Does scenario thinking make a difference?
An integrative model linking organisational inertia, openness to change, and absorptive capacity
Diploma Thesis 2011 116 Pages
2 THEORETICAL BACKGROUND
2.1 Organisational inertia
2.1.1 Value of change
2.1.2 Definition of organisational change
2.1.3 Reality of change outcome
2.1.4 Why change actions fail
2.2 Absorptive capacity
2.3 Scenario planning
2.3.2 Value of scenario planning
3 DOES SCENARIO THINKING MAKE A DIFFERENCE?
3.1 An integrative model
3.1.1 A micro-level perspective
3.1.2 Influence of the individual’s consciousness on his/her openness to change
3.1.3 Role of scenario thinking
3.1.4 Degree of openness to change
3.1.5 How the degree of openness to change determines the organisation’s absorptive capacity
3.2 A proposed method
3.2.1 Sample and data collection
3.2.2 Variables and measurement validity
4.1 Theoretical contributions
4.3 Managerial implications
LIST OF FIGURES
Figure 2.1 A process model of absorptive capacity (modified, based on Lane et al., 2006: 856)
Figure 2.2 Illustration of simple slope analysis (based on Lichtenthaler, 2009: 842)
Figure 2.3 Forecasts (based on Cornelius et al., 2005: 94)
Figure 2.4 Scenarios (based on Cornelius et al., 2005: 94)
Figure 3.1 Scenario thinking influences the relation of the individual’s conscious- ness and his/her degree of openness to change (proposition 1)
Figure 3.2 The degree of openness to change determines the individual’s level of absorptive capacity (propositions 2.a and 2.b)
Figure 3.3 The positive attitude towards change determines the evaluation of scenario thinking regarding its effectiveness (propositions 3.a, 3.b, 3.c, and 3.d)
Figure 3.4 An integrative model linking organisational inertia, openness to change, and absorptive capacity (propositions 1 to 3.d)
LIST OF TABLES
Table 3.1 Development of individual consciousness (based on Karp, 2005: 170).
Table 3.2 Overview of dimensions used in the scenario construction process.
“ If you want to succeed you should strike out on new paths rather than travel the worn paths of accepted success ”
— (John D. Rockefeller (1839-1937), in Feynman, 1988)
Rockefeller already recognised the value of novelty one century ago (in Feynman, 1988). However, terms like ‘new’ and ‘change’ are frequently perceived with insecurity and negative feelings. These days, companies’ viability and sustained success is threatened continuously since challenges and demands, which companies encounter, have increased in its dynamism and magnitude - a development unlikely to alter (Balogun & Jenkins, 2003; Karp & Helgø, 2008). Thus, organisations are obliged to cope with impediments promptly emerging and cannot ignore reality: Change has become an inevitable part of their business life.
Although this is an acknowledged fact and companies are aware of its importance, managing change as well as assuring flexibility is a complex undertaking, often unsuccessfully conducted (Bacon et al., 2010; Clegg et al., 1997; Gibbs, 1997; Holman et al., 2000; IBM, 2004; Landauer, 1995; Lassen & Nielsen, 2009; Levasseur, 2010; Willcocks & Grint, 1997). Reasons can be identified by examining the phenomenon of organisational inertia (Junarsin, 2009), which can either lead to unsuccessful change initiatives or prevent companies from undertaking change actions in the first place. A remedy to overcome inertia might lie in the creation of enhanced confidence to be able to deal with change requirements and in developing appreciation of opportunities derived from dynamism and unpredictability (Balogun & Jenkins, 2003; Boyer & Robert, 2006). As scenario planning aims to transform strategically important information into new perceptions and recognises the triggered creative process leading to strategic deliberations beyond the scope of previous thinking patterns (Mietzner & Reger, 2005; Wack, 1985), it might decline inertia. Moreover, “entrepreneurial power of foresight in the context of change, complexity, and uncertainty” (Wack, 1985: 150) can be a beneficial outcome. Therefore, it can facilitate a pro-active approach towards gaining new information and creating unique knowledge to cope with challenges surrounding every organisation.
Although organisational inertia refers to an obstacle to engage in transformation on the company-level, individuals significantly contribute to its establishment (Diefenbach, 2007; Oreg, 2003). Each member’s behaviour and attitude can be viewed as embodiment of a corporate culture, for all members jointly establish the foundation of the organisation and, simultaneously, convey the firm’s norms and values (Martin, 2002; Raz & Fadlon, 2006; Schein, 1992). Indisputably, every individual lives in distinct organisations (for example organisations related to personal life i.e. family, clubs, etc., or organisations related to employment) and varies in respect to his/her personality. However, corporate cultures inspire and affect organisational members in such a way that in regard to certain aspects (for instance evaluation of flexibility or stability) norms and values are lived similarly. Thus, an organisation encouraging and living innovation will consist of innovative people rather than of people preferring patterns as usual (Mead, 1934; Unwin, 2005).
Individuals also participate in the creation of an organisation’s absorptive capacity, the ability to utilise externally held knowledge (Cohen & Levinthal, 1990; Lane et al., 2006). Less absorptive capacity can be put in line with organisational inertia and structured routines which are identified as “[...] hindrances to the discontinuous innovation” (Junarsin, 2009: 10). Enhanced discontinuous change is only achievable if past and present knowledge is combined without merely focusing on internal knowledge; instead, external knowledge is required for preventing failure in times of turbulence. Thus, absorptive capacity does not solely make firms capable of reacting, it might lead to innovative advances.
The phenomenon of organisational inertia is essential for companies to overcome, and one approach might be to reduce and prevent it by focusing on the individual who significantly contributes to its occurrence. Through an enhanced individual openness to change and increased appreciation of new knowledge the capability to cope with change and also a pro-active searching for new opportunities ultimately might lead to thriving innovation. The questions arising in the scope of the aforementioned deliberations are: How can the individual’s attitude towards change be altered? Does thinking in scenarios contribute to gaining a higher degree of openness to change? Does enhanced openness to change find expression in the individuals’ attitude towards new information? And do individuals, who experience an increased individual absorptive capacity, positively evaluate the effectiveness of practices that support the development of the capability to appreciate new information? The goal of this thesis is to provide answers to these questions. Since it represents a conceptual piece of work, propositions will constitute the results. However, a method to test the validation of the presented propositions is suggested, which provides a starting point to engage in future empirical investigations. The structure is the following: First, a theoretical background of organisational inertia (section 2.1), absorptive capacity (section 2.2), and scenario planning (section 2.3) is given. Subsequently, the introduced deliberations on these theories are utilised to derive propositions that are unique and new in their nature (section 3.1). Furthermore, a possible method is suggested to test the model and to find support for the built up propositions (section 3.2). In chapter 4 the results, i.e. the propositions, as well as their contribution to theoretical understandings within the scope of the research field change, limitations of this work, and managerial implications are discussed. The conclusion (chapter 5) will finalise this thesis.
2 THEORETICAL BACKGROUND
“ [...] in order to overcome resistance to change [...] I would change [...] willingness to collaborate, because innovation is different from creativity.Creativity is an individual effort, whereas innovation is commercialisation of creativity. That requires organisational effort [...] ”
— (Govindarajan, 2009 )
Nowadays companies are facing diverse challenges like increasing competition and stag- nated markets, fulfilling customers’ expectations and spotting potential needs] which can be commercialised, as well as the often mentioned dynamic and ever-changing environment leading to uncertainty, to mention a few. The capability of being responsive, adaptive, and simultaneously innovative has become a crucial premise - rather than a target - to retain competitiveness. Thus, organisational change cannot be neglected as a side-task; instead, it has become a major part of sustaining organisational development and viability. Although this is a well-known fact and companies are aware of its importance, managing change as well as assuring flexibility is a complex undertaking, often unsuccessfully conducted (Clegg et al., 1997; Collinson & Wilson, 2006; Desai, 2008; Gibbs, 1997; Holman et al., 2000; IBM, 2004; Landauer, 1995; Levasseur, 2010; Willcocks & Grint, 1997). Frequently, change activities are conducted in such settings where internal and external complexity and uncertainty are “too high to predict or control the future development by management of organization” (Karp & Helgø, 2008: 86). Therefore, the competency to exercise requisite change successfully can entail performance enhancement and potentially competitive advantage.
2.1 ORGANISATIONAL INERTIA
Organisational inertia may be defined as
“[...] fear for changes. The current systems and procedures have helped shape the competitive advantage, making [...] [corporations] complacent and resistant to changes” (Junarsin, 2009: 13).
There are numerous research fields like (strategic) management and organisational psychology to which scholars devote their efforts to examining issues of organisational inertia and other sources exacerbating the achievement of change. In this section the value of change is outlined, followed by a clarification of how organisational change is understood in this work.
Ultimately, the impediments of both actively detecting change requirement and achieving beneficial outcomes through change practices, their interrelation as well as the complexity of change, and finally, the role of the individual as a source of change failure are presented.
2.1.1 Value of change
Why is change valuable for organisations? The answer lies in the potential benefits it might yield and the possible drawbacks which occur if requisite change initiatives are missed out on. Organisations experience a decrease in competitiveness, the threat of new entrants in their markets, or a profound change in their industry (Balogun & Jenkins, 2003). To cope with these challenges they need to pro-actively re-think their “strategy, structures, systems, processes, and ultimately culture” (Balogun & Jenkins, 2003: 247).
Change and the ability to change can be considered as an embodiment of flexibility. Like Boyer and Robert (2006) point out, flexibility mostly engenders benefits to which notions like efficiency and enhanced performance are linked to. They refer to a report from Business International published in 1991 which accentuates the necessity of being flexible, especially in times of highly volatile markets (BusinessInternational, 1991). According to the report, flexibility is considered an overarching concept of various recent management theories which aim to improve organisational performance (BusinessInternational, 1991). Furthermore, it is stated in the report that its achievement is implemented by engaging in collaborations, emphasising the importance of confronting an organisation with new approaches regarding
2.1 ORGANISATIONAL INERTIA
strategy, structures, and values as well as new knowledge and other competencies (Business- International, 1991). Consequently, companies are required to participate in doing change activities to - at best - put themselves in a position ahead of their competitors, or to - at least - prevent being overtaken by other market players.
Clegg and Walsh (2004) substantiate the value of change management by listing desirable attainments like cost reduction and quality improvement, both increasing an organisation’s competitiveness, as well-regarded organisational goals. Change can affect several areas within an organisation. It can be utilised as a tool to change work flows or remits of employees on an operative level, to adapt the corporate culture according to a modified (innovative) business strategy, to integrate acquired or outsource former internal business units, to enter new markets, and to enable many other change activities (for example Bacon et al., 2010; Bathurst & Monin, 2010; Bhatnagar et al., 2010).
From an entrepreneurial point of view, companies capable of change can also be described as entrepreneurial organisations which
“[...] repeatedly initiate new product or service ideas [...] reconverting their people and assets to new uses, bringing new ideas from many sources into good currency” (Jelinek & Litterer, 1995: 137-138).
Others state that acting entrepreneurially, i.e. adapting to changing conditions and detect quickly fading opportunities (Shepherd et al., 2007) or react to emerging threats, specifically in highly volatile environments (Covin & Slevin, 1991), can result in a competitive advantage. Thus, the ability to utilise change can be viewed as embodiment of an organisation’s level of entrepreneurial spirit. One determinant for such an ability is an existing “nonlinear thinking” (Hitt, 2000: 14) that employees within an organisation need to perform. What is meant by non-linear thinking is the ability to think outside the box, thus, escaping the narrow view based on interactions merely within an organisation and focusing mainly on what is happening in the near surroundings. Greater potential benefits can be derived from entering a perspective, which provides an appropriate distance to what is already known. Hence, non-linear thinking possibly triggers the development of new ideas and the enhancement of an entrepreneurial spirit. Supportingly, Vance et al. (2008) found that the degree of linear and non-linear thinking style balance possessed individually and collectively is a determinant for building up innovative capabilities.
2.1 ORGANISATIONAL INERTIA
To prevent adopting an one-sided perspective on change, the benefits of inertia are worth mentioning. In some circumstances, inertia can appear as consequence of specific aspirations: Hannan and Freemen developed an evolutionary model of inertia, which illustrates “[...] that selection pressures in modern societies favour organisations that can reliably produce collective action and can account rationally for their activities” (1984: 162). Therefore, the organisations need to put a structure in place as well as retain it which is characterised by a high fidelity. To achieve this, structural inertia may occur as a by-product of the selection process that favours reliable and accountable organisations. Obviously, a stable structure is merely an advantage if it represents the most important selection criteria. Are other characteristics more important to ensure viability in the competitive environment, it is replaced. Accordingly, in dynamic environments - as it is increasingly the case in current markets - “[t]he capacity to respond quickly to new opportunities presumably competes with the capacity to perform reliably and accountably” (Hannan & Freeman, 1984: 163). Besides considering this trade-off, one should not neglect that specifically adaptability and responsiveness might also provide reliability and accountability: Companies in a very volatile market need to act agile to prevent mortality. However, the potential adverse impacts of change itself should be taken into account. As Carroll and Hannan (2000) indicate, the conduction and the process of change can provoke disruptions to an extent that might threaten an organisation’s viability.
Furthermore, implementing change actions is an expensive undertaking in terms of financial, but more importantly, in terms of human efforts. Some might argue that some change actions are not worth the costs, and thus, would decide against changes. Nevertheless, the potential of gaining a competitive advantage is greater if the company is attentive to occurring change requirements and able to pro-actively adapt her strategies and processes respectively. The value of change should have convincingly been pointed out above. Yet, this should not lead to the misunderstanding that a high number of change actions is more beneficial than a low amount of change initiatives. It is rather the most appropriate change activity regarding the organisation’s environment that is to be identified (see also 2.1.4).
2.1 ORGANISATIONAL INERTIA
2.1.2 Definition of organisational change
What is understood as organisational change? There are various concepts of change and diverse approaches to distinguish between change practices. Here a number of approaches of the concept of change and change definitions are presented, however, the vain attempt to build up an exhaustive list will not be made.
Change can be considered as a single incident, for instance an introduction of a new management practice, be it in operations management or in human resource management and the like. Contrarily, it may be part of an organisation’s strategy, targeting the capability of adaptability. Beck et al. (2008) differentiate change regarding the focus of research on organisational change. They assert that it “deals with the analysis of discrete organisational change events” (Beck et al., 2008: 414) and present the three basic distinctions made between those events, namely changes of (market) niches, changes in organisational leadership, and changes of formal organisational rules. But, this categorisation is made due to data availability rather than theoretical elaboration.
A further distinction might lie in the magnitude of impact on an organisation, often re- ferred to as either conducting continuous development or facing disruptive change, frequently labelled as ‘exploitative’ change or ‘explorative’ change, respectively (March, 1991). Ex- ploitative change “makes organisations better adapted to their current context” (Barnett & Pontikes, 2006: 1238), whereas the latter may result in the disruption of an organisation’s current structures, core competencies, and strategic alignment. Some scholars regard discon- tinuous change, i.e. disruptive change, as inevitable to gain and retain competitive advantage, especially in times of highly dynamic business environments (Junarsin, 2009; Reger et al., 1994). Nevertheless, others observed a shift from thinking about change as being episodic to being continuous which additionally emerged as transformational change rather than punc- tuated equilibria and episodic transformations (Marshak, 2002 ; Rindova & Kotha, 2001, Weick & Quinn, 1999). In Junarsin’s (2009) work on the management of discontinuous innovation the object affected by change initiatives and the degree of novelty are named as differing factors. He made the distinction between two forms of innovations, namely the product innovation and the process innovation, “[...] which refers to finding new ways or methods of doing something” (Junarsin, 2009: 10). According to him given the magnitude of innovation, discontinuous and incremental innovation can then be differentiated. Tools have been elaborated that assist organisational change. For instance, regarding continuous change the Malcom Baldrige National Quality Award1 and the European Excellence Model2 have gained popularity. The purpose of both tools is to improve an organisation’s performance by incentivising long-term improvement processes.
Obviously, the range of distinctions in which change obtains diverse relevance is wide. This emphasises the importance, complexity, and context-dependent meaning of change challenging corporations to manage and effectively implement change aspirations.
In this work the way an organisation approaches the goal of change is considered context dependent and shall not represent the focus. Hence, whether the organisation makes use of a rather venturesome approach or decides to emphasise continuous organisational development, if it decides making changes in its leadership or is about to introduce Total Quality Manage- ment (TQM), in other words the ‘expression’ of change, are questions neglected here. Here the ability to gain awareness and competency to spot opportunities for potentially valuable chan ge action is the main interest.
Though continuous development is not examined in respect to its effectiveness in compar- ison to disruptive change actions, Unwin’s (2005) deliberations regarding a change in the mindset of the user of tools, which support continuous change, are taken into account - since they advocate an incorporation of development. As he states regarding change practices, i.e. “tools” (Unwin, 2005: 1031), as discrete initiatives that provide solutions leads to the misinter- pretation that continuous change is “something to do” rather than “something an organization becomes” (Unwin, 2005: 1031). Referring to Unwin’s (2005) demand for somewhat living continuous change it is warranted to point to the risk an organisation encounters when change is considered necessary, but not genuinely part of its corporate culture and/or strategy. It might have devastating aftermaths if change practices are implemented, yet, merely with an ‘on-top’ approach rather than with an ‘in-to’ approach. Not only that investments in change might not result in fruitful outcomes, thus represent sunk costs, the (desultory) efforts might distract from other opportunities or threats emerging in the organisation’s environment. Hence, the importance of doing change is over-estimated. The more promising aspect of change, is being able to change (Unwin, 2005). Supportingly, Teece et al. (1997) regard ‘dynamic capabilities’ as enabler to successfully change and prevent failure (see also Helfat, 1997). Compliant with their understanding dynamic capabilities enable firms “[...] to integrate, build, and reconfigure internal and external competences to address [...] [the challenge] [...] of rapidly changing environments” (Teece et al., 1997: 516). Consequently, an integration of change into the mindset of organisation members and the development of appropriate capabilities to effectively change is inevitable to attain change successes.
In the context of this thesis successful change (management) is defined as the capability to detect change requirements and the competency to implement appropriate practices to achieve and maintain sustainable success. Moreover, regardless of its characteristic - either continuous or disruptive - change should be an integrated part in an organisation’s strategy, as it has become a premise to achieve sustainable success. Since many organisations are highly aware of the value of responsiveness and adaptability, one could assume that being flexible has become a common capability of organisations rather than a competitive advantage. In addition, from a more operational perspective, the implementation of change practices is expected to result in enhanced performance measures. Yet, reality exhibits a different picture: Most have not discovered and overcome all sources of failure in change management.
2.1.3 Reality of change outcome
Managing change and assuring flexibility is a complex undertaking, often unsuccessfully conducted. This conclusion is underlined by many case studies, surveys and economic analy- ses (see Clegg et al., 1997; Gibbs, 1997; Holman et al., 2000; IBM, 2004; Landauer, 1995; Saunders, 2005; Willcocks & Grint, 1997). Clegg and Walsh found that the “effectiveness of such changes, when considered against their organisational objectives and/or their economic performance, is often disappointing” (2004: 218). As an example they refer to a study which detects the rather moderate overall success rates of the uptake of change related management practices (Clegg et al., 2002).
Furthermore, McManus and Wood-Harper (2007) found that 65% of IT projects failures result from so-called “management causal factors” (McManus & Wood-Harper, 2007: 39). Thus, people issues are the main obstacles of project successes.
Change actions have their supporters and their opponents. According to a study 20% of an organisation’s employees initially endorse change actions, 50% passively observe what is happening, and 30% reject them (Saunders, 2005). Considering these observations it is not surprising that without joint endeavours of actors from both strategic and operational level change initiatives fail.
Change practices are also examined in the scope of organisational development (OD). Porras and Robinson’s (1992) review, which can be considered as a highly comprehensive and rigorous evaluation of the impact of OD, indicates marginal effectiveness of change practices with 53% of the dependent variables lacking any kind of change outcome, 9% yielding negative change, and merely 38% revealing positive change. Therefore, the following three conclusions can be drawn: Firstly, change initiatives are common, secondly, their performance appears to be disappointing, and therefore thirdly, many organisations are not very good at change management (Clegg & Walsh, 2004).
2.1.4 Why change actions fail
The sources of inability to implement change practices effectively are various. To examine the reasons for failures, two situations are differentiated: Firstly, the situation in which an organisation’s change actions are unsuccessful (see Bacon et al., 2010; Barnett & Pontikes, 2006; Clegg & Walsh, 2004; Diefenbach, 2007; Karp & Helgø, 2008; Levasseur, 2010; Marshak & Grant, 2008; Walsh, 1995) and secondly, the situation in which an organisation is a priori reluctant to take change actions (see Barnett & Pontikes, 2006; Beck et al., 2008; Boyer & Robert, 2006; Cyert & March, 1963; Junarsin, 2009; Lassen & Nielson, 2009; Levitt & March, 1988). The former relates to the problem of an ineffective implementation of change practices, whereas the latter describes the suffering from organisational inertia. Though, considered separately the boundaries of these two perspectives are blurred, since they are partially interrelated. Their mutual impact on each other and the complexity of change receive attention after introducing to several sources of change failures.
Unsuccessful change actions
Diefenbach (2007) argues that the paternalistic type of leadership jeopardises change action success: The top-down approach of defining, communicating, and justifying change leads to the risky circumstance that change actions are forced through. Change is pushed to the operational level and represents a highly hierarchical view on change management. Senior managers consider themselves as the ones who ‘know’, whereas the others - the members on the operational level - are the ones who ‘do not know’. Additionally, the “TINA-principle” (Diefenbach, 2007: 129) (There Is No Alternative), which is used to defend the fact that change is inevitable, thus, that “the reality of change” (Karp, 2005: 88) confronts and challenges the organisation, compounds the effect of the paternalistic leadership style. Their joint emergence results in the conviction of decision makers that a clear, even fierce, guidance and leadership is necessary to secure a change implementation like aspired and expected.
Diefenbach describes this change management style as followed:
“Together, the hierarchical understanding of management and change (“being clear”) and the fierceness with which it is justified, communicated, and imple- mented by its proponents (“being tough”) are core parts of a paternalistic ideology of leadership, of leaders who are knowledgeable, insight- and skilful - and their relations to those who are not” (2007: 131).
He further argues that individuals do not resist change in general; instead, he claims that many have a refusing attitude towards the presented paternalistic ideology of leadership and centralisation of power and control, i.e. managerialism. What might be even more resisted is a managerialistic change management “which primarily serve[s] the personal and group interests of a few” (Diefenbach, 2007: 137). Members on the pursue short/middle term view approaches in such a way that favours their own status and position. He concludes by identifying managerialism as “cause of the problem and not the cure” (Diefenbach, 2007: 137).
In a similar vein, Clegg and Walsh (2004) analysed current change management practices, positing that a change in mindset and language in the scope of the research field change management needs to take place. They identified the “old mindsets and language” and the neglect of “[including] social science ideas in the design process” as impediments for a successful change management (Clegg & Walsh, 2004: 235-236). According to them, new mindsets support change management. One example is the decision in favour of a pull-based system approach, instead of a push-based system approach: By making users to “legitimate owners who pull towards themselves the changes they need to help them undertake their work more effectively [...]” (Clegg & Walsh, 2004: 235) organisations can overcome their concerns regarding the participants’ resistance to change or other obstacles of change practices.
Likewise, Unwin (2005) proposes a change of mindset. He suggests to adopt the approach of “explorers” instead of “day-trippers” (Unwin, 2005: 1034). The latter are described as organisations that consider change practices as tools which provide them with clear instructions regarding what will come, what is required to ensure viability, and how to behave accordingly. Day-trippers prefer details and answers, incline uncertainties and open questions. “In [...] [their] [...] world we may visualize continuous improvement tools as a contract that specifies things to be done and rewards to be gained” (Unwin, 2005: 1038). Consequently, day-trippers are constrained by such a contract and its resulting standards as well as detailed prescriptions - change initiatives beyond what is expected are hindered, and thus, an ongoing development is hardly possible. On the contrary, the explorers view change tools as “painting” (Unwin, 2005: 1039), which inspires all users to be excellent, yet, how they achieve it is different and the path to take is not determined nor defined. They value change guidelines as triggers of development by provoking questioning and generating challenges, which need to be overcome: “[T]he painting provides the launch pad to discovery” (Unwin, 2005: 1039). Therefore, the process of creation is stimulated and a continuous improvement is internalised and lived. As a result, Unwin (2005) claims that change practices should not be conducted according to what they prescribe. Instead, they should be utilised as inspiration and demand for re-thinking in every situation the organisation finds herself in. Using change as a tool to manage the future will ultimately lead to failures, since it implies control of what will happen in future time. Organisation often draw the misleading inference that a prospective future must be managed. The future can neither be accurately predicted nor be managed. Thus, change should rather represent an openness towards exploration that enables to cope with environmental and organisational developments.
Additional sources of unsuccessful change initiatives may lie in the nature of interaction between decision makers and change executors. In 2004 IBM Business Consulting Services conducted a survey which showed that less than 10% of change programmes were actually successful (IBMBusinessConsultingServices, 2004). Karp and Helgø (2008) consider these findings as a result of a lack of understanding of leaders in respect to the complexity they face when implementing change activities. They claim that the challenge of managing change should be understood as dealing with the nature of human beings and coping with affective reactions, rather than implementing best practice structures and strategies. To them the struggle associated with change management remains, for leaders tend to “professionalize all types of human interactions into ‘tools’ of change management” (Karp & Helgø, 2008: 86) and adopt a too formal approach to their organisational members.
Further reasons for failures in change practices can be found in absent “common ground [...] among multiple stakeholders with different bases and relationships power” (Marshak & Grant, 2008: 15). This conclusion is drawn from the work of Hardy and Phillips (2004) who posit that the characteristics of power dynamics determine and reinforce the discourse in an organisation. A dominant meaning of discourse may find establishment, for some actors in certain positions endorse this specific meaning. Nevertheless, “[...] discursive ‘closure’ is never complete [...]” (Marshak & Grant, 2008: 14), hence, giving the opportunity for ‘counter’ discourses to achieve dominance, which might lead to disagreement or misunderstanding. Consequently, the lack of shared understanding might endanger achieving benefits through change processes, since the organisational members allocate their efforts respective their individual opinions and goals, instead of tunnelling their endeavours to achieve a joint aim. The aspect of power relations also finds consideration in Walsh’s (1995) review of the managerial and organisational cognition literatures. He states that power is obtained by imposing and legitimating “a self-serving construction of meaning for others” (Walsh, 1995: 290; based on Gray et al., 1985), for managers are well aware of the fact that enforcing their views and opinions might generate opportunities beneficial to them. Therefore, change can be understood as manifestation of a socially constructed reality, which is established as outcome of negotiation, explicit/implicit conflicts, and power execution (Grant et al., 2005). The individuals mostly act on their own behalf. However, these personal interests are often shared by others who belong to the same group, for example, decision makers. These so-called “[...] group interests, i.e. to strengthen the roles, position, and influence of managers (in comparison and against other professions, lower ranks or external stakeholders)” (Diefenbach, 2007: 136), reinforce the issues of top- down approaches, since a powerful group of decision makers jointly pressurise other groups, which are less powerful. They utilise the possibility to force change practices that are beneficial to them as (senior) managers, neglecting goals valuable to every member in the organisation. Therefore, overall organisational goals are at risk, for they do not represent achievements solely aspired by decision makers; instead, they are supposed to attain and retain success beneficial to the organisation consisting of several interest groups. As indicated, effort making for merely individual and group interests causes tensions that jeopardise organisational change success.
As a consequence, there is a need for a shared view and mutually understood discourse of the various participants to foster valuable organisational development (OD). Similarly, Karp and Helgø (2008) underline the importance of common meaning by pointing to the concept of involvement regarding change actions: Individuals “seek individual recognition” (Karp & Helgø, 2008: 93) and therefore try to enforce the utilisation of their own individual potential. This might cause uncertainty, unpredictability, and disagreement, which can be overcome by conducting conversations within the organisation. The result of providing individuals with the opportunity to gain a common meaning, i.e. achieving a level on which the individuals feel individually recognised and therefore comfortable, can be an increased motivation to adjust behaviours. The implications here are twofold: Firstly, a shared understanding is inevitable to achieve successful implementations of change actions, as hindering tensions will otherwise occur. Secondly, given the achievement of common meaning, individuals are intrinsically motivated to engage in the change action, as they directly contribute to the development of shared views beforehand, thus, agree to the change management goals.
Barnett and Pontikes (2006) considered success bias as another reason for failures. They identified the misleading belief of those managers whose organisation’s history is informed by survival of Red Queen competition, thus, that their organisation is highly capable of adapting to environmental changes (Barnett & Pontikes, 2006), as source of bad success. Therefore, by successfully implemented change actions in the past, managers are prone to be more convinced that taking new directions is strategically valuable. This may result in adverse consequence, for capabilities are over-estimated or required resources are actually not at present. Companies might struggle with implementing change actions effectively, and for this reason, experience an unpleasant surprise.
Reluctance to take change action
The inhibiting effect of exploitative change on prospective change actions represents an important source for inertia. Organisations improve their performance by improving their recent and current procedures. Once performance enhancement to a satisfactory level has been achieved or the level of aspiration is lowered, organisations end the process of problem solving (Cyert & March, 1963). This applies for most companies aiming to gain increased competitiveness. Like Barnett and Pontikes showed in their investigation, “[i]n an ecology of learning organisations, competition and organisational learning each trigger the other in an ongoing, self-exciting process [...]” (Barnett & Pontikes, 2006: 1239). This is the aforementioned Red Queen. The consequence is that the organisations’ exploitative abilities increase. However, at the same time they are confronted with the limitation of their ability to explore. On that account, when moving into new markets, the “problem of disruption and inertia is predicted to plague [...] those [...] that have learned from and survived competition” (Barnett & Pontikes, 2006: 1240). Hence, companies are surprised by the new conditions in the specific environments and they suffer from being competent in one area, but inexperienced in another.
Moreover, exploitation of a competency in a specific change activity might yield further negative consequences. The threat is a furtherance of a different kind of inertia, i.e. sticking to certain well-known procedures. Routines may benefit in terms of cost efficiency and quick information acquisition, however, if radical external shocks occur they mitigate the ability to gain and utilise new information and knowledge (Junarsin, 2009). Beck et al. support this aspect and point out that “increasing confidence may cause organisation members to overlook any dysfunctional consequences of change activity and to evaluate the outcomes as overly successful” (2008: 415). Additionally, the development of so-called change rou- tines might lead to a ‘competency trap’ (Levitt & March, 1988). This phenomenon occurs when an accumulation of competencies in implementing a particular change activity ‘traps’ organisations into executing this type of change again, despite other options implementing preferable outcomes (Beck et al., 2008). Lewin et al. consider it as “continual elaboration of increasingly obsolete capabilities” (Lewin et. al, 1999: 537). Beck et al. (2008) findings indicate that, in contrast to their assumption, the likelihood of a subsequent change of the same type does not increase. As already indicated above, the underlying reasoning was that, given a competency in a certain change activity, the company increasingly implements the same change activity, hence, conducts the same routines. Instead, their results endorse their second hypothesis that “prior changes of a given type decrease the likelihood of a subsequent change of the same type” (Beck et al., 2008: 418), i.e., a deceleration exists. The derivation of this hypothesis included the idea of “refinement processes resulting from change” (Beck et al., 2008: 417): Organisations implementing change activities gain additional knowledge and increase their competencies in organisational procedures, thus, enhancing their capability to implement changes which entail satisfactory as well as sustainable outcome. In simple terms, if you do the change properly now, you do not need to do one again in the near future.
These findings support the assumption that “change inhibits further change” (Beck et al., 2008: 428), therefore leading to the occurrence of inertia. Within the scope of this argumen- tation one could argue that this kind of inertia can be positively evaluated, as it indicates successful change activities. Noteworthy, a successful change initiative which might decrease the probability of a further similar change initiative, due to a decrease in necessity, should not entice to draw the conclusion that change activities have become obsolete. Instead, it challenges an organisation to remain attentive to (new) change requirements emerging from volatile environments. The capability to change is therefore not synonymous with a certain (low) amount of subsequent change practices, but rather the ability to react appropriately to occurring threats. As mentioned above, sticking to well-known practices increases the impact of disruption in case of change requirements new to the company. It follows that it is imperative for organisations to prevent themselves from becoming passive and idle. Another reason for organisational inertia might be the aim of a change action, namely to achieve enhanced performance. By adopting a micro-level perspective Boyer and Robert state, the effort made to initiate change is supposed to result in a stable situation leading to the paradox that “change may require the promise of future inertia” (2006: 325). They continue that this development is enforced by promising future rents to their members, which - once obtained - are well protected. Thus, owners of rents are reluctant to any kind of change threatening their owned rents (Boyer & Robert, 2006). This desire to keep what was achieved can be manifested in the so-called endowment effect. It explains that individuals value goods or services more, once their property right to it has been established. Empirical findings of asymmetric evaluations of gains and losses implied that people commonly make choices that differ depending on the direction of proposed trades, i.e. being buyer or seller in the trade (Knetsch, 1989). Thus, individuals perceive the loss of a certain asset they possess as bigger than the gain of this particular asset. Considering this, it is even more obvious how difficult it is for individuals to give up certain possessions in the form of habits and routines or the like. Further sources of organisational inertia can be detected when examining diverse organisa- tional settings. Boyer and Robert view “the fact that career possibilities [...] are commonly linked to the successful completion of projects” (2006: 326) as reason for agents to continue a project, although the outcome of it may not satisfy initial expectations. Therefore, the linkage of reward to the finalisation of a project, i.e. variable income, can lead to a decreased willingness to change.
Interrelations and the complexity of change processes As shown, there are many reasons why change practices fail and why attempts to implement them are generally missing. The two situations presented mutually affect each other, for witnessing failures of change initiatives and the absence of the desired return of its investment might decrease the probability to initiate change activities in the future. Some organisations do not recover from the disappointment of a dissipated investment. Before experiencing another costly initiative that merely produces sunk costs, they prefer to continue to improve the processes already in place. Conversely, an existing organisational inertia might prevent an organisation to build up requisite competencies to achieve successful change activities. How difficult it is to consider these two phenomena separately becomes obvious when referring to the findings Desai (2008) obtained within his test on the capacity expansion behaviour of U.S. rail road companies. He found support on the hypothesis that
“organizations with limited operating experience are less buffered from failure, and hence that poor performance results in more reduced risk taking at these organizations than at organizations with ample experience” (Desai, 2008: 594)
exacerbating the achievement of requisite improvements. If change is not incorporated into the business strategy, skills and experiences in respect to change actions are not considered valuable. In fact, the fatal threat of organisational inertia is rather sticking to old habits and established processes than the lack of change action. As already indicated, it is not the amount of changes that illustrate a flexible company. Instead, it is the ability to detect change requirements and adapt to them accordingly. Therefore, an organisation that does not suffer from organisational inertia is more likely to exhibit the appropriate skills and processes to implement change actions successfully, in case they are required.
The description of the sources of inability of change is not exhaustive, but gives an impression of how complex the achievement of flexibility is. Interestingly, all problems mentioned are well-known to the actors in organisations and there is also the awareness of the necessity to remedy the problems of change practices. Nevertheless, organisations struggle with overcoming these impediments. Obviously, there seem to be latent obstacles which need to be detected. To approach the challenge of these implicit issues, the individual itself as source of change failures is examined more detailed in the following part.
2.2 ABSORPTIVE CAPACITY
In their seminal work Cohen and Levinthal describe absorptive capacity as the “[...] ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (1990: 128) which serves as a function of prior related knowledge. Later, they considered the value of absorptive capacity not solely lying in the authorisation of firms to “[...] exploit new, valuable developments, but also to envision better their emergence” (Cohen & Levinthal, 1994: 244), enabling to detect opportunities. Lane et al. (2006) reviewed the subsequent literature on absorptive capacity and re-defined the concept as follows: Absorptive capacity is a firm’s ability to utilise externally held knowledge through three sequential processes: (1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning, (2) assimilating valuable new knowledge through transformative learning, and (3) using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning (Lane et al., 2006). With these three sequential processes they emphasised the multidimensionality of the learning process by which new knowledge is differently processed. So here the concept of exploitation and exploration finds reflection. According to Levinthal and March, a firm’s long-term viability depends on its ability to “[...] engage in enough exploitation to ensure its current viability and, at the same time, to devote enough energy to exploration to ensure its future viability” (1993: 105).
Thus, they posit that there is a necessity to engage in both learning processes simultaneously. Yet, extreme conduction of each of the learning approaches jeopardises a firm’s viability. In the case of too much exploration undeveloped ideas and too little distinctive competence may be the outcome, or in the case of too much exploitation an evolving competency trap (see 2.1.3), may occur (Levinthal & March, 1993). Lane et al. position the transformative learning concept between explorative and exploitative learning, representing the “several processes that affect how the newly acquired knowledge is combined with the existing knowledge of the firm” (2006: 858), somewhat bridging the divide (see figure 2.1). In opposition to this concept, Zahra and George (2002) distinguish between potential and realised absorptive capacity. They contend that potential capacity synthesises acquiring knowledge and assimilating capabilities, whereas realised capacity centres on transforming and exploiting knowledge. Therefore, they attribute assimilation to the concept of gaining new knowledge and transformation to the concept of using the new knowledge, respectively. This conceptualization was evaluated by Todorova and Durisin who criticised that Zahra and George (2002)
illustration not visible in this excerpt
Figure 2.1: A process model of absorptive capacity (modified, based on Lane et al., 2006: 856).
“[...] omit some insights from the original concept of absorptive capacity [...] [and] [...] do not incorporate some important research contributions on learning and innovation” (2007: 783).
They suggest an investigation of the impact of socialisation mechanisms and the role of power relationships, as well as including feedback loops in a dynamic model of absorptive capacity. Moreover, they recommend reverting to the component capabilities, namely recognition, acquisition, assimilation/transformation, and exploitation, as they do not agree with separat- ing the concepts of assimilation and transformation, but instead favour a linkage between them (Todorova & Durisin, 2007). This matches with Lane et al.’s (2006) model, in which assimilation is conducted via transformative learning. In this work, it will be referred to Lane et al.’s (2006) model of learning processes, for to date it represents a broadly acknowledged definition (for example Lichtenthaler, 2009), based on Cohen and Levinthal’s (1990) first considerations twenty years back.
In Volberda et al.’s (2010) review and examination of the literature on absorptive capacity they illustrate various theories informing absorptive capacity, their contributions, and constructs as well as their implications. Three selected theories, i.e., dynamic capabilities, managerial cognition, and dynamic capabilities are of main interest to this work. Subsequently, the 2 meanings of social integration, organisational form and the role of the individual are introduced as drivers for absorptive capacity.
DYNAMIC CAPABILITIES. Dynamic capabilities refer to an organisation’s non-imitable capabilities and competences. Teece subdivides them
“into the capacity to (1) sense and shape opportunities and threats, (2) to seize
opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets” (2007: 1319).
As mentioned above, Cohen and Levinthal also warn that missing out on investing in the capability of exploiting new, valuable information cumulatively, i.e. “[...] passivity [,] may make both the firm and society worse off” (1994: 246). Lichtenthaler’s (2009) study provided empirical support for the importance of dynamic capabilities in the context of technological and market turbulence, which explains why firms might benefit differently from external knowledge. Even though some firms do not necessarily have to invest as much as others, a pro-active search for new information, and the unique combination of it with existing knowledge as well as built up competencies may result in promising outcomes. Obviously, flexibility and the willingness to undergo this search repeatedly, challenging the firm with new obstacles, are of great importance and value. Therefore, the (efficient) effort taken to establish these dynamic capabilities influences the level of absorptive capacity.
CO-EVOLUTIONARY THEORY. Co-evolutionary theory describes firm change as the joint effect of managerial intentionality and institutional as well as environmental effects (Lewin & Volberda, 1999; 2003). The core deliberations referring to the concept of absorptive capacity are that the level of absorptive capacity is the result of the combination of managerial actions and developments in the knowledge environment (Volberda et al., 2010). Volberda et al. (2010) assess that many studies in the context of co-evolutionary researches suggest that absorptive capacity enables or restricts the level and range of exploration adaptations (see for example Cohen & Levinthal 1990, 1994, 1997; Lewin et al., 1999). In addition, Van den Bosch et al. (1999) show co-evolutionary effects, such as that a high level of absorptive capacity makes it more likely that a firm’s expectation formation will be determined by opportunities present in its environment, independently from current performance criteria.
This means that firms react to what is happening and adapt the criteria accordingly, which have been defined to determine expected achievements, to measure performances, and to evaluate expected results. In the context of this work, co-evolutionary effects are of interest, as they make the influence of the context salient, in which an organisation operates. Whether the company is active in a highly turbulent market, confronted with specific institutional settings, or governed by certain types of corporate culture - all these aspects drive the level of absorptive capacity, which itself influences the ability to act pro-actively rather than to react to changes in the environment (Cohen & Levinthal, 1994).
MANAGERIAL COGNITION. The theory of managerial cognition implies that dominant management logics, so-called mental mind maps, influence organisational forms (Dijksterhuis et al., 1999) and indirectly the level of absorptive capacity (Van den Bosch et al., 1999). For example, a manager who does not consider the environment as a source of valuable knowledge to be absorbed will favour traditional organisational forms (Van den Bosch et al., 1999), thus limiting the level of absorptive capacity. Managers can also develop absorptive capacity by directly providing information on new practices, hence, increase knowledge in respect to these practices. In a similar vein, Minbaeva et al. (2003) view the individuals’ ability, created by respective education as well as skills, and their motivation to absorb external knowledge as direct influence on the level of absorptive capacity. In this work, not the managers’ cognition in particular plays a key role to enhance an organisation’s absorptive capacity, but the influence of the cognitions of organisational members in general. The argument offered is that an organisation cannot build up and sustain its capability to detect and use new knowledge without their members’ willingness and capability to process the new knowledge. Therefore, an organisation is contingent on its members’ attitudes, feelings, and perceptions influencing the success of increasing its level of absorptive capacity. SOCIAL INTEGRATION. A further driver of absorptive capacity is the aspect of social integration. This antecedent has experienced high attention in the literature on absorptive capacity. Becker-Ritterspach’s comparative case study on different learning outcomes delivers evidence that
“social interaction [...] is a key requirement for absorptive capacity as it enables local actors to participate in the transformation of new knowledge to the local context” (2010: 24).
Consequently, he claims that social mechanisms directly affect a unit’s absorptive capacity.
He concludes that the observed difference regarding their capability to learn and to sustain
“[...] can be linked to different social interaction patterns which enabled or constrained the ability and motivation of local actors to transform the transferred knowledge to the local context” (Becker-Ritterspach, 2010: 3).
Others propose that social integration mechanisms might lead to a decrease of information sharing barriers, while increasing the effectiveness of assimilation and transformation capabil- ities (Zahra & George, 2002), stressing the key role of social mechanism. Yet, as opposed to Becker-Ritterspach, they argue that there is a rather indirect relation, since it facilitates knowledge sharing and promotes mutual understanding (Todorova & Durisin, 2007; Zahra & George, 2002). Dhanaraj et al. illustrate the importance of social embeddedness in the transformation of tacit and explicit knowledge and identify “[..] tie strength, trust, and shared values and systems” (2004: 428) as important aspects to transfer tacit knowledge. All these approaches accentuate that social mechanisms are crucial to develop new ideas from newly gained knowledge.
ORGANISATIONAL FORM. As indicated in the paragraph dedicated to managerial cognition, the organisational form can also affect the level of absorptive capacity. An over- determined (Anderson, 1999) organisational form will probably result in a lower ability to recognise new opportunities. Companies deploying such an organisational structure, i.e. rather bureaucratic and traditional, are inclined to exhibit lower adaptive and improvisation capabilities (Weick, 1999), and thus a higher level of structural inertia (Lewin et al., 1999). Conversely, a rather flexible (non-bureaucratic, non-hierarchical) organisational structure and approach to management is linked to higher capacities for knowledge acquisition (Dodgson, 1993; Lyles & Baird, 1994; Lyles & Salk, 2007). Organisational flexibility increases absorptive capacity, as it encourages “[...] greater receptivity of organisation members to new stimuli from the outside” (Lyles & Salk, 2007: 6). This can be achieved by encouraging collaboration and knowledge exchange within the firm, and by enabling as well as empowering members to adapt to perceived change requirements.
1 Established in the USA. “The Malcolm Baldrige National Quality Award was created by Public Law 100-107, signed into law on August 20, 1987. The Award Program, responsive to the purposes of Public Law 100-107, led to the creation of a new public-private partnership. Principal support for the program comes from the Foundation for the Malcolm Baldrige National Quality Award, established in 1988. The Award is named for Malcolm Baldrige, who served as Secretary of Commerce from 1981 until his tragic death in a rodeo accident in 1987. His managerial excellence contributed to long-term improvement in efficiency and effectiveness of government” (NIST, 2010).
2 “The EFQM Excellence Model is [...] a non-prescriptive assessment framework that can be used to gain a holistic overview of any organisation regardless of size, sector or maturity”. “The Fundamental Concepts of Excellence are the underlying principles of the EFQM Excellence Model which are the essential foundation of achieving Sustainable Excellence for any organisation [...]”: achieving balanced results; adding value for customers; leading with vision; inspiration and integrity; managing by processes; succeeding through people; nurturing creativity and innovation; building partnerships; taking responsibility for sustainable future (EFQM, 2008).
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- Organisation Change Management Resistance to change Scenario Planning Absorptive Capacity Organizational Inertia