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Strategic Flexibility and Competitive Advantage Kathryn Rudie Harrigan Subject: Business Policy and Strategy, Operations Management DOI: 10.1093/acrefore/9780190224851.013.2

Online Publication Date: Mar 2017

Summary and Keywords Concerns regarding strategic flexibility arose from companies’ need to survive excess capacity and flagging sales in the face of previously unforeseen competitive conditions. Strategic flexibility became an organizational mandate for coping with changing competitive conditions and managers learned to plan for inevitable restructurings. They learned to reposition assets and capabilities to suit their firms’ new strategic aspirations by overcoming barriers to change. Core rigidities flared up in the form of legacy costs, regulatory constraints, political animosity, and social resistance to adjusting firms’ strategic postures; managers learned that their firms’ past strategic choices could later become barriers to adapting corporate strategy. Managerial insights concerning how to modify firms’ resources changed the way in which they were subsequently regarded. Enterprises saw assets lose their relative productivity and value as mastery of specific knowledge become less germane to success. Managers recognized that their firms’ capabilities were mismatched to market or value-chain relationships. They struggled to adapt by overcoming barriers to change. Flexibility problems were inevitable. Even if competitive conditions were not impacted by exogenous change forces, sustaining advantage in a steady-state competitive arena became difficult; sustaining advantage in dynamic arenas became nearly impossible. Confronted with the difficulties of changing strategic postures, market orientations, and overall cost competitiveness, managers embraced the need to combat organizational rigidity in all aspects of their firms’ operations. Strategic flexibility affected enterprise assets, capabilities, and potential relationships with other parties within firms’ value-creating ecosystems; the need for strategic flexibility influenced investment choices made to escape organizational rigidity, capability traps and other forms of previously unrecognized resource inflexibility. Where entry barriers once protected a firm’s strategic posture, flexibility issues arose when the need for endogenous changes occurred. The temporary protection afforded by imitation barriers slowed an organization’s responsiveness to changing its strategy imperatives—making the firm rigid when adaptiveness was needed instead. A firm’s own inertia to change sometimes created mobility barriers that had to be overcome when hypercompetitive conditions arose in their traditional market arenas and forced firms to change how they competed. Where exogenous changes drove competitive conditions to become more volatile, attainment of strategic flexibility mandated the need to downsize the scope of a firm’s activities, shut down facilities, prune product lines, reduce headcount, and eliminate redundancies—as typically occurred during an organizational turnaround—while simultaneously increasing the scope of external activities performed by an enterprise’s value-adding network of suppliers, distributors, value-added resellers, complementors, and alliance partners, among others. Such structural value-chain changes typically exacerbated pressures on the firm’s internal organization to search more broadly for value-adding innovations to renew products and processes to keep up with the accelerated pace of industry change. Exploratory processes of self-renewal forced confrontations with mobility or exit barriers that were long tolerated by firms in order to avoid coping with the painful process of their ultimate elimination. The sometimes surprising efforts by firms to avoid inflexibility included changes in the nature of firms’ asset investments, value-chain relationships, and human-resource practices. Strategic flexibility concerns often trumped the traditional strengths accorded to resource-based strategies. Keywords: flexibility, advantage, strategy, mobility, value chain, investments, competition, barriers, outsource

Introduction Firms’ need for strategic flexibility arose from concerns about future uncertainty (Eppink, 1978), with a particular concern for the effects of irreversible types of changes on firms’ strategic postures (Rhenman, 1973). Highly specialized assets had few alternative uses, which could become a matter for concern if those assets were no longer needed in the future. Strategic flexibility became of greater concern as the nature of competition dramatically evolved away from the activities and assets that had once been firms’ bastions of relative strength in serving customers. Strategic flexibility had been critical to achieve since professionals in the Office of Strategic Services planned logistical programs of troop support during World War II and subsequently wrote about their insights. In particular, Igor Ansoff’s (1965) writings (based on his Rand Corporation and Lockheed Aircraft assignments) sensitized managers to the need for contingency planning in their strategic thinking. Challenges from accelerating rates of technological change (and from entry by lower-wage offshore competitors) heightened managers’ concerns that their firms must plan proactively for strategic renewal in order to cope with continuous competitive change (Aaker & Mascarenhas, 1984; Chakravarthy, 1984; Hayes & Abernathy, 1980). In some cases, strategic flexibility concerns trumped the value accorded to resource-based strategies. The sometimes surprising results of avoiding inflexibility included changes in the nature of firms’ asset investments, value-chain relationships, and human-resource practices. In this article about strategic flexibility, managers’ concerns about being trapped by ineffective strategic postures are traced from the economic theory of entry barriers, mobility barriers, and exit barriers. Physical assets and knowledge are highlighted as the corporate resources that were most at risk of becoming inflexible as the duration of all sources of competitive advantage became shorter over time. First, managerial practices are reviewed for substituting inflexible resources, as needed, to serve new types of customers. Typically, managers improved their firms’ strategic planning processes to remain flexible as competition intensified. Second, the impact of hypercompetitive environments on the effectiveness of all types of resource-based strategies is outlined. The quest to keep resources competitive is often translated into configurations that emphasize both flexible operations and the outsourcing of less-critical activities to supply-chain partners. Efforts to become asset-light are explained in terms of virtuality, partnering arrangements, and other relationship-based strategies. Organizational rigidity explains why the market for corporate control has often swept inflexible firms into workout processes where they may be starved of capital and cannot invest in the physical assets needed to regain their competitiveness. The dark side of organizational rigidity is explored in terms of bankruptcies, liquidations, and other restructuring arrangements. Organizational ambidexterity sometimes emerges as a means of survival after firms have faced threats of such outcomes. Finally, the conclusion is reached that firms’ continued ability to maintain strategic flexibility over time in the face of many exogenous changes may itself be a source of competitive advantage to cultivate.

Barriers and Strategic Flexibility Strategic flexibility concerns about adapting to changing competitive success requirements were exacerbated by the propensity for entry barriers—which had protected firms’ competitive positions initially (Bain, 1956)—to subsequently become mobility barriers when competitive conditions changed adversely (Caves & Porter, 1977). Enterprises that had not anticipated such changes faced difficulty repositioning themselves within a market, changing their game plans, or dismantling their current strategic postures, whereas younger competitors moved on to cope with exogenous changes in their markets by changing the rules of their mutually competitive game (D’Aveni, 1994). Industry-wide average profit margins had indicated an industry’s relative attractiveness (Porter, 1980), and possession of valuable resources had contributed to a particular firm’s ability to outperform the industry’s average return on sales (Collis, 1991; Wernerfelt, 1984). High entry barriers were typically associated with unique and valuable resources. When these were possessed, firms’ choices in their strategic postures seemed to promise competitive advantage in the short-term. However, with time, the tangible and intangible resources that had once made a firm’s strategic posture difficult to imitate (by acting as entry barriers) could become neutralized by exogenous forces. For example, well-established firms that had for decades won patents to protect their technologies eventually faced disruptive competition from start-up firms which did not have to fund the pensions of the retired scientists and engineers who had created the patented inventions. This lack of liability provided competitive advantage for the newer competitors. In some examples of strategic inflexibility, new types of competitors having lower-wage cost structures (or different macroeconomic objectives for engaging in commerce) captured many of the traditional customers of well-established firms by emphasizing product attributes the extant firms could not readily match. In other cases, economic recession, regulatory constraints, or demographic changes eroded demand for products and services so dramatically that assets had to be bottlenecked (throughput volumes were limited artificially ) or other adjustments made to reduce excessive operating costs created by excess capacity (DeWitt, 1998). Technological changes made some products—as well as the assets used to provide them—obsolete (Harrigan, 1980B ), while the switching-cost barriers that had once commanded customer loyalties became eroded by exposure to new ways of satisfying demand introduced by the new competitors. In light of these environmental changes, many firms tried unsuccessfully to change how they operated (Chang, 1998; Reed & DeFillippi, 1990), but they discovered that regulatory, political, and social resistance to adjusting their strategic postures made change difficult to implement (Lorange & Murray, 1984). Strategic inflexibility inhibited firms’ abilities to make changes to strategy because the very entry barriers that had once protected a firm’s ability to extract rents from its strategic outlays later hamstrung that same firm’s ability to make necessary changes to its resources, capabilities, and personnel practices. Consequently, managers took actions to understand the dynamics of barriers to change in order to modify their firms’ asset investments proactively. Barrier asymmetry had once been the basis for value in firms’ resources. Firms would later repudiate this attribute, which had once conveyed advantage, in order to remain flexible.

Mobility Barriers Entry barriers (i.e., resources that prevented the easy imitation of firms’ unique strategic postures) sometimes also prevented protected firms from repositioning their market orientations to serve new types of customers effectively (or to serve extant customers differently). For example, the brand equity and ubiquitous store locations of retailer Sears, Roebuck lost value as younger shoppers patronized online specialty retailers offering overnight delivery of merchandise. The burden of supporting Blockbuster’s bricks-and-mortar distribution assets dragged it into bankruptcy when online delivery of entertainment became the norm. Mobility barriers arose if the resources offering entry-barrier protection were subsequently difficult to redeploy (Caves & Ghemawat, 1992; Caves & Porter, 1977). Established firms wishing to diversify into similar but younger lines of business noticed that the success requirements needed to enter new markets were sometimes different from the strengths their extant resources conveyed (Smith & Cooper, 1988). Inflexibility was particularly likely to be encountered when introducing substitute products that employed different complements, channels of distribution, or service levels. Even well-established firms that focused on providing underserved customers with the exact products (and services) sought by those specialty buyers were at risk. Focused firms commanded longer-lived loyalty from their particular market niches as long as these were of viable size, but focused firms faced fewer alternatives for using their dedicated resources elsewhere when demand shrank. The specialization they had invested in to serve their target customers affected them negatively when it was time to reposition strategically (Willard & Cooper, 1985). Specialization was a two-edged sword; specialization may have connoted commitment to serving customers, but it also created embeddedness problems that managers struggled to overcome when they faced resistance to change (Ghemawat & del Sol, 1998; Granovetter, 1985). In response, flexible manufacturing programs were launched to combat the risks that resource redeployment would face exit barriers when greater competitive responsiveness was required (Gerwin, 1987; Slack, 1983). In addition to flexibility in physical assets, firms pondered how best to maintain flexibility in their use of human resources (Brockner, Grover, Reed, DeWitt, & O’Malley, 1987; Lorsch, 1986) and remain adaptive vis-à-vis how their brands and trademarks would be perceived as competitive conditions evolved (Grenwal & Tansuhaj, 2001). In particular, managers strived to overcome exit barriers as they moved their firms’ focus away from markets in which demand was stagnating or declining to those in which demand was growing (Caves & Porter, 1978; Harrigan, 1980A , 1981; Harrigan & Porter, 1983; Porter, 1976).

Exit Barriers Porter (1976) identified exit barriers as being economic, strategic, and/or emotional factors that kept companies operating in troubled lines of business even though they were earning low or negative returns from doing so. The presence of high exit barriers created an adverse industry environment in which excess capacity (and failing competitors) could not be easily removed to bring supply in line with demand; price warfare typically followed when each trapped firm tried to fill their respective plants to break-even levels because they could not exit or easily redeploy their resources elsewhere (Harrigan, 1980A , 1982). Exit barriers acted as an extreme form of the mobility barriers that prevented firms from adjusting their mix of products, customers, technologies, and geographies to modify their respective strategic postures in response to changing success requirements. Economic exit barriers were associated with those irreversible assets (e.g., specialized equipment for making paper) that could not be easily converted to other uses or sold to competitors, except at scrap-metal salvage values (Hozl, 2005; Rosenbaum & Lamort, 1992; Shaanan, 1994). Barriers arose from the way managers may have regarded any sunk costs that would incur accounting losses when such assets were retired. Exit barriers included (a) “legacy costs” associated with retired employees (e.g., pension and healthcare obligations owed to retirees but underfunded—as was the case in the U.S. steel, petrochemical, and automotive industries); (b) “remedial costs” (e.g., mandated clean-up costs associated with closing a facility); or (c) other “redundancy costs” that would be incurred in downsizing operations, among others. Such exit-associated expenses constituted barriers as firms unable to fund such costs postponed their incurrence by taking no action. The U.S. Pension Benefit Guaranty Corporation was created to ensure legacy costs were funded during the corporate restructurings that were frequently performed under court protection by failing firms as bankruptcy became a means of exiting from uncompetitive strategic postures. Strategic exit barriers were sometimes obligations to supply past customers who were shared with a firm’s other divisions or mandated to be served by regulatory requirements (Harrigan, 1981). Linkages between two or more such businesses could incur reputational harm to ongoing businesses if discontinuation of products or services within the downsized business inconvenienced customers who were also purchasing products from sister business units. Vertical linkages between a firm’s business units became strategic exit barriers if one stage of the value-adding chain of activities became uneconomical but that unit’s operations could not be shut down because other business units in the corporate family depended on its viability (Harrigan, 1985A ). For example, automotive firms discovered that they needed to help former parts suppliers whom they had abandoned after a model change if they expected to use those suppliers for components in future model years. Similarly, suppliers to the military forces had to be awarded minimum contract amounts even when they lost a particular bake-off competition for an aircraft, tank, or other type of weapons system in order to keep them viable during the years between systems upgrades or redesigns. Emotional exit barriers originated with management’s rationalizations for deferring hard decisions that may have caused embarrassment. Examples included failures to discontinue the firm’s founding line of business products (or a manager’s particular arena of success) or to abandon routes associated with an airline’s history (Feldman, 2014; Schnell, 2001). Guilt about making workforce reductions, or other organizational changes, was sometimes so deeply entrenched—and managers were so reluctant to reduce headcount—that the exit barriers had to be refuted by clear and persistent evidence of recurring losses in order to be overcome (Schwenk & Tang, 1989). As many Japanese electronics firms discovered, the influence of mobility and exit barriers impeded managers from making timely operational and strategic changes when competitive conditions had diminished the value of their extant operations. Their facilities should have been closed (or moved to lower-wage sites) but were used to grow hydroponic vegetables instead. Worse, jealous managers associated with older technologies, for example, U.S. vacuum-tube producers, quashed in-house start-up efforts to make semiconductor devices, thereby preventing their firms from transitioning to next-generation, solid-state electronics (Harrigan, 1980B ).

Procrastination in Transferring Assets and Knowledge within Organizations Awareness that attributes of firms’ assets, knowledge workers, and organizational knowledge could potentially impede easy redeployment to new lines of business did not immediately drive firms to become asset-light and staffed primarily by outsourced service providers. Unique and irreplicable resources still conveyed advantage for serving customers in some contexts, and these resources remained valuable as long as no substitute resources could trump them (Barney, 1991; Peteraf, 1993). Knowledge workers continued to embody the distinctiveness that motivated customers to patronize particular vendors over others. The risks of ownership (or control) of these potentially inflexible strategic assets were sometimes mitigated by the installation of sunset-budgeting plans (whereby contingent costs of exit were researched and incorporated into cash-flow forecasts so that asset-deployment decisions could be made dispassionately). Managers searched more broadly for the diverse types of information that signaled the need for changes in their firm’s strategic posture (Tichy, 1993); the novel information they retrieved was used to build “trigger points” into their strategic planning processes that would force confrontation of decisions regarding what to do about potential inflexibility when certain causal events occurred. Strategic planning processes distinguished between linked gestalts of businesses and those in which resource transfers between business units were less likely to occur. Organizations adjusted the performance measures and incentives of their management systems to reflect whether a particular business unit’s actions had impact on, or did not have impact on, the flexibility of other corporate family members. The performance of related groups of businesses was often scrutinized together. The recognition that the resources employed and bases for competitive advantage enjoyed by certain lines of business could not readily be transferred (or shared) with other lines of business affected firms’ diversification decisions (Collis & Montgomery, 2005). Ultimately, related lines of business—those that could share assets and know-how—employed operational (or behavioral) bases for assessing decision-making efficacy, whereas autarkic lines of business used financially based measures only. Sequestering lines of business in this manner helped firms to overcome potential problems with strategic exit barriers that were otherwise unrecognized until it was too late. Recognition of such strategic inflexibility mitigated firms’ potential to enjoy operating synergies across such related lines of business. Recognition of intrafirm linkages among business units was helpful for transitioning to strategies that emphasized customer-based similarities instead of asset-based (or production-oriented) ways of conceptualizing strategy (Manral & Harrigan, 2015). Knowledge of customers’ expectations was a critical competitive resource that too many firms failed to renew. In particular, using a demand-based diversification logic was helpful in addressing the challenges of reaching customers via online conduits of contact. However, firms pursuing customer-based diversification strategies faced their own version of exit-barrier risks if vendors within their supply-and-delivery networks failed to adapt to customers’ changing expectations. Retailers often faced this form of mobility barrier when customers who had once carried them to success aged and changed their purchasing preferences, as in the example of Benetton’s changing market orientation. Briefly, Bennetton’s loyal customers wanted different types of apparel as they matured while Bennetton failed to attract the next wave of youthful buyers as successfully as they had attracted their predecessors. Inflexible merchandisers often failed to notice how the next wave of targeted consumers (those matching firms’ internal market-segmentation criteria) differed in their unique expectations of vendors. Salient differences between generations of customers meant that well-established merchandisers were no longer as well-suited to compete using their extant strategic postures. Brand equity, which had assumed great value after years of success in serving customers, became less meaningful to subsequent generations of consumers who patronized new brands.

Hypercompetition and the Death of Competitive Advantage Barnett and Hansen (1996) noted that competition was like being on a treadmill (also likened to the Red Queen effect) in the sense that firms’ efforts continually to renew themselves created stronger competitors. Concerns about maintaining strategic flexibility led firms to engage in various types of innovative activities in order to keep up with their rivals’ newest competitive sorties (D’Aveni, 1994) or to carve out different, albeit temporary, bases for advantage. Too often, firms faced a competitive stalemate instead (McGrath, 2013). Temporary competitive advantage could be gained from perceived or actual product differentiation when serving customers, but the window of opportunity for exploiting any such advantages in serving customers sometimes closed abruptly, and new bases for attaining distinctiveness continually had to be found (Dreyer & Grønhaug, 2004; Meyer, Brookes, & Goes, 1990). Resource differences that had made some strategic postures more valuable than others were being negated, and resource asymmetry mattered less where hypercompetition raged. As their industries trudged inexorably toward competitive stalemate, managers hunted for temporary respite from the pressures of creative destruction (Schumpeter, 1951) and the disruptive competitive changes (Christensen, 1997). Firms’ bases for sustaining profit margins evolved continually—from gaining advantages that resided in resources (Amit & Schoemaker, 1993; Bain, 1956; Barney, 1991; Connor, 1991; Mahoney & Pandian, 1992; Peteraf, 1993) to finding advantages in how managers organized and coordinated their operating activities and routines (Novak & Stern, 2008, 2009; Powell & Dent-Micallef, 1997) to advantages based on recruiting superior knowledge workers (Groysberg, Lee, & Nanda, 2008) to developing keener learning capabilities and absorptive capacity (Cohen & Levinthal, 1990; Lane & Lubatkin, 1998; Volberda, Foss, & Lyles, 2010) to making the firm’s organizational capabilities suitably dynamic so that its people can copy competitors’ sources of competitive advantage more nimbly (Helfat & Peteraf, 2003). Advantage had to evolve because the duration of any single basis for competitive advantage was often brief. Firms had to be flexible to keep abreast of (or anticipate) the next basis for competitive advantage (Tang, 1988; Volberda, 1996, 1997). Because it seemed that in many industries no sources of competitive advantage were sustainable for long and that no resources conveyed advantage forever, firms struggled to remain nimble by investing along many competitive dimensions (Collis, 1994; D’Aveni, Dagnino, & Smith, 2010; McGrath, 2013; Ruefli & Wiggins, 2003). Because firms’ operating-profit margins were improved (relative to competitors) by enhancements in their cost structures or increases in customers’ willingness to pay higher prices (Ghemawat, 1986; Porter, 1985), they were continually forced to innovate, invest in new technologies, and collect smaller rents on extant resources as they moved on to their next basis for advantage (Hafeez, Zhang, & Malak, 2002). Simultaneously, firms were prospecting for new types of customers and creating new products that diverse niches of customers might value (Javalgi, Whipple, Ghosh, & Young, 2005; Johnson, Lee, Saini, & Grohmann, 2003; Sanchez, 1995, 1996). The search for advantage drove firms to make diversifying investments in new types of corporate resources, and it justified their organizational decisions to restructure extant asset postures (Slack, 2005; Verdú & Gómez-Gras, 2009).

Flexible Operations and Scope Reductions Technological uncertainty drove firms to develop new capabilities to replace their skills before they become outmoded (Evans, 1991; Smith & Zeithaml, 1996; Yuan, Zhongfeng, & Yi, 2010; Zhou & Wu, 2010). Rigor in updating products, forcing obsolescence, and sunset-budgeting improved the flexibility of some firms’ operations (Dibrell, Down, & Bull, 2007; Weerd-Nederhof, Visscher, Altena, & Fisscher, 2008). Flexible operations were supported by greater cross-functional collaboration in product development as product life-cycle times accelerated (Lei, Hitt, & Goldhar, 1996; Rajala, Westerlund, & Moller, 2012; Young-Ybarra, & Wiersema, 1999). Prowess in management systems, information technology, and the flexible management of operations assumed greater importance in supporting management systems designed to stimulate adaption to change (Asif, Fisscher, de Bruijn, & Pagell, 2010; Beach, Muhlemann, Price, Paterson, & Sharp, 2000; Celuch, Murphy, & Callaway, 2007; Fredericks, 2005; Sanchez, 1997). Progress in attaining strategic goals was benchmarked by greater attention to reduced relative cycle time, accelerated clockspeed, and continuous process improvements as firms strived to retain their flexibility relative to competitors (Nadkarni & Narayanan, 2007; Stalk, 1988; Stalk & Hout, 1990; Tichy & Charan, 1989). The race to balance flexibility with competitive advantage could not be static (Bettis & Hitt, 1995). Firms also devised processes for reusing (or disposing of) resources that had lost their relative strategic value. Manufacturing flexibility was supported by asset redeployment, retraining, and process innovation (Bahrami & Evans, 2011; Gerwin, 1993; Price, Beach, Muhlemann, Sharp, & Paterson, 1998; Upton, 1994). A focus on strengthening firms’ relative strengths (while spinning off auxiliary tasks where they were less competitive) was supported by astute scope reductions, downsizings, and exits from less-advantageous operating activities (DeWitt, 1993, 1998; Kazozcu, 2011; Kovenock & Phillips, 1997). Disintermediation of supplier-buyer relationships allowed firms to specialize in performing value-adding tasks that were strategic in nature while also forming networks of suppliers to perform ancillary value-chain tasks. Changes in the relationships within value-chain activities emphasized outsourcing, modularity, and logistical agility as firms exited from vertically related activities in which they lacked advantage and concentrated on a focused core of competitive strengths while they quasi-integrating the remaining processing stages through supply-chain partnership programs (Balakrishnan & Wernerfelt, 1986; Bergh, Johnson, & DeWitt, 2008; Decker & Mellewigt, 2007; Harrigan, 1985A , 1985B , 1986).

Outsourcing and Virtuality The challenges created by accelerating technological change and entry by lower-cost, offshore competitors precipitated major structural changes in choosing which activities firms performed in-house versus the tasks they entrusted to their value-chain partners (Li & Tang, 2010, 2011; Mentzer, Min, & Zacharia, 2000). Where firms once strived to control all aspects of their valueadding postures in order to protect trade secrets and build advantage in performing critical tasks (Fronmueller & Reed, 1996), concerns about strategic inflexibility and relative competitive disadvantage led managers to entrust suppliers and distributors (or value-adding resellers) with tasks they considered to be of lesser importance to maintaining their organizations’ internal strengths, as occurred within the apparel, shoes, and other fashion-oriented businesses (Quinn, 1999; Quinn & Hilmer, 1994). In particular, the rise of the business process outsourcing (BPO) industry was driven by firms’ concerns about maintaining strategic flexibility by contracting out the tasks whose technologies changed faster than firms could manage internally (Nadkarni & Herrmann, 2010; Zhang, 2005, 2006). This capability shortfall facilitated the success of BPO firms, such as Wipro Technologies, Infosys, Tata Consultancy Services, and Cognizant, among others, as challengers to Accenture and IBM Business Consulting Services. As the need for greater flexibility in human-resource management practices became apparent, virtual organizational arrangements allowed firms to reduce headcount in some activities and still maintain access to needed services (Coucke, Pennings, & Sleuwaegen, 2007; Roca-Puig, Beltrán-Martin, Escrig-Tena, & Bou-Llusar, 2005; Wright & Snell, 1998). Flexible firms could position themselves at the center of spiders’ webs of supplier and distributor relationships to manage modular organizational arrangements where they were appropriate. But reductions in headcount also resulted in a leakage of organizational knowledge to competitors, as did many outsourcing activities. Organizational advantages were mitigated by such knowledge diffusion. Successful outsourcing was supported by the development of superior logistical capabilities (Abrahamsson, Aldin, & Stahre, 2003; Swafford, Ghosh, & Murthy, 2008), modular designs, and close coordination with value-adding partners (Millington, Millington, & Cowburn, 1998; Sanchez & Mahoney, 1996; Worren, Moore, & Cardona, 2002). Formation of vertical strategic alliances enabled firms to outsource necessary activities to capable partners and at the same time retain access to needed supplies for the modules of value creation that they kept in-house. Collaboration with outsiders gave firms knowledge of germane technological advances and practices that might otherwise have been off their strategic radar (Bensaou & Anderson, 1999; Harrigan, 1986, 1988; Leiblein, Reuer, & Dalsace, 2002). Concerns about the loss of advantage through knowledge appropriation were frequently resolved by firms focusing their attention on bolstering their most valuable resources; these efforts included entering into virtual-firm arrangements with outsourcing partners and also participating in strategic alliances, crowdsourcing, and other flexible organizational forms for developing new resources and needed capabilities in the arenas in which they had sufficient knowledge to negotiate a view beyond their corporate scope of other firms’ innovations and practices (Bleecker, 1994; Gulati & Singh, 1998; Mitchell & Singh, 1996; Mohr & Spekman, 1994; Robertson & Gatignon, 1998). For products like laptop computers and cellphones, outsourcing partners (such as Lenovo, Samsung, and LG Electronics) grew to become formidable competitors in their own right (Apple seemed to be an exception; it managed to preserve its respective distinctiveness in computers and cellphones by presiding over supply-chain partners that did not become its competitors—until Foxconn acquired Sharp’s assets and brand marque). Success in attaining desirable levels of strategic flexibility depended on managers developing appropriate internal systems to prevent the development of organizational mobility barriers in those activities their firms owned (Goodstein, Boeker, & Stephan, 1996), while their firms also invested aggressively in those core capabilities controlled through in-house oversight of their alliance partners. As managers implemented programs to avoid asset and workforce inflexibility, they assumed greater risks of relationship inflexibility, because their firms increasingly relied on third parties to implement their strategies. As competition became more diverse in the manner by which past investments in resources, capabilities, and competencies were made inadequate, firms were not allowed to cling to their past success recipes or to assume that reliance on alliance partners or supply-chain partners would stave off incursions by new types of competitors using radical approaches to serving customers. Strategic flexibility was best maintained by a thoughtful program of questioning the viability of extant competitive postures while searching for their successors.

Overcoming Organizational Rigidity Because the temporary protection afforded by firms’ imitation barriers could dull an organization’s responsiveness to the need to change its strategy imperatives—making the firm rigid when it needed to be adaptive instead—managers were challenged to develop a means of preserving valuable internal strengths while simultaneously cannibalizing their embedded postures with improved organizational capabilities which may have been appropriated following exposure to third-party transactions. Because firms’ own organizational inertia may have created the internal mobility barriers they faced when trying to remain viable, the capabilities of laggard firms were ultimately starved of funding and became difficult to upgrade as hypercompetitive conditions developed in their traditional market arenas (Sharfman & Dean, 1997). Rigid corporate structures had to be dismantled or modified quickly, before such firms were swept away by the capital markets’ broom of efficiency through bankruptcy or liquidation; too frequently, rigid organizations were acquired by more flexible firms that profited by assuming responsibility for their valuable assets while unwinding their liabilities. A variety of psychological and organizational forces conspired to prevent timely change from occurring within troubled firms (Combe, Rudd, Leeflang, & Greenley, 2012; de Figueiredo, Rawley, & Rider, 2015; Leonard-Barton, 1992; Schwenk & Tang, 1989). Their impact was apparent in the privatization processes occurring in Eastern European firms (Filatotchev, Buck, & Zhukov, 2000) and in the airline markets that had become liberalized (Schnell, 2006). Having reduced their commitment to inflexible asset configurations and outsourcing less-profitable activities to their value-chain partners, firms’ attentions turned to designing management systems for institutionalizing organizational flexibility, while their investment criteria focused on avoiding future capability traps (Carlsson, 1989; Englehardt & Simmons, 2002; Hitt, Keats, & DeMarie, 1998; Shimizu & Hitt, 2004; Weiss & Birnbaum, 1989).

Capability Traps Timely responses to competitive incursions indicated the presence of flexible organizations that anticipated exogenous changes and shifted their strategic postures appropriately. Failures to respond affirmatively resulted in firms whose organizational capabilities were overvalued by their managers or could not be used effectively to retain customers (Collis, 1994; Smith, Grimm, Gannon, & Chen, 1991). Too often, the organizational capabilities of inflexible firms became trapped in a downward spiral as poor performance impaired their ability to renew themselves by investing in new technologies and processes as they became available—perhaps because they had not used partnering strategies advantageously when alliances were most appropriate in their respective industries (Combe & Greenley, 2004; Lyneis & Sterman, 2016; Matthyssens, Pauwels, & Vandenbempt, 2005; Singh, Oberoi, & Ahuja, 2013). Failure to upgrade organizational capabilities perpetuated mediocre performances that ultimately precipitated a crisis in which a firm’s organizational barriers had to be confronted (Repenning & Sterman, 2001, 2002). Few older organizations, for example, E. I. DuPont de Nemours or General Electric, could persist within their chosen industries without undergoing radical scope changes and internal upheavals to remedy organizational rigidity. Younger firms with narrower scopes often rose from the ashes of inflexible organizations that did not change quickly enough. During this phase of an organization’s evolution—when trapped organizational capabilities endangered its viability—objective (third-party) leadership was often needed to identify a firm’s strengths and refocus its purpose while it was downsizing its scope and spinning off those resources that had lost their relative value. Sometimes such reorganizational confrontations were precipitated by infusions of advice from private-equity investors; in other cases, confrontation occurred during the process of turnaround—albeit supported by restructurings that forced writeoffs of assets erroneously being hoarded for value lost long ago. When troubled firms’ managers intervened quickly enough to confront the barriers and traps that were miring the firms in old organizational policies and practices, success was sometimes found by emphasizing ambidextrous goals.

Ambidexterity and Flexible Management Systems Ambidexterity enabled managers to be proactive in changing their firms’ strategic postures by exploring new sources of value creation while simultaneously exploiting the value of corporate resources that were still viable (Duncan, 1976; March, 1991). The ambidextrous organization simultaneously stimulated progress by exploring novel sources of improvement while preserving its valuable core of organizational strengths where those activities still worked effectively (Collins & Porras, 1994). Ambidextrous management required a balanced approach to exploiting the firm’s then-valuable resources and capabilities while simultaneously searching for new potential strengths which would become valuable as the nature of competition evolved (Benner & Tushman, 2003; Tushman & O’Reilly, 1996; O’Reilly & Tushman, 2004). Company-wide organizational learning could be enhanced by employee rotations and programs to transfer knowledge among businesses. Diversified firms could utilize their extant cross-fertilizing processes to transfer best practices to new business units while allowing them the freedom to fulfill customers’ new expectations as they augmented by adapting accordingly. Successful implementation of ambidexterity involved investigation of sometimes radical sources of innovation and willingness within the organization to evaluate new operating approaches and relationships with ancillary actors. Successful attainment of an appropriate balance between the familiar and the exotic in how firms approached changes in their strategic postures depended upon their organizations’ cultural values, as well as how their processes were organized to evaluate strategy alternatives (Bock, Opsahl, George, & Gann, 2012; Cabello-Medina, Carmona-Lavado, & Valle-Cabrera, 2006; Kouropalatis, Hughes, & Morgan, 2012; Wei, Yi, & Guo, 2013). Since organizations often resisted the need for change (Tamayo-Torres, RuizMoreno, & Verdu, 2010), successful leaders had to keep the importance of maintaining strategic flexibility clearly in the forefront of their firms’ goals by reminding managers of how easily the next generation of would-be competitors sprang into existence to assuage any customer discontent that incumbent firms could not satisfy. The ready availability of entrepreneurial funding sources constituted a constant threat to the corporate complacency that managers fought to overcome.

Strategic Flexibility as Competitive Advantage In summary, if no sources of competitive advantage were sustainable for long, and no resources maintained their relative value over time without adjustment, the continual quest for strategic flexibility could be construed as a valuable organizational advantage for firms engaged in this search activity. Maintaining strategic flexibility is difficult. Smaller and younger firms that lack the slack resources and managerial seasoning needed to audit their strategic postures will not readily question the persistence of practices symptomatic of inflexible strategies; instead they typically ride the wave of their temporary success to its inflection point without confronting the need to be introspective about strategic flexibility—until it may be too late. Well-established firms that entrust execution of critical tasks to outsiders so as to avoid resource inflexibility soon confront the daunting task of having to audit the strategic postures of their value-adding chain of affiliates, as well as their own flexibility, in order to maintain competitive viability. Astute new and well-established organizations both seek the middle ground between the extremes of a generalized strategic posture in which no resources can be too unique (hence inflexible) and the risk of being too specialized to serve customers’ needs well (even as customers’ expectations continue to evolve). The strategy literature eschews the use of focus strategies at the very time when buyers press for greater customization of purchased items in many industries, perhaps because so-called market niches are viable to serve for ever-decreasing periods of time. Asset inflexibility is most at risk in industries facing technological changes where extant firms cannot easily cope with using value-chain arrangements that increase unintended bleedthrough of in-house knowledge to alliance partners and outsiders. Firms operating in regional markets (e.g., limestone excavators selling aggregates to local concrete firms) are better-protected against asset inflexibility from international competitors than are firms facing global markets where new rivals emerge from unexpected origins. In the latter case, customers’ wants and needs are converging and fragmenting worldwide and vendors who would satisfy their demand could be domiciled anywhere (often using newer-vintage assets with better cost structures to vend their wares). Industrial markets that require a process of stringent vendor certifications are better-protected against asset inflexibility created by new potential vendors than are markets serving residential consumers in which product specifications change faster and new brands reach buyers more easily. The value of extant intangible assets, such as brand marques, can be adjusted by continually matching firms’ market orientations to evolving customer expectations, but the waning value of intellectual property, such as patents and trade secrets, must be replenished through radical innovations or the acquisition of firms possessing appropriate technological assets that extant organizations may lack. Flexible organizations possessing sufficient strength in their managerial resources and systems can transition themselves to serve attractive customers most effectively. But the generalized nature of reliance on organizational assets that can be imitated more easily places flexible organizations in the precarious position of being ever-vigilant in their need to adjust their strategic posture in response to exogenous change. In essence, firms sacrifice uniqueness in resource content and configurations for the sake of greater flexibility to change.

Further Readings Bahrami, H., & Evans, S. (2010). Super-flexibility for knowledge enterprises: A toolkit for dynamic adaptation. New York: Springer. Find this resource: Fine, C. H. (1999). Clockspeed: Winning industry control in the age of temporary advantage. Reading, MA: Perseus Books. Find this resource: Hamel, G., Prahalad, C. K., Thomas, H., & O’Neal, D. E. (Eds.). (1999). Strategic flexibility: Managing in a turbulent environment. New York: Wiley. Find this resource: Harrigan, K. R. (1985). Strategic flexibility: A management guide for changing times. Lexington, MA: Lexington Books. Find this resource: Harrigan, K. R. (2003). Declining demand, divestitures and corporate strategy. Frederick, MD: Beard Group. (Originally published in 1980 with the title Strategies for declining demand by Lexington Books, Lexington, MA.) Find this resource: Sanchez, R., & Heene, A. (1997). Strategic learning and knowledge management. New York: Wiley. Find this resource: Volberda, H. W. (2006). Strategic flexibility: Creating dynamic competitive advantages. In A. Campbell & D. O. Faulkner (Eds.), The Oxford handbook of strategy: A strategy overview and competitive strategy. Oxford: Oxford University Press. Find this resource:

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Columbia Business School, Columbia University

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