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Changing Business Strategically 2022/2023 | Dorith BronzwaerCHANGING ENVIRONMENT AND
INERTIA
CHANGING A BUSINESS STRATEGICALLY
CHANGING COMPETITIVE LANDSCAPE
- In many industries, new technologies and business models change the competitive landscape by redefining how
customer value is created
- New technologies are developed constantly, but their impact on companies are different depending on whether
or not they require new business models
- Sustaining technologies do not require a new business model to be utilized commercially à new products
using these technologies can be delivered through using existing business models
- Disruptive technologies require a new business model to be utilized
- Disruptive technologies caused successful companies to rapidly collapse à they collapsed because they
did not realize the disruptive nature of new technologies à they tried to utilise these new technologies with
their old business models à led to new products that did not meet the expectations of customers, quickly
resulting in the collapse of these companies
- Reason why previously successful companies were unable to utilize the new technologies properly was inertia
- Inertia = resistance to change
3 DIMENSIONS OF SUCCESSFULLY ADAPT A BUSINESS TO CHANGING COMPETITIVE
LANDSCAPE
1. Phycological
- The manager and employees need to be psychologically
convinced that change is needed, and ready to
implement necessary change actions
2. Technological
- Companies should be able to develop necessary
technological capabilities, or otherwise access them
- They need to configure them in a way that addresses
customer needs
3. Relational
- Companies need to have relational capabilities to develop
and manage their collaborations with external partners
WHY CAN’T GOOD FIRMS ADAPT?
- Inertia à tendency to do nothing or to remain unchanged
- Managers mindsets are shaped by old ways of doing business which made them successful so far
- Organizational processes evolved to run the current business efficiently are difficult to manage
- Investing in new resources to embrace the new technologies or business models involves difficult trade-offs in
resource allocation decisions
- 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
POPULATION ECOLOGY THEORY
- Organizations, like living organisms, are born, grow, and
die
- In order to survive and grow (or adapt to their
environment) organizations need to develop processes
that allow them to replicate their outputs consistently
and efficiently
- Efficiency: doing things right (production process of
McDonald’s)
- This refinement and perfection cycle makes organizational processes more efficient, but also more rigid à difficult
to change or adapt
- Conflict of interest among organizational members make agreements about how to change existing
processes difficult
- Environmental changes, which require new processes, also create uncertainty, which makes it difficult to
understand how existing processes should be changed to make them more effective
- Effective: doing the right things
- When the environment changes radically, existing processes are no longer effective
- Replacing them with more effective processes is difficult due to their rigidity à organizational inertia
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, Changing Business Strategically 2022/2023 | Dorith Bronzwaer
WHY GOOD COMPANIES GO BAD (SULL, 1999)
INTRODUCTION
- One of the most common business phenomena is also one of the most perplexing à when successful companies
face big changes in their environment, they often fail to respond effectively
- The problem is not an inability to take action but an inability to take appropriate action
- One of the most common reasons is active inertia (usually associated with inaction)
- Active inertia = 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, market leaders simply accelerate
all their tried-and-true activities.
- Because active inertia is so common, it is essential to understand its sources and symptoms
- If executives assume that the enemy is paralysis, they will conclude that the best defence is action, but if they
see that action itself can be the enemy, they will look more deeply into all their assumptions before acting,
leading to a clearer view of what really needs to be done and what prevents them from doing it
FOUR HALLMARKS OF ACTIVE INERTIA
Strategic frames become Processes harden into Relationships become
Values harden into dogmas
blinders routines shackles
•Strategic frames helps •Routine rigidity •Companies must build •Companies values are the
concentrate managers' •Employees have strong strong relationships with set of deeply held beliefs
attention on what is incentives to lonk into employees, customers, that unfy and inspire its
important but it can also processes they know work suppliers etc. people
blind them by: to increase their •But when conditions shift, •As companies mature,
• Seducing them into productivity, however they these relationships can their values harden into
believing that these are often become "the way become shackles, limiting rigid rules and regulations
the only things that matter things are done" flexibility and leading to •When that happens,
•Constrict peripheral vision, •Once a process becomes active inertia values no longer inspire,
preventing people from a routine, it prevents and their unifying power
noticing new options and employees from degenerates into a
opportunities considering new ways of reactionary tendency to
•Force surpising information working circle the wagons in the
into the existing schema or face of threats
ignore it
ORGANIZATIONAL INERTIA
3 SOURCES OF INERTIA
STRATEGIC FRAME RIGIDITY
- Strategic frames = the mindsets that shape how individuals see the world and how they believe satisfactory
outcomes will be achieved
- Strategic frames of managers = the mindsets that shape how managers see the business world and how they
believe customer value should be created:
- What business are we in?
- How do we create value?
- Who are our competitors?
- Which customers are crucial?
- 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
- Managers of established companies are too fixated on how they learned to do business
- Their ways of thinking are shaped by old ways of doing business that brought success in the past
- Established organizations struggle when new technologies or business models require them to revise the way they
create value
ROUTINE RIGIDITY
- Organizational routines = established procedures to carry out organizational tasks, or “the way things work in an
organization”
- Organizations learn how to deal with situations and develop practices and procedures
- Over time these practises and procedures are perfected and become automated responses to business situations
à become organizational routines
- Routines are useful because they enable efficient operations, but that are also hard to change, or rigid
RESOURCE RIGIDITY
- Incumbents tend to invest in resources that have been useful to develop a competitive advantage in the past
- They hesitate investing in new resources that have become important as a result of new technologies and
business models
- Why?
- Failure to realize the importance of new resources
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, Changing Business Strategically 2022/2023 | Dorith Bronzwaer
- Fear of losing current customers
- Constraints placed by investors and capital markets
- Stock of incumbents lose value when they invest in new technologies
OVERCOMING INERTIA
SOLUTION: RENEWAL
- Success breeds active inertia, which breeds failure. But failure is not an inevitable consequence of success
- Successful companies can avoid, or overcome, active inertia
- Companies have to break free from the assumption that their worst enemy is paralysis
- Need to realize that action alone solves nothing
- Instead of rushing to ask, “what should we do”, managers should ask “what hinders us?” à focuses on
strategic frames, processes, relationships and values that can subvert action by channelling it in the wrong
direction
- Should have a clear understanding of how their old formulas for success would hinder them in responding
to the changes
- After a company has come to understand the obstacles it faces, it should resist the impulse to rush forward
- Changes everything will not help, as it destroys crucial competencies, breaks social relationships, and
disorient customers and employees alike.
- Managers should respect the company’s heritage, build on the foundations of the past as they teach employees
that old strategic frames, processes, relationships, and values need to be recast to meet new challenges.
RESEARCH INVESTMENTS AND OVERCOMING INERTIA (KAPOOR & KLUETER, 2015)
INTRODUCTION
- Recent studies have consistently found incumbents to be more responsive to and to invest in the radical
technology
- Within this research stream, the adaptability of incumbents in the face of technological change has been
attributed to their ability to leverage their specialized complementary assets that are necessary for the
commercialization of the new technology
- Therefore, investments in radical technologies, coupled with access to specialized complementary assets,
are generally theorized to facilitate adaption
INCUMBENTS INERTIA WITH RESPECT TO PRODUCT DEVELOPMENT
IN-HOUSE RESEARCH
- Investments in in-house research are embedded in the organization, and managers decide whether and how to
support them through product development and commercialization initiatives
- In-house research will less likely result in development when the radical technology regime is disruptive than when
it is sustaining
- subject to incentive structures, cognition of managers, and resource allocation processes (difficult to lead to
subsequent product development)
CONTRACT RESEARCH
- Investments in contract research involves an incumbent firm outsourcing a given R&D project and/or licensing a
specific intellectual property with the goal of adding new knowledge to the firm, after the externally developed
knowledge is acquired, the incumbent firms makes decisions regarding subsequent product development and
commercialization
- Contract research may be less readily translated into product development when the technological regime is
disruptive than when it is sustaining
- subject to incentive structures, cognition of managers, and resource allocation processes
- Royalty payments to the licenser further diminishes their incentives to initiate product development for new
technologies with an unproved business model
RESEARCH ALLIANCES
- Alliances involve partners jointly pooling their resources to discover new technological solutions
- Alliances are characterized by a dedicated decision making and governance structure comprising technical and
managerial personnel from partners
- Decisions regarding product development is also done by the outside partner who are not subject to the
incumbent's cognitive constraints and have strong incentives to commercialize their research despite an
unproved business model
- Alliances are often governed by middle managers who are less constrained by the existing beliefs and incentives
of the top managers
- alliances are often managed through a separate organizational unit, thus decision making is structurally
separated from the mainstream incumbent organization, reducing inertial pressures
- Incumbents firm's managers are in close contact with outsiders, thus are more informed about commercialization
opportunities and more likely to question the status quo with respect to prevailing the business model
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