We have noted that when confronted with paradigm shifts, many incumbent businesses decline. This decline is normally due to the inability of an enterprise to change its strategy and organization architecture as rapidly as the environment is changing due to organization inertia.
By organizational inertia we mean internal and external forces that make it difficult to change the strategy or organization architecture of an enterprise. These inertia forces include cognitive schemata, internal political constraints, organizational culture, strategic commitments and capabilities, and external institutional constraints.
In the course of their work managers form cognitive schemata, which are mental models of the world their enterprise inhabits. These mental models include beliefs about what works and does not work in their business and about what is important and unimportant.
These models are based on experience. When a management team has worked together for some time, they often come to share the same worldview—the same cognitive schema—and this can influence their decision making. Although this can lead to quick decisions, management teams with a shared cognitive schema tend to ignore events, data, and suggestions that fall outside their schema:
They have cognitive blind spots. Consequently they may not understand the threat posed by new technologies and new enterprises. Cognitive schemata are usually adopted because they have worked in the past. Danny Miller has postulated that senior managers in successful enterprises often develop powerful cognitive schemata about the right way to do business, and this makes them particularly vulnerable to cognitive blind spots when new competitors or new technologies emerge.
Miller calls this the “Icarus paradox. ” Icarus, a figure in Greek mythology, used a pair of wings—made for him by his father—to escape from an island where he was being held prisoner. He flew so well that he climbed higher and higher, ever closer to the sun, until the heat of the sun melted the wax that held the feathers onto his wings and he plunged to his death in the sea. The paradox is that his greatest asset—his ability to fly—caused his demise. Miller argues that the same paradox applies to many once-successful enterprises.
According to Miller, managers at such companies become so dazzled by their early success that they believe more of the same type of effort is the way to future success: They develop powerful cognitive schemata about what works. Unfortunately these ideas can be invalidated by the rise of new technologies, but the managers may not recognize this until it is too late. One of Miller’s examples is Ken Olson, the brilliant entrepreneur who founded Digital Equipment Corporation (DEC), one of the dominant computer companies of the 1970s and 1980s.
The success of DEC was based on minicomputers, which were smaller than mainframe computers but far more powerful than the personal computers of the day. For all of hisbrilliance, Olson and his management team at DEC failed to see the threat posed by the rise of the personal computer, primarily because it fell outside their cognitive schema. DEC made powerful machines that were sold to businesses and accessed through terminals.
Olson believed that such machines were the way of the future. In 1977 Olson was asked what he thought of personal computers, which were just starting to emerge. He replied, “There is no reason anyone would want a computer in their home.” Olson didn’t get it! His company missed the personal computer revolution. Meanwhile, people who did get it, such as Steve Jobs at Apple, Bill Gates at Microsoft, and Michael Dell at Dell Computer, were busy laying the foundations for a revolution in the industry.
INTERNAL POLITICAL CONSTRAINTS
Organizations can be thought of as political systems within which there is an existing distribution of power and influence. The power and influence enjoyed by different managers is a function of several things, including their position in the hierarchy, their control over valuable resources and information, and their perceived expertise.
For example, a well-regarded marketing vice president whose sales database gives her access to important information about customer preferences might enjoy significant power in an organization otherwise dominated by engineers. Personal attributes are also a source of power, including a manager’s energy, eloquence, empathy with others, and physical endurance.
Senator Ed Muskie, one of the most powerful members of the Senate during his day, was reputed to be able to get things done, and thus accumulate power, in part because of his enormous physical stamina. When a bill was being debated in committee, he never left the room, not even to go to the bathroom—proving the old adage that a large bladder can be an asset in a bureaucracy.
However power is accumulated, managers who possess it are unlikely to give it up willingly, and this is the problem. Any change, almost by definition, tends to alter the established distribution of power and influence within an organization. Those whose power is threatened by change will naturally tend to oppose it, often arguing that the change is inappropriate.
Because they have power, this opposition may be considerable. To the extent that they are successful, this constitutes a source of organizational inertia that might slow or stop change.
For example, in the 1990s the large Dutch multinational enterprise Philips NV increased the roles and responsibilities of its global product divisions and decreased those of its foreign subsidiary companies. The idea was to consolidate power in the hands of divisional heads, letting them reap economies of scale and lower costs by closing down factories in various countries and consolidating production in a few efficient plants.
This implied that managers running the foreign subsidiary companies, who had wielded considerable power within Philips, would see their power and influence decline. As might be expected, the managers of foreign subsidiary companies did not like this change and resisted it, which slowed the pace of change and put Philips at a competitive disadvantage relative to rivals like Sony and Matsushita, both of which had powerful global product divisions.
Another source of organizational inertia is the existing culture of the enterprise as expressed in norms and value systems. Closely related to cognitive schemata, value systems reflect deeply held beliefs; as such they can be hard to change.
If the formal and informal socialization mechanisms within an organization have emphasized a consistent set of values for a prolonged period, and if hiring, promotion, and incentive systems have all reinforced these values, suddenly announcing that those values are no longer appropriate and need to be changed can produce resistance and dissonance among employees.
At Philips, for example, the culture had long placed a high value on granting autonomy to the managers running foreign subsidiaries. The changes of the 1990s implied a reduction in this autonomy, which contradicted the established values of the company and was thus resisted.
COMMITMENTS AND CAPABILITIES
A major determinant of the ability of an incumbent firm to respond to new competition is the nature of that firm’s prior strategic commitments. Strategic commitments are a firm’s investments in tangible and intangible assets to support a particular way of doing business (a particular business model). Tangible assets are buildings, plants, and equipment. Intangible assets include capabilities (skills and knowledge) that are accumulated over time.
Once a firm has made a strategic commitment, it will have difficulty responding to new competition if doing so requires a break with this commitment. When established firms have deep commitments to a particular way of doing business and have developed supporting capabilities, they may be slow to imitate an innovating firm’s strategy or adopt radical new technology. In part this is because they are unwilling to walk away from their existing commitments; and their capabilities may not be well suited to the new competitive environment, so they stick with what they know best even if that is no longer working.
The history of the U.S. automobile industry offers an example. From 1945 to 1975 the industry was dominated by the stable oligopoly of General Motors, Ford, and Chrysler, all of which geared their operations to making large cars, which American customers demanded at the time. When the market shifted from large cars to small, fuel-efficient ones during the late 1970s, U.S. companies lacked the assets and capabilities required to produce these cars.
Their prior commitments had built the wrong assets and capabilities for this new environment. As a result, foreign producers, particularly the Japanese, stepped into the market breach by providing compact, fuel-efficient, high-quality, low-cost cars. The failure of U.S. auto manufacturers to react quickly to the entry of Japanese auto companies gave the latter time to build a strong market position and brand loyalty, which subsequently has proved difficult to attack.
Ironically the same thing seems to be occurring now, with high fuel prices switching demand away from the large SUVs made by Ford and General Motors and toward small fuel-efficient cars, such as the Toyota Prius, built by foreign manufacturers.
Another example is IBM. In the 1980s IBM had major investments in the mainframe computer business. When the market shifted toward personal computers, IBM was stuck with significant assets specialized to the declining mainframe business: Its manufacturing facilities, research organization, and sales force were geared to the production of mainframes.
Because these assets and capabilities were not well suited to the emerging personal computer business, IBM’s difficulties in the early 1990s were in a sense inevitable. Its prior strategic commitments locked it into a business that was shrinking. Shedding these assets was bound to cause hardship for all organization stakeholders.
EXTERNAL INSTITUTIONAL CONSTRAINTS
External constraints imposed by powerful institutions, such as government agencies or labor unions, can also act as a source of inertia. Unions, for example, might resist job cuts or attempts to introduce flexible work rules, thereby slowing a firm’s ability to meet new competition. The ability of established airlines such as United to respond to low-cost competitors such as Jet Blue and Southwest, for example, has been hindered by strong labor unions that have resisted attempts to change aspects of their employment contracts and to restructure pensions, which has kept the cost structure of United Airlines high.
Similarly, government regulations can limit the ability of an organization to change its strategy and organization to meet new competition. In some countries, for example, local content rules specify that a certain percentage of a product sold in a country must be produced there. This can make it difficult for a business to counter low-cost competition by moving parts of its production system to countries where costs are lower.
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