Concept Of Dynamic Strategic Fit Commerce Essay

The Notion of fit has become very important in the area of business as discrete activities often impact on one another and are the processes by which a firm adapts to its markets, and forms a link between its strategy and the outside world.

This report aims to assess the concept of dynamic strategic fit. The key factors, including competitive advantage, sustainable competitive advantage, VRIN (valuable, rare, inimitable and non-substitutable) attributes, resource-based view and dynamic capabilities will be identified and also their relation to strategic fit will be outlined. Southwest Airlines, a successful US domestic aircraft company, will be used to illustrate how the company combines these concepts to its policy choices and also illustrate Southwest`s integration, complementarity and interdependency between its resources.

Determining an appropriate strategy can be a long process; the outcome of this process is change which requires effort, commitment and discarding old practices, therefore, to maintain fit can be difficult to achieve and sustain over long periods due to changes in the environment. In order to overcome the aforementioned difficulties, the paper will discuss and assess contingency theory under four possible scenarios in a framework of dynamic strategic fit. Internal and external strategic fit of a company occupying a peak in a performance landscape framework and change framework will be discussed in detail. Those frameworks will be employed in the case of Southwest Airlines, by observing how Southwest achieved strategic fit amongst its business strategy and policy choices.

Finally, a conclusion will be drawn from the findings of the study with an emphasis on the importance of strategic dynamic fit in order to remain competitive in a rapidly changing environment.

2.0 Concept of Dynamic Strategic Fit – The Notion of Fit

In order to remain competitive in the fast-moving global market place, a firm needs to implement a value creating strategy. (Porter, 1996) The strategy is based on a firm`s resources being complementary, interdependent (Porter, 1996, cited in Rivkin, 2000) and heterogeneously distributed throughout the firm, and if it is not simultaneously executed by any present or potential competitors, this results in a competitive advantage. (Barney, 1991) A firm`s resources are financial and intellectual assets, human capital, research and development, staff skills, structural capital and customer capital. (Barney, 1991) Moreover, if a firm`s resources are VRIN (valuable, rare, inimitable and non-substitutable) and are unable to be duplicated or imperfectly imitable by any competitors, this results in a sustainable competitive advantage for the firm. (Barney, 1991, cited in Eisenhardt and Martin, 2000) However, changes in the economic structure of a firm`s industry or any kind of changes in a firm`s external and internal environment may make what was a sustained competitive advantage no longer valuable. (Barney, 1991) To address those changes in the environment, a firm`s dynamic capabilities lead to sustained competitive advantage in other words a firm`s ability to integrate, build and reconfigure its internal and external competences allows for adaptation to rapidly changing markets. (Tecee et al, 1997, cited in Eisenhardt and Martin, 2000)

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Dynamic capabilities make it possible for firms to prepare for an uncertain future, quickly respond to changes and maximize new or emerging opportunities. (Eisenhardt and Martin, 2000) The processes by which a firm integrates its resources, its adoption of routines to learn routines, decision making/reconfiguration strategies and abilities to match or create market change constitute its dynamic capabilities which are employed to respond to emerging, the collision, splitting, evolution, and death of markets. (Teece et al, 1997) A firm`s ongoing ability to fit and match strategically in line with environmental or organizational contingencies develops systems complexity. (Zajac et al, 2000)

Dynamic capabilities have determined Southwest`s choices and activities in order for the company to perform optimally in a difficult, challenging and highly competitive market place. Its success has been based on its continued emphasis on innovation, ability to configure individual activities and relate its particular set of activities to one another. Southwest’s sustainability and competitive advantage has been a result of its unique system of activities which can be described as embodying VRIN attributes; in that they are complementary, highly integrated and interdependent – the notion of fit drives its competitive advantage and sustainability. (Porter, 1996)

In figure 1 below these systems of strategic fit among policy choices are illustrated showing the complexity of its operating systems which is fundamental to not only its competitive advantage but also the sustainability of the company’s advantage.

Figure 1: Southwest Airlines` Policy Choices. (Porter, 1996, p73)

Southwest Airlines have actively pursued its strategy of providing low cost, no-frills air travel. The company’s strategic fit has created its competitive advantage and profitability by reducing costs, how activities are performed and relate to one another promotes proficiency and efficiency. (Porter, 1996) The companies interlocked activities make it difficult to imitate and implement by its market competitors; through attributes such as its use of aircraft (Boeing 737) making maintenance, job efficiency and staff training standardised to a degree. Frequent departures, rapid gate turnaround, strategic choice of routes therefore avoiding congestion and resulting delays, zero baggage transfer, seat allocation and meals have been features of the companies high-convenience, low-cost approach to air travel. (Shah et al, 2005)

The notion of fit is developed and addressed using the strategy employed by a firm in respect of its fit among strategic choices and policies combined with its dynamic capabilities in a changing internal and external context; and the processes by which a firm adapts to markets to match between its strategy and outside world. (Ghemawat, 1999) Dynamic fit means strategic fit responds by strategic change to a given market through control, prediction and adaptation. (Zajac et al, 2000)

Strategic fit concerned can be a difficult and complicated affair requiring a company’s analytical approach to viewing how environmental factors and organisational strategies affect a firm’s performance and strategic fit. It is not always clear whether a company should adopt changes in a strategy to improve its fit with changing external environmental factors or not. There is a long standing but ambiguous association between notion of fit and structural contingency theory. (Zajac et al, 2000)

The next section of the paper aims to discuss and assess contingency theory under the four potential scenarios in a framework of dynamic strategic fit. Following that the performance landscape framework will be discussed for a company occupying a peak including change framework and the implications of internal and external fit. Southwest Airlines will be used to illustrate these concepts.

2.1 Contingency Theory of Strategic Dynamic Fit

Contingency theories prepare a firm for an unknown future through the exploration of its revision possibilities, reviewing the initial choice decisions or developing the organizational capacity to act in response more flexibly to changes that cannot be completely expected. (Wang and Horsburgh, 2007)

In light of contingency theory Zajac, Kraatz and Bresser (2000) developed a contingencies framework (Figure 2) using the concept of dynamic strategic fit and highlighted how widely the correlation between strategic change, dynamic strategic fit and performance in organisation can be described in terms of four possible situations. In Figure 2 the vertical dimension shows if strategic change is needed to set up dynamic strategic fit and the horizontal dimension shows if strategic change happens or not. (Zajac et al, 2000)

Does Strategic Change Occur?

Yes

No

Is Strategic Change Needed to Establish Dynamic Strategic Fit?

Yes

Beneficial Strategic Change (Dynamic Fit)

Insufficient Strategic Change (Dynamic Misfit)

No

Excessive Change (Dynamic Misfit)

Beneficial Inertia (Dynamic Fit)

Figure 2: Four possible scenarios in a framework of dynamic strategic fit (Zajac, Kraatz and Bresser, 2000, p433)

2.1.1 Beneficial Strategic Change Resulting in a Dynamic Fit

This box illustrates the situation in which a company is confronted with the need to change, produces the required changes resulting in desired performance benefits for the company and thus achieving dynamic strategic fit. External contingencies such as changes in technology, customer preferences, government regulations, competitor`s strategies or any other affective changes in the environment can impact on a firm`s existing strategy. The results of strategic change will increase the benefit level when it combines numerous complementary contingencies (Zajac et al, 2000) as can be observed in the strategy employed by Southwest.

In order for Southwest Airlines to perform the difficult task of remaining economical and efficient, and therefore maintaining continued success in a highly competitive market they have adapted and in so doing developed its own market segment. Its continued adaptation and response to customer needs resulted in changes to its strategy, its strategy decisively changed from the short-haul flight market to longer non-stop, long-haul flight markets such as Baltimore to Las Vegas, Nevada (2,099 miles) as an addition whilst, maintaining is short-haul services. Southwest continues to offer the lowest cost airfares in its market at an average of 15-25% below that of its competitors. The company was required to make changes to its strategy to enable strategic dynamic fit, Southwest implemented changes resulting in beneficial strategic change. (Shah et al, 2005)

2.1.2 Insufficient Strategic Change Resulting in a Dynamic Misfit

This box illustrates a company’s failure to change appropriately in response to changing factors, resulting in a diminished ability to perform. In this situation the company’s strategy has failed to achieve the necessary changes required and thus constitutes negative inertia, therefore a dynamic misfit occurs due to an unwillingness, inability, or lack of awareness for the need to change. (Zajac et al, 2000)

2.1.3 Beneficial Inertia Resulting in a Dynamic Fit

This box illustrates where a company’s existing strategy requires little, or indeed, no change. The company makes no changes and continues to experience performance benefits. In this case inertia is a positive contributing factor as fit has already been achieved and is not endangered by changing contingencies. The firm`s environment might not be relatively changing or the firm`s sustainable competitive advantage might be still unique, inimitable and valuable. This is referred to as beneficial inertia, resulting in dynamic fit. (Zajac et al, 2000)

2.1.4 Excessive Change Resulting in a Dynamic Misfit

This box illustrates where a company employs an unwarranted change in strategy, resulting in a negative impact on its’ performance. Changes implemented may be well-intentioned but miscalculated or misinterpreted; environmental and organisational contingencies do not present the need for change and the company can be described as being too ready to adapt to environmental changes, which, ultimately have the effect of damaging organizational competencies and performance. This is referred to as a dynamic misfit. (Zajac et al, 2000)

In summary some companies will effect required changes, some companies will not make sufficient changes, and others ought to change but fail to respond appropriately, whilst some will make unnecessary changes. It is suggested that this conceptualised model of dynamic strategic fit be applied in the identification and incorporation of contingencies both organizational and environmental that should highlight what changes, if any, should be implemented in order to achieve dynamic strategic fit. (Zajac et al, 2000)

2.2 Performance Landscapes and Change Framework in terms of Internal and External Strategic Fit

A company’s ability to negotiate a changing environment may present a challenge because the resulting changes can adversely affect the value of the company’s assets and such a tightly interconnected company may find adapting to changes difficult. (Levinthal, 1997) Another feature of tight fit in a company means changes are quickly felt, and in multiple areas of the company, making such a company more sensitive to changes in its’ environment. (Siggelkow, 2001)

The distinction between internal fit and external fit lies amongst a company’s cohesive and interconnected activities which can lead to a sustainable competitive advantage, as this can result in making imitation difficult – internal fit. Whilst external fit is described as the appropriateness of its activities in relation to the environment in which the company operates. (Rivkin, 2000, cited in Siggelkow, 2001) In the case of Southwest Airlines, its complex and complementary strategy made it difficult imitate leading to its sustainable competitive advantage. (Porter, 1996)

The concepts of internal and external fit can be illustrated using a performance landscape, which is a multidimensional space where the values of particular choices a company make are represented in each dimension. The final dimension shows the resulting performance value. (See figure 1a and figure 1b below). (Siggelkow, 2001)

Figure 1a and 1b: Performance Landscapes, (Siggelkow, 2001, p840)

In the early 1900s the Ford company employed a low variety and low flexibility production system, exploiting the available technologies and information of the time efficiently, representing a high peak in the performance landscape (Figure 1a). In the 1980s with the introduction of increasingly sophisticated production technology the Japanese introduced a higher-performance set of choices, with high variety and high flexibility creating a new peak in the performance landscape whilst, the Ford production system went into decline due to the landscape had changed (Figure 1b). (Siggelkow, 2001)

In terms of Southwest’s policy choices of high flexibility, high variety resulted in a high peak in the performance landscape signifying its lead in the domestic airline industry. The company’s ability to adapt and adopt a strategy, were it made internal changes in order to fit externally has ensured its continued success, comparisons can be made to that of the Japanese production system in the diagram above (Porter, 1996). Southwest Airlines just-in-time (JIT) performance; its low prices and no-frills approach enabled its rapid domination of the market. (Shah et al, 2005) Southwest’s ability to adapt and adopt a strategy, were it made internal changes in order to fit externally has ensured its continued success as it is illustrated below its operating statistics.

Southwest Airlines – Operating Statistics – Consolidated Highlights

(Dollars In Millions)

2001

2002

2003

2004

2005

2006

2007

2008

Operating Revenues

$5,555

$5,522

$5,937

$6,530

$7,584

$9,086

$9,861

$11,023

Operating Expenses

$4,924

$5,104

$5,454

$5,974

$6,859

$8,152

$9,070

$10,574

Operating Income

$631

$415

$483

$554

$725

$934

$791

$449

Operating Margin

11.04%

7.60%

8.10%

–

9.60%

10.30%

8.00%

4.10%

Net income

$511

$241

$442

$313

$484

$499

$645

$178

(Southwest Annual reports, 2010)

Changes in environment therefore, can affect both internal and external fit of a company occupying a peak in a performance landscape. Four possible cases are illustrated below in Figure 3.

EXTERNAL FIT

NO CHANGE

CHANGE

INTERNAL FIT

NO CHANGE

NO CHANGE

FIT-CONSERVING CHANGE

CHANGE

BENIGN FIT-DESTROYING CHANGE

DETRIMENTAL FIT-DESTROYING CHANGE

Figure 2: Change Framework, (Siggelkow, 2001, p841)

No change: Environmental change has no relevance to the company and neither internal nor external fit is affected. (Siggelkow, 2001)

Detrimental fit-destroying change: Both internal and external fit are affected therefore the company is located away from a peak and at a lower elevation (lower internal and external fit). (Siggelkow, 2001)

Benign fit-destroying change: Environmental change has occurred resulting in an effect on internal fit but the firm’s performance remains unaffected. (Siggelkow, 2001)

Fit-conserving change: Although changes in the company’s environment have not resulted in damage to its system of choices it has impacted negatively on the suitability of the company’s system as a whole. External fit has decreased whilst, internal fit remains unaffected. (Siggelkow, 2001)

To summarise; with fit-conserving change a company continues to occupy a peak, whilst with fit-destroying change a company ceases to occupy a peak. (Siggelkow, 2001)

3.0 Conclusion

In conclusion; a value creating strategy is needed for companies to achieve competitive advantage and sustainable competitive advantage by using complementary and interdependent resources. Dynamic capabilities enable firms to prepare for an uncertain future and quickly respond to changes through reconfiguration, integration and decision making. In the case of Southwest’s Airlines; its dynamic capabilities have determined its choices and activities in order to perform well in a challenging and highly competitive market place. Southwest`s VRIN activities are complementary, highly integrated and interdependent – the notion of fit drives Southwest`s competitive advantage and sustainability. Fit is among strategic choices and policies combined with its dynamic capabilities in a changing internal and external context to match between its strategy and the outside world.

Desirable performance can be achieved through dynamic strategic fit, that is; to respond by strategic change to a given market through control, prediction and adaptation however strategic fit can be difficult and complicated due to the fact that it is not always clear whether a company should adopt changes in a strategy to improve its fit or not. In this instance, contingency theory aims to prepare a firm for an unknown future and provides four possibilities both organizational and environmental changes; that should be employed in order to achieve dynamic strategic fit. In the case of Southwest, necessary changes were implemented resulted in resulting in beneficial strategic change.

Performance landscape framework in terms of internal and external fit concept – in the 1980s, the Japanese system created a new peak with high variety and flexibility whilst, the Ford production system declined with low variety and flexibility due to environmental changes. In terms of Southwest’s policy choices of high flexibility and variety, this resulted in a high peak in the performance landscape. Southwest’s ability to adapt and adopt a strategy, were it made internal changes in order to fit externally has ensured its continued success. In the change framework, a company occupying a peak in a performance landscape should take into account how changes in the environment can affect internal and external fit.

Consequently, there is a need for firms to implement an appropriate strategy among choices to achieve strategic dynamic fit, in rapidly changing global markets, in order to sustain competitive advantage and stay above the competition over long periods.