STIEGLITZ, N., KNUDSEN, T., & BECKER, M. (2009).

STRATEGIC FOCUS
AND THE QUEST FOR TEMPORARY ADVANTAGE. Academy of Management
Proceedings, 1-6. Retrieved from Business Source Premier database.

STRATEGIC FOCUS AND THE QUEST FOR TEMPORARY ADVANTAGE

NILS STIEGLITZ
Strategic Organization Design Unit
Department of Marketing & Management
University of Southern Denmark
Campusvej 55, 5320 Odense M, Denmark

THORBJØRN KNUDSEN
University of Southern Denmark

MARKUS C. BECKER
University of Southern Denmark

ABSTRACT

The paper addresses the challenge of how firms adapt to a turbulent environment and
reap temporary advantages. We contrast strategic flexibility and focus in the sampling of
alternatives. Our results suggest that strategic focus reaps temporary advantages in more
turbulent environments, while strategic flexibility is viable in less turbulent markets.

INTRODUCTION

How do firms adapt to turbulent business environments and reap temporary competitive
advantages? Market turbulence confronts organizations with a dilemma. On the one hand, they
must rapidly adapt to changing market conditions, requiring strategic flexibility. On the other
hand, they need time to learn about the performance implications of possible strategic actions.
Learning needs to be sustained, since first impressions could be misleading. This calls for
strategic focus in sampling alternatives. Our concern is primarily the adjustment of market scope
as a response to turbulent market conditions. Broad scope provides more options and thereby
supports flexibility. By contrast, a narrow focus restricts flexibility. This can be thought of as
putting Porter’s generic strategies of broad and narrow scope in a dynamic context.
Remarkable little is known about the way strategic focus, as opposed to strategic
flexibility, influences organizational adaptation. We develop a modeling structure to analyze
organizational adaptation in turbulent environments, drawing on the multi-arm bandit model
widely used in the literature on decision-making under uncertainty.
A turbulent environment is characterized by frequent and unpredictable changes of the
links between strategic actions and performance. To cope with uncertainty, decision-makers
form beliefs about action-performance linkages. In the absence of vicarious learning, decision-
makers have to rely on experiential learning by sampling strategic actions to form beliefs.
Two aspects seem to be of fundamental importance to understand organizational
adaptation. The first aspect relates to how much reliance decision-makers place on prior beliefs.
It corresponds to the classic trade-off of exploration and exploitation in organizational learning.
The decision-maker must choose whether to act upon current beliefs and to select the most
attractive action identified so far, or whether to seek out new information by choosing an action
currently believed to be inferior. Turbulence complicates the task, since entrenched beliefs about
action-performance outcomes may quickly become outdated. Intuition therefore suggests that a
more turbulent environment calls for less emphasis on prior beliefs and more exploration of
alternatives. This amounts to more strategic flexibility in sampling. In contrast, strategic focus in
sampling requires sampling strategic actions believed to be the most attractive one.
The second aspect is how decision-makers form beliefs. The question here is how
sensitive a decision-maker is to acquiring new information about the performance implications of
an action. Shall the decision-maker change estimates on first impressions, placing heavy
emphasis on recent experiences? Or is it better to be more insensitive to new information,
treating it as just another piece of evidence in finding a good strategic action? Strategic focus
calls for sustained learning about strategic actions, drawing on all information available. Again,
intuition suggests that a turbulent environment calls for more flexibility and higher sensitivity in
updating beliefs, since new information should be more reflective of the current state of the
world than previously obtained information.
While the first aspect looks at how much reliance is placed on prior beliefs, the second
aspects deals with forming these very beliefs. The interactions between these two fundamental
aspects of organizational adaptation have not been systematically explored in prior research. And
little is known about how they influence organizational adaptation in turbulent environment.

MODEL DESCRIPTION

The business environment is represented by a set of N possible strategic actions. Each

strategic action n is initially associated with an initial mean payoff Xn,0, drawn randomly from a
normal distribution with a mean of 1 and a standard deviation of 1. To capture market
turbulence, we extend the standard multi-arm bandit model by letting the mean of each strategic
action change over time. The mean payoff of a strategic action n in time step t is given by

X n ,t = X n ,0 + ! ( X n ,t #1 # X n ,0 ) + " (1),

with the random shocks ! i.i.d and normally distributed, with a mean µ = 0 and variance "2. The
variance determines the magnitude of environmental changes. The higher the variance, the more
do mean payoffs for a strategic action differ across two time periods. A higher variance therefore
signifies a more turbulent environment. The parameter #, bounded on the unit interval, is the
autoregressive coefficient and determines how quickly a trend reverses itself. It sets the pace and
direction of change. A lower value of # essentially makes the current payoff less dependent on
the previous time step. This translates into a more turbulent environment, with high volatility and
less discernable trends in the performance of strategic actions.
Every time a decision-maker samples a strategic action n, she receives a payoff drawn
from a normal distribution with the mean Xn,t. Decision-makers form beliefs about the
attractiveness of each strategic action. We draw on the reinforcement learning literature to model
belief formation. In principle, a decision-maker strengthens the belief in a strategic action that
yields a high payoff. Formally, the model uses the following rule for updating beliefs:

(! n ,t / Tn ,t # En ,t ) ! n ,t ! n ,t #1
En ,t +1 = En ,t + " t
+ (1 # " )( # ) (2).
Tn ,t Tn ,t #1
$T
i =1
n ,t
 E is the belief about a strategic action n, T the number of trials in a time step, and $ is a
parameter bounded on the unit interval. The first part updates beliefs based on an estimate of the
average payoff of the strategic action by equally taking into consideration all payoffs received so
far. The estimate is fairly insensitive to recent payoffs and it thereby signifies strategic focus in
sampling strategic actions. The second part considers the marginal gains of a strategic action,
leading to a very high sensitivity to recent payoffs and more flexibility in sampling. The
parameter $ sets the weights placed on these two approaches to updating beliefs. A high $ tends
to make belief updating more accurate and slower, while a low $ corresponds to more sensitive,
but less accurate updating.
Managers sample strategic actions based on their beliefs about performance implications.
The decision-maker must choose whether to act upon current beliefs and to select the most
attractive action identified so far, or whether to seek out new information by choosing an action
currently believed to be inferior. A straight-forward approach to modeling sampling and resource
allocation based on these principles is provided by the Softmax algorithm. The probability pn,t of
choosing action n out of N options in time period t is given by

N
En ,t /! En ,t /!
pn ,t = exp / (" exp ) (3),
n =1

with E as the belief about action n in t. The parameter % is the proclivity to explore. With a low %,
a manager focuses sampling on the most attractive strategic action identified so far. Resources
get deployed to actions believed to be superior. A higher % results in a higher probability of
choosing an action so far believed to be inferior. It corresponds to more strategic flexibility in
allocating resources and more active exploration of the environment.

RESULTS

We use the analytical structure outlined above to study the search for temporary
advantages. Each business environment consists of ten strategic actions (N = 10). All simulations
are seeded with 10,000 agents and the mean payoffs of each action are firm-specific. Managers
have no prior beliefs about the environment they operate in. Each simulation runs over 250 time
steps. In each time step, an agent may allocate two samples (trials) to strategic actions.
We first compared strategic flexibility and strategic focus for the baseline case of a stable
environment. In a stable environment, the mean payoffs of strategic actions stay constant over
time. We find that strategic focus – a low proclivity to explore and very low payoff sensitivity –
reaps significant performance benefits (the results are available upon request).
------------------------
Figure 1 about here
------------------------

Figure 1 contains the main results for turbulent environments. In principle, a turbulent
environment does call for greater strategic flexibility compared to the stable environment. This
reinforces the basic intuition of prior research. Counter-intuitively, the results also show that
greater market turbulence requires less strategic flexibility and more strategic focus. Firms cope
better with an increasing pace of external change by focusing the sampling of strategic actions.
They have a lower proclivity to explore and are less sensitive to recent payoffs. In contrast, when
the environment is characterized by a lower pace of external change – with long, sustained trends
– strategic flexibility in sampling performs much better.
Increasing the magnitude of environmental change does not change the basic relationship
between strategic focus and market turbulence (detailed results are available upon request).
Strikingly, major random shocks make more insensitive updating of beliefs viable. In principle,
more market turbulence calls for more accurate learning. Managers gain from being more
insensitive to new information the more volatile the business environment becomes. Focus in
updating beliefs is more effective in turbulent markets. The important boundary condition here is
that highly accurate learning ($ = 1) combined with absolutely no exploration is a bad idea in
changing environments, regardless of the level of market turbulence. The results also suggest a
nuanced relationship between belief formation and the bases of learning. A higher proclivity to
explore goes hand-in-hand with more inaccurate learning, and vice versa.
These findings are very robust to changes in the model parameters. The principal results
hold for different specifications of prior knowledge about the business environment and for more
localized changes in the business environment (turbulence changes the performance of some, and
not all, strategic actions). The results are also substantiated by considering disruptive changes in
the structural conditions of the business environment (changes in Xn,0). Environmental
turbulence helps agents to cope with disruptive changes, since beliefs become less firmly
entrenched. However, our results do not apply to stable environments that experience disruptive
change. Under those conditions, responding to disruptive change calls for greater strategic
flexibility to quickly abandon old strategic actions and identify new attractive ones. These results
are available from the authors upon request.

DISCUSSION AND CONCLUSIONS

Our paper advances a more nuanced understanding of organizational adaptation for

gaining temporary competitive advantages. The received wisdom in prior literature is that
managers need to be more flexible in more turbulent markets. This implies that they should
engage in more active exploration of strategic actions and be more sensitive to new information
about performance implications.
Our results cast serious doubts on strategic flexibility as the right answer to increasing
market turbulence. Broadly, we found that decision-makers benefit from strategic focus in
sampling strategic actions. They engage in less active exploration and are more insensitive to
recent information. This strategic posture allows them to focus on uncovering more or less stable
features in the turbulent business environment, giving them a performance advantage. In
contrast, strategic flexibility runs into danger of chasing phantoms. The organization adapts to a
seemingly attractive strategic action, but the world has already changed again. At the same time,
it fails to identify and appreciate the more stable traits of the environment.
Put differently, the focus logic suggests that the trigger points that allow pursuit of new
business opportunities should be raised when uncertainty increases. The intuition here is that
getting lured away from a proven business model will be unprofitable because the firm loses
direction in its pursuit of questionable opportunities that come and go with increasing pace. In
order to redeploy resources to a new alternative, managers must have strong reasons to believe
that it is more profitable than the status quo alternative.
 The explanation for our counter-intuitive finding lies in a more fine-grained distinction of
different classes of turbulent environments. Turbulent environments can be fairly orderly in the
sense that they are characterized by sustained cycles and prolonged trends. While turbulent, the
world after tomorrow is pretty much the same as today. In such environments, trends have a long
shadow. Increasing the pace of change shortens the shadow and length of these trends – the
future becomes increasingly less rooted in the past.
In orderly environments, firms need to sense and quickly seize an emerging trend. Under
these conditions, firms gain temporary advantages by strategic flexibility. A high proclivity to
explore allows them to broadly scan the business environments and to identify new attractive
strategic actions. To reap the benefits of more active exploration, the high proclivity to explore
needs to be complemented by a high sensitivity in belief formation. A higher sensitivity to recent
information leads to less accurate, exaggerated beliefs about performance implications.
Attractive actions often appear to be better than they actually turn out to be, while bad options
look much worse than in reality. Exaggerated beliefs amplify the perceived differences between
strategic actions. In orderly environments, hyperbole is very valuable: Firms quickly seize a new
emerging opportunity, allowing them to shift from one trend to the next. Less sensitive and more
accurate updating of beliefs would derail the beneficial interactions between flexibility in
resource allocation and belief formation. It takes longer to discern a new emerging trend and it
might be in decline again before the firm starts to seize it. Moreover, good estimates do not blow
impressions out of proportion; they narrow down the perceived performance differences. The
firm will therefore tend to act slowly and miss out on the good trends even while they are very
profitable.
In contrast, more turbulent and less orderly environments call for strategic focus. In such
markets, attractive opportunities suddenly appear and then quickly turn sour. Trying to ride a
trend will therefore often be an exercise in futility. Under these conditions, strategic flexibility
leads firms astray. They get distracted by first impressions and disappointed when they seize
them. New information is more or less useless noise, since the world has already changed. In
such markets, managers need to focus on the lasting, structural properties masked by market
turbulence. This requires a less active exploration and low sensitivity to recent information in
belief formation. Low sensitivity in belief formation promotes slow, more accurate learning. It
effectively blocks out the noise of tempting short-term impressions and thereby enables
managers to get an idea about the structural properties of the business environment. Less active
exploration focuses resource allocation to these properties and prevents the firm from wandering
away from strategic actions that are attractive over the long run. The result is a series of
temporary advantages (since a firm may be outperformed by a lucky competitor at any specific
point in time) gained by a sustained focus on a specific strategic action.
Our research contributes to prior literature in a number of ways. First, we add to our
understanding of organizational adaptation. We analyze flexibility and focus in sampling
alternatives in a turbulent environment. The main findings from our simulation model suggest
that firms need to match the rate of organizational adaptation to the rate of environmental
change. Second, our research adds to the literature on temporary advantages and strategic
decision-making in volatile and hypercompetitive environments. While strategic flexibility is
viable under fairly orderly market regimes with sustained cycles and trends, rapidly shifting
demand and technological regimes call for strategic focus. This qualification provides an
important missing boundary condition for much of the conclusions forwarded in prior research
on temporary advantages. Third, we add to prior research on strategy under uncertainty. While
 this line of research has uncovered important insights on the tradeoff between commitment and
flexibility, we are throwing light on a different class of problems. We look at problems relating
to the interference of random forces beyond the control of the firm.
To conclude, the paper addresses the challenge of how firms adapt to a turbulent
environment and reap temporary advantages. We contrast flexibility and focus in the sampling of
alternatives. Counter-intuitively, the results of our simulation model suggest that strategic focus
reaps temporary advantages in more turbulent environments, while strategic flexibility is viable
in less turbulent markets.

REFERENCES

REFERENCES ARE AVAILABLE FROM THE AUTHORS

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The bars report the average accumulated performance at the end of the simulation run (t = 250)
for the best-performing resource allocation strategy (%), as indicated by the label on top of each
bar. The absolute performance difference between the best- and the worst-performing resource
allocation approach is also indicated for each performance bar. Each panel shows a different
updating rule ($ = 0, 0.25, 0.5, 1).