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Strategic Flexibility and Competitive Advantage  

Kathryn Rudie Harrigan

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.

Article

The Application of Real Option Approach in International Business Research  

Tailan Chi and Yan Huang

The real option theory (ROT), a theory on investment decision making under uncertainty, has been applied to analyzing a broad range of questions in international business (IB). In the face of uncertainty, any discretion that the managers of a multinational enterprise (MNE) have over the timing, scale, speed, and sequence of investing or using the firm’s resources, in the forms of physical or intellectual capital or managerial time and effort, can be a real option. Such options confer upon the managers the right, but not the obligation, to exploit the upside potential while limiting the downside risk. Uncertainty, irreversibility, and absence of immediate and complete preemption are three necessary conditions for a real option to create value. Uncertainty offers opportunities to gather more information in the future, and such information can help managers make better decisions or alter prior decisions for improvement. Irreversibility is defined as the proportion of the investment committed to a project that cannot be recouped if the project is abandoned. Preemption refers to the revocation of the decision-making discretion that nullifies the option. It is possible to distinguish seven types of real options that have been examined in IB studies: (a) option to defer, (b) option to abandon/exit, (c) option to exchange, (d) option to grow/scale up, (e) option to contract/scale down, (f) option to switch, and (g) compound options. These types of options are found to influence a firm’s international market-entry strategies (e.g., location, timing, scale, speed, and mode) and the configuration and organization of the firm’s geographically dispersed production network. ROT has also been integrated with other economic theories, such as transaction cost economics and resource-based view, to better understand these decisions. Although ROT assumes a strong form of rationality on the part of the decision maker, it is also possible to incorporate cognitive or cultural biases into the theory and give the theory’s analysis greater realism. ROT represents a theoretical approach that can be integrated with various economic and noneconomic theories. More work in such theoretical integration can potentially help researchers gain deeper or more complete understandings of IB questions. Extant studies in IB typically analyze only a single type of option in isolation. But the global production network of a MNE typically has a portfolio of different types of options embedded, and the different types of options inevitably interact. The study of interactions among two or more types of options under different sources of uncertainty is likely to yield new insights on the strategy and organization of the MNE.