STRATEGY FRAMES, STRATEGIC FLEXIBILITY AND FIRM PERFORMANCE:

THE MODERATING ROLE OF INDUSTRY CLOCKSPEED

SUCHETA NADKARNI
Department of Management
University of Nebraska, Lincoln
Lincoln, NE 68588-0491

V.K. NARAYANAN
Drexel University

INTRODUCTION

Speed of industry change has created much interest in both the academic and practitioner-
oriented literature on strategic management. Firms in fast paced industries need strategies that
are different from those in slow paced industries. Although the theoretical literature has stressed
that cognition is important in coping with rapidly changing environments (Gustafson & Reger,
1995), the empirical research has dealt mainly with competitive and economic issues (Bogner &
Barr, 2000). Comparative studies exploring the differences in cognitive challenges faced by
firms in fast and slow paced industries are noticeably absent in the literature. As a result, we
know little about the cognitive differences in fast and slow paced industries and the strategic and
performance implications of the fit between cognitive characteristics of strategic decision makers
and speed of industry change. The current paper provides systematic evidence that strategy
frames affect performance through strategic flexibility, and the patterns of these relationships are
different in fast and slow paced industries. The findings of the study provide key insights into the
differences in cognitive needs in fast and slow paced industries and the strategic and performance
outcomes of the match between strategy frames and speed of industry change.

INDUSTRY CLOCKSPEED, STRATEGIC FLEXIBILITY AND PERFORMANCE

Industry clockspeed refers to the speed of changes endogenous to an industry (for
example technological, competitive, and organizational) that incumbent firms in the industry
initiate (Fines, 1998). Fast clockspeed industries experience higher rates of new product and
process introductions, shorter product and process life cycles, and greater degrees of product and
process obsolescence than slow clockspeed industries (Eisenhardt, 1989; Fines, 1998).

The nature of strategic challenges posed by fast and slow clockspeed industries differ in
the sustainability of competitive advantage and the feasibility of feedback-based learning. In fast
clockspeed industries, building sustainable competitive advantage is not possible because firms
cannot protect existing products and processes for a long time (D’Aveni, 1994; Williams, 1994).
The persistent change in fast clockspeed industries opens the door to a wide range of potential
rivals who may use various technological, strategic and managerial platforms to further change
the competitive dynamics of the market. To survive in fast clockspeed environments, firms must
introduce new products faster, often change their strategic orientation to meet the market needs
and carry out new competitive actions (Eisenhardt & Martin, 2000; Eisenhardt, 1989). On the
other hand, in slow clockspeed environments, firms can achieve sustainable competitive
advantage by building isolating mechanisms that retard imitation. In these industries, firms focus

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on augmenting and protecting existing core competencies. Firms cannot learn from past
strategies in these industries because similar actions do not result in the same outcomes over time
(Bogner & Barr, 2000; Eisenhardt & Martin, 2000). Strategies that have proven effective in the
past become outdated quickly. This severely limits the potential for feedback-based learning. In
slow clockspeed industries, major shifts in the markets are rare and past strategies are durable.
Since the causal ambiguity of the action-performance relationship is low in these industries,
firms can use past experience to make current decisions.

These differences in the strategic challenges have major implications for the level of
strategic flexibility required to cope with the two industry contexts. Strategic flexibility is
defined as the ability to precipitate intentional changes and adapt to environmental changes
through continuous rethinking of current strategies, asset deployment and investment strategies.
(Bahrami, 1992; Evans, 1991; Sanchez, 1995). Thus strategic flexibility captures the variations
and diversity in strategies (Sanchez, 1993; Slack, 1983) and the degree to which firms can
rapidly shift from one strategy to another (Slack, 1983).

The dynamic capabilities as well as the hypercompetition views point to the differences
in the relative importance of flexibility in fast and slow clockspeed environments (D’Aveni,
1994; Eisenhardt & Martin, 2000; Sanchez, 1993; Young-Ybarra & Wiersema, 1999). Strategic
flexibility is likely to be superfluous and inefficient in slow clockspeed environments for three
reasons. First, since the speed of change is low and sustainability of competitive advantage is
high, an emphasis on flexible resource deployment and competitive actions may unsurp a firm’s
established competitive advantages (Garg, Walters & Preim, 2003). Second, since competitive
changes are few in these industries, fewer opportunities may be available to firms to exploit and
act on. Finally, since competitive advantages are durable, development of new products and
processes may prematurely shorten the life cycles of its strong products (Kessler & Chakrabarti,
1996). Firms in these industries would benefit from strategic persistence rather than flexibility
that could erode existing competitive advantages.

The stable and persistent pattern of resource deployment and competitive actions may not
work in fast clockspeed industries, in which the speed of industry change is high and competitive
advantage is temporary. Firms in fast clockspeed industries are relentlessly pursued by existing
and unforeseen challengers that aggressively find new ways to satisfy customers (Bogner & Barr,
2000; D’Aveni, 1994; Eisenhardt & Martin, 2000). Stability in resource deployment and
competitive responses may lock company resources into products and processes that may
become outdated, adversely affecting performance (Bogner & Barr, 2000; D’Aveni, 1994). Thus,
flexibility of resource deployment is likely to be successful in fast clockspeed industries.

H-1: Industry clockspeed will moderate the relationship between strategic flexibility and
firm performance.
STRATEGY FRAMES AND STRATEGIC FLEXIBILITY

A strategy frame (also called dominant logic or belief structure) refers to the knowledge
structures that top managers use to make strategic decisions (Daft & Weick, 1984; Huff, 1982;
Prahalad & Bettis, 1986). These frames provide the lenses through which strategic decision
makers interpret uncertain information and translate it into organizational actions (Huff, 1982).

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Strategy frames influence firm performance by promoting effective strategic actions (Daft &
Weick, 1984; Weick, 1995). Two key characteristics of strategy frames are most relevant to
strategic flexibility--complexity (Bogner & Barr, 2000; Wally & Baum, 1994) and centrality
(Eden, Ackermann & Cropper, 1992). Complexity reflects the differentiation and integration in a
strategy frame (Walsh, 1995). Differentiation reflects the breadth of environment, strategy and
organizational concepts embedded in the frame, whereas integration reflects the degree of
connectedness among these concepts. Thus, complex strategy frames accommodate multiple
dominant logics and a diverse set of alternative strategy solutions in strategic decision making.
Greater complexity allows firms to notice and respond to more stimuli, which in turn increases
their adaptability (Ashy, 1956; Lyles & Schwenk, 1992; Stabell, 1978).

Centrality reflects the focus and hierarchy in a strategy frame. The more centralized a
map, the greater the extent to which a strategy frame is focused around a few ‘core’ concepts
(Eden et al 1992). Core concepts develop through gradual elaboration and feedback over a long
period of time (Carley & Palmquist, 1992) and have a strong historical context and a significant
depth of meaning to strategic decision makers (Eden et al., 1992). Centralization drives strategic
decision-making that is hierarchical where managers focus attention mainly around a narrow set
of core strategy concepts (Lyles & Schwenk, 1992). Thus, centralized frames mainly promote a
single dominant logic.

We argue that complexity of strategy frames will promote strategic flexibility that is
critical to success in fast clockspeed industries. On the other hand, centrality will promote
strategic persistence and stability that is likely to succeed in slow clockspeed industries.

Complexity

Complex frames may foster strategic flexibility by reducing two major biases in strategic
decision making: discounting and cognitive inertia (Hodgkinson, 1997; Keisler & Sproull, 1982;
Reger & Palmer, 1998). The discounting bias occurs when managers ignore important
environmental variables and evoke a narrow focus in identifying causes of specific events.
Complex frames foster comprehensive scanning by increasing managers’ awareness of diverse
and continuously changing environmental stimuli. Greater complexity allows managers to notice
and respond to more stimuli, reducing the gap between the environment and the interpretations
of the environment (Bogner & Barr, 2000). Thus, complex frames are likely to determine the
ability of firms to develop new resources by forming a comprehensive awareness of new
opportunities and to change their competitive posture quickly by promoting better inference of
continuously shifting competitor moves.

Complexity also promotes strategic flexibility by preventing firms from getting locked
into cognitive inertia in strategic diagnosis and consideration of alternatives (Dutton, Fahey
Narayanan, 1982; Lyles & Schwenk, 1992). Complex frames increase the diversity of
perspectives brought to bear on strategic questions. This diversity promotes more learning
opportunities and more extensive discussion of strategic choices (Lant et al 1994), reducing the
likelihood of cognitive inertia (Hodgkinson, 1997; Reger & Palmer, 1994) and status quo
behavior (Miller & Chen, 1994) that inhibit strategic flexibility. Therefore,

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 H-2: Complexity of strategy frames will be positively related to strategic flexibility.

Centrality

Centralized frames evoke focused and hierarchical decision making around the core
concepts with a strong history (Lyles & Schwenk, 1992). This leads to the illusory causation bias
in decision making wherein firms make false association of environmental events based on the
core set in their strategy frames (Keisler & Sproull, 1982). Illusory causation results from
premature or inappropriate causal inferences about new environmental stimuli. Core concepts in
the map draw managers’ attention to environmental variables and relationships among variables
that do not exist. Managers automatically infer new events using the core concepts rather than
conducting formal directed search before developing inferences about new events. Centralized
frames also lead to cognitive inertia because central concepts have a deep historical rooting and
are difficult to discard (Carley & Palmquist, 1992). Centrality may lock firms into known and
historically successful strategies that will preclude them from exploring new knowledge based on
experimentation. This severely limits the capacity of centralized frames to absorb new
knowledge (Hodgkinson, 1997; Reger & Palmer, 1998). We, therefore, expect that centrality will
inhibit adaptability and flexibility.

H3: Centrality of strategy frames will be negatively related to strategic flexibility.

METHOD
Sample

Our sample consists of firms from six fast clockspeed (personal computers, computer
software, toys and games, athletic footwear, semiconductors and movie) and five slow
clockspeed industries (aircraft, steel, shipbuilding, petrochemicals and paper) identified by Fines
(1998). Based on the four digit SIC codes, we selected a stratified random sample of 62 firms in
the five slow clockspeed industries and 72 firms in the six fast clockspeed industries from the
COMPUSTAT database. The sampled firms drew at least 70% of their sales from a single
business and were at least 10 years old. To reduce the potential bias introduced by replying on a
single year, we collected the data on industry clockspeed and strategy frames in 1990
(expansion) and 1992 (contraction) (U.S. Department of Commerce, 1994).

Derivation of Strategy Frames

We used the CEO’s letter to shareholders published by the companies in the annual report
to construct strategy frames. We conducted several validity checks to reduce three potential
biases in using annual reports as data sources: the accuracy of annual reports, time lags in
reporting, and attribution bias. We derived causal maps from the CEO's letters to shareholders in
a four-step procedure (Axelrod, 1976). In the first step, two raters identified statements from the
CEO’s letter that clearly contained a cause-effect relationship (W=0.85). In the second step, the
raters separated the causal statements identified in the first step into 'causes' and 'effects' to build
the 'raw causal maps.' In the third step, the raters used the exploratory filtering procedure to
classify the raw concepts into 35 broad categories that were distinct and uniform in breadth and
abstraction (for details, please refer to Carley & Palmquist, 1992). In the final step, the raters
recast the raw phrases into coded categories to derive coded causal maps.

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Measures

Industry Clockspeed. We measured industry clockspeed (Fines, 1998; Mendelson &

Pillai, 1999) by averaging the z scores of 1) the span of intervals between new product
generations, 2) the average number of years over which firms depreciated capital equipment and
3) frequency of changes in corporate strategies and structures (for example changes in top
management, restructuring and reengineering). We recoded this measure such that the higher the
measure, the faster the clockspeed and the lower the measure the slower the clockspeed.

Strategy Frames. We measured complexity by averaging the z scores of

comprehensiveness (total number of concepts in a causal map) and connectedness (total number
of links in the map divided by the total number of concepts) (Eden et al 1992; Knoke &
Kuklinski, 1983). We measured centrality of each concept in the causal map by the average
length of all the total paths that link it to other concepts in the map (Carley & Palmquist, 1992;
Calori et al 1994; Eden et al 1992; Knoke & Kuklinski, 1983). The centrality of the causal map is
the centrality of the most central concept minus the centrality of all other concepts in the map.

Strategic Flexibility. We used four measures of strategic flexibility: 1) coefficient of

variation across R and D intensity (R & D expenditures/Sales), capital intensity (capital
expenditures/sales), advertising intensity (advertising expenditures/sales) and debt-equity ratio in
1993 and 1995, 2) the sum of the absolute values of differences in the proportions of allocations
to capital, R & D and advertising expenditures for the three-year period following the study
(1990-1993 and 1993-1996), 3) Ferrier’s (2001) Herfindahl-type index of competitive simplicity
(For detailed discussion and computation of this measure, please refer to Ferrier, 2001), and 4)
shifts in the proportions of five competitive actions (pricing, marketing, new product, capacity
and service) for the three years following the study (1990-1993 and 1993-1996).The exploratory
factor analysis yielded two distinct factors. Coefficient of variation in resource deployment and
competitive simplicity loaded on the first factor, which we call strategic diversity (eigen value:
3.78, variance: 0.43). The shifts in resource deployment and competitive actions loaded on the
second factor (eigen value: 2.91, variance: 0.39) that we call strategic shifts.

Firm Performance. We measured performance by averaging the z scores of sales

growth, return on investment growth and net income growth (Venkataraman & Ramanujam,
1987). We lagged the performance measures by one year.

Control Variables. We used five industry variables as controls—industry growth, R & D

intensity, capital intensity, advertising intensity and industry concentration. We also entered two
firm variables as controls-- size (logarithmic transformation of total employees) and age (Carley
& Kauffer, 1993).

SUMMARYOF RESULTS

We employed moderated regression model (Aiken & West, 1991) to test H-1 by
successively entering controls, direct effects of strategic diversity, strategic shifts and industry
clockspeed and the interaction terms—strategic diversity X industry clockspeed and strategic
shifts X industry clockspeed. The direct effects of strategic variety and strategic shifts on

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performance were not significant. However, the interaction terms were significant. The positive
sign of strategic variety X industry clockspeed (B = 0.09, p<0.001) and strategic shifts X
industry clockspeed (B = 0.06, p<0.001) imply the faster the industry clockspeed, the stronger
the positive relationship between strategic flexibility and firm performance. Thus, strategic
flexibility promotes performance in fast clockspeed industries, but not in slow clockspeed
industries. These results support H-1.

Complexity has a positive relationship with strategic variety (B = 0.007, p<0.001) and
strategic shifts (B = 0.01, p<0.001). On the other hand, centrality relates negatively with strategic
variety (B = -2.79, p<0.05) and strategic shifts (B = 0.008, p<0.001). These results lend support
to H-2 and H-3.

DISCUSSION

This study addressed the paucity of comparative studies exploring the differences in
cognitive structures used by firms to cope with fast and slow clockspeed environments. The
results suggest that complexity promotes strategic flexibility, which is successful in fast
clockspeed industries. On the other hand, centrality fosters strategic persistence, which is
effective in slow clockspeed industries.

Our study suggests that complexity promotes strategic flexibility, whereas centrality
fosters strategic persistence. These findings imply that complexity and centrality may promote
different types of scanning and diagnosis. Firms scan their environment through undirected
viewing or focused search (Aguilar, 1967). Undirected viewing promotes broad and varied
scanning, which offsets the natural tendency of firms to notice and digest information that is of
immediate relevance. Thus, firms with complex frames may scan the environment using
undirected viewing. Focused search evokes a narrow search on specific information. Centralized
frames are likely to promote search that focuses around the core concepts. Firms diagnose new
stimuli through exploratory cause-effect links that accommodate various strategic choices or
through confirmatory links based on feedback. Complex frames hold multiple logics and
encompass a wide variety of causal links. Thus, complex frames may promote exploratory
diagnosis. On the other hand, centrality promotes diagnosis based on core concepts that have
been successful in the past.

Our study contributes to the strategic flexibility literature by identifying the cognitive
antecedents and the performance implications of flexibility in fast and slow clockspeed
industries. The strategic flexibility literature points to the crucial role of diversity and breadth of
managerial mindsets in fostering the ability to create and support ideas (Bahrami, 1992; Calori et
al, 2000; Volberda, 1999). Our study extends this literature by identifying specific facets of
strategy frames that contribute to flexibility. Centrality had a positive relation and centrality a
negative relation with strategic variety as well as strategic shifts. These results are consistent
with studies examining the antecedents of flexibility in other contexts. For example, network
studies on group structure suggest that star networks (centralized) enable group efficiency,
whereas wheel networks (noncentralized) promote flexibility (Leavitt, 1999).

REFERENCES AVAILABLE FROM THE AUTHORS

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