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Incumbent inertia upon disruptive change in
the airline industry: Causal factors for
routine rigidity and top management
moderators

Working Paper No. 9

Leipzig, July 2010
Chair of Strategic Management and Organization

                     HHL – Leipzig Graduate School of Management

         Incumbent inertia upon disruptive change in the airline industry:

        Causal factors for routine rigidity and top management moderators

                       Oliver Viellechner and Prof. Dr. Torsten Wulf

           Working Paper Chair of Strategic Management and Organization

                  Copyright: Lehrstuhl für Strategisches Management und Organisation

                                                 Leipzig 2010

                             Jede Form der Weitergabe und Vervielfältigung

                                bedarf der Genehmigung des Herausgebers

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                                             ABSTRACT

In the face of disruptive innovations, incumbent firms frequently encounter substantial rigidity in

business routines. Our article investigates the role of top management teams to overcome this

inertia. Based on a literature review including strategy, organizational and psychological

research fields, we conducted four case studies in the European airline industry and collected

data from qualitative interviews with senior executives. As a result, we find new causal factors

for routine rigidity in four groups, namely knowledge insufficiencies, inadequate self-concept,

inflexibilities and financial concerns. Further, we propose a comprehensive set of top

management team characteristics along individual members, team structure and team process,

which influence the impact of the identified causal factors to ultimately lower routine rigidity.

Our findings uniquely link existing research streams and allow practitioners to better prepare

incumbent firms for future disruptive change.

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                                           INTRODUCTION

This article addresses the response behavior of incumbent firms when facing discontinuous

change by business model innovations. Almost always, this entails a problem of inertia, related

to the sluggishness of incumbent response due to insecurity in deciding on an adequate response

strategy. For instance, when low-cost carriers (LCC) introduced disruptive change in passenger

air travel, most incumbents tended to ignore the new phenomenon: "Our pricing strategy is not

for debate. Our high quality product justifies a substantial fare differential to LCC" (Anonymous,

2002), a Lufthansa board member stated in 2002. Only some years later, with LCC constantly

winning market shares, most airlines finally realized the challenge. The responses of major

European incumbents, however, were already late by two to five years.

After Christensen and Bower investigated disruptive technologies for the first time (Christensen

and Bower, 1996), the topic created broad interest, not only among academics. A Google search

yields more than 400,000 hits for the term "disruptive innovation". Christensen/Bower pioneered

the academic field by discovering the possibility that technologies with inferior performance

may supersede established incumbents. Their group of scholars also explained typical

maladaptive incumbent responses to disruptive technologies and provided several response

recommendations (Christensen, 2000; Christensen and Raynor, 2003; Christensen, Anthony and

Roth, 2004). More recently, scholars also investigated disruptive business models (i.e., disruptive

strategic innovations). Scholars categorized typical incumbent response behaviors and developed

normative response recommendations (Charitou and Markides, 2003; Markides and Charitou,

2004) or identified factors inhibiting incumbents to extract value from new strategic options

(Vlaar, de Vries and Willenborg, 2005). In addition, there are studies focusing on the refinement

of definitions, e.g., the development of a scale for the disruptiveness of innovations

(Govindarajan and Kopalle, 2006) or on specific sub-elements, such as demand conditions

enabling disruptive dynamics (Adner, 2002).

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Gilbert opened a new field of research centering on the struggle and inertia of incumbent firms

when facing disruptive strategic innovations. Research within this is still described to be

somewhere between nascent and intermediate stage (Edmondson and McManus, 2007). So far,

only one interpretive model by Gilbert exists for incumbent inertia that is sufficiently empirically

tested (Gilbert, 2005). He identified the role of rigidities and cognitive frames by unbundling the

sluggishness of response into denial of resource allocation (resource rigidity) and the change of

management processes (routine rigidity). Moreover, he found cognitive framing as threat or

opportunity as a key influence factor for incumbent inertia. Subsequently, more researchers

focused on rigidities by replicating and extending Gilbert's model and unbundling cognitive

framing into profit/loss perception and perceived control (König, 2009).

A number of questions, however, still remain unclear. In general, only a few studies

comprehensively explain incumbent response behavior and especially the role of top

management teams in light of disruptive strategic innovations (Chesbrough, 2001). Rather, many

studies investigate isolated aspects of incumbent response, without considering alternative

explanation approaches or different research disciplines. Further, studies are often difficult to

compare due to ambiguous terminologies and research designs (Gatignon et al., 2002). For

example, some work is purely theoretical and lacking empirical grounding, and other studies

facilitate either a single or multiple case study based approach. Since investigated discontinuities

and industries are highly heterogenous, it remains open if findings using qualitative empirical

data can be generalized without further research.

More specific, considering Gilbert's (2005) unbundling of inertia into resource and routine

rigidity, a detailed understanding of causal factors for routine rigidity linking various research

disciplines including strategic management, organizational science and psychology is still

missing. In particular, beyond financial concerns, it would be important to understand the role of

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the respective level of expertise, self-concept of the organization, as well as internal and external

flexibility. The study of Vlaar et al. (2005) identified several factors for incumbent failure, but

insights from our pilot interviews suggest that this list is not exhaustive yet. In addition, their

work is based on a literature review without empirical foundation.

Since by nature discontinuities like LCC are hard to predict, a central question emerges of what

prerequisites can help to prepare incumbents to respond more swiftly in such situations.

Certainly, the role of top managers at the apex of incumbent firms needs to be considered pivotal

in this respect. Since leadership in corporations is not a given and can be actively influenced, it is

particularly worthwile to consider for both research and managerial practice. So far, only König

et al. (2008) discussed the influence of several top management team (TMT) variables on the

impact of the CEO-framing on resource commitment. However, both the effect on routine

rigidity as well as the broader role of top management characteristics are still unclear.

Incorporating upper echelons research (Hambrick and Mason, 1984; Finkelstein, Hambrick and

Cannella, 2009), this should include individual members' characteristics, the structure of the

team or the process in the team.

Therefore, by developing four explorative case studies in passenger air travel, we will address

these aspects. Specifically, we asked why some incumbent airlines responded later than others

and how TMT aspects contributed to this. Since some previous work in the field is purely

theoretical and external validity to case-study based research is often debated, we established an

empirical foundation in the airline industry. Even though it is hardly possible to anticipate

discontinuous innovation, findings from this study will help incumbent firms to prepare for

future disruptive changes and allow recognizing them earlier. It is intuitive that TMT have

pivotal impact; however, a comprehensive understanding of the most relevant design parameters

will tremendously help not only airlines, but firms also in other industries.

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                                                 THEORY

In management literature, technological innovations and executive influence are not untapped

fields. On the one hand, a number of scholars already investigated the impact of technological

innovations on incumbent firms. Developed concepts include "strategic responses to

technological threats" (Cooper and Schendel, 1976), the "technology S-curve concept" (Foster,

1986), "competence-destroying innovations" (Tushman and Anderson, 1986), "architectural-

changing innovations" (Henderson and Clark, 1990), and "disruptive innovations" (Christensen

and Bower, 1996; Gilbert, 2005). On the other hand, a broad range of scholars already discussed

the influence of executives on corporate decision making (e.g., Helmich and Brown, 1972; Hage

and Dewar, 1973; Hambrick and Mason, 1984; Smith, Carson and Alexander, 1984; Gupta and

Govindarajan, 1984; Virany and Tushman, 1986; Pfeffer and Davis-Blake, 1986; Finkelstein,

1988; Cannella and Rowe, 1995).

However, the combination of both subject matters, that is, the study of top managers' effect on

incumbent response in the face of disruptive innovations, is a highly juvenile field. So far, only

one study exists which investigates the role of the CEO in overcoming incumbent inertia (König

et al., 2008). This is surprising, as disruptive innovation research has recently started to involve

related research disciplines as well, such as psychology, organizational theory, economics or

industrial organization (Hill and Rothaermel, 2003; Mellahi and Wilkinson, 2004; Vlaar, de

Vries and Willenborg, 2005; Assink, 2006).

In innovation research, Christensen/Bower (1996) discovered disruptive innovations by

explaining anomalies in the impact of technological innovations on large companies, which

previous studies could not sufficiently explain. Their theory relates to specific situations where

innovations are not necessarily better, but rather simpler, smaller and cheaper. The authors

distinguished disruptive from sustaining innovations. Whereas sustaining technological changes

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appeal to established customers in mainstream markets and provide demanding high-end

customers with more of what they had come to expect, disruptive innovations rather redefine the

technology trajectory by underperforming established products in mainstream markets and

offering other features that a few fringe (and generally new) customers value (Christensen,

2000). Low-end and new-market innovations constitute two different types of disruptive

innovations. Whereas the former address over-served customers with a lower-cost business

model, the latter create new growth by overcoming lack of deep expertise or high wealth for a

whole new group of consumers (Christensen, Anthony and Roth, 2004). In addition to both

distinct types, low-end and new-market approaches may also be combined. LCC must be

considered as a hybrid disruption by targeting both incumbent airlines' passengers and previous

non-air-travelers (Christensen and Raynor, 2003).

Disruptive innovation theory suggests that in sustaining circumstances, incumbents almost

always prevail, but in disruptive situations, entrants have an advantage over incumbents

(Christensen and Raynor, 2003). The reason is that as companies innovate and introduce new

products, they typically achieve a higher rate of improvement than what customers can utilize

and are willing to pay for. At a certain point, this pace eventually "overshoots" the absorption

ability of customers. Whereas disruptive innovations initially underperform customers'

expectations, they improve as well and at some point become good enough for the mainstream

market. In such situations, customers are more concerned with differences in absolute prices than

price/performance points (Adner, 2002). Ultimately, this results in incumbents failing or at least

facing considerable inertia in response.

So far, failure in resource allocation served as primary explanation for incumbent inertia.

Incumbents have little incentive to invest in disruptive innovations because their resource

allocation process tends to favor sustaining innovations (Christensen and Bower, 1996). In early

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stages, customers reject disruptive innovation due to their inferior performance. At the same

time, disruptive innovations only promise lower returns than investors ask for and hence, will not

receive funding (Noda and Bower, 1996). As a result of both concerns, "these companies find it

very difficult to invest adequate resources in disruptive technologies – lower margin

opportunities that their customers don't want – until their customers want them. And by then it's

too late" (Christensen, 2000).

More broadly, a conceptual study by Vlaar, de Vries and Willenborg (2005) considered

managerial, organizational as well as cognitive psychological research to explain the struggle of

incumbents to extract value from new strategic options. Despite not specifically linked to

disruptive innovations, the authors suggest five explanation factors for incumbent failure from a

literature review: cannibalization, conventional wisdom, corporate inflexibility, incompetence or

overconfidence and access to resources. Whereas the initial four factors have a negative

influence in the model on incumbents' ability to extract value from new strategic options, the last

factor is positively correlated.

Whereas initially researchers investigated incumbent inertia as discrete construct, Gilbert

unbundled inertia into two distinct categories, namely resource rigidity (failure to change

resource investment patterns) and routine rigidity (failure to change organizational processes

using those resources) (Gilbert, 2005). Both categories constrain an adequate response, but

feature different causal mechanisms. Gilbert focused his research on cognitive frames, especially

the framing of the innovation as threat vs. opportunity. In his work, threat perception was

associated with negative focus, emphasis on loss and sense of a lack of control. In contrast,

positive focus as well as terms like gain or in control were associated with opportunity

perception (Gilbert, 2005).

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By this, it was finally possible to explain previously conflicting findings on the effect of threat

perception on inertia. Some earlier studies have shown that threat framing increased inertia

(Dutton and Jackson, 1987), whereas in other cases it worked as a catalyst for change (Lant,

Miliken and Batra, 1992). In his final model, Gilbert illustrates that threat framing helps to

unlock resource rigidity, at the same time, however, increases routine rigidity. Opposite to this,

framing as an opportunity enables search processes and relaxes routine rigidities, however, may

lead to underinvestment and hence resource rigidity (Gilbert, 2006).

The discussion about the role of framing in incumbent response provides a link with the impact

of executives in organizations. Yet so far, only König et al. (2008) considered a broader range of

top management team variables to influence incumbent resource allocation. For this, the authors

integrated existing theory from different fields, namely communication science, organizational

studies and cognitive psychology and developed a holistic model of ten moderating variables,

grouped in message moderators, relationship moderators and top management team moderators.

They found that CEO-framing can have a positive influence on organizational resource

commitment even if the CEO uses an opportunity framing when communicating with the TMT

members. This is counter-intuitive to the theory of Gilbert, who proposed an opportunity frame

to overcome routine rigidity, but a threat frame to reduce resource rigidity. Instead, König et al.

argue that resource commitment in response to threat or opportunity framing is contingent on the

described moderating variables. It is to note that the study represents a conceptual approach,

even though the authors are using expert interviews to generate research hypotheses. Moreover,

the model only relates to resource rigidity, moderating factors of the CEO- or TMT-framing

effect on routine rigidities are not examined.

The approach of König et al. is based on the upper echelon model describing strategic choice

under conditions of bounded rationality (Hambrick and Mason, 1984). Back then, the authors

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argued that managers' characteristics influence the decisions they make and therefore the actions

adopted by the organization they lead. Specifically, their model suggests that due to executives'

different psychological and observable characteristics, an objective situation will be perceived in

different ways. Consequently, subsequent strategic choices and performance outcomes will vary

as well. The first class of psychological characteristics includes values, cognitive models,

cognitive style, personality and charisma, locus of control and self-regard. The second class of

observable experiences relates to rather tangible information including executive tenure,

functional background, formal education, international experience and age.

Acknowledging the fact that in practice, executives usually collaborate in teams, we understand

TMT as the CEO and the group of top executives involved in the strategic decision making for

an appropriate response to the disruption. Upper echelon scholars outlined three conceptual

elements of TMT: composition, structure and process (Finkelstein and Hambrick, 1990;

Finkelstein, Hambrick and Cannella, 2009). Composition relates to the collective characteristics

of TMT members, given by their values, cognitive bases, experiences and personalities. The

roles of members and the relationship among those roles define the structure of a TMT. Here,

role interdependence represents the degree to which the firm's performance depends on resource-

and information-sharing, in addition to other forms of coordination within the TMT. The third

major element of TMT is process, referring to the nature of interaction among its members as

they participate in strategic decision making. The scholars conclude that all three conceptual

elements constitute the social makeup of the TMT.

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                        OPEN QUESTIONS AND RESEARCH MODEL

Still, we find a number of questions unanswered by extant research, which we considered when

developing the research framework for this study. First, Gilbert's unbundling of inertia into

resource and routine rigidity is highly useful to investigate causes of inertia. Yet we find that

underlying explanations for resource rigidity are by far better understood than those for routine

rigidity, since Christensen initially did not distinguish between both types and Gilbert's

unbundling only occurred eight years after original development of disruptive innovation theory.

Therefore, there is a need for additional research to develop such causal factors for routine

rigidity. This shall also entail multiple perspectives from strategy, organizational and

psychological research disciplines. Second, in our literature review, we found that research on

the role of top management team in enabling incumbents to overcome inertia is still rare. So far,

only König et al. investigated the role of several TMT dimensions for the impact of CEO-

framing on resource rigidity. Conversely, the influence of TMT on routine rigidity is entirely

unclear yet. The objective is to investigate parameters for design and conduct of TMT, reducing

the impact of causes for routine rigidity so that inertia will be lower as one would expect without

moderators.

Addressing these shortcomings, we developed a research framework from theory, which guided

our empirical investigation. First, with regard to causes for routine rigidity, we incorporated

findings on the unbundling of inertia into resource and routine rigidity, the moderating role of

framing, external influence and structural separation (Gilbert, 2005) as well as evidence on social

proof as additional driver for rigidities, i.e., incumbents tend to benchmark with peers and as a

result stick with their old business model just like other incumbents do (Enders and König,

2009). Further, we incorporated Vlaar, de Vries and Willenborg's (2005) conceptual study

proposing cannibalization, conventional wisdom, inflexibility, incompetence and resource access

as categories for incumbent failure. Building on all this, we set out to investigate causes of

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routine rigidity and hence incumbent inertia stemming from various disciplines, incorporating

(1) insufficient knowledge, (2) inadequate self-concept, (3) internal/external inflexibility and

(4) financial concerns. Insufficient knowledge relates to the extent incumbents are savvy on the

nature of the disruption, the industry, customers or competitors, but also on management skills or

practices. Self-concept of the incumbent can include the firm's belief on own capabilities and

market dominance, manager confidence and openness. Inflexibilities describe the resulting

degree of freedom from the embeddedness of the incumbent in a stakeholder network of

suppliers, employees, investors, customers and partner firms. Finally, financial concerns include

issues like returns of existing and new products, future business development as well as upfront

investments.

Second, in the major part of this research, we determined how an organization's top management

team moderates the influence of these causal factors. In order to disaggregate TMT aspects into

more tangible constructs for empirical research, we built upon upper echelons theory. This

includes the work of Hambrick/Mason separating observable experiences from psychological

factors and Finkelstein et al. subdividing TMT characteristics into its members, its team

composition and team interaction. Based on this structure, we outlined TMT moderators along

the dimensions of their (1) individual members, their (2) structure as well as (3) process. The

member category may include executives' observable experiences, but also psychological

characteristics. Structure relates to effects from team composition, size or power distribution.

Process finally entails the way members collaborate and interact with each other as both

decision-making body and social group.

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                                          METHODOLOGY

For this research, we selected a qualitative, case study-based methodology due to the nature of

the phenomenon and characteristics of the chosen industry. It features a high likelihood of

developing novel theory and permits for later quantitative testing of identified constructs

(Eisenhardt, 1989). Case studies are the preferred strategy to investigate our explorative, "how"

and "why" type research questions and when the phenomenon is of contemporary character (Yin,

2003). Response strategies to LCC are a contemporary event, since LCC have existed for almost

ten years now in Europe, yet in many countries new market entries and new incumbent responses

are still unfolding during writing of this article. By including contemporary data such as

interviews and observations, case studies are particularly suitable to investigate this

phenomenon. In addition, case study research is able to capture the complexity and richness of a

phenomenon such as LCC to a higher extent than other research techniques (Schöberl, 2007). All

these characteristics of the phenomenon render a case study design more appropriate than

laboratory experiments, because the latter separate phenomena from their social contexts

(Eisenhardt and Graebner, 2007). Furthermore, characteristics of the chosen airline industry also

point towards a case study design. Qualitative interviewing is clearly more practical than a

written survey for data collection from senior executives at the apex of incumbents. In addition,

the limited overall number of incumbent airlines only permits small-sample techniques.

We chose an explorative, multiple-case and embedded case design for the following reasons:

First, our primary research objective is exploring and explaining in order to arrive at a better

understanding of insufficient and somewhat contradictory previous findings. Second, we selected

a multiple case design because neither a critical incidence case from the outset existed given the

variety of response patterns by established airlines, nor had we access to a phenomenon

previously inaccessible to scientific investigation to develop a revelatory case (Yin, 2003).

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Further, since the investigation is grounded in a framework of existing theory, we considered it

necessary to integrate our emergent concepts right away (Eisenhardt, 1989). Third, an embedded

case design was preferred due to the need to consider multiple units of analysis demanded by our

research questions on causal factors and TMT moderators.

We focused the investigation on a single industry to control for extraneous variation (Gilbert,

2002). The disruption of European passenger airlines by LCC occurred in this decade. This

allowed us to study a recent, contemporary phenomenon to overcome retrospective bias during

interviews (Benewick et al., 1969). Furthermore, the industry's monopolistic or at most

oligopolistic structure makes it suitable to investigate incumbent response behavior

predominantly related towards entrants' actions. When selecting the cases, we relied on

theoretical sampling rather than statistical considerations (Eisenhardt, 1989). To ensure

replication logic, cases were investigated sequentially and newly gained insights were replicated

accordingly (Yin, 2003). We applied several criteria to sufficiently differentiate the cases among

each other: market leadership, differences in response patterns and degree of inertia. In addition,

access to executive board members or senior managers directly reporting to the board as

interview partners was another prerequisite for sufficient data quality.

In the end, our sample includes Austrian Airlines (OS), Lufthansa (LH), Iberia (IB) and British

Airways (BA). A brief review of the sample along the mentioned selection criteria shows: All

incumbents are market leading in their country, with a share of 40-60% of total intra-European

traffic from, to, and within their home market. LH, BA and IB are among the four largest

European incumbent airlines (Anonymous, 2009). By including smaller OS in the sample, we

aimed to assess the role of less complex organizations with close alliance-links to larger airlines

in other countries (e.g., LH). The sum of all cases covers a broad array of response types and

inertia periods. LH responded comparably late by founding a LCC subsidiary and differentiating

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high-end services even further. IB initially was highly routine rigid, yet finally chose to found a

low-cost subsidiary as well. OS responded with medium inertia, yet could not decide on

establishing a LCC subsidiary and rather evaded in a geographical niche positioning. BA

responded early with a low-cost subsidiary, yet reverted its strategy later by selling it off and

largely retreating from the segment.

In this study, we used a multi-method approach to enable triangulation of results from collected

data, namely by means of analyzing externally available information, conducting semi-structured

interviews with key executives and asking for internal archival documents (Saunders, Thornhill

and Lewis, 2003). All materials were collected in a comprehensive case study database. External

information included company press releases, annual and quarterly financial reports, investor

relations presentations, practitioner conference proceedings, investor and analyst conferences,

and press articles from newspapers and magazines. We used those to corroborate and augment

evidence from other sources, not as definite recordings of events (Yin, 2003). Explorative

interviews with company representatives provided the most important source of data. We

conducted 2 pilot interviews for conceptual clarification of the research design, followed by 10

in-depth interviews with executives from all four case companies. The latter included 6 members

of the airlines' boards and 4 senior vice presidents directly reporting to the board. 9 interviews

were conducted face to face, 1 by telephone. We taped each interview and literally transcribed it

within 24 hours. For each discussion, we used a semi-structured interview guide. Typical for

theory building research, we continuously adjusted the guide to newly gained information

(Strauss and Corbin, 1990). In line with scholarly recommendations, it consisted of both

investigative questions and narrative questions (Schnell, Hill and Esser, 2005). Finally, we

received several internal archival records, such as a photography of a decision flow chart used

during a board workshop.

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For data analysis, we combined evolutionary case write-ups of 20-30 pages using time-series

analysis, software-aided structural content analysis based on a scheme of 47 codes across four

hierarchical levels, as well as within- and cross-case analysis using pattern-matching technique

(Eisenhardt, 1989; Strauss and Corbin, 1990; Yin, 2003; Saunders, Thornhill and Lewis, 2003).

Since interviews were conducted sequentially, also the coding scheme was iteratively applied to

data. The repeated scan of materials ensured high intra-coder reliability. The idea behind within-

case analyses was to become intimately familiar with each case as a stand-alone entity

(Eisenhardt, 1989). Cross-case search for patterns avoided leaping to conclusions from limited

data through cross-tabbed comparison of constructs for all cases. Finally, we condensed

hypotheses and compared those with literature in the field.

We took every step to ensure high quality of our research. For sufficient construct validity and to

reduce retrospective bias, we used various data sources to triangulate evidence and citations in

each case study report, documented evidence in the case study database aiming to maintain a

chain of evidence, and asked key informants to clarify open issues or misleading statements after

the interviews (Yin, 2003). The theory-informed frame of reference also helped in this (Mayring,

2003). We increased internal validity by applying pattern matching techniques, creating detailed

case write-ups (called "thick descriptions" by Miles and Huberman, 1994), conducted multiple

iterations and follow-ups and considered both confirming and competing explanations during

data collection and analysis (Eisenhardt, 1989). External validity was ensured by the multiple-

case research design and comparatively analyzing findings across cases. Further, we applied

consistent structures and reference frames across case write-ups, within-case and cross-case

analyses (Yin, 2003). Further, we strived for high reliability by including several interviewees

per company, creating a detailed case study protocol and extensive case study database. Finally,

we followed scientific standards for transcribing and coding of data (Yin, 2003).

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                                       CASE RESULTS AND HYPOTHESES

Causal factors for routine rigidity

We tested an initial set of causal factors from our literature review in the interviews and

identified 12 especially relevant factors causing inertia. Of those, six are new to academic

discussion (see Table 1).

             Table 1: Identified causal factors for incumbent inertia at research sites
                                                                      Austrian                               British      Research
                                                                                   Lufthansa Iberia
                                                                      Airlines                               Airways      contribution

   Group 1: Knowledge insufficiencies
     C11       Insufficient knowledge on customer preferences             ++           ++           ++           ++       (new)
     C12       Overestimation of entry barriers for new entrants          ++           ++           ++            +       (new)

   Group 2: Inadequate self-concept
     C21       Status-oriented belief in current business model            +           ++            +            +       (new)
     C22       Filtered perception of information                         ++            +            +           n/a      (new)
     C23       Insufficient use of external knowledge and support          +            +            +            +       (confirming)
     C24       Fear of insufficient capabilities for new business         ++           ++           n/a          n/a      (confirming)

   Group 3: Internal & external inflexibilities
     C31       Interdependencies with partners                            ++            ○           ++            ○       (new)
     C32       Resistance by stakeholder groups                           ++            +           ++            +       (new)
     C33       Complexity of organization                                 n/a          ++           n/a           +       (confirming)
     C34       Inadequate employee incentives                              +            +           n/a          ++       (confirming)

   Group 4: Financial concerns
     C41       Fear of cannibalizing the existing business                ++           ++            +           ++       (confirming)
     C42       Fear of switching cost to new business model                ○            +           n/a          n/a      (confirming)

   +: contributed to incumbent inertia at research site; ○: no influence; n/a: no evidence; (double signs indicate strong evidence);
   (new): first to identify increasing effect on routine rigidity; (confirming): in line with extant research

Knowledge insufficiencies. First, we found strong evidence on knowledge insufficiencies on

customer preferences (C11). At OS, managers missed a change in consumer behavior and

believed that the Austrian's great service would avoid business travelers to churn to LCC. With

knowledge mainly derived from in-flight surveys and CRM data, OS had inferior knowledge on

non-consumers. Similarly, LH initially believed "Germans would never buy those LCC

products". Yet also here, the airline admitted that it knew leisure passengers much less than

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business travelers. Managers at IB at first believed customers to share the same level of emotions

like them when flying and would never consider LCC, revealing that product-orientation clearly

dominated customer-orientation at IB at that time. Likewise, BA expected customers to focus on

quality rather than low prices, and was surprised by the increasing number of week-end travelers.

These results suggest that airlines were unaware of preferences of large customer groups once

LCC emerged, caught by surprise of growing LCC popularity and therefore required

considerable time to respond.

Existing literature includes only different notions. One found that on industry level, a shared

belief on customers, technologies and strategies can exist (Hill and Rothaermel, 2003).

Incumbents thereby tend to focus on most profitable customers, who demand further

improvements of established products or services (Chandy and Tellis, 2000; Czarnitsky and

Craft, 2004). Others argued incumbents would listen "too carefully" to their customers

(Christensen and Bower, 1996) or that a lack of knowledge about the disruption leads to routine

rigid strategies (Schöberl, 2007). However, our identified knowledge insufficiency does not

relate on the quality of the disruption as such, but rather on consumers' preferences and decision

criteria. Despite incumbents have broad and preferential access to a large customer base and

distribution channels (Chandy and Tellis, 2000), we found that they tend to fail in evaluating

minimum acceptable quality standards customers are willing to pay for. This is not to contradict

Christensen/Bower by saying that incumbents listen too little to customers, but clearly they are

not always asking them the right set of questions.

    Hypothesis 1: Incumbents frequently have insufficient knowledge on customer

    preferences and their ranking for decision-making purposes, which ultimately

    contributes to inertia in response to disruptive innovations.

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Second, there was strong evidence on overestimation of entry barriers for new entrants (C12).

OS, for instance, assumed LCC would not be able to enter Vienna airport due to high charges

and unfavorable government support, until Air Berlin and NIKI proved the opposite by

establishing a base. LH expected Deutsche BA would deter other LCC from entering the market,

but TUIfly, Easyjet and Ryanair all expanded including local bases. In Spain, IB believed low

internet penetration and intense competition to hinder LCC, yet again reality with now even five

competing carriers was different. At BA, evidence was less clear, but still the airline assumed

Heathrow and Gatwick as sufficiently protected by slot constraints. Yet at least in Gatwick, LCC

now mark the dominant segment. In all cases, the perception of entry barriers made incumbents

feel more secure than they actually were and prevented them from launching response measures.

Extant literature does not include a discussion of this phenomenon. In our perspective,

incumbents, due to their sustaining conduct of business, have not experienced procedures for

setting up businesses for long. Consequently, they underestimate the ability of new entrants to

overcome presumably high entry barriers and as a result feel overly secure. In the meantime,

however, entrants use the time advantage to not only enter marginal segments of the market, but

in fact also move up to the established players' core business.

    Hypothesis 2: Incumbents tend to overestimate entry barriers for disruptive new

    entrants, making them feel overly secure in their position. As a result, they respond only

    late to the entrants.

Inadequate self-concept. In this group, we discovered two new contributions to academic

discussion. First, we identified status-orientation (C21) issues. At LH, a cultural belief of the

company as inventor of aviation eradicating every competitor through its size was prevalent. As

prestigious national carrier, participating in the LCC model was initially unthinkable. Also OS

discarded a response since it believed passengers still thought of air travel as a privilege, and

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business passengers "would never board a LCC". At IB, a manager said the industry was full of

emotions and rationality would not always control it, since incumbents were considered as

national prestige. Related, BA for long believed that as all-purpose carrier it had to fly to all

destinations regardless of profitability.

So far, notions in literature focus on the incumbent's role as innovator: Foster (1986) argued

conventional wisdom would encourage maintaining focus on the current business and refrain

from innovating. Vlaar, de Vries and Willenborg (2005) found overconfidence to lead to a lower

ability to extract value from new strategic options. Other scholars stated difficulties from

adapting knowledge and mindsets from old business models to the reality of new ones because of

established beliefs or "dominant logic" for the firm based on its history (Henderson and Clark,

1990; Tripsas and Gavetti, 2000; Jones, 2003). In our case, we found an even graver issue in

status-orientation hindering incumbents not only from innovating, but also from imitating

measures that disruptors already took before them.

    Hypothesis 3: Whenever incumbents show a status-oriented belief in their existing

    business model, they tend to respond only late to disruptive strategic innovations.

Second, we found evidence on filtered perception of information (C22) to cause inertia at three

research sites. At OS, statements accounting LCC for substantial losses were politically

incorrect. At LH, LCC concerns were initially muted by the belief that since 80% of LCC

passengers were British, they would be uncomparable to much less price-sensitive German

customers. At IB, the cost gap was in fact much higher than managers believed in 2002, since the

"company did not want to listen to bad news". At all sites, these practices eased conflicts and

made the current business seem less threatened, thus reducing pressure to find an adequate and

swift response.

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So far, scholars elaborated on patterns in organizations to search for and process new

information only in general terms, yet not in disruptive contexts. Prahalad/Bettis (1986) argue

that organizations' cognitive structures may screen out information by using only information

that is adequate or easily available. When attempting to radically innovate, organizational filters

make firms less effective, as several other scholars found (Hannan and Freeman, 1984;

Henderson and Clark, 1990 and Chandy and Tellis, 2000). Hill/Rothaermel (2003) stated that

organizations tend to search only inside their established frames of references, determined by

information systems and processes. My findings suggest that in disruptive situations, patterns of

screening-out information make the imitation of measures as response to disruptors even more

difficult, since they inhibit a stronger and clearer framing of the disruption.

    Hypothesis 4: Incumbents tend to filter information on new business models, which

    increases their inertia in response to disruptive innovations.

Further, we confirmed existing research on the role of insufficient involvement of external

expertise (C23) and concerns of sufficient capabilities (C24) to cause inertia.

Internal & external inflexibilities. Here, we found two new explanations for inertia not yet

discussed in disruptive innovation literature. First, we identified a restricting effect of

interdependencies with partners (C31), and especially in the case of the airline industry,

incumbent alliances. We found strong evidence for this at OS and IB, which makes sense given

their role as junior partners in Star and Oneworld alliances. OS experienced constraints to

modifying its in-flight product and pricing structure due to obligations of alliance communality.

IB as well suffered inflexibilities in modifying product quality and sales channels. LH and BA

also voiced these requirements for communalities, however, stressed that as dominant airline in

the alliances, these had no impact on their responsiveness to LCC.

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Chair of Strategic Management and Organization

So far, scholars only found the embeddedness of incumbents in a value chain network of

suppliers, customers and investors to potentially constrain the development of new business

models (Ghemawat, 1991; Argyres and Liebeskind, 1999; Christensen, 2000; Nickerson and

Silverman, 2003). Restricting effects due to corporate partnerships have not been mentioned.

Nickerson (2003) states that contractual commitments may create adjustment cost delaying

change. We found similar constraints to reduce the space of response measures, and hence,

reduce incumbents' propensity to respond at all. Despite the related underlying mechanisms,

alliances between incumbents as constraining factor are new to the scientific discussion.

    Hypothesis 5: Interdependencies between the incumbent and partner firms in its network

    (e.g., alliances or joint ventures), may restrict the degree of freedom by which

    incumbents can respond to the disruption and increase inertia.

Second, we found evidence on resistance from stakeholder groups (C32). In many occasions,

conflicts with pilots caused major fear among managers. At OS, this made salary cuts difficult,

which were necessary to compensate fare discounts. Major strikes in the past at IB caused dread

of taking measures that could cause unrest among pilots, resulting in the late launch of its LCC

subsidiary. In addition, the public exerted pressure at OS to pursue a high quality strategy, since

it still perceived the airline as national prestige. In the case of LH, unions and especially pilots as

well resisted an earlier subsidiary launch. At BA, this antagonized workforce so heavily that the

board withdrew support for a previously launched subsidiary. Further, BA feared it could lose

the support of government for airport expansions if it responded too harsh against LCC.

Whereas scholars found that direct shareholders may create uncertainty for TMTs and limit

managerial discretion (Hambrick and Finkelstein, 1987), researchers so far have not investigated

the influence of stakeholders on the responsiveness to disruptions. Incumbents as larger

organizations also attempt to satisfy more stakeholders. Argyres/Liebeskind (1999) found that

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prior contractual commitments, both formal and informal, can limit a firm's future ability to

differentiate its governance arrangements. However, our research findings relate to a broader

context beyond simply binding commitments. The observed resistance stemmed from various

stakeholder groups as a whole, all sufficiently powerful to exert pressure on the organization,

e.g., by strikes. Neither of those yet considered the bigger picture behind the response measures

they were seeking to stall.

    Hypothesis 6: Incumbents may face resistance from powerful stakeholder groups inside

    and outside the organization, whose exerted pressure may constrain the set of available

    response measures and as a result, increase inertia in response to disruptive

    innovations.

Further we identified explanations for routine rigidity in organizational complexity (C33) and

inadequate incentive systems (C34), yet those causes have already been discussed in existing

literature. Further, with regard to financial concerns, we confirmed suggestions by previous

scholars, namely fears of cannibalization (C41) and switching cost to the new business model

(C42) as factors causing inertia (Charitou and Markides, 2003).

TMT moderators

Most important in our study, we also tested an initial set of moderating factors around

incumbents' TMT from our literature review and found 11 especially relevant moderators,

reducing the impact of causal factors on inertia. By either identifying new variables or revealing

different    results    to    earlier    work,   we    entirely   yield   new   findings   (see

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Table 2).

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Chair of Strategic Management and Organization

               Table 2: Identified TMT moderators on causal factors at research sites
                                                                     Austrian                               British      Research
                                                                                  Lufthansa Iberia
                                                                     Airlines                               Airways      contribution

    Group 1: Members in TMT
     M11        Risk propensity                                           ––           –           ––            –       (new)
     M12        Organizational tenure                                     ++          n/a           +            +       (new)
     M13        Operations experience in industry                         ––          ––            –            –       (new)
     M14        Disruption experience in same/other industry              –           n/a          n/a          ––       (new)

    Group 2: Structure of TMT
     M21        Heterogeneity of members' backgrounds                     n/a          –           ––            –       (new)
     M22        CEO authority                                             U            U            –            –       (different result)
     M22mod Risk propensity of CEO                                    amplifying amplifying amplifying amplifying (new)
                                                                        M22        M22        M22        M22

    Group 3: Process in TMT
     M31        Consensus-focused culture                                 n/a          +          mixed         ++       (different result)
     M32        Social integration of members                             –           n/a          n/a           –       (new)
     M33        Insufficient risk management & scenario planning          ++          n/a          n/a          n/a      (new)
     M34        Decisiveness, determination and persistence               –           ––           ––            –       (new)

    +: increases impact of causal factors; –: reduces impact of causal factors; n/a: no evidence; double signs indicate strong evidence;
    (new): first to identify increasing effect on routine rigidity; (different result): contradicting to extant research

Members of TMT. In this group, we for the first time identified four TMT moderators on

inertia. Table 3 shows an example from each case. First, we identified a moderating factor in risk

propensity of TMT members (M11). OS did not seize several opportunities to participate in the

LCC segment, e.g., by expanding acquired Slovak Airlines. Managers accounted inferior risk

propensity for not starting such a venture. Massive changes in board configuration also

decreased members' readiness for highly visible response measures. IB explained airlines' strong

technology focus to result in an overly conservative, risk-averse culture. A manager also

differentiated between financial risk and personal risk: whereas it is comparably easy in the

industry to take financial risks by routing and pricing decisions, committing to LCC response

measures increases the visibility of the individual manager. At LH, a manager explained the

same issue and pointed to the high visibility of deciding for a LCC venture with seemingly small

upside and substantial personal downside potential for the manager. Only high individual risk

propensity enabled the launch of Germanwings and Lufthansa Italia. For the BA's launch of Go,

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Chair of Strategic Management and Organization

the CEO was credited with high risk propensity and the readiness to overcome resistance in the

organization.

       Table 3: Examples from research sites for identified TMT moderators (group 1)
 Causal factor     Austrian Airlines               Lufthansa                         Iberia                            British Airways

 ƒ Risk            (– –) "(…) you need entre-      (–) "For a CEO the question       (– –) "The airline industry       (–) "Individual members
   propensity      preneurs who are really         is, will I start a new venture    was created in a very regul-      have to show a certain risk
   (M11)           ready to take risks, starting   with all the attention and        ated environment. What was        propensity. You have to dare
                   from the board down to the      reporting in my supervisory       really important was the          such a venture and to have
                   2nd management level. Only      board? Germanwings is             technical part, creating an       the heart to overcome fore-
                   then you are really able to     small - but still you report to   overly conservative culture.      seeable resistance in the org-
                   launch non-linear strategic     the supervisory board, and        And if you are in a very con-     anization. That is a personal
                   measures."                      labor representatives don't       servative culture, you won't      character trait which must
                                                   think that's funny at all."       change."                          not be underestimated."

 ƒ Organizational (++) "When you have a           (no evidence)                      (+) "I think our management       (+) "Of course, most air-
   tenure         change of paradigms, so that                                       team has been too stable for      liners are people who
   (M12)          now you will have high                                             too many years. And I don't       worked for 20 years in the
                  passenger numbers but low                                          think it's good, you need to      industry and sat for years in
                  yields, then it is essential in                                    move. We need to change           the same position, they are
                  my view that you implement                                         every 5 or 6 years, otherwise     entirely unable to recognize
                  somebody who brings along                                          we'll lose the ability to inno-   such disruptions. And to
                   this new way of thinking."                                        vate, to adapt."                  respond quickly."

 ƒ Operations      (– –) "It is fatal if TMT       (– –) "It is really important     (–) "The board members, if        (–) "However, it is clear that
   experience in   members are too traditional     to have a feeling for things,     they don't know the industry,     you need real experts of the
   industry        and know aviation only as a     to know what a crisis means,      it's a complex industry. If       business. Every industry has
   (M13)           passenger in business class."   what are the connections,         you know the industry, you        its specifics and economics.
                                                   what happened 5 years ago,        also know how you can filter      That is absolutely important.
                                                   is this crisis bigger. Espe-      and how you cannot filter         But those people are not
                                                   cially in a business, rela-       information. I think this         short in airlines, you find
                                                   tively sensitive and short-       works together with the           them everywhere."
                                                   lived like ours."                 experience."

 ƒ Disruption      (–) "The fact that the new      (no evidence)                     (no evidence)                     (– –) "In hindsight you can
   experience in   CEO already experienced                                                                             say that we should have had
   same/other      low-cost competition and                                                                            such a change agent, able to
   industry        understood air travel as                                                                            immediately recognize this.
   (M14)           commodity extremely                                                                                 (…) But these outsiders are
                   helped us to launch these                                                                           rare, this is a very networked
                   measures."                                                                                          industry."

 Grey shade indicates new findings

Literature already discussed risk propensity of executives for long, yet rarely in the face of

disruptive innovation. Sitkin/Pablo (1992) found that the perceived risk of any given choice is

lower for a decision maker with higher risk propensity. Thus, several scholars argue that it

distorts decision makers' perceived risk of strategic issues (Brockhaus, 1980; Sitkin and

Weingart, 1995). This implies that also for disruptions, varying risk propensity of TMT members

leads to different situation judgements. On the direction of this impact on inertia, König et al.

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Chair of Strategic Management and Organization

(2008) found that it moderates resource rigidity: the higher executives' risk propensity, the higher

the influence of the CEO-frame on resource commitment. Similar to resource rigidity, we

conclude that with high risk-propensity, TMT members perceive any choice that involves a

change in business routines as less risky than normatively appropriate.

    Hypothesis 7: Incumbents with higher risk propensity of their TMT members can expect

    less impact from causal factors on incumbent inertia and hence, a faster response to

    disruptive threats.

We also found evidence for the influence of TMT members' organizational tenure (M12). Even

after privatization at IB, a manager reported that people were "too long in their position" and not

suited to take the company from a civil-servant mentality to the reality of LCC. A BA manager

also said that people in the industry have been active for 20 years and sat for years in the same

position, which made them unlikely to recognize change. At OS, managers similarly complained

that employees could not adapt to new high-passenger, low-yield realities and "drove with the

back mirror", since they experienced the old business for too long.

There is no discussion on the role of organizational tenure in disruptive situations in literature. In

general, upper echelon research argues that human beings become less flexible, creative and

adaptable the longer they live and work in a constant environment. Miller (1991) found that

firms with long-tenured CEOs are less likely to find appropriate strategies and structures

matching their environment. Shortly thereafter, Wiersema/Bantel (1992) argued similarly by

finding shorter average organizational tenure of all team members to promote strategic change of

firms. Finkelstein/Hambrick (1990) also argued that higher tenure TMT members followed more

persistent to central tendencies of the industry, since they become increasingly committed to

their previous course of action. My findings for disruptive situations do not contradict to those

claims. In the face of disruptions, longer organizational tenure of TMT members will reduce

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Chair of Strategic Management and Organization

experimentation and increase focus on existing resources. According to Gilbert (2005), such

behaviors ultimately increase incumbent inertia.

    Hypothesis 8: Higher organizational tenure of incumbents' TMT members increases

    routine rigidity and inertia in response to disruptive innovations.

Third, we found evidence on the role of operations experience (M13). At OS, an interviewee

argued that more true knowledge of airline operations in the TMT would have been helpful,

since some managers were outsiders and knew the business only "from their own perspective as

a business class passenger". It was their influence upon which the company focused on the core

business instead of LCC. At LH, a manager also argued that insufficient operations knowledge

might lead to misleading judgements of the situation, strategic positioning and economics, i.e.,

how quickly airlines may accumulate substantial losses. Therefore, it would be crucial to know

market mechanisms by heart. At IB, evidence suggested that operations knowledge in the board

allowed better information filtering, reducing the impact of this factor. Due to the complexity of

network marketing economics of scale, airline expertise is essential for the right response. In

summary, operations experience seems to be beneficial, with effects of team heterogeneity

disregarded for the moment.

In existing literature, this topic is hardly discussed, as only some upper echelon findings on the

general role of formal education exist. Finkelstein/Hambrick/Cannella (2009) described the

greater the amount of formal education of top executives, the more innovative their firms are.

According to them, formal education is concomitant with open-mindedness, information

processing abilities and cognitive flexibility. More specific to industry expertise, research is rare

– likely since it seems too much common sense whether professional experience is beneficial for

organizational outcomes. However, two considerations seem important here: First, the studied

airline industry is far more specific than others, and it is difficult for outsiders to acquire a

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