The relationship between environmental turbulence, risk taking behavior and
innovation types: A Historical Study of two service providers
Dr. Jyoti Navare
University of Middlesex, The Burroughs, London NW4 4BT United
Kingdom.
E-mail: [email protected]
Dr. Zhongqi Jin*
University of Middlesex, The Burroughs, London NW4 4BT United
Kingdom.
E-mail: [email protected]
* Corresponding author
Abstract:
The research considers historical timelines of two large financials services
organizations over a period of around 150 years. A conceptual framework
(REI) is developed consisting of three components: risk taking behavior
environmental conditions, and innovative types. The case studies
demonstrate similar innovative behavior in similar environmental
conditions irrespective of geographical differences. The findings indicate
that it is the strength of the environmental conditions that is critical in how
organizations adapt to managing turbulence. The timelines based nature of
the cases demonstrate subtle shifts in innovative strategy and specific
service solutions such as strengthening current portfolio in new markets,
strengthening core of activities and developing strong partnerships or
following an acquisitions strategy to enable access to market. It is the first
research determining the interplay between risk-taking, environment and
innovative behavior and provides an avenue to explore whether the
concept could apply to firms in other markets and their service solutions.
.
Keywords: innovation, environment, risk management, timelines, solutions.
1
Introduction
In a highly complex, changing and dynamic environment, innovation is seen as
key for survival (Tushman & Anderson, 1986, Wind & Mahajan, 1997; Hamel, 1998;
Pich, Loch & Meyer, 2002, Paladino, 2008). Organizations adapt by developing
innovative strategic options by sourcing and utilizing new ideas to make strategic or
structural changes that enable them to sustain the future of their business (Prabhu, 2010,
Naman & Slevin, 1993). As early as 1977, Hannan & Freeman argued that organizations
adapted as conditions changed. Although in 1984 they observed that this was not easily
achievable because of organizational inertia effects. Organizations tend to change in parts
more so than create a total change, for example, rebuilding and retrenching certain
functional areas. Hodgson (2013) postulated that organizations changed by “evolving”.
He argued that in order to respond to environmental changes organizations adapted by
making strategic, structural and procedural changes even though the outcome may not
result in improved performance (ibid. pg. 980). Earlier studies also identified that
organizations evolved by reacting to environmental turbulence by way of improvisation
strategies (Moorman & Miner, 1995; Eisenhardt & Tabrizi, 1995; Dickson, 1997).
Hodgson (2013) and Quinn (1980, 1986) claimed that incremental adaptation was
undertaken by way of replication and imitation and through information sharing. Cohen
& Levinthal (1989) termed this as “absorptive capacity”.
Research has manifested that in fast moving environments, organizations make different
strategic choices: do little, undertake incremental adaptations or they make radical or
creative changes (Weick, 1995; Mintzberg & McHugh, 1985; Brown & Eisenhardt, 1995;
Eisenhardt & Tabrizi, 1995; Tushman & Anderson, 1986)
2
However, to observe organizations it is not only about understanding external
drivers to change but also internal drivers that can either enable or restrict change
(Hannan & Freeman, 1984). Research has demonstrated that large corporations are by
nature complex and generally they seek to mitigate their innovation risks by following
market or sector level practices in innovation (Moorman & Miner,1988; Spender, 1989;
Weick & Sutcliffe, 2001; Chesbrough & Rosenbloom, 2002; Bond & Houston,
2003).Schumpeter, as early as 1942, had argued that large organizations in particular
could survive the effects of environmental turbulence, where the environment of the
organization was changing fast and was unstable and unpredictable (Emery & Trist,1965),
as they had greater capacity and resources for innovative and imitative change. This
capability was crucial in enabling a competitive advantage. Teece, Piscano & Shuen
(1997) observed that successful companies demonstrated strong management capability
that manifested the ability to respond timely with flexible product innovation by
deploying their internal and external competences- in other words demonstrating strong
dynamic capabilities.
The Resource-based and Dynamic Capability (DC) theories (Barreto, 2010; Teece,
et al., 1997) acknowledge that there are influences such as technological, organizational,
procedural that firms leverage in undertaking their innovation strategies. The dynamic
capabilities theory posits that through interrelated resource management strategies firms
are enabled to develop organizational capabilities which in turn develops the dynamics
for not only survival but for growth (Chandler, 1990).
Eisenhardt & Martin (2000) considered the pattern of dynamic capabilities
depended on the level of market dynamism. They observed that where markets were
3
dynamic, changes tended to be non linear and uncertain. The organization’s dynamic
capabilities in such circumstances tended to be simple and non-complicated.
However, innovation can be costly, complex, risky and uncertain. Over the
decades economists have believed that organizations in general are risk-averse and do not
take high risk innovative strategies unless the expected yield is proportionately
significant (Armour & Teece, 1978; Fisher & Hall, 1969; Shepherd, 1979; Bowman,
1980, 1982). Further studies have demonstrated that organizations establish its risk
tolerances and appetite for innovation based predominantly on its strategic drivers and
environmental triggers (Berry-Stölzle & Altuntas, 2010).
The level of risk appetite and environmental uncertainty enabling certain types of
innovativeness has been considered (March & Shapira, 1987; Berglund & Hellström,
2002; Forlani, 2002; Berglund, 2007). However, the relationship between these three
factors (organizational risk, environmental turbulence and innovativeness has not been
developed (Floricel & Ibanescu, 2008; Jenkins, 2010).
The changing environment over the years has brought about dynamic uncertainties
(external) impacting the organization’s dynamic capability (internal) and determining
innovation strategies and typologies. By applying a timeline approach, it will enable us to
unveil complex patterns as well as pace and rhymes of organizational change (Ancona,
Goodman, Lawrence, & Tushman, 2001; Jenkins, 2010). We are particularly interested in
how the relationship between external and internal dynamics impacts strategic choice and
affects organizational solutions and sustainability (Geiger, 2005).
Our paper considers three research questions:
4
Q1.
How can firms have different innovation historical trajectory (timelines) and
strategies when their environment and the risk that they confront are similar?
Q2. What are the behavioral differences of these innovators in terms of risk management
attitudes in different environmental conditions?
Q3.
How does the interrelationship between the organization’s innovative type and
conditions of innovativeness affect its service solutions?
In answering these questions, we use case studies to build a framework by analyzing two
like-sized financial services companies over a period of 150 years. We draw on existing
literature on innovation, dynamic capabilities and organizational risk taking to secure our
conclusions. The paper is organized as follows. We first review the literature that informs
our study. The following section develops our conceptual framework. We next describe
our research design and methodology and present our results. The final section provides a
discussion of the results.
Literature Review and Conceptual Framework
Notion of innovativeness
Research into innovation has become a multidisciplinary and multiple approach
effort (Tao, Probert & Phaal 2010). There are many perspectives of innovations such as,
through customer and/or provider perspectives (Drucker 1999, Goldsmith & Newell
1997), levels of innovation in terms of individuals, teams/projects, organizations,
industries and countries (Subramanian, 1996, Pich et al., 2002). A significant proportion
of research in the last fifty years into innovation has been focused on establishing critical
factors linked to the success and failure of new products or new services (Craig & Heart,
1992, Jin & Li, 2007, Unger & Eppinger, 2009). Hollenstein (1996) and Miller & Blais
5
(1993) observed different innovation modes from within different sectors, highlighting
different influences on the content/variance of innovation.
Risk and uncertainty has long been recognized as having an inevitable association
with innovation (Freeman, 1982). However, different types of innovation carry different
risks and uncertainties. Incremental or continuous innovations are innovations that
provide new solutions at a rate consistent with the existing technical trajectory (Gatignon
et al, 2002). Incremental innovations are considered exploitative in nature and less risky
than radical or discontinuous innovations which involve more exploratory learning
(March, 1991). Radical innovations are generally identified as more risky. For example,
architectural innovations are considered disruptive or competence
destroying
(Christensen, 1997; Tushman & Anderson, 1986). The level of risks and uncertainties
requires significant shifts in the thinking about strategies for sound risk-taking (Hsu
2009, Prabhu 2010). Traditionally, innovation research has focused largely on
technological or technical innovations (Burgelman, Maidique & Wheelwright, 2008)
which carry different risks and uncertainties than non-technological innovations
(Birkinshaw, Hamel & Mol, 2008). In respect of non-technological innovations, Teece
(2010) argued that the creation of new organizational forms and in particular new
business models are of equal if not greater importance as innovations. Given that our unit
of analysis is at the organization level, considering organizational strategies for growth,
change and renewal over time (Tushman & O’Reilly, 2002, Damanpour, Walker &
Avellaneda, 2009; Birkinshaw & Mol, 2006, Hamel, 2006), we clarify the type of
innovation we intend to study below.
6
Jin, Hewitt-Dundas & Thompson (2004) addressed two types of organizational
innovations: ‘Creative’ and ‘Adoptive’. Creative innovation refers to the capability of an
organization to develop ‘hard’ output innovations as implemented and realized through
the operating and technical systems of an organization, usually in the form of new
products or production methods (Antoniou & Ansoff, 2004). Adoptive innovation refers
to the capability of an organization to source and utilize new ideas from outside that
organization or even the industry (Thompson et al., 1998), adapting these ideas to
implement changes in the organization’s management system or the relationships
between components of that system (Subramanian, 1996).
Garcia & Calantone (2008: 112) considered ‘high innovativeness having a high
degree of newness and low innovativeness have a low degree of newness’. By dividing
each of the two dimensions into very limited innovative activities (low level newness)
and innovative activities, (high level newness) we use the four category typology earlier
developed by Jin et al. (2004): the creator (hard options oriented innovator), the adopter
(soft options oriented innovator), the non-innovator ( neither hard or soft options oriented
innovation), and the all-round innovator (both hard and soft options oriented innovation).
The typology is shown in
_________________________________
Insert Figure 1 about here
____________________________________
Dynamic capabilities and Adaptation
7
There has been increasing research which has considered dynamic capabilities key to
firm’s strategy choice making and risk appetite (Teece et al., 1997; Eisenhardt and
Martin, 2000; Winter, 2003, Teece, 2007, Helfat et al., 2007). Earlier, Selznick’s (1957)
view was that organizations accumulate their resources that provide them with a
competitive advantage, although this may be limiting as internal behaviors may prevent
the adequate use of these resources to achieve effective change to meet the challenges of
environmental turbulence(ibid.:18). Ghemawat (1991: 14) introduced the concept of
persistency of strategic decisions over time. His key thinking was that commitment or
persistency was the only factor that could manifest sustained performance differences
over a period of time and that organizations overall tended to make early strategic choices
that were good over a period of time. Selznick, too, had observed that organizations
which demonstrated historical success tended to be on a sustainable path to success
irrespective of environmental turbulence. Cyert & March (1963) also argued that the
historically successful organizations tended to adapt and thrive irrespective of
environmental turbulence. However, in the last decade there have been contradictions to
this thinking with many organizations with large resource capacities and a competitive
advantage losing all of this in a highly turbulent environment as seen during and in the
aftermath of the financial crisis of 2008 (Bernanke, 2009). As Tushman & Anderson
(1986) predicted, fast moving environments can destroy existing organizational
competencies requiring the organizations to “compose new behavior” (Moorman &
Miner, 1998).
The need to adopt and adapt a firm’s competencies is what makes the
understanding of dynamic capabilities different from other strategic frameworks. Internal
8
competences reflect the ability to accurately sense changes and risks in a firm’s
competitive environment, such as the ability to forecast economic political, competitive,
shifts that could result in opportunities and threats.
Teece et al (1997:515) claimed that what was critical was the ability to adapt and
adopt to conditions. We note that there are different understandings of what constitutes
“adaptability”. Hodgson (2013) defines organizational adaptability “as the capacity of an
organization to change its strategies, structures, procedures or other core attributes, in
anticipation or response to a change in its environment, including changes in relations
with other organizations”. Hodgson (ibid: 978) explains the definition of adaptability
further “By definition they [individuals and organizations] face immediate scarce
resources and struggle to survive, whether through conflict or cooperation [sic]. They
adapt and may pass on information to others, through replication or imitation.”
These explanations inform us that adaptability is in fact a strategy that is driven by a mix
of internal/personal and external factors. We are also made aware that adaptability can be
incremental, radical and non-innovative. We use these explanations of adaptability by
considering strategic change that adapts by way of soft and/or hard options. This provides
an additional insight to not only that change has occurred but to the types of change and
how these types relate to the drivers of change. It may well be that different types of
organizations behave differently as they are susceptible to variant innovation timelines.
Environmental turbulence, risk taking behavior and innovation types
Environmental unpredictability has meant that it is not sufficient simply to be
innovating but also to be engaging in innovation strategies that reflect both the
environment in which the organization operates and the emerging risks (Paladino, 2009).
9
Ansoff’s (1991) five-stage model indicates a continuum that ranges from low level
market turbulence or a stable environment and low need to respond quickly to new
product development, to fast incremental or discontinuous turbulence where survival
becomes a critical consideration and the need to respond quickly and frequently with new
product developments is crucial. Although, Ansoff’s model provides a guide to
turbulence factors, it does not reflect the level of organization’s dynamic capability in
dealing with environmental turbulence.
As discussed, innovative behavior has much to do with the level of risk appetite of the
organization (Dutton & Jackson 1987; March & Shapira, 1987; Busenitz & Barney, 1997;
Sarasvathy, Simon & Lave, 1998; Berglund & Hellström, 2002; Forlani, 2002; Berglund,
2007). The risk appetite to innovate and take risks is influenced by a number of internal
and external organizational factors or capabilities which have complex interrelated
relationships. The degree of risk-taking is dependent on both internal and external
environmental factors (Keizer & Halman, 2007; Tushman & Anderson, 1997)
The orientation of an organization to survive the environment becomes a driver
for higher levels of risk taking in managing new innovation. From this thinking, we have
developed the risk, environment and innovation (REI) framework (see Table 1).
==========================
Insert Table 1 about here
The manifest triggers that enable the relationship between environment and
innovation typology include strategies determining length of the product cycle, resource
availability and capacity, the level of risk appetite and risk taking enabled by the firm’s
risk perception of the environment. The external triggers manifest the relationship
between environment and innovation typology, for example, the complexities of the
10
environment: level of competition and new players, the degree of consumer demand
shifts and the subsequent time for response and the threat to firm survival.
The framework operates linearly with the environmental five point scale as the
benchmark. Each scale point represents the environment and the supportive innovation
typology and associated risk factors for that environmental turbulence level.
Research methods
In this study, we used a case study approach (Yin, 1994) by looking at two
organizations in historical lenses (Chandler, 2001). The rationale for such an approach
rather than a structured survey is base on three premises:
First, the relationship between environmental forces, risk factors, and innovator
types are complex and had not been fully explored. By using a case study approach, we
were able to collect rich data and insight to untangle the complex phenomenon.
Second, each of the three components of REI framework: environmental forces,
risk factors, and innovator types, takes time to evolve and to observe. Given that the
change of environment takes time to observe and therefore the nature of this research
requires longer term analysis, we did not think that a snap-shot cross sectional study
approach was an option (Callinicos, 1995).
Third, given the longitudinal nature of organizational change, we felt that it was
appropriate to adopt a historical view of companies (Jenkins, 2010). As suggested by
Ancona et al (2001), using the temporal lens not only we are able to think about
“processes but also how fast they are moving, their trajectory over time, the cycles they
align with, and the historical positions they take on the continuum of time (p.645)”.
11
For some well-known companies, such historical data is well documented and
available from public resources. However, it is also well-known that such information is
likely to bring publication bias inevitably. In the search for information for our case
study, we followed guidelines in evaluating and accepting information as suggested by
Goder & Tellis (1993): competence of the informant, objectivity of the source, reliability
of the source, and corroboration from at least a different source. Both trade magazines
and academic research papers into business history were being consulted.
We chose two similar types of organizations operating in similar environmental
conditions manage their dynamic capabilities, risks and shift their innovator typologies to
gain more sustainable solutions. Our innovation timelines illustrate a progression of
innovative behavior of these two firms over a period of around 150 years. The progress
can be viewed as a series of phases driven by environmental conditions and by the
individual organizational dynamic capability.
In enabling the development of this study we, firstly, identified the timeline
changes; secondly, we extracted main environmental factors and risk factors of the two
companies using the REI framework; thirdly, we derived the association of the three
components: type of innovators, environmental change, and risk taking behavior and
finally, we identified the innovative positioning of the organization over the 150 years.
Innovative positioning of the choice organization
For the convenience of description, we divided the period from 1855 to 2009 into
six periods: 1855-1900; 1901-1955; 1956-1980; 1981-2000; 2001-2005; 2005 to date.
The rationale for these timeline categories are based on the acceleration of environmental
conditions. Between 1901 and 1955, world wars took place with potential impact on
12
expanding businesses. The period 1956-1980 was one of consolidation and firming up of
the markets. 1980s onward saw the impact of new technology. The new millennium saw
the development of postmodern financial services era with new structures and services
using web based solutions. From 2005, the drag effect with shocks and the credit crunch
has special implications for the financial services market.
The phases can vary by activity and dynamism of the organization which affect
their innovation position. For example, Case Study I started as a creator innovator,
changed quickly into an all round innovator, whereas in Case Study 2 is a long term
creator innovator, only became an all round innovator since late 1990s. Their shifts of
positioning of innovative behavior can be summarized as in Table 4.
The TWO case studies are discussed below and findings tabulated in Tables 2 and 3.
Research findings
Case study 1 – Swedish financial services organization
The company was founded in Scandinavia in mid-nineteenth century and in less
than ten years became a listed company. At the turn of the 20th century, the company
established operations in the United States (US) and became the first non-British foreign
insurance company to set up business there. In early twenties, the company introduced
lines of business and in 1953, set up operations in Latin America and India. At this stage
the company restructured and became computerized. It used a computer for the first time:
the IBM650 Magnetic Drum Calculator. In 1964 it reorganized by merging with five
additional companies and unveiled its new umbrella logo. In the early nineties, the
company became known for initiating the concept of emotional intelligence and valuation
of human capital. These traditional measures of success were not the only ones by which
13
the organization measured itself: since 1994 the company supplemented its annual reports
with accountings of its "intellectual capital" employee knowledge and expertise and other
intangible assets, and was deemed a pioneer in the movement to quantify such assets. By
2000 the company had restructured into an asset management company and today, most
of its business is international and its focus is financial services and risk management.
In 2004 the company revisited its strategy, opening up the potential for bidders.
On its 150th anniversary, there was a hostile bid made by a South African financial
services giant who succeeded in their bid to acquire all the organization’s shares. The
organization thrives today as a full scale subsidiary of a foreign parent.
==========================
Insert Table 2 about here
==========================
Case study 2: A Swiss Financial Services company
The company was founded in Switzerland in 1872 and by the turn of the century
became Switzerland’s key financial organization. In the early 20th century, the company
established operations in the US at the close of the first year of business, the US business
constituted about 9% of total business. In the early twenties, the company established
further in Europe, including in the UK market. In the years between WW1 and WW2, it
undertook a series of acquisitions in the UK and Europe and opened up new operations in
the US. It further acquired the Ford scheme in the UK, resulting in the UK business
constituting 50% of the total premium income. It also set up a new life insurance
company. In 1930, it entered the electronic data era for incorporating accounting
technology. The growth rate for the company was phenomenal, averaging over 13% per
annum. In the mid-fifties it changed its name and also made further acquisition in Latin
14
America, Australia and in Europe. In the seventies it became the first European insurers
to offer umbrella programs to its corporate customers worldwide. In 1978 it founded the
Risk Engineering division. It continued to grow in strength and continued its expansion
into the late eighties in acquiring companies in the US, Brazil, and Europe. It also
acquired a minority stake in the largest Philippine company. In 1989, it acquired its
largest takeover of an insurance company in the US. It continued its acquisition strategy
in the nineties by acquiring companies in Switzerland, Mexico and the UK. In 1993, it
opened an office in China. In 1998, it linked in with British American Tobacco to
become one of the largest financial services companies worldwide. In 2005, it set up a
global strategy and until today it has continued to demonstrate strong results.
The Group became acquisitive once again in 2007, mainly in emerging markets.
In March 2007 the company acquired a Spanish credit and surety insurer. A month later
the Group became the first foreign insurance company to gain control of a leading
Russian property and casualty insurance firm. The Group also purchased a minority stake
and gained management control of a Chinese insurance-brokerage firm. In December
2007 the Group announced plans to create a new Hong Kong-based unit to expand its
offerings to corporate customers in Japan, Greater China, Southeast Asia, and Australasia.
That same month, the Group sought to capture a larger share of the growing life
insurance market in southern Europe by reaching a deal to purchase an Italian life insurer.
Through such initiatives, the Group sought to spark a new period of growth.
==========================
Insert Table 3 about here
==========================
15
The risk and environmental implications of the shifts are summarized for the two case
studies in Figures 2 and 3.
==========================
Insert Figure 2 about here
==========================
We conclude that all round innovators are more immune to the turbulence, have a
higher level of risk acceptance, and are more sustainable than other types of innovators,
whereas creator innovators are more vulnerable to uncertainties where competition is
diverse, and therefore the creator will not sustain its growth without strategic change in
its innovative behavior. This can be seen in our case studies. It must be noted that it is
unlikely that as organizations grow in a highly competitive market, it is unlikely that they
will be purely creative and therefore the profiles indicate most organizations become all
round innovators. Non-innovators have a low tolerance to uncertainty and perceived risks
and are more vulnerable to high speed and more turbulent environmental change, which
lead to unsustainable behavior. Adopters have a high tolerance for managing uncertainty
and appetite for risk taking in line with competitors.
==========================
Insert Figure 3 about here
==========================
Analysis and Discussion
The history of the two cases studies indicate that they relate closely to changes in
market, the socio-political landscape and economic growth of nations and free
competitive system. The growth in industrialization and urbanization opened up the doors
for insurance and for new innovation (Adams et al, 2009). The pattern is similar across
countries where growth was accelerated and risks were increased enabling the emergence
16
of new risk organizations providing new products to cover these risk. Much of this
research identifies the growth of modern insurance where the environment was generally
stable and controllable. However, in recent times where shocks and consequent punitive
liabilities have led to ineffective leveraging of resources and from this failure, increased
regulation. The two cases studies are therefore similar in many ways but differentiated by
their timelines. The markets are similar but their individual ability to manage their
internal resources and dynamic capability varies.
Regarding research question one (p.4) on how innovators with different
innovation timelines and strategies vary, by risk and innovator typology in similar
environments, the timeline framework provides a new perspective in support of
considering environmental forces and risks in innovative process. As Stock, Noel &
Fischer (2002) puts it, the interactions among the determining factors in either the
internal or external environment of a company are not easily predictable as they may
change over time. However in our two case studies, although operations in different
countries were affected by similar environmental conditions, what became obvious in the
two case studies that the environmental conditions were more dominant in how strategies
were set out than the organizational strategies for innovation. The dynamic capabilities
varies in that, in Case study 2, the organization was more leveraged in a managing shocks
than the organization in Case Study 1. Irrespective of this, the timelines indicate that
whether the organizations sought to be innovative with new lines of business and
exploring new markets, they were strongly affected by environmental conditions which
made it necessary to undertake both hard and soft innovative solutions. They not only
created new products and service solutions (hard innovations) but mostly they had to
17
restructure and develop core strategy to ensure their sustainability (soft innovation). Both
organizations display similar innovative behavior irrespective of their own risk appetite
and internal capability.
Question two demanded the exploration of the behavioral differences of these
organizations as innovators. The REI framework elaborates a critical understanding of
two interrelated dynamics: innovation and risk taking, and innovations and environmental
turbulence. The review of the case studies identify critically that the external
environmental analysis of the organization provides the meta-explanation about when
organizations seek to innovate and what solutions they seek in reducing uncertainty.
Zahra et al (2000) and O'Regan, Ghobadian, & Gallear (2006)’s studies highlight that
empirical studies in this area evidence that high levels of environmental turbulence
(Naman & Slevin, 1993) and environmental complexity (Zahra, 1991) are both positively
correlated to innovative and risk-taking behavior of firms.
However, the meta-explanation demonstrates that there is no real difference
between the innovative solutions undertaken by organizations ,operating within the same
sector, as they seemingly take on similar positions (all round innovator or adopter etc.) to
manage the risks arising from environmental conditions. The difference is in their
dynamic capability which affected their decision for hard and soft innovative solutions.
The case studies also demonstrate that irrespective of shocks, organizations are
able to risk manage or alternatively may be susceptible to a takeover as in Case Study 1.
For example, taking environmental condition 3 (or timelines 1900-1980) where there is
complexity in the market creeping in, with a number of players entering the market and
demand cycles shortening the need to increase the risk appetite becomes prevalent. As
18
there is more external risk, we note that fast growing financial services organizations tend
to increase their risk taking attitude as well as increase the organizational risk appetite
(strong innovative profile). However, those that do undertake structural changes (soft
innovation) become more risk taking and continue to innovate.
Penrose (1959) and Kor & Mahoney (2000) consider that the firm’s competitive
capability is based on it internal competencies and resource management.
Amit &
Schoemaker (1993, p35) consider resources are both physical resources and capabilities.
The organization shift to leveraging its resources and its dynamic capability through
recognizing intellectual capital demonstrates the dynamic fit between resources and
environment and particularly an uncertain environment.
In considering question three and the impact of the interrelationship between the
organization’s innovative type, environment and risk on service solutions, we argue that
it is the external triggers that impact on innovation strategies. The REI framework and the
timelines phases demonstrate the implications of the environmental factors (based on
Ansoff’s environmental conditions) on innovation conditions. This framework also
enables the manifestation of inadequate typologies for particular environmental
conditions. For example, where organizations are operating in Ansoff’s environmental
condition 4 which is complex involving rapid change with high level of competitor threat
and with increasing new soft and hard innovations taking place, none of the organizations
can afford to have a pure creator profile with fast developments in innovations and
requiring high levels of risk capital will not survive if internal efficiencies are not
considered at the same time (soft innovations). The REI reinforces the framework
conditions that, for organizations to survive, a strategic shift will happen purely based on
19
the impact of their environmental drivers (See Table 4). The challenge for such
organizations is implementing innovative solutions that can provide sustainability against
strong environmental drivers (Tushman & Anderson, 1986). Three types of solution
emerge from the timeline changes in strategy: strengthening current portfolio in new
markets (as seen in the expansion and growth drives but both organizations); solution
advantages through partnerships and mergers, particularly in new geographical areas; and
strengthening the core of services provided in fast moving environments (4 or 5 on the
Ansoff’s scale).
==========================
Insert Table 4 about here
==========================
Conclusions
This paper has used historical timelines on two large financial services
organizations to consider the interplay between environmental conditions and
competitive performance over a 150 year period. The findings indicate that the strength
of the environmental pull on organizations operating in similar markets, in our case the
financial services market, and further suggest that such firms are often able to adapt to the
impact of shocks. The timeline based nature of our cases allowed us to observe subtle but
insignificant shifts in innovative strategy, and specific service solutions that can provide
sustainability against strong environmental drivers (Ancona et al., 2001). These include
strengthening the current portfolio in new markets, strengthening core activities and
developing strong partnerships or following an acquisitions strategy to enable access to
markets.
However, the findings must be explained with caution. First, although we adopted
a historical approach, we did not examine the two organizations from a multiple level
20
perspective which may provide further insights into organizational changes (Ancona et al,
2001). Secondly, given that the time period covered is relatively long (about 150 years) it
is likely that some of the anecdotal evidence and details were not included. Therefore
some potentially important factors may not be discovered.
Nonetheless, the REI concept provides an avenue for further research and to
explore whether the concept could apply to other firms in other markets and the impact of
this framework for their service solutions. Researchers may benefit from considering the
interplay between these different interlinking concepts of environment, risk and
innovation and their implications for different industries.
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30
Soft Innovativeness
Innovative
Very
limited
Adopter (Soft activity oriented
innovator)
organization, which is characterized
as high in the ‘soft’ innovativeness
dimension and low in the ‘hard’
innovativeness dimension. The
innovations can be administrative or
relational. These companies break
the rules of the game by strategically
redefining their business and
focusing on areas often overlooked
by the big competitors (Markides,
1997).
Non-innovator
organizations which hardly
produce anything new or fail to
change the way things are done in
the business. Non-innovators may
not necessarily resist change, but
rather lack the expertise or
motivation to exploit opportunities
as they arise
All round innovator
organization, characterised as high in
both the ‘Hard’ and ‘Soft’
innovativeness dimensions, in other
words, ambidextrous (O’Reilly &
Tushman, 2004). for instance, they
beat competition by introducing “Hard”
innovations through superior products
Not only do they change the rules of
the game, often they change the entire
game via different means”.
Creator (Hard activity
oriented innovator)
organizations capable of engaging
activities that are high in the hard
innovativeness dimension and low in
the soft innovativeness dimension. E.g
capable of producing new products or
processes, successfully replacing the
old without introducing changes in the
way a business is run (Damanpour,
Szabat, & Evan, 1989).
Very Limited
Innovative
Hard
Innovativeness
Figure 1 The organizational innovativeness (Source: Jin et al., 2004)
31
1901-1955
1981-2000




Fast incremental environment : market
becoming more competitive
More second than first movers
Some new product or incrementally new
products developed
More marketing and innovation aggressiveness



ADOPTER


Innovation and
Market
Environment
185
5 to
190
0



CREATOR
Fast incremental turbulence
more first mover products
product cycles revisited – more shorter cycles
Non existent
NON INNOVATOR
2001-2005
2005<
Non-existent
Highly Turbulent environments
High frequency of new products
Tendency towards “first mover” or low cost
efficient “me too” products
Market and innovative aggressiveness

Stable with incremental turbulence
Limited range of high quality /service
products
Long product cycles and innovation
response cycles

1956
1980
ALL ROUND INNOVATOR
Figure 2 Case Study 1
1901-1955
1956
1980
ALL ROUND INNOVATOR




Fast incremental environment : market
becoming more competitive
More second than first movers
Some new product or incrementally new
products developed
More marketing and innovation
ADOPTER



Highly Turbulent environments
High frequency of new products
Tendency towards “first mover” or low cost
efficient “me too” products
Market and innovative aggressiveness

Innovation and
Market
Environment
18
55
to
Stable with incremental turbulence
Limited range of high quality /service
products
Long product cycles and innovation
response cycles
2001- todate
198
1
to



2000
190
0



NON INNOVATOR
Figure 3 Case Study Two
32
Non-existent
CREATOR
Fast incremental turbulence
more first mover products
product cycles revisited – more shorter
cycles
Non-existent
Table 1: Risk, Environment and Innovation framework
Organizational
Risk appetite
Ability to
forecast
environmental
shifts
Organizational
Risk taking
behavior.
Low
Demand for
utilization of
risky business
Medium
Fairly High
High
Acceptance of risks for
a higher reward
Very High
Tolerance thresholds
Low /
Cautious risk
averse
Rejecting
Change –
working to a
safe formula
Medium
Incremental
ly adapting
to change
Medium/High
Risk Taking
Moving towards
risk assessment
in all operations
Although
seeking familiar
change
Low Stable
and non
ambitious
Medium
Reactive
and
working
from past
experiences
Fairly High
Anticipatory
High Increased Risk
Taking
Moving towards risk
assessment in all
operations- greater level
of embeddedness –
change that is sought is
related to current risk
capability
High Entrepreneurial
and open to new ideas
High Forced to be
risk taking –
although prudent
Strong values
sharing- embedding
risk management in
all operations as
novel change is
sought
Very High
Creative
1
2
3
4
5
Repetitive
Slow and
little or no
change
Hard
Few players
in the market
Some
incremental
change
Some
complexity
creeping in
Complex
Rapid change
V. Complex
V. Rapid and novel
change
Hard with
few
competitors
Soft with market
opening up to
new players
Soft
Significant
competition
Turbulence
Level of Threat
Repetitive
Low
Expanding
Low
Discontinuous
High
Innovative
Organization
type
NonInnovator
Innovation
Type
Non innovat
/Soft
Product cycle
Time to
respond to new
innovation.
Degree of
innov.
Long
Long
NonInnovator
with some
adopter
culture
Soft/ some
hard
innovation
Long
Long
Changing
Medium
With creeping
uncertainties
Creator
Soft with
significance
competitors and
threats of substitutes
Surpriseful
Significant
With crippling
outcomes
All-round
innovator
Small/increm
ental
Medium/
incremental
Organizational
Risk State
internal risk
profile
and dynamic
capability
Environ
Turbulence
Level
Complexity of
Environ and
level of change
Market
Adopter
hard innovation
Soft innovation
Medium
Medium/Short
Short
Short
V. Short
V. Short
High
High
High
33
Hard and soft
innovation
Table 2: Case Study 1 Model of REI*
Timelines
Changes in strategic
management
1855-1900
INCEPTION
 Started as fire and life
insurance office
 Open office in other
Scandinavian and
European countries for
life and fire insurance
 Listed company
 Introduces accident and
disability insurance
 Operations in the US
established
1901-1955
EXPANSION
AND GROWTH
1956-1980
GROWTH AND
DIVERSIFICATI
ON AWAY
FROM HOME
MARKET
1981-2000
GROWTH AND
CONTINUED
DIVERSIFICATI
ON AWAY
FROM HOME
MARKET
Hard
/soft
change
Hard
Soft
Soft
Hard
Soft
 1906 first company to
start own newsletter
 1920 Motor insurance
established
 1936 – took on married
women workers
 1938 Home insurance –
comprehensive liability
introduced
 1953 –operations in
Columbia established
 1955 – India operations
Soft
 1957 Company
computerizes
 1963 – acquires five
other companies and
changes logo
 1970 International
Reinsurance Business
opened in Australia
 1974- child insurance
introduced
Soft
 1987 US life operations
opened
 1987 Ideas for life
project to support
positive forces in society
on behalf of children
and youth
 Pioneered the multimanagement approach
to fund management
 1990 –listed on the
London Stock Exchange
Soft
Hard
Soft
Hard
Soft
Soft
Soft
Soft
Hard
Hard
Hard
Soft
Environmental influences
Risk
 Low competition and
high demand (Lindmark,
Andersson & Adams,
2006)
 Increasing middle class
and strong demand for
life insurance
 Risk control-induced
diversification strategy
(Pearson, & Lönnborg,
2008)
 The cycles in the 19th
century were disruptive
following price wars and
big city fires. reflecting
large shifts of insuring
capacity into and out of
the insurance business
Public concern led to a
system of centralized
price setting with
controls over costs and
underwriting.
 Reputation build and
competition
(Kimball ,1965; Skogh,
1982, Adams et al ,
2009)
 Demographic change
 Insurance regulator in
1903 demanded tighter
accounting information
form composites
 WW1 enabled export led
financial and risk
management services
(Hansson and Jonung ,
1997)
 The growth in new
technology
 Reconstruction of a new
global economy
 Advent of floating
exchange rates resulting
in a huge opening of
financial markets in the
1970s.
 The growth of
multinationals
 Demographic trends
favored Scandinavia
 Asian markets joined
the expansion
movement in 1996
when “Big Bang”
financial reforms
brought about
deregulation.
 Since 1998, the
financial services
industry in the mature
economies experienced
rapid geographic
expansion; customers
Low
= low level
competition
= Plenty of time
to develop new
products
= easy entry
into new areas
= strong access
to capital
34
Low as
competition
mainly by
oligopolies
= less
competition in
products and
hence able to be
first movers
= easy access of
entry
Low- Medium
= more
companies
entering the
market
= leveraging
dynamic
capability
High
= more
competition
as global
markets open
up
= product
cycles
shortening and
time for
launching new
products
decreasing
Innovation
typology
Creator
to
Adopter
Adopter
To
All round
innovator
All round
innovator
2000-2005
SHOCKS AND
SURVIAL
CONSIDERATIO
NS
2005- to date
ACQUISITION
AND
REBRANDING
 1990 introduced unitlinked insurance in
Sweden
 1993 values company by
way of intellectual
capital
 1994 on-line services
opened
 1995 – on-line extended
to Europe – First in the
field
 2000 company
restructured into a
savings and asset
management company
 The on-line banking
expanded to Norway
 1990- 2000 establishes
operations in more than
20 locations around the
globe including Chile,
the United Arab
Emirates, China and
Poland.
 2003 the US operations
sold to Prudential
Financial
 2003 – internal fraud
resulting in board level
resignations
 2004 – reorganizations
to make the company
more market oriented –
created an integrated
business model
 2005 Large South
African Company made
a hostile bid
 2006 Bid successful
bought out Swedish
company and delisted
shares from the LSE and
Stockholm Stock
exchange
 2007/8 rebranded logo
 2008 decided to move
away from localized
sponsorships
previously served by
local financial
institutions were now
targeted at a global
level..
US , European and
Japanese management
gurus focused on human
capital
Corporate governance
came on the scene
Hard
Soft

Hard
Hard

Soft
Soft
Soft
Hard

Corporate governance
becoming predominant
US financial markets in
disarray with a
technological shares
bust in 2002

Soft
V. High
= corporate
fraud and
squeeze
= capital
markets
tightening
Adopter
To Noninnovator
Soft.
Soft
Soft
Soft
Hard
 Economic change – not
dependant on state
pensions
 Demographic change –
longevity increasing
 Culture: less reliant on
company based
information
 Technological :
advances significant
 High rate of M&As
 Credit crunch
High
=credit crunch
implications
-M&A makes
the organization
more secure
and able to
withstand
turbulence
Non-innovator
to
Adopter
* Adapted from Bukowitz and Petrash (1997); Edvinsson and Malone (1997), Galagan, 1997, Economist ,18/1/1992, 18/4/1992,
Moberg, G (1996),Roos et al(1998), Stewart and Losee (1994), Bests Review ,2/1997, Zimmerman,(2001) International Directory of
CompanyHhistories, (2003), Sydedain (2001), Melymuka (2000), Hobday, 2002); BBC1/12/03;6/2/04;02/09/05;14/1/05
(ews.bbc.co.uk/2/hi/business/4652406; Adams et al (2009).
35
Table 3: Case Study 2 Model of REI*
Milestones
Changes in strategic
management
1855-1900
 1872 Commenced as
marine insurer and
reinsurer
 1875 Expanded line of
business to accident
insurer and involved a
name change to include
Accident insurance.
 1875-1885 New offices in
Germany, Austria,
Scandinavia, Belgium,
France, Spain and Italy
 1880 High level liabilities
in the marine business led
to getting out of marine
insurance
 1880 Gross premium rose
to above 1 million Swiss
francs.
 1886-1890 An expansion
of accident and liability
lines – to include
homeowner, real estate,
professional indemnity
and other professional
liability insurance
 1894 Name change again
to delete Marine and to
was now a “General
Accident and Liability”
insurer
 1898 Expanded into
automobile insurance
 1900 New CEO
 1900 Initiated the
development of strong
reserves and robust
financial management
 1901 New building
 1912 US business
established
 1915 continued expansion
in the Spanish market by
way of acquisition –
creating significant reserve
base and strong financials.
 1922 establishes in the UK
market, buys into Life
business in the home
market of Switzerland and
expands life business in
Belgium, Netherlands,
Spain, Germany and
France
 1923 –establishes branch
in Canada
 1924-1939 – initiates
acquisitions in
Czechoslovakia Germany;
Austria, UK, France and
UK (New York)
 1925 – provided free
medical check-ups
 1926 introduction of the
INCEPTION
AND GROWTH
1901-1955
GROWTH
AND
DIVERSIFICAT
ION AWAY
FROM HOME
MARKET
Hard
/soft
change
Hard
Hard
Soft
Hard
Hard
Environmental influences
Risk
 Low competition and
high demand (Lindmark,
Andersson & Adams,
2006)
 Increasing
industrialization
 Risk control-induced
diversification strategy
was common (Pearson, &
Lönnborg, 2008)
 Highly cyclical business
demanding prudent
financial management
 Growth in professions
and hence insurance
cover
 High level of
internationalization and
associated risk
Low
= low level
competition
= Plenty of time
to develop new
products
= easy entry
into new areas
= strong access
to capital
 Reputation build
becomes part of the
international competitive
advantage(Kimball ,1965;
Skogh, 1982)
 Demonstrating
understanding of
demographic change and
the growth in the life
insurance markets
 Insurance regulator in
1903 demanded tighter
accounting information
from composites
 WW1 enabled export led
financial and risk
management services
(Hansson and Jonung ,
1997)
 The growth in the
automobile industry
opened doors for new
business
 Life insurance was
catching on
 The beginning of
Low as
competition
mainly by
oligopolies
= less
competition in
products and
hence able to be
first movers
= easy access of
entry
Innovation
typology
Creator
to
Adopter
Soft
Hard
Soft
Soft
Soft
Soft
Soft
Hard
Soft
Soft
Hard
Hard
Soft
Soft
36
Adopter
To
All Round
innovator
1956-1980
CONTINUED
GROWTH
AND
DIVERSIFICAT
ION AWAY
FROM HOME
MARKET
Ford scheme in the UK
 1930 computerization
 1933 – won the tender to
provide insurance for the
world fair in Chicago
 1950 – establishes in
Portugal
 1955 Simplifies name to
substitute “General and
liability” to “insurance
company”
 1960-70 initiates more
acquisitions in Australia,
Switzerland, Argentina
and Germany
 1976 – now offers
comprehensive (umbrella)
cover to businesses.
 1978 Founded Risk
Engineering Division
 1979-88- more
acquisitions in the US,
Switzerland, Brazil and
Italy
 1980 Foot in the
Philippine door
Soft
technology usage in
business
Soft
Soft



Hard
Hard
Soft



1981-2000
CONTINUED
EXPANSION
 1984 Service package for
risk engineering includes
training for corporate
customers.
 1989 largest takeover in
the US of Casualty Group
 1991-1998 Expansion
strategy continues in to
Chile, Mexico and also
UK, US and China
Hard


Soft
Soft


2000-2005
SHOCKS AND
SURVIVAL
ISSUES
 2001 Restructuring
 2001 sold off bulk of its
Global Asset unit to a
German Bank
 Net loss around $400m
after Sept 11th attacks –
CEO resigned
 2002 New CEO
 2002 – the focus is now on
being a financial services
provider
 2002 – 4500 redundancies
 2002 rid off its non-core
Soft
Soft


Soft
Soft
Hard
Soft
37
Continued growth in new
technology
Beginning of
Reconstruction of a new
global economy
Collapse of Bretton
Woods and the advent of
floating exchange rates
resulting in a huge
opening of financial
markets in the 1970s.
The growth of
multinationals began
Demographic trends
favored Scandinavia as
more youthful states of
Europe
Asian markets becoming
attractive for new
business
Asian markets joined the
expansion movement in
1996 when “Big Bang”
financial reforms brought
about deregulation.
Since 1998, the financial
services industry in the
mature economies
experienced rapid
geographic expansion;
customers previously
served by local financial
institutions were now
targeted at a global level..
Management gurus such
as Drucker (2007), Peters
& Waterman (1982),
Kanter (1977), Ohmae
(1990) focused on human
capital
Corporate governance
came on the scene and
risk management is
becoming critical
Corporate governance
becoming predominant
US financial markets in
disarray with a
technological shares bust
in 2002
Low- Medium
= more
companies
entering the
market
= leveraging
dynamic
capability
= economic
uncertainties
- high level
liabilities
High
= more
competition as
global markets
open up
= product cycles
shortening and
time for
launching new
products
decreasing
V. High
= corporate
fraud and
squeeze
= capital
markets
tightening
All round
innovator
All round
Innovator
To Adopter
Adopter
To
Noninnovator
business
 2005 – launches global
brand campaign
2005- to date
SHOCKS AND
SURVIVAL
ISSUES
FOLLOWED
BY
CONTINUED
EXPANSION
 2006-2007 record results
despite shocks from
Hurricanes US and
wildfires in Europe
 2006 –delisted form LSE
during to low trading
volumes
 2007 became acquisitive
in emerging markets
Russia and China
 2008 introduced customer
centric “help point”
service
 2009 –continued growth in
premium income
Soft
Soft
Soft
 sub prime mortgage
backed securities scandal
 longevity increasing
 Culture: less reliant on
company based
information
 Technological : advances
significant
 High rate of mergers and
acquisitions
 Credit crunch and global
uncertainty
 Bid rigging allegations
 Climate change and
poverty of international
public interest
Soft
Soft
Hard
Soft
High
=credit crunch
implications
-M&A makes
the organization
more secure and
able to
withstand
turbulence
NonInnovator
to
Adopter
*Adapted from Wall Street Journal, 26/6/1992:B1, 11/4/1995: A3,12/4/1995:B4, 17/10/1997:B14, 8/10/2001:14, 24/11/2001,
23/4/2001:C1,15/5/2002:M, 17/6/2003:M6, 27/12/2006:19; 17/8/2007:17, 5/9/2007:23; Luond, (1998); Financial Times,
31/5/2003:8,16/8/2005:23,18/8/2006:22, 15/2/2007:23, 12/6/2007:24, Economist, 8/9/2001:80-8, 30/3/2002:66.
Table 4 Shifts in positioning from 1850 to 2009
Company
Timelines
1855-1900
Inception
and Growth
1901-1955
Expansion and
growth
1956-1980
Growth,
innovation and
diversification
globally
Case study 1
Creator to
Adopter
Adopter to All
Round Innovator
All round
innovator
Timelines Case
Inception
and Growth
Growth and
diversification
away from home
markets
Highly
innovative
Adopter to All
Round Innovator
Continued
Growth,
Innovation and
diversification
globally
Case study 1
Study 2
Case study 2
Creator
Adopter
to
All round
innovator
38
1981-2000
Growth and
continued
diversification
away from home
markets
All round
Innovator to
Adopter
Continued
Expansion but
slowing down in
the latter part of
the period
2001-2005
Shocks and
Survival
issues
2005 –to date
Shocks
followed by
acquisition and
rebranding
Adopter to
NonInnovator
Shocks and
Survival
issues
Non-Innovator
to Adopter
All round
Innovator
To Adopter
Adopter
To NonInnovator
Non- Innovator
to
Adopter
Shocks
followed re
strategizing by
continued
expansion