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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
2Chair of Strategic Management and Organization
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.
3Chair of Strategic Management and Organization
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
20Chair of Strategic Management and Organization
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.
21Chair of Strategic Management and Organization
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.
22Chair 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
23Chair of Strategic Management and Organization
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
24Chair of Strategic Management and Organization
Table 2).
25Chair 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,
26Chair 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
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."
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."
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."
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.
27Chair 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
28Chair 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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