姝 Academy of Management Executive, 2004, Vol. 18, No. 4........................................................................................................................................................................

Strategic flexibility:
Organizational preparedness toreverse ineffective strategic
decisionsKatsuhiko Shimizu and Michael A. Hitt
Executive Overview

In a highly uncertain and changing environment, managers need to have the strategic
flexibility to respond to problems speedily. Strategic flexibility is the organization’s
capability to identify major changes in the external environment, quickly commit
resources to new courses of action in response to those changes, and recognize and act
promptly when it is time to halt or reverse existing resource commitments. This strategic
flexibility requires managers to find the right balance between committing the resources
necessary to carry out a decision and avoiding investment of good money in bad projects.
This article seeks to help managers understand the importance of and difficulties indeveloping strategic flexibility. The challenge in doing this results from the substantial
uncertainties inherent in making these strategic decisions as well as from psychologicaland organizational biases that affect the attention, assessments, and actions of decisionmakers in ways that prevent them from recognizing problems and acting in a timely
fashion. Being careful and rational is important but not sufficient if managers are torecognize when resource commitments should be halted or reversed and act quickly. We
show that managers may become unconsciously trapped in a vicious cycle ofinsensitivity, self-serving interpretation, and inaction. We recommend six practical steps
for avoiding such problems. We stress that managers and organizations should be
prepared and proactive to overcome the biases, to avoid becoming trapped in the vicious
cycle of rigidity, and to cope effectively with the uncertainties of a dynamic environment.

........................................................................................................................................................................
Recognizing problems and making changes to correct them often present substantial challenges. For
example, after a firm finally recognizes a problem
that has existed for about a year and initiates
actions designed to correct it, another year is often
required to accomplish the change. However, if ittakes a firm two years to recognize a mistake, aslong as four years may be necessary to resolve theproblem.1 This outcome is referred to as the “law ofsquares” (e.g., 1 ⫻ 1 ⫽ 1; 2 ⫻ 2 ⫽ 4). This “law”
dictates that the longer problems go unrecognized
or unresolved, the more damage that occurs to thefirm and the more difficult it is to solve the problems. In a highly uncertain environment, firms
need the capability to enact major strategicchanges to resolve problems in a timely fashion.

The importance of speed in recognizing and responding to problems has been dramatically accentuated by the dynamic competitive landscapein recent years. A former CEO of ABB once remarked that “The cost of delay is greater than thecost of an occasional mistake.”2 Similarly, Juergen
Schrempp, CEO and chairman of DaimlerChrysler,
stated in an interview with a Wall Street Journal
reporter, “My principle always was. . .move as fast
as you can and [if] you indeed make mistakes, youhave to correct them. . . . It’s much better to move
fast, and make mistakes occasionally, than move
too slowly.”3
Although identifying and acting on problems
have become increasingly important, commitment
to initiatives is also necessary for organizations to
44

2004

Shimizu and Hittbe successful. In many cases, new initiatives encounter various types of resistance and challenges
in their implementation that must be overcome tobe successful.4 Without strong commitment andpatience, their potential may never be realized.
There are numerous examples of heroic leaders
and innovators who achieved their final victories
by maintaining a strong commitment to overcoming multiple obstacles. For example, it is wellknown that Corning took more than ten years and$100 million— dealing with high market skepticism
and middle-management resistance—to launch its
optical fibers business.5 Konosuke Matsushita, thefounder of Matsushita, stated that the primary secret of success is to remain committed until success is achieved. A firm that frequently changes its
strategy and course of action may vacillate, waste
resources, and eventually fail.6 Yet, being overly
committed to an erroneous decision can also bedisastrous.
Strategic flexibility can be defined as an organization’s capability to identify major changes inthe external environment (e.g., introduction of disruptive technologies), to quickly commit resourcesto new courses of action in response to change,
and to recognize and act promptly when it is timeto halt or reverse such resource commitments.
Herein we focus on the ability to recognize problems and reverse resource commitments in atimely fashion when the initial action and resource
commitments turn out to be unsuccessful (i.e., strategic mistakes). Strategic mistakes can result froman initial inaccurate evaluation of the environment
and from maintenance of the status quo despite
environmental changes.
However, distinguishing strategic mistakes from
temporal setbacks is difficult. The decision-making process involved in maintaining strategic flexibility focuses on the use of three capabilities,
each at a different stage: (1) the capability to pay
attention to negative feedback (attention stage), (2)the capability to collect and assess negative data
objectively (assessment stage), and (3) the capability to initiate and complete change in a timely
fashion even in the face of uncertainty (action
stage). Correctly balancing commitment andtimely change should produce outcomes that maximize potential benefits and minimize losses.
At the same time, achieving the correct balanceis undoubtedly challenging. Abandonment of an
initiative too quickly because of initial problems
may result in the loss of a large future potential
benefit, while overly strong commitment to a money-losing project can only exacerbate problems.
While once considered as an exceptional CEO,
Percy Barnevik has been accused of mismanage-

45

ment that produced ABB’s performance problems.
Juergen Schrempp has also received increasing
criticism for the acquisition of Chrysler. Likewise,
many Japanese firms, including Matsushita, thatwere once highly regarded for their long-term
vision and strong commitment to a long-range
strategy have been experiencing performance
problems for over a decade. These examples reemphasize the fact that maintaining strategic flexibility is one of the most important yet most difficult
tasks of managers and organizations in a dynamic
environment.

Maintaining strategic flexibility is one of
the most important yet most difficult
tasks of managers and organizations in a
dynamic environment.
Our primary objectives in this work are (1) tohelp managers understand the importance and difficulty of developing strategic flexibility and (2) toprovide practical recommendations to deal withthis challenging task by focusing on structuralissues (i.e., contingencies) that contribute to various biases and traps. Because these biases are
frequently unconscious, and uncertainties are inherent in strategic decisions, we suggest that managers should proactively develop effective organizational structures and systems rather thanstruggling with the biases and uncertainties reactively. In the following sections, we first examinebarriers that hinder strategic flexibility and thendiscuss prescriptions to help managers overcome
the barriers and maintain strategic flexibility.
Barriers to Strategic Flexibility
As described, strategic flexibility requires use of
three capabilities: maintaining attention, completing an assessment, and taking action. However,
several barriers block the development and use of
the organizational capabilities necessary for strategic flexibility. Next we examine the barriers
along with the conditions under which an organization is more vulnerable to those barriers.
Barriers to Attention: Psychological andOrganizational Insensitivity to Negative
Feedback
Organizations need to be sensitive (maintain attention) to feedback from the market, particularly
negative feedback. This sensitivity also requiresorganizations to respond to feedback in a timely

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fashion. In a dynamic environment, even a seemingly good project may suddenly lose its potential
value. Unfortunately, both research and anecdotal
evidence suggest that managers often ignore earlysigns of strategic mistakes.7
Over time managers develop a particular mindset along with a set of decision rules and heuristics
based on their experiences.8 As successful managers are promoted within an organization and successful initiatives are repeated, previous successful experiences control attention to and enactmentof future issues and regulate responses to the enacted issues. The mind-set and rules are self-reinforcing such that successful experience often prevents managers from being sensitive to important
new information. This situation nurtures managerial overconfidence and complacency. Moreover,successful experiences often attract media attention and praise, thus providing support for managerial hubris. As a result, overconfident managers
assume that their decisions are unlikely to fail andunconsciously ignore negative signs regarding
their decision outcomes.9

Overconfident managers assume that
their decisions are unlikely to fail andunconsciously ignore negative signs
regarding their decision outcomes.
Furthermore, the mind-set and decision rules of
top management are often shared, routinized, andtaken for granted within the organization. This process ensures that the same type of information will
be collected using the same methods and that the
information collected will be analyzed using taken-for-granted assumptions with routinized approaches. Ideas and actions that deviate from thecurrent routines will not be considered legitimate.
Such outcomes produce organizational inertia andmake it less likely that an organization will consider (pay attention to) new information (e.g., negative feedback from the market). Instead, this typeof information will be either ignored or assumed to
be an exception and not analyzed further.
Naturally, managers and organizations are more
likely to enact barriers to attentiveness when they
have previously experienced success.10 Successful
experience contributes to the development of individual and organizational mind-sets that underestimate the negative feedback from the market anddecision routines that repeat the same procedures,
even if those procedures are no longer valid in the
new environment. Additionally, long tenure among
the top-management team is likely to rigidify its

Novembershared mind-set toward more narrow perspectives,
resulting in a lower likelihood of incorporating
new information.11 Similarly, when organizations
become older and larger, the shared perspectives
and routines are likely to be more institutionalized
and the interactions across the routines to become
more complicated. In this type of organization,changing the attention patterns will be difficult,and therefore early signals of strategic mistakes
are likely to be ignored.
This appears to be the case with Michael Eisnerand Disney. After tremendous success in 1980s and1990s, the Disney Company has performed below
expectations for some time. The acquisition of
Capital Cities ABC never produced the synergy
foreseen at the time of the merger. Part of thereason for this outcome is the hubris exhibited by
CEO Eisner. Accustomed to his old businessmodel, he seemed incapable of recognizing thelow probability of turning around the performanceof ABC and other underperforming business units
within the Disney Company without making majorchanges in the operations or how they were managed. In September 2004, Eisner agreed to retire in2006 and may be pressured to step down earlier.
Motorola is another example of a firm haunted
by its past success.12 In late 1980s and early 1990s,
Motorola was a market leader in the analog cell
phone market. As stated by former CEO RobertGalvin, “We were the unbridled leader in analog
devices around the world.” Because Motorola wasso successful and proud of its analog technology, it
dramatically underestimated the effects of digitaltechnology. Motorola responded to customer pleas
for digital phones with contempt: “Remember theold phones in WWII— carried on backs. That iswhat our digital phone will look like. It can’t bedone.” The hubris and biases of top management
were exacerbated by Motorola’s organizational
structure. Past success had led Motorola to develop
a decentralized structure, where new information
developed by a division was not shared with others and previously successful division managers
made critical decisions within silos. The established incentive system also promoted sales of analog cell phones and discouraged new investment
to develop digital phones.
Barriers to Assessment: Self-Serving
Interpretation of Negative Feedback
Even if managers remain vigilant and recognize anegative signal at an early stage, they do not necessarily initiate a response. First, managers areoften reluctant to admit that they made a mistake.13 To justify their decision and avoid admit-

2004

Shimizu and Hittting a mistake, they may attribute the poor outcomes to external factors (e.g., the economy orother uncontrollable events like war in Iraq). Alternatively, they may reemphasize their commitment
to make the initiative a success. Research has
shown that people in situations that are likely to
produce a loss are more willing to take risky actions to create positive returns. An early negative
signal may be interpreted as the result of insufficient time or inadequate implementation actions,and thus even more resources may be invested.
Therefore, when confronted with undesirable outcomes, managers who initially pursued an initiative vigorously may take a risk by making a further
commitment to the project as opposed to taking theopportunity to abandon it.14 These managers may
continue to invest, hoping for a dramatic turnaround of the initiative. In so doing, they sequentially over-invest in the business and make it increasingly difficult to earn a positive return on theinvestment.
The organizational context and political processes often play important roles in decisions thatinvolve reversing previous strategic decisions.
Such decisions commonly produce a struggle forpower in an organization. These potential power
struggles and the potential career-limiting effectsof strategic errors contribute to a manager’s unwillingness to admit mistakes. When the supporters of the original decision have power, they preferto retain the project and avoid admitting a mistakein order to maintain the power. Therefore, while
poor performance may signal a need for change,organizational politics often prevent an organization from interpreting the signals correctly and/orin a timely fashion.
Several contingencies create strong barriers to
objective assessments. First, when the size of theinitiative is large, both the amount of commitment
to the initiative and the size of damage when theinitiative is deemed a mistake are likely to belarge. The likelihood that the managers responsible for the project will be penalized or will have
limits placed on their career opportunities is alsosignificant. Accordingly, it is difficult for managers
to analyze the information objectively and consider reversing an initiative in a timely fashion.
Instead, managers may interpret the negative signal as a temporary setback or may underestimate
the negative information in the hopes of salvaging
their careers. In either case, they are likely to continue commitment to and investment in the moneylosing initiative.
As Michael Eisner’s record suggests, weak governance mechanisms allow managers to pursue
their personal interests at the expense of an orga-

47

nization’s interests.15 A weak board may not beable to stop powerful managers from behaving
politically or continuing the commitment to mistakes. It is also notable, however, that managers
may consciously hide negative information even incases of strong governance, because disclosing it
could result in punishment by the board.16 Finally,
the organizational culture and institutional environment also influence the strength of the barriers.
Leaders who overcome obstacles and eventually
are successful in accomplishing their goals tend to
be respected. In a culture where success is highly
praised and mistakes are severely punished, managers avoid admitting mistakes.17 Thus, we should
not expect managers to give up on an initiativeeasily. Instead, many managers may believe (erroneously) that they can overcome the odds and succeed. These managers are unlikely to evaluate
negative signals objectively regarding the strategic initiative.

In a culture where success is highly
praised and mistakes are severely
punished, managers avoid admitting
mistakes.
A Fortune article entitled “CEOs in Denial” examined a number of former CEOs who were facedwith problems, either denied them or attributed
them to external environments, and led their firms
to disastrous outcomes.18 For example, Gary DiCamillo arrived at Polaroid in 1995 and predicted aturnaround in three years. After regularly blaming
poor performance on external conditions such as
Russia’s economic problems and global turmoil,
Polaroid filed for bankruptcy in 2001 and eventually stopped all business operations. Jill Barad, aformer CEO of Mattel, unwaveringly maintained apositive assessment of her $3.5 billion acquisitionof Learning Co. despite its poor performance andaccounting problems. She later confessed that she
did not fully grasp the problems in Learning Co.
and resigned as CEO in 2000 after repeated recovery promises, none of which materialized. According to one analyst, “Because she was so resultsoriented and never took no for an answer, shefostered a culture that made it nearly impossible todeliver bad news.”19
Barriers to Action: Uncertainty and Resistance
Even if managers understand the psychologicaland organizational biases that produce barriers
and attempt to be rational, the decision of whether

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or not to maintain commitment to or change apoorly performing initiative is not solely a matterof economic calculation. This is mainly because of
the uncertainty associated with the future of the
project and its environment. Herein, uncertainty
refers to a lack of information regarding potential
outcomes.
To the extent that evaluation of a particular
project involves assumptions about the environment and forecasts of the future, it is difficult topredict the outcome of any one project with confidence, especially a loss-generating project. The
prospects of the project are often perceived as uncertain because predicting changes in the external
environment, as well as their effects on the project,
is difficult. While simple net-present-value calculations provide seemingly objective assessments,
the results are dependent on assumptions such as
the projected sales growth rate and discount rate,
which are often derived from extrapolations basedon historical data. In fact, many scholars question
the argument that escalation arises solely frompsychological biases and self-protecting behaviors. Instead, decisions regarding maintaining orwithdrawing commitment are laden with uncertain consequences associated with either choice.20
Moreover, it may be difficult to identify the complex relationships leading to the poor outcomes.
Poor results can come about because of the initialstrategy, inadequate implementation, or mitigating environmental factors. Even if the current performance is poor, an initiative may still have potential. To the extent that the initial decisions
involve future upside potential and actual causal-

November

ity is unclear, it is difficult to deny the potential for
turnaround even if the probability is small.

Poor results can come about because of
the initial strategy, inadequate
implementation, or mitigating
environmental factors.
Further, uncertainty often creates resistance. In
general, people resist change because of familiarity with the current conditions and a fear of theunknown. People prefer the status quo becausechange disrupts the established routines and creates uncertainty, thereby involving risks. “Consequences of changing are usually less well known
than the consequences of not changing.”21 Research shows that managers and organizations
tend to maintain the status quo in the face of economic adversity.22 When performance is weak,
managers often become defensive and try to limit
receipt of further information. As a result, exploration of other alternatives is constrained. People
may ask, “Who moved my cheese?” and come backto the same cheese station every day. “I like it here.
It’s comfortable. It’s what I know. Besides, it’s dangerous out there.”23
The uncertainty in the external environment is amajor cause of managers’ reluctance to reverse
seemingly poor decisions. For example, rapid development of new technologies makes it difficult
for managers to predict the consequences of suchenvironmental changes. Thus, it is challenging toTable 1Barriers to Strategic Flexibility
Component of Strategic
Flexibility

Barriers

Conditions That Increase the Risks of the
Problems

Attention▪ Complacent mind-set/decision rules(including hubris)▪ Organizational inertia
䡩 Institutionalizing initial decisions by rules
and routines
䡩 Ignoring ideas and actions that deviate
from the routines▪ Past success experience▪ Long tenure of top management▪ High age and size of organization

Assessment▪ Self-justification▪ Framing effects (managers tend to takerisks in the face of losses)▪ Organizational politics▪ Large-size projects (that result in largecommitment and loss)▪ Weak governance▪ Organizational and social culture that isharsh on mistakes

Action▪ Perceived uncertainty regarding theprospects of the project▪ Resistance to change▪ High environmental uncertainty▪ Financial resource availability

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FIGURE 1
Vicious Cycle of Strategic Rigidity
determine the appropriate type and timing ofchanges needed to initiate a response. Availabilityof financial resources also influences the timing ofaction.24 When an organization has abundant resources, it may be able to take more risk and wait
for uncertainties to be resolved. Alternatively, resource-rich organizations often have multiple alternatives, allowing them to abandon the focal initiative without material harm. In other words,
wealthy organizations enjoy the flexibility to commit to a particular initiative or to make changes by
reverting to one or more other feasible options.25
Alternatively, a resource-poor organization is limited in terms of the alternative actions it can takein response to the negative outcomes of an initiative. This type of organization may either abandon
a potentially valuable initiative at an early stage
to minimize losses or commit to a loss-generating
project because it does not have other feasible
options.

Managers often prefer the status quo as
the easiest path until the outcomes
become extremely bad.
Table 1 summarizes the barriers that hinder strategic flexibility based on the perspectives of atten-

tion, assessment, and action. These barriers, however, rarely have independent effects on strategic
flexibility. Rather, the barriers often interact witheach other and create a vicious cycle that makes it
exceedingly difficult for managers and organizations to maintain strategic flexibility, as shown in
Figure 1.26 As explained, overconfidence, a complacent mind-set, and organizational inertia often
hinder managers’ attention to early signals of mistakes. With these attention barriers in place, only
limited negative information may recognized,
making it easier for managers to bias assessmentsof that information. Coupling the limited negative
information with the assessment biases, negative
outcomes are particularly likely to be interpreted
optimistically, and therefore problems are unlikely
to be carefully examined. Further, the extent towhich the assessment of outcomes is positively
biased can heighten organizational resistance tochanging the initiative. Also, if blame is deflectedby citing external forces, the assessment of outcomes may increase or introduce uncertainty. In
this case, uncertainty can limit motivation tochange, and resistance is likely to be strong. Because change involves risks, it is difficult, even for
excellent managers, to initiate a new action. Instead, managers often prefer the status quo as the

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Academy of Management Executive

easiest path until the outcomes become extremely
bad.
When no action is taken, the existing mind-set
and current routines are further reinforced. Uncertainty and resistance may also lead even effective managers to unconsciously place a lower
priority on resolving problems with majorchanges. Some have referred to this inaction as“the ostrich effect” because ostriches stick theirheads in the sand assuming that those who posea threat cannot see them. In this case, uncertainty is seemingly “controlled” by ignoring it.27
When these conditions occur, any negative information may be overlooked. This cycle gradually
becomes institutionalized as suggested in Figure 1.
Even in legitimate decision-making processes,
the cycle shown in Figure 1 can occur. An exampleof this complex situation existed in AOL Time
Warner. The merger of the Internet portal AOL withthe media company Time Warner has been highly
unsuccessful. The lack of success is partly becauseof the excessive premium that was paid for themerger, partly because of the crash of inflated Internet company valuations, and partly because assumed synergies between the two companies
failed to materialize. However, because of the hubris developed from past successes, AOL Time
Warner continued to deny its problems andstressed the upbeat performance forecast. In spiteof its insistence on an optimistic future, the company’s market capitalization decreased by $223 billion in the first two years following the merger. The
merged company was initially dominated by theformer AOL managers (based on the past successof AOL), and they were unwilling to admit problems and to make needed changes in the struggling company. In 2004 the new CEO, Richard Parsons, considered spinning off AOL as anindependent business. Although this seems to bean appropriate action, delays in such a decisioncontinue, which suggests that the complacentmind-set still prevails. Thus, even with the change
in CEO, there is reluctance to admit an error, fully
assess the situation, and take the necessary action
to stem the weak performance.28 AOL Time Warner(now called Time Warner) seems to have been
trapped in the vicious cycle.
The arguments presented above suggest thatbarriers interact and are self-reinforcing,
thereby severely limiting strategic flexibility. It
is thus important for an organization to avoid
being trapped in the vicious cycle. We discussvarious actions for this purpose in the following
sections. We begin with a discussion of our research results that highlight actions and charac-

Novemberteristics of the situation serving as catalysts forchange.
Triggers for and Barriers to Change: Research
Results
In the previous section, we explained the barriers
at each stage of organizational strategic flexibility. Because cognitive biases and organizational
inertia can disrupt top managers’ attention to the
focal decision, they may not recognize potential
problems in a timely fashion. Even if they do, admitting a mistake may be difficult, so they choose
instead to continue investing in the losing project.
Finally, uncertainty still remains even without theattention and escalation problems, becausechanging or withdrawing a particular initiative
may result in the loss of future value.

Because cognitive biases andorganizational inertia can disrupt top
managers’ attention to the focal decision,
they may not recognize potential
problems in a timely fashion.
Because most organizations face these challenges, particularly in a dynamic environment, theresults of our research provide important insights.
Our arguments in this article are based on two
separate but related studies. The first exploratory
study examined 18 cases to identify how and whenchanges were made in a previous strategic decision based on interviews with 17 managers in 11
organizations.29 The second study, drawing on thefindings from the first study, examined the barriers
to change and the situational characteristics thattriggered change, using a sample of acquisitions
that were later divested.30
A key finding from the first study is that change
in an initial decision is often triggered by “unrelated” events within an organization. Althoughpoor outcomes may be a necessary condition for
initiating a change, it is rarely a sufficient condition alone. Many firms that we studied needed
more than a year (sometimes several years) to initiate a change after the poor outcomes were initially reported. Even highly intelligent managers
struggle with the decision of whether to commit
further or withdraw the investment after acknowledging poor outcomes. In this context, an organization often needs external events to overcome thevicious cycle as described in Figure 1 and to stimulate and increase momentum for change. To illustrate, two example cases are briefly described be-2004

Shimizu and Hittlow. The first case exemplifies lack of attention
and assessment, and the second one is an example
of delayed action due to uncertainty.
One manager in a firm we studied described
how his organization remained committed to its
initial marketing strategy in Europe for morethan five years, despite its poor outcomes during
this time. Top management attributed the poor
performance to the immaturity of the market. The
firm had achieved success in the US with a similar marketing strategy, so the executives werecomfortable with it. As a result, they did notadequately attend to the business environmentand competitive practices in Europe. When a
new manager was appointed, he reviewed theentire European market to understand it and thefirm’s current position in the market. He thenprovided a summary presentation at a meetingof other top managers. While the information in
his presentation had been reported piece bypiece previously, his presentation became a“wake-up call.” Only then did the top managers
pay attention to the information and its implications for the firm’s marketing practices. The firmchanged its marketing strategy in Europe.
In another firm studied, top managementchanged its organizational structure after threeconsecutive years of losses. For top managers, it
was difficult to assess whether the poor outcomes arose from fundamental problems in theorganizational structure or something transitory,
and thus they were hesitant to initiate a change.
A failure of a strategic project, however, produced the momentum to examine every major
problem within the organization, deny any“wishful” assumptions, and initiate necessarychanges. According to a director, “Why did ittake three years? Yes, we should have done it
earlier, but it was hard to evaluate the decision
in a short period.”

Top managers often ponder what should
be done when an acquired businessproduces unexpectedly poor results.
Should they remain committed to theacquired business or sell it?
To extend our understanding from the firststudy, we also examined the effects of barriers
and trigger events on strategic flexibility in thecontext of mergers and acquisitions, an increasingly important strategy used globally. In contrast to the popularity of acquisitions, the resultsof an acquisition strategy are often not positive.

51

For example, Business Week reported that of thelargest M&A deals in 1998-2000, 61 per cent destroyed shareholder wealth and only 17 per centcreated positive returns.31 Thus, top managers
often ponder what should be done when an acquired business produces unexpectedly poor results. Should they remain committed to the acquired business or sell it?
Triggers that counter barriers include factors
such as a large decline in acquired unit performance, arrival of a new CEO from outside of thefirm, or arrival of a new outside director. These
triggers serve as a catalyst to accelerate the divestiture of a poorly performing acquired unit.32 Our
research showed that divestiture of such a unit isover 100 times more likely when a new outside
CEO is hired compared to when the current CEO
remains in the position. A large decline in theperformance of the formerly acquired unit increases the pressure on managers to take action.
Although less influential than a new externalCEO, a new outside board member also increases
the pressure for action. Our research showed thatdivestiture is two times more likely when an organization has a new outside board member. Such amember is more likely to break the chains of inertia and redirect the attention patterns of top management. A new board member can also infuse theother directors with a fresh perspective by bringing a different experience base to the firm.
Recommendations for Maintaining Strategic
Flexibility
Because managers are subject to various psychological and organizational biases when evaluating previous strategic decisions, especially when
the outcomes of those decisions are undesirable, it
is difficult to maintain strategic flexibility. The uncertainty exacerbates the challenges in making
decisions about whether to continue commitment
to previous strategic decisions or to change them.
Yet, there are steps that organizations can implement to reduce these problems and avoid the vicious cycle described earlier.
Extending our research on 18 cases wherechanges in decisions were needed and on 140 acquisitions, we propose the following six principles
to build organizational preparedness that allow
managers and organizations to effectively maintain attention to negative signs, evaluate and analyze outcomes objectively, and initiate actions
that reverse, where necessary, previous strategic
decisions. The key is being proactive and focusing
on structural issues (i.e., contingencies) that contribute to the various biases and barriers. These

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actions need to be taken before managers become
victims of the vicious cycle shown in Figure 1.
Once in this cycle, exiting from it is difficult because the biases are subconscious, and managers
often become unknowingly trapped.
1. Measure and Monitor Decision Outcomes.
If managers are unaware of the specific outcomesof a decision, it is unlikely that they will attend toit or that they will change the decision. Therefore,
managers must ensure that decision outcomes aremeasured and monitored. While this recommendation seems obvious, the reality may not be so.
When managers have experienced previous successes, they can become overconfident. Praisefrom others and routinized “success patterns” contribute to managers’ beliefs that their decisions areunlikely to fail. As a result, they make decisions
and then move on to the next initiative without
considering the outcomes of the earlier decisions.
For example, a manager in a company that grewthrough several M&As was asked if all of the acquisitions had been successful. She stopped andpondered: “Well, the interesting thing is, I don’t
know. . . . I don’t know if the president would know
how the acquired firms are performing. Because
what generally happens is that those businesses
are integrated with other businesses in the regions.” Thus, in this case, no one was clearly measuring the performance of the businesses acquired, and therefore the managers were neither
attentive to the outcomes nor able to assess them.

Managers must ensure that decisionoutcomes are measured and monitored.
While this recommendation seems
obvious, the reality may not be so.
Managers have many competing demands fortheir attention every day; if managers have beensuccessful, they may regard decisions as end
points even though in reality, decisions need to be
implemented and adjusted or terminated. Therefore, our recommendation to measure the outcomesof decisions is an important first step in maintaining attention to critical strategic issues. As Jack
Welch states, “What you measure is what you
get.”33
2. Stimulate Decision-Making Processes by
Incorporating a Devil’s Advocate Approach.
As discussed in the previous sections, managers
embedded in organizational contexts are sub-November

ject to various biases and inertia. The problem is
not so much the existence of the biases as
the fact that these managers are unaware ofthem.
Ignoring mistakes is common when alternative
viewpoints are not considered. Incorporating andevaluating new ideas often help firms to adjust
their initial decisions flexibly. Team-based decision-making enhances the opportunity to incorporate different perspectives into decisions. Teambased decision-making processes also createmeans for a check-and-balance to the CEO’s opinions. However, using a team to make decisions is
not always effective. For example, teams are subject to groupthink whereby team members focus ona single perspective and reinforce each other eventhough that perspective is inaccurate. Accordingly,
team decision-making processes need to be carefully designed to avoid this problem and toachieve maximum effectiveness. One useful teambased design is the devil’s advocacy approach because it can forestall a biased diagnosis of theoriginal strategic decision and thus help to avoid
groupthink.34
The value of a team-based approach can be bestderived from the diversity of the members’ perspectives and experiences.35 This diversity is formally emphasized when a member of the top management team is designated as a devil’s advocate.
The role of the devil’s advocate is to question theassumptions and alternatives presented. In thisway, alternative solutions are analyzed more completely and from many different vantage points.
Such an approach can be particularly effective
when managers are complacent, a decision-making team is relatively homogenous or even rigid in
its approach to decision-making, or organizational
inertia is high.
However, the CEO must be prepared to receive
challenges to his or her position in this process.
The CEO should build a nurturing organizational
culture that encourages open communications.
Disclosing and sharing bad information is important to develop the necessary momentum toovercome problems.36 Without such an approach,managers may unknowingly enter the detrimental cycle described earlier, which is difficult to break. GM provides a classic example.
The culture of GM under Roger Smith was once
described as follows: “If you raised a problem,
you got labeled as ‘negative,’ not a team player.
If you wanted to rise in the company, you kept
your mouth shut and said ‘yes’ to everything.”37

2004

Shimizu and Hitt

3. Create Dynamic Mechanisms to Gain New
Ideas and Perspectives from Outside of the Firm,
Before Problems Appear.
Conventional wisdom suggests “Don’t fix something if it is not broken.” However, such an approach is highly risky. As explained previously,
poor results may be interpreted as temporary, either intentionally or unintentionally, with no actions taken. When managers finally recognize or
admit that the outcomes are “really” bad and thatsomething is broken, it may be late and very costly
to create a turnaround or to make needed changes(refer to the law of squares).

When managers finally recognize or
admit that the outcomes are “really” badand that something is broken, it may belate and very costly to create aturnaround or to make needed changes.
Following a careful process is important but unlikely to be sufficient to avoid being trapped in thepotentially debilitating cycle. Instead, it is important to be proactive; don’t wait for something to
break. For example, establishing an organizational system that regularly receives new ideas
and infuses new perspectives from outside the firm
can provide a “wake-up call” to managers. Theseoutside ideas help managers avoid being trappedby path dependence.38 By exposing themselves toexternal ideas, managers can evaluate the firm’s
past strategic actions, its current strategy, and theoutcomes achieved through the lens of external
standards. This approach is similar to informal
benchmarking. Exposure to external ideas provides perspectives that are unbiased by internal
political processes or by involvement in the initialstrategic decision. Thus, an external perspective
helps managers to be more sensitive to negative
feedback by questioning assumptions regarding
previous successful experiences. Managers canthen change the group dynamics within the top
management team and stimulate the developmentof new routines.
An external perspective also helps an organization to make a more realistic and effective
assessment of the negative information by nurturing a culture of learning from mistakes andcreating a new dynamic that “refreshes” the relationship between top management and theboard of directors. Based on our research results,
we suggest several ways that firms can inject
new ideas and external perspectives into thedecision-making processes.

53

a. Limit the Tenure of Top Executives
In support of past and continuing research,39 ourstudy found that appointing a new CEO from outside of the firm dramatically increases the probability of divesting an acquired business that is
performing poorly. A new outside CEO brings perspectives developed from different experiencesand different settings that may redirect an organization’s strategic intent, policies, and assumptions. Arrival of a new outside CEO provides anopportunity for an organization to revisit obsolete
assumptions and correct mistakes in past strategic
decisions.
We recognize that hiring a new CEO from outside the firm is not feasible in all succession
events and, indeed, such an action could havenegative effects on the motivation of internalmanagers. However, turnover in the top-management team, especially when a team approach isused to make strategic decisions, can be healthy.
Furthermore, limiting the tenure of top managers
provides the opportunity to infuse the firm withnew leadership and new perspectives, thereby
reducing path dependence in the thinking andlearning process of the firm. Such changes may
well enrich the capacity of the team to learn andto develop new strategic approaches. Often,
CEOs are replaced only when the performance ofthe firm deteriorates, in which case it takes moretime to recover (refer to the law of squares). However, precedent exists for building in regularturnover in the top management team. Both
Toyota and Honda change their CEOs every four
to five years, regardless of their performance. In
contrast, Michael Eisner has been Disney’s CEO
since 1984.
Although there are companies that have infrequent top-management changes and maintainhigh performance (e.g., GE), those companies are
becoming more rare (e.g., see Coca-Cola). Given
the importance of maintaining strategic flexibility,
companies should seriously consider and evaluate
the pros and cons of limiting the tenure of top
executives. This point is also applicable to thefollowing two recommendations.

b. Routinely Appoint New Outside Directors
Interestingly, our research showed that appointment of new outside directors also increases theprobability of divesting an acquired business thatis performing poorly. The rationale here is similar
to that for new CEOs but with an additional twist.
New outside directors also bring different experiences and potentially fresh perspectives to the54

Academy of Management Executive

firm. To learn about the firm, these new directors
are likely to pay special attention to important
strategic issues, some of which may have beentaken for granted by incumbent directors. They
also may change the power balance between the
CEO and the board. Thus, while a change in the
top-management team, especially in the CEO position, brings new leadership, a new director canpotentially infuse new perspectives into the governance process. As a result, the director’s new ideas
have the potential to unlock the cognitive inertia in
the firm that reinforces past actions and serves asa barrier to changing previous strategic decisions.
New outside directors also add a new dynamic in
the relationship between top management and theboard of directors with the potential to prevent
directors from becoming entrenched and ineffective.

Our research showed that appointment of
new outside directors also increases theprobability of divesting an acquired
business that is performing poorly.
Although excessive turnover of directors can be
dysfunctional because of the need for continuity(e.g., for organizational memory) and the time required for new directors to learn about the industry
and the firm, these concerns must be balancedwith the importance of injecting new perspectives.40
c. Rotate Managers in Key Positions Routinely
Accumulation of experience and expertise alongwith maintaining an organizational memory areimportant for an organization. However, creating aclosed circle in a management team can also produce an inertial mindset (as shown in the case ofMotorola). Regular rotation of managers in key positions ensures that fresh perspectives will be considered in each area important to the company
over time. Also, new managers are more likely toevaluate previous strategic actions taken in thearea because their performance will be appraised
based on the unit’s outcomes, some of which will
be due to prior decisions made by their predecessors. Further, when lower-level managers observe
their superiors asking questions, they may become
more open to share their ideas, ask additionalquestions, and possibly even communicate mistakes.
The merits of proactively providing a stimulus
for attention to and assessment of problems requir-

Novembering change are important advantages of managerial rotation, particularly to those organizations
with complacency, rigidity, and/or inertia. Japanese companies such as Toyota and Honda takeadvantage of rotation to provide broader views of
the organization to managers and prevent themfrom being entrenched in excessively narrow andrigid functional perspectives. Jack Welch’s experience is also consistent with this idea. When heoffered critical comments to managers of the problematic nuclear business in 1981, they argued,“Jack, you really don’t understand the business.”
Based on his objective assessment of the situation,
he commented. “That was probably true, but I had
the benefit of a pair of fresh eyes. I hadn’t invested
my life in this business. I loved their passion, eventhough I felt it was misdirected.”41
There are also some risks and disadvantages ina regular rotation of managers. A major risk is thatnew managers may change effective strategic activities in order to put their own “stamp” on the job,when no change is warranted. Also, while regularrotation is desirable, adequate time in a position isnecessary to evaluate and create new directions,as well as to implement and nurture them. Thus,balancing the advantages and disadvantages ofrotation is critical to the program’s success.
d. Exploit Alliances with Other Firms as a Way toIncorporate New Ideas
Alliances with other firms through joint ventures orlong-term contracts have become highly popular
strategic moves. In fact, they are probably the mostcommon global strategic action taken by large andsmall, established and new firms.42 Strategic alliances provide a valuable source of new ideas.
While firms can gain from the complementary resources provided by partners, perhaps a longerterm advantage is learning new capabilities andtechnologies.43 Strategic alliances provide a usefulsource of new perspectives as well.44 Experience inmanaging the integration of two or more different
corporate cultures and mind-sets should help topromote the creation and communication of new
ideas inside the firm. The experience may also
provide an opportunity for managers to recognizethat their own internal standards or perspectives,
which they thought were absolute, may not be adequate for gaining and/or sustaining a competitive
advantage. In other words, alliances can provide ameans of benchmarking the standards used withina firm.
While alliances are often developed for strategic
purposes, their potential value extends beyond
these initial purposes. In particular, exposing

2004

Shimizu and Hittmanagers to new cultures and ideas is an opportunity that should be exploited when available.
These ideas provide a source of and a catalyst fordeveloping a culture of learning and neededchanges.45
4. Recognize the Limitations of Static Governance
Systems.
Strong corporate governance should ensure that
executives examine appropriate alternatives andopportunities when they exist. One element of agovernance system touted for many years is a majority of outside directors. However, research has
produced mixed results regarding the effects ofboard composition or leadership structure on firm
performance.46 And, as we have learned from recent major scandals such as Enron, unethical top
executives may be able to work around the governance system unless careful safeguards are inplace.

Unethical top executives may be able towork around the governance system
unless careful safeguards are in place.
Recent proposals for a lead director and assurances of an independent audit committee on theboard are correct steps. The separation between
the CEO and board chair positions is also important. However, we recommend further actions toinfuse additional dynamics into the board decision
processes as well. First, as stated above, routinely
appointing new outside directors can be beneficial. While static conditions in the board composition may be useful for monitoring and forestalling
opportunistic behaviors of managers, long tenure
can also result in a homogenization of perspectives, cognitive inertia, and entrenchment of theboard. In fact, our research implies that relatively
static monitoring by outside directors and investors has less influence on decisions to divest
poorly performing units than do the arrivals of new
key leaders and board members (i.e., CEO, outside
director). Supporting this argument, finance researchers found that “appointment of an outside
director is accompanied by significant positive
returns, even on boards which are numericallydominated by outsiders before the appointment.”47
Second, we recommend that processes be established to ensure that a devil’s advocacy approach
be used in board decision processes similar to theprocesses used by the top-management team to55

make strategic decisions. As a result, there should
be some processes to ensure regular turnover on
the board and, importantly, actions should then be
taken to ensure that new members infuse theboard with new ideas and different perspectives.
Thus, incorporating a more dynamic view of board
membership and processes can improve governance effectiveness and rejuvenate the assertiveness of boards of directors.

5. Do Not Narrowly Focus on One Decision.
Consider Decision Portfolios.
If an organization has only one project and is dedicated to the project, it may be natural to continuecommitment to the project despite warning signs ofnegative outcomes. In reality, most organizations
have various functions and projects. Resourcesmust be allocated across such functions as research and development, operations, and marketing, and multiple projects may be simultaneously
active in each function. If the top managers ignore
the existence of multiple projects within an organization and focus only on a particular project,they may not only risk escalating commitment to alosing project but risk underfunding more promising projects. Alternatively, if top managers consider projects as a portfolio of options, it is easier tocompare multiple projects and prioritize them,while independently assessing a single project’s
potential and risks under uncertainty is much moredifficult.48 Even if a focal project seems to havepotential, a decision to allocate resources to amore promising project will be easier using a portfolio approach. Meanwhile, if the focal project istruly more promising than other projects, managers can decide to maintain commitment and consider the next steps.49
While using a broader view may be difficult for
middle managers because they are often dedicated to one project, top management should
maintain a portfolio view of multiple decisions toeffectively assess decision outcomes and allocate
resources accordingly.50 Although it is difficult forsmall or less-resourceful organizations to havemultiple alternatives, using small trials as an experiment will allow those organizations to enjoy
the similar benefits of having multiple alternatives.51 Comparing multiple alternatives can also
produce new ideas by, for example, integrating
those alternatives. Thus, examining multiple alternatives can contribute to nurturing an organizational culture that encourages learning and knowledge sharing.

56

Academy of Management Executive

November

FIGURE 2
Creating the Capability to Maintain Strategic Flexibility*
6. Analyze and Measure Learning That Can Be
Used in the Next Step.
A real-options approach also suggests that a decision can be positioned to provide a base for the
next step.52 Because organizations are ongoing,
one decision rarely determines their long-term success, especially under conditions of uncertainty.
Instead of gambling on one or a few decisions inthe short run, it is important to learn from decisionoutcomes and use the learning for subsequent
strategic decisions or in the next steps of the focal
initiative. Our research also suggests that pastexperience helps an organization to understandand initiate strategic changes such as divestitures.
As discussed, it is difficult to clearly predict future potential and risks and make major decisions
under conditions of uncertainty. However, assessing the return on investment by incorporating theinvestment’s learning and value can provide managers with a new perspective to help making difficult decisions. For example, when managers are
faced with the unsatisfactory performance of an
acquisition, considering the benefits of learningfrom the experience will help in making the difficult decision. If the organization has learned wellfrom poor acquisition experience (i.e., they know
the reason for the failure), this knowledge can beutilized in future acquisitions and the business canbe sold. Alternatively, when managers think thatpoor performance results from ineffective integra-

tion but that they need more experience with integration to better understand what went wrong or
how to improve the integration, they may delay
making major changes (such as divesting the business) until adequate learning is obtained. Although measuring the knowledge learned is difficult, the organizational process of building
knowledge has become critical to gaining and sustaining competitive advantages.53 In fact, various
strategic initiatives such as alliances and new
business development include learning as one of
the key objectives.54 Moreover, vigorously analyzing learning can facilitate the development of anorganizational culture that encourages sharing information and ideas including past strategic errors.55

Although measuring the knowledge
learned is difficult, the organizational
process of building knowledge has
become critical to gaining andsustaining competitive advantages.
While Cisco Systems has experienced someproblems over time, a substantial amount of its
growth has come through acquisitions, and a reasonable amount of its success is due to the capabilities and learning it captured in these acquisi-

2004

Shimizu and Hitttions. Cisco Systems uses an elaborate process tointegrate the acquired firm quickly into its operations. Furthermore, Cisco Systems takes great
pains to avoid the departure of key personnel fromthe acquired firm because of the knowledge it
could lose if they leave.56 Often, however, learning
is not easy to achieve. The Interpublic Group (IPG)
made over 300 acquisitions in the span of five
years (1997–2002). The expected synergies did notmaterialize from the acquisitions, and the firm now
has substantial debt. The performance of the firm
is suffering. In this case, the firm was so focused on
making acquisitions that it failed to evaluate theirperformance and learn from them.57 So, IPG failed
to use our first and sixth recommendations.
Can a large, difficult-to-reverse investment suchas a major acquisition be justified by the potential
learning from it? The answer is probably “no.”From the perspective of strategic flexibility, large
and difficult-to-reverse investments are particularly risky. For example, such investment decisions are often affected by hubris, organizational
politics, and significant uncertainty. This type ofinvestment can be justified only when an organization has accumulated enough knowledge fromits past experiences. Although a large acquisition
is often characterized as a “once-in-a-lifetime opportunity,” its potential is unlikely to be realized
unless an organization is fully prepared. In thissense, managerial styles/approaches and an organizational culture that encourage learning fromthe initiatives are important not only for managing
a focal investment but also for managing a portfolio of strategic decisions over time.

Can a large, difficult-to-reverse
investment such as a major acquisition
be justified by the potential learningfrom it? The answer is probably “no.”The key linkages of our recommendations to thecontingencies in the three processes of attention,assessment, and action are depicted in Figure 2.
The Managerial Dilemma: Final Thoughts
We examined the managerial dilemma of balancing the need for change to minimize loss with theneed for commitment to ensure that a strategic
action is given adequate opportunity to be successful. It should be noted that the lack of change
by top executives is not always because of opportunistic reasons. Steve Usselman, a professor at
the Georgia Institute of Technology, argues thatmany executives suffer from a common malady:

57“habits of the mind.” He suggests that it is often
difficult for top management to develop a vision for
the firm that departs from its current trajectory.58
His observations match well with the arguments
presented herein. Psychological and organizational biases often affect managerial attention, assessments, and actions in ways that prevent managers from recognizing and acting on a failingcourse of initiative in a timely fashion. Moreover,inherent uncertainty regarding the future potentialof strategic initiatives often makes even effective
managers hesitant to initiate a change quickly.
This uncertainty suggests that it is difficult tomake effective strategic decisions even when managers use an appropriate process to do so. Our
recommendations should help to avoid or to heal
the executive malady “habits of the mind” andhelp to reduce some of the uncertainty inherent instrategic decisions.
Given that new ideas are often a result of arecombination of well-known elements, this article
provides new and practical implications to researchers and managers. These include:(1) We provide a comprehensive set of challenges that managers encounter in maintaining
strategic flexibility from the perspective of attention, assessment, and action. While research often
focuses on the irrationality of decision-making, including psychological biases (e.g., escalation ofcommitment) and inertia, we go beyond the conventional boundaries, focusing additional attention on future uncertainty in reversing a strategic
decision.59(2) We explain that managers may be unconsciously trapped by various barriers to strategic
flexibility at multiple stages. Corresponding tobarriers in each stage, specific contingencies arepresented for which managers need to be prepared.
(3) We present six recommendations as summarized in Figure 2. However the difficulty of maintaining strategic flexibility must be acknowledged; there is no panacea. Accordingly, rather
than discussing “easy-to-state but difficult-to-accomplish” solutions, we explain the importance ofbeing proactive and the risk of taking for granted
the outcomes of prior decisions, offering specificactions that managers can take. We emphasize theimportance of attacking structural issues that contribute to problems, rather than reacting to eachproblem on a case-by-case basis. The recommended
actions can serve as a “wake-up call” for many managers by helping them to revisit their taken-forgranted assumptions, examine their current organizational structures and processes, and increase
their preparedness to make effective decisions.

58

Academy of Management Executive

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13
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Kahneman, D. 1992. Reference points, anchors, norms, andmixed feelings. Organizational Behavior and Human Decision
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McGrath, R. G. 1999. Falling forward: Real options reasoning and entrepreneurial failure. Academy of Management Review, 24 (1): 13–30.
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Chattopadhyay, P., Glick, W. H., & Huber, G. P. 2001. Organizational actions in response to threats and opportunities.
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29
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30
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31
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32
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33
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34
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Experiential effects of dialectical inquiry, devil’s advocacy, andconsensus approaches to strategic decision making. Academyof Management Journal, 32 (4): 745–772.
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40
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41
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42
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43
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52
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53
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59

57

knowledge for sustained competitive advantage. San Francisco:
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54
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55
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Usselman, S. W. 2003. Leadership and cognition: Or, what
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59
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Katsuhiko Shimizu is an assistant professor of strategic management at the University ofTexas, San Antonio. He received his Ph.D. from Texas
A&M University. Prior to his academic career, he engaged instrategy consulting for start-up
and large multinational corporations located in Japan andother countries. His current research centers on managerial
challenges under uncertainty,
including strategy implementation and reactions to mistakes.
Contact: kshimizu@utsa.edu.

Michael A. Hitt is a Distinguished Professor and holds
the Joe B. Foster Chair in Business Leadership and the C. W.
and Dorothy Conn Chair in New
Ventures in the Mays Business
School at Texas A&M University. He received his Ph.D. fromthe University of Colorado. His
research focuses on international strategy, the management of firm resources, corporate governance, and strategic
entrepreneurship.
Contact:
MHitt@cgsb.tamu.edu.

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0-19-516634-5

320 pp.
$30.00Prices are subject to change and apply only in the US. To order, please call 1-800-451-7556. In Canada, call 1-800-387-8020.
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