the Structure of Inertia: Resource versus Routine
Rigidity – Gilbert
Proposition: The difficulty of changing with discontinuous technological change occurs because of a
failure to differentiate between two very distinct forms of inertia.
Incumbent inertia => the inability to enact internal change in the face of significant external change.
- Resource rigidity => the failure to change resource investment patterns.
- Routine rigidity => the failure to change the organizational processes that use those resources.
The problem of Incumbent Inertia
Of the many reasons that firms might underinvest in discontinuous change, resource dependency
and incumbent reinvestment incentives are two important inertial forces blocking incumbent
investment in discontinuous change.
- Resource dependency => a firm’s external resource providers shape and constrain its internal
strategic choices.
o Resource providers can include both capital markets and customer markets (think of e.g. funding, attention
denied by consumers if only focused on emerging market and not current consumers).
- Incumbent reinvestment (& market power) => If entry to a new technology is blocked,
incumbent firms, strongly positioned with a given technology, have strong incentives to reinvest
in their current market positions and not in the new technology => they desire to preserve
market power (and incumbent investment increases the probability of market adoption in a way
that alters a firm’s otherwise dominant position).
Routine Rigidity
Even when incumbent firms invest, there is a second inertial problem: the persistence and
inflexibility of firm routines.
- Part of the explanation for routine rigidity is that organizational processes that are tightly aligned
with one environment can be difficult to change, because they are self-reinforcing and are not
built to adapt to discontinuities. Further, exploitation processes can drive out exploration
processes, making it difficult to develop new capabilities.
- Another part of the explanation is that the original motivation for designing an organizational
routine can be separated from the people executing the routine: ingrained cognition, often tacit,
making it more difficult to recognize the sources within the routines that are creating the
difficulties.
The Effect of Threat Perception on Inertia
Threat perception => a deep sense of vulnerability that is assumed to be negative, likely to result in
loss, and largely out of one’s control.
Analysis of Data
In absence of threat:
- The field analysis confirmed that without a perception of threat, there was considerable
resource rigidity around discontinuous change.
, - Much of the initial resource rigidity stemmed from resource dependencies (hard to reconcile the
demands of print newspaper customers with the requirements of an emerging set of online
customers).
- Position reinvestment incentives. Resource rigidity in the initial response almost entirely in the
category of resource dependence. Even as these incumbent organizations came to realize the
risks incurred by depending so heavily on their traditional customers, they did not necessarily
overcome their resource rigidity (scared of cannibalization).
- Threat perception led to expanded financial and organizational commitment and generated
resource commitment (financial expenditures, headcount employees, management time, effort)
- The threat overcame customer dependencies that might otherwise have pulled investment
away from the new technology.
- Threat perception had a powerful catalytic effect on both types of resource rigidity.
P1: The perception of an imminent threat in the face of discontinuous change enables managers to
overcome sources of resource rigidity that stem from resource dependence and that stem from
incumbent position reinvestment incentives.
Threat Perception and Routine Rigidity
- Threat perception increased routine rigidity through the production of three intermediate
behaviours that amplify routine rigidity.
- (1) Contraction of authority. Corporate management asserted its control over decision making,
withdrawing considerable authority from operative divisions (more control to corporate officers)
o Also took the form of centralized decision approval and little autonomy.
o These restrictions increased reliance on existing routines because it limited alternatives
considered. Further, operating managers were less likely to change corporate-imposed
routines.
- (2) Reduced experimentation. The contraction of authority had a feedback effect on the level of
experimentation (constrained by corporate strategy) but not solely a function of corporate
control; the aggressive pace of resource commitment also made it more difficult to step back
and change behavior.
o If an initial response is wrong, then expanding resources may only solidify those initial
tendencies. The resources often reinforce rather than reshape established routines.
- (3) Focus on existing resources.
o The fear of cannibalizing the core newspaper business prompted managers to focus on their
existing resources, rather than consider new options presented by the new technology.
Because they were focused on the existing business, they responded with routines that
worked well in that business.
=> Focused on replication of the current product and business model (e.g. revenue streams). This
caused them missing features that new entrants did have, even though the technologies to develop
these features were largely available.
P2a: Perception of an imminent threat leads to a contraction of authority, reduced level of
experimentation and a focus on existing resources that amplifies routine rigidity.
An exception:
- The new venture was subsequently set up as a wholly owned subsidiary and hired outside
managers with new media experience. They also developed a separate brand to signal that the
product would be distinct from the newspaper => less routine rigidity.
