EURAM 2011: Does scenario thinking make a difference?
An integrative model linking organisational inertia, openness to change, and absorptive capacity
Research Paper (postgraduate) 2011 37 Pages
Valuing or underestimating the opportunities derived from environmental changes might determine which organisation will survive and which organisation will see its viability at risk. Organisational inertia and a lack of absorptive capacity can inhibit organisational flexibility and innovativeness. In this study, we suggest organisations to implement a pro-active search for new opportunities, which potentially entails innovation. By adopting a micro-level perspective, we emphasise the importance of individuals within an organisation as contributor to the organisation’s success. An integrative model linking organisational inertia, scenario planning, and absorptive capacity is proposed. We present scenario thinking as a tool which may impact individuals’ openness to change, hence leads to a positive attitude towards new information, i.e. absorptive capacity. Several propositions are derived from this multi- theoretical model. We argue organisations may be presented with a promising approach to increase the motivation and capability of individuals to engage in innovative actions, and suggest further research to empirically test this model.
Keywords: organisational inertia, absorptive capacity, scenario thinking, openness to change, innovation.
Nowadays, companies’ viability and sustained success is threatened continuously, since the challenges and demands, which companies encounter, have increased in its dynamism and magnitude - a development unlikely to change (e.g., Balogun & Jenkins, 2003; Karp & Helgo, 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 a well-known fact and companies are aware of its importance, organisational learning, change management, as well as assuring flexibility is a complex undertaking, often unsuccessfully conducted (Bacon et al., 2010; Clegg et al., 1997; Collinson & Wilson, 2006; Desai, 2008; 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 being 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 serve as a tool to decline inertia. 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 they establish the foundation of the organisation, and, simultaneously convey the firm’s norms and values (Martin, 2002; Raz & Fadlon, 2006; Schein, 1992). Individuals also participate in the creation of an organisation’s absorptive capacity, the ability to utilise externally held knowledge (Lane et al., 2006). The phenomenom 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 proactive searching for new opportunities, ultimately might lead to thriving innovation.
The questions emerging are: How can individuals’ attitude towards change be altered? Does thinking in scenarios contribute to gaining a higher degree of openness to change? Does an enhanced openness to change find expression in individuals’ attitude towards new information, i.e. individual level of absorptive capacity? 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 article is to provide answers to these questions. Since it represents a conceptual piece of work, propositions will constitute the results. The structure is the following: First, a brief theoretical background of organisational inertia, absorptive capacity, and scenario planning is given. Subsequently, the introduced deliberations on these theories are utilised and integrated to derive propositions that are unique and new in their nature. Before concluding, we will discuss our contributions to theoretical understandings within the scope of the research field organisational learning, limitations of the model, and managerial implications.
2. Theoretical background
2.1 Organisational inertia
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 & Helgo, 2008: 86). Change is consequently a continuous challenge to be taken. The competency to exercise requisite change successfully can entail performance enhancement, and potentially, competitive advantage. However, companies encounter problems when coping with change.
2.1.1 Definition of organisational inertia and the value of change
Organisational inertia may be defined as “[...] fear for changes since 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 the issue of this phenomenon and other sources exacerbating the achievement of change. In the following we will briefly introduce considerations on these topics.
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 - when required - is 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. 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. Change can be utilised as a tool to adapt the corporate culture according to a modified (innovative) business strategy, to integrate acquired/outsource former internal business units, to enter new markets, etc. (e.g., Bacon et al., 2010; Bathurst & Monin, 2010; Bhatnagar et al., 2010).
Here, the ability to gain awareness and competency to spot opportunities for potentially valuable change action is of interest. 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. The more promising aspect of change is being able to change (Unwin, 2005). An integration of change into the mindset of organisation members and the development of appropriate capabilities, e.g. dynamic capabilities (Teece et al., 1997), to effectively change is inevitable to attain change successes. Synthesising, in the context of this article 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 exploitative or explorative (Barnett & Pontikes, 2006; March, 1991) - change should be an integrated part in an organisation’s strategy (Unwin, 2005).
2.1.2 Reality of change outcome
Since many organisations are well-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: 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). Furthermore, McManur and Wood-Harper provide evidence that 65 % of IT projects failures result from so-called “management causal factors” (2007: 39). Thus, people issues are the main obstacles of project successes. In addition, 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.
The sources of inability to implement change practices effectively are various. Two situations can be 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 & Helgo, 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; 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. How difficult it is to consider these two phenomena separately becomes obvious when referring to 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. Consequently, we conclude that an organisation which 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.
2.2 Absorptive capacity
In their seminal work Cohen and Levinthal describe the “[...] ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (1990: 128) as absorptive capacity which, according to them, serves as a function of prior related knowledge. Later they consider 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 the detection of opportunities. Lane et al. reviewed the subsequent literature on absorptive capacity and re-defined the concept as follows:
’’Absorptive capacity is a firm’s ability to utilize 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” (2006: 856).
With these three sequential processes they emphasise the multidimensionality of the learning process by which new knowledge is differently processed. Hereinafter, we will refer to Lane et al.'s (2006) model of learning processes, for it represents, to date, a broadly acknowledged definition (e.g., Lichtenthaler, 2009), based on Cohen and Levinthal’s (1990) first considerations twenty years ago.
2.2.2 The outcomes of absorptive capacity
Why is absorptive capacity, a firm’s ability to utilise externally held knowledge, valuable to achieve? As Cohen and Levinthal already stated in 1990, the benefits of combining new with prior knowledge, i.e. knowledge diversity, lie in the co-existence of various knowledge patterns eliciting such kind of learning and problem solving processes that have the potential to yield innovation. Similarly, Junarsin puts less absorptive capacity in line with organisational inertia and structured routines which are identified as ”[...] hindrances to the discontinuous innovation” (2009: 10). He claims that 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 additionally might lead to pro-active and innovative advances. Therefore, it facilitates a proactive approach towards gaining new information and creating unique knowledge to cope with the challenges surrounding every organisation.
2.3 The objective of scenario planning
Scenario planning is a method which aims to increase a firm’s ability to cope with occurring changes. In 1985 Wack stated that “[o]ne of the most constant variables of today’s management practices is the notion of change, adaption, and innovation” (139), with its importance having been increased rather than declined. Schoemaker’s proposition of a scenario planning definition is: “[...] a disciplined methodology for imagining possible futures [...]” (1995: 25) in which organisational decisions may be demonstrated. Thus, the emphasis predominately made refers to the distinction between precise forecasting and creating stories about prospective developments (Chermack et al., 2001; Mietzner & Reger, 2005; Ramírez et al., 2008; Schoemaker, 1995; Wack, 1985), the latter approach representing the method of scenario planning to manage uncertainties.