Internal Sources of Strategic Transformation: Competitive Advantage through Innovation

The fundamental purpose of strategic management is to keep the firm in tune (strategic fit) with its unstable, unpredictable, and competitive business environment. Any form of change in the firm’s external environment, including technological change, is a problem for established firms because these firms find difficulties in coping with it. The reason for this is organizations tend to develop incrementally in the limited dimensions of strategy, which is not enough to keep them in pace with the rapidly changing environment. The firm’s rate of strategic change is much slower than the rate of change that occurs in its environment. This condition is described as “strategic drift.” This strategic drift reflects a gap between what a firm is doing and what it should be doing to remain competitive in the marketplace. Due to a slower rate of change the firm’s performance declines first, and when no action is taken (strategy fails to address the small change) then the gap widens over time until the firm’s performance further declines to a level where it forces the firm to reactively change, as described by the punctuated equilibrium models of change. External change occurs faster and the pace at which the firm can absorb this change or respond to it is much slower. When the performance starts to decline, companies take reactive measures to bring the performance back to the desired level. Internally, organizational inertia or resistance to change is another cause that generates a slower response to change. The message is simple, to be successful, and gain and sustain competitive advantage, a firm should stay in synchronization with its changing environment. These forces of change can also obstruct the progress in innovation. But if we can understand change and adapt to these changes or initiate a change (by proactively addressing it), we can manage it. By learning how to manage strategic change (external and internal) an established firm can manage innovation successfully.

Types of Changes

Change management is a complex process and, to manage it, change is divided into two main components: transformation and realignment, based on the end results or the desired goals and objectives a firm is pursuing. Transformation and realignment are further subdivided into evolution and revolution, and adaptation and reconstruction respectively, based on the nature of change desired. The nature of change can be incremental or big bang. Revolutionary strategic transformation is a big bang or large change.

Why Strategic Transformation is Difficult to Understand and Implement?

Transformational changes are hard to implement. They should only be undertaken when the firm has exhausted all other strategic alternatives to restore the firm to its competitive position. Managing strategic transformation typically involves redefining the mission, goals and objectives, and strategies that will give the firm a new direction in response to the perceived environmental threats. But, managing transformational change is difficult and uncertain, because firms normally respond differently to the same environmental changes. The reason for this is managers lack the ability to perceive and understand the external strategic factors and issues correctly, and their impact on the firm. The external strategic factors those were responsible for the “2008 recession” and how those factors were affecting firms were not known to most of the firms in the global market before or at the beginning of the recession. Therefore, to manage the downturn, firms responded inappropriately through downsizing, restructuring, and implementing negative change programs. Moreover, a firm holds its own assumptions about itself and its environment and competition, which may not be true and certain. Under these conditions, it is most likely that the firm’s response will be uncertain, slow, and unfocused: like a scatter-gun effect.

Evolution

Evolution is a transformational change in which change is implemented gradually through different stages. It’s a proactive transformation in which activities are most likely planned and implemented based on the anticipated future needs. Prospectors and analyzers are two basic types of strategically oriented companies who focus on this type of change through innovation and emphasize exploring new market opportunities. Examples are product innovation in the automobile and personal computer industry. From 1890 to 1912, rapid innovation took place in the auto industry. Over time, product innovation cycle or time and the industry life cycles have constantly shortened. Patterns of evolution also differ based on the product’s industry and geographical location.

Revolution

Revolution is a large-scale transformational change and takes place rapidly within a short span of time, typically within a 1-to-3-year period. Forced reactive transformational measures are undertaken, when the firm’s performance is declining due to its changing environment. The need for this type of transformational change arises when a company determines that it can no longer pursue with its old or current strategy and needs a new strategy to fill the strategic gap in performance and therefore, forces a fundamental change in a short period of time to accomplish the required change.

When product innovation slows, most likely, the revolutionary process innovation begins. In this transition, the dominant design emerges in the industry’s evolution process, and the focus shifts from product innovation to process innovation to reduce costs, improve product reliability, and introduce large-scale production methods. In 1913 Ford introduced revolutionary production methods (including a moving assembly line) to assemble car chassis, which was implemented over a time span of 1 year that resulted in Ford offering a lower price for its T-model. Likewise, Toyota’s revolutionary process innovation in automobile production introduced lean production. From the above discussion, we see that innovation can also drive large-scale transformation and, therefore, is linked to it. The above examples also tell us that revolutionary transformation through innovation has the potential to create an enormous amount of value for the organization.

Design Choices and Change Paths

The first step in managing change is to define the goals or end results (transformation or realignment) and the nature of change (incremental or big bang) desired. The numbers or types of change that are required would be based on the strategic issues the organization is facing. Selecting the right design (nature of change) and change path are essential when planning for an appropriate change for the organization. To manage change, the organization should have skills in strategic management because any change path is a context-specific change. Additionally, the change agents should possess analytical and judgmental skills.

Based on the complex nature of strategic transformation, companies fail to assess the numbers and sequences of changes required to regain their competitiveness in the marketplace. The change history of General Motors (GM) shows that it took 13 years to transform and that the change paths were not planned but emerged through trial and error. GM’s strategic transformational change path first involved reconstruction (an enabling phase), followed by evolution and revolution. From the year 2000 to 2005, it lost 74 percent of its market value and market share. Due to this declining performance by the year 2005, it realized a need for a strategic change. After the year 2005, some incremental changes were introduced but were not enough to drive the company out of trouble. It was only after 2009 when GM realized it needed a transformational change through revolution (rapid); it emphasized technological innovation (evolution) in new car models and then used process innovation for reliability and large-scale manufacturing (revolution). Because of this transformation through innovation, by the end of 2013 GM’s net sales & revenues reached a new high.

References and Further Reading
1. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice Hall, 2000), Chapters 1 and 3.
2. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 7, 8 and 9.
3. J. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapters 1 and 2.
4. E. Romanelli and M. Tushman, Organizational Transformation as Punctuated Equilibrium: An Empirical Test, Academy of Management Journal(October 1994), 37(5), pp. 1141-66.
5. M. Hensmans, G. Johnson, and G. Yip, Strategic Transformation: Changing While Winning(Great Britain: Palgrave Macmillan, 2013), Chapter 1.