In this post we will have a brief look at a specific phenomenon of strategic management. Turn back time is in interesting concept in terms of movies or sci-fi literature, but in terms of chosen strategic directions an easy way out often does not exist. So let’s look at this issue – given the example of competitive advantages and investment activities to achieve those advantages.
Competitive advantages exist when an organization has a specific resource structure in comparison to other firms. Such a differentiation in terms of resource structure can be achieved and protected by investment activities (e.g. by R&D activities; establishing a new plant with a very efficient production line that creates a cost advantage). Due to incomplete information and a future perspective investment activities are always linked with uncertainty. No matter how good your analysis and forecasting have been, you always deal with the future and hence there is no guarantee that you receive your expected returns. But this uncertainty is not the only critical issue. Another attribute for an investment activity is its irreversibility. This irreversibility occurs due to the impossibility to reverse an investment without consequences. Typical consequences are sunk costs (see this old post concerning sunk cost dilemma). Could one reverse investment activities without cost, every investment activity could be made without any kind of risks.
Another critical issue is commitment that can be defined as to stick to a chosen strategic direction. In corporate practice this stick is called “commitment” very often. Reasons to stick are called “sticky factors”; four different types of these sticky factors can be distinguished.
The first factor is an exit barrier which creates a lock-in situation. It is established by composition of everlasting and specialized factors which make it difficult to turn back to the starting point. Sunk cost and the loss of intangible assets represent the most critical issues.
Barriers for a re-entry. An exit from a specific strategic direction can be inappropriate since a re-entry to this direction might be difficult or impossible afterwards.
The time lag between strategy implementation and observation of results is another issue. During this time an organization will stick to selected strategic direction.
Organizational idleness arises from different psychological or sociological reasons, e.g. that a project promoter does not want to accept a failure. This factor has its share that an organization sticks to a selected strategy, too.
Choosing the right strategic direction is a hard business. When identifying the need to change this direction you have to keep in mind that there are sticky factors which create barriers to shift to a new direction.