Bottom Line: If firms become mired in the successful practices that got them to where they are, they may stop looking for new ways to exploit resources and opportunities.
Among the many factors that have been identified as undermining a firm’s success — unstable leadership and project setbacks, for example — there’s one that has received remarkably little scrutiny from researchers: success itself. After all, if success is a product of developing and deploying certain resources and routines that breed better performance, firms may decide that the best way to replicate success is to replicate those practices over and over.
Staying ahead of the competition, however, typically involves tapping new markets, innovating, and flouting traditional modes of thinking — all strategies that, by definition, require breaking free from the status quo.
According to Royal Holloway University of London’s Catherine L. Wang and her colleagues, companies can indeed sink into so-called success traps, harming their long-term sustainability by overemphasizing proven methods rather than exploring new ways to do business. The new study found that such companies shrink away from the changing market landscape and get stuck in long periods of inertia.
The authors surveyed directors, CEOs, and senior managers at more than 100 high-tech companies, which provide an ideal lens through which to examine the problem: Avoiding success traps should be of great concern to firms operating in this highly competitive market segment, which includes aerospace, biotechnology and pharmaceuticals, computing, media, and medical equipment.
Of course, there are various ways to hinder a company, and managers can be guilty of one or several. The authors analyzed three types of corporate behavior that have been linked to increased inertia: stressing the familiar over the unknown; preferring the well established over the nascent; and failing to search for genuinely novel solutions. Accordingly, study participants provided several measures of their firms’ operations and performance, along with an assessment of how well they deployed different dynamic capabilities (such as acquiring knowledge, integrating new systems, supporting employees, and achieving a balance between internal and external skill sets).
The authors focused on whether these high-tech firms were ensnared by their established technological setups or bursting free from their constraints, a crucial source of competitive advantage for the companies studied. They also measured several aspects of corporate performance, including growth in employment, profitability, and sales.
Companies that rigidly stuck to routines — even successful routines — became less able to introduce new modes of doing things, the authors found. Specifically, companies in success traps had trouble exploiting external opportunities, assimilating new knowledge, reacting to outside changes, and coming up with innovative ways to adapt to unforeseen events.
The overall effect of success traps on short-term financial returns was unclear, but because dynamic capabilities were clearly linked to firm performance, it’s logical to assume that ensnared companies would eventually see their fortunes tumble. Firms in fast-moving sectors were particularly afflicted by success traps, the authors found, which demonstrates the importance of thinking one step ahead in markets that fluctuate frequently. The negative effects of success traps also increased as firms grew in size, underscoring how larger companies may be less flexible in shaking off inertia because they become wedded to organizational routines.
Larger companies may be less flexible because they become wedded to organizational routines.
Falling into a rut was also especially harmful for firms that adopted a prospector strategy, continually seeking out new market and product opportunities, and defensive companies, which were more likely to protect their narrow niche and engage in little innovation while stressing efficient operations. Thus, success traps impeded firms at both ends of the strategic spectrum: those searching for new openings and those carefully guarding their turf.
Indeed, the authors suggest that success traps may have even more impact on firms than failure traps, which occur when companies get stuck in a cycle of unrewarding initiatives. After all, failure means only that one particular course of action didn’t work out for a company, whereas success gives managers and employees a blueprint for how to proceed on several fronts.
The challenge for managers, then, is to properly use existing competencies while always looking for ways to update them in the face of market or environmental trends. Managers must embrace a blend of exploitative and exploratory approaches in their attempts to get the most out of a firm’s resources.
“When firms have successfully adapted to the environment, they tend to perceive this as a rationale for current organizational logic, norms and practices, and hence become less open to learning from new knowledge and less prepared to adapt when the environment changes,” the authors write. Managers’ refusal to rest on their laurels, therefore, is “instrumental to firms’ ability to develop and pursue firm strategy effectively.”
Source: “Success Traps, Dynamic Capabilities and Firm Performance,” by Catherine L. Wang (Royal Holloway University of London), Chaminda Senaratne (Northumbria University), and Mohammed Rafiq (University of Roehampton), British Journal of Management, Jan. 2015, vol. 26, no. 1