The effect of environment instability on the decision of strategic flexibility implementation in Syrian companies

Abstract

In an unstable business environment full of risk and uncertainty, companies should try to find a way to cope with instability.  Flexibility at the strategic level considers as a mechanism that enables companies to deal with uncertain and risky situations. It can be proactive and reactive flexibility. In this study, the aim was to investigate how instability represented by uncertainty and risk can affect the decision of managers to implement strategic flexibility as a technique in light of turbulences. The sample of the study is insurance companies in Syria which are 14 companies, it is a survey study and a questionnaire was used to collect the data from 70 managers at those companies, and the respondent rate equalled to 63%, and the results showed that environment instability affects the decision of adopting both proactive and reactive strategic flexibility in Insurance companies in Syria.

Keywords: uncertainty, risk, proactive strategic flexibility, reactive strategic flexibility.

Introduction

Globalization has weighed heavily on the business environment, making it complex, described by risk and uncertainty, the reason which pushed the organizations to look for mechanisms to adapt to emergency situations and changes in their work environment, and to adopt flexibility as a mechanism to respond to such changes, risks, and uncertainty. The concept of environmental uncertainty or uncertainty has attracted the interest of many researchers and has been the focus of many research initiatives that have focused on the features of the interrelationship between the organization and its environment, especially considering the organization as an open system that affects and is influenced by the surrounding environment. So, in a dynamically unstable environment, organizational flexibility represents the capability to manage risks or uncertainty by direct responding in a proactive or reactive manner to business opportunities or market threats (Grewal and Tansuhaj, 2001). Organizational theorists emphasize that organizations must adapt to their environment if they are to remain viable (Duncan, 1972). Eccles (1959) was one of the authors who formed the concept of strategic flexibility, when he explained, “the intellectual concept of strategy naturally leads to the intellectual concept of flexibility”. According to (Shimizu and Hitt, 2004) strategic flexibility is a way to develop and maintain a competitive advantage. Furthermore, (Hitt, et al, 1998, p 22) explained, “Success in the 21st-century organization will depend first on building strategic flexibility”. The importance of that citation can be explained through the term of uncertainty which refers to cases that decision-maker is not aware of possible options with their consequences and prospects (Artinger, et al., 2014). Uncertainties may arise from continuous changes in technology, markets, customer tastes, and costs of production schedules or the introduction of new products or services (De Meyer, Loch, & Pich, 2002). There is also uncertainty in entrepreneurship where organizations must make decisions in a timely fashion without relying on data from experiences (Busenitz & Barney, 1997). Therefore, uncertainty justifies the reasons, which push the organization to adopt strategic flexibility to cope with changes. In the same area (Combe and Greenly, 2004, p,1457) clarified that successful adaptation through strategic flexibility will likely generate superior performance, exacerbating the imitation problem for competitors. Flexibility enables the service providers to handle both uncertainties in demand and the external production factor (Corsten and Gossinger, 2006). Strategic flexibility reflects the capacity of an organization to respond to various kinds of external change (Singh et al, 2013). Dill (1962) explained that organizations that operate based on a limited amount of information are more likely to face uncertainty. With the increasing dynamism and complexity of the business environment, the organizations themselves will face a constant confrontation with increasing and urgent changes in their business environment. Jauch and Kraft (1986) have noted that uncertainty management will remain the primary task of management. Greenley and Oktemgil (1998) showed that strategic flexibility reflects the organization’s ability to respond rapidly to emergency conditions, and deal with uncertainty situation. Strategic flexibility is the ability of a firm to adjust its strategic decisions in response to internal or external changes (Aaker & Mascarenhas, 1984; Matthyssens et al 2005; Price et al, 1998).

The Syrian business environment considers one of the most turbulent business environments characterized by risk and uncertainties. Nevertheless, insurance companies as an important service sector still working despite environmental turbulences. Therefore, this study tries to investigate the relationship between uncertainty and strategic flexibility, which extends to uncertainty push insurance companies in Syria to adopt strategic flexibility as a mechanism to maintain an equilibrium and survival of the company.

Theoretical background

Uncertainty

Uncertainty is a fact of the turbulent work environment. The concept of “uncertainty” has been fundamental in the literature on strategy and regulation. Early perceptions of key management scholars such as Knight, Barnard, and March and Simon, who said corporate business environments are inherently unstable (Knight, 1921) (Marc and Simon, 1958).The literature of strategic management defines both the micro-environment and the macro environment as sources of uncertainty by distinguishing between sectors that have a direct or indirect relationship with the company and which directly affect its business strategy (Dill, 1958). Literature addressed uncertainty through a variety of definitions. Uncertainty defined as a lack of information and knowledge in decision-making (Duncan 1972; Lawrence and Lorsch 1967). Uncertainty is seen as the result of the unpredictability (Cyert and March 1963), environmental disturbance (Emery and Trist 1965), and the complexity of variables affecting the work of the organization (Galbraith 1974). Moreover, uncertainty described as a tangible aspect of the external environment, and as an illumination of the way of awareness in which managers explain the state of their decision (Milliken, 1987). Collis (1992) assumed that uncertainty results from the complexity and lack of clarity in the relationship between internal processes within the organization as well as between the organization and its external environment. According to Fahey and Narayanan (1986), the complexity and interdependence of the factors influencing work environment lead to divide uncertainty into four types, described as dimensions of uncertainty including, firstly, macro and micro environmental uncertainty: macro represents uncertainty in the overall environment of the organization, including political, regulatory, legal and economical. This type of uncertainty has the potential to limit the organization’s ability to design and pursue strategic options (Miller and Friesen 1984). Environmental uncertainty considered as an indication of the increase in the level of environmental dynamics and complexity (Johnson and Scholes 1999), whereas, microenvironment consists of competitors, customers. Suppliers, potential customers, alternative products and complementary product providers (Porter, 1980).According to ( Lenz 1980), external environment of organizations is viewed as the source of events and changing trends which “create opportunities and threats for individual firms” In the context of information and resource dependency views of organization- environment relationship, there can be two kinds of environmental uncertainty; one that is based on resource scarcity and the other based on information complexity (Lawrence and Dyer 1980). Secondly, competitive uncertainty: is the inability to determine the extent of future competition in the organization’s field of work, as well as the relative strengths of competitors, their future work and their strategies. Thirdly, market uncertainty (demand and supply): this uncertainty stems from the lack of clarity of market dynamics and their effects on the organization’s operations, in addition to the uncertainty of supply and demand conditions in the industry. Fourthly, Uncertainty of technology: this type of uncertainty relates to changes in resource and technological capabilities in the area of the organization’s work. Technological uncertainty has the potential to undermine the competitive base of the organization (Anderson and Tushman 1990).

Risk

According to (Miller,1992) there is no specific general definition for risk in strategic management literature. He explained that “risk” refers to uncertain environmental variables, which decrease performance forecasting, in addition to the lack of predictability of outcomes. Further, Risk, defined as an organization’s inability to collect data and information about decisions relate to opportunity exploitation and possible outcomes (Hmieleski and Baron, 2008). According to (Riabacke, 2006) there are many definitions to risk, they differ according to the field of study, and managers distinguished between different types of risks, such as fire risk, financial risk, technical risk, commercial risk, and investment risk, but in general, they agreed that risk situation where the outcomes are unknown to the decision-maker, for example, when they are not sure about results and the uncertainty leads to erroneous choices, like investing in new machines and techniques, acquisition of new companies or development of new products and entering new markets. In the same context (Riabacke, 2006) refereed than managers can avoid risk or in other words manage the risk if they have correct data,  enough information about the problem, or have the required experience in light of lack information to make the right decision.

Strategic flexibility

Flexibility is a very common word and uses in different cases to refer to many notions, in management studies, according to management thinking flexibility refers to do the same things in new ways to deal with unexpected or new situations. Flexibility discussed widely through three different levels, strategic, tactical and operational level, but the interesting thing is there is no consensus by researchers about standard dimensions or definition for flexibility in different levels, for example, strategic flexibility identified by (Wright and Snell 1998; Zhou and Wu 2010) as the ability to handle change. It defined as the ability of organizations to adapt to environmental changes (Hrebiniak& Joyce, 1985). It also reflects the organization’s ability to reallocate its resources quickly and easily to respond to changes (Baclley & Casson, 2009). The ability of organizations to develop and adapt their work strategies to adapt to changes in their working environment called strategic flexibility. It defined by Grewal & Tasuhai (2001) as the ability of the organization to respond effectively and proactively to threats and opportunities. Strategic flexibility allows the organization to manage unforeseen events efficiently without losing existing resources (Ansoff, 1980). Sanchez (1995) suggests that flexibility is constrained not only by resources but also by the ways a firm uses the resources, and he divided flexibility to, resource flexibility and coordination flexibility. According to Brozovic (2015) in his literature review, there are six dimensions to strategic flexibility as following: a: Strategic flexibility as a reactive ability: Strategic flexibility as a proactive, C: Strategic flexibility as a fast, swift, quick, prompt, timely response, D: Time aspect (short, medium or long term), E: The choice of an appropriate strategic option. F: Intention. This study will depend on Evans (1991) perspective, where very few literature dependent on it, the reason to adopt this model in this study because it the most encompass model, it encompass five dimensions of the previous in his study in (Evans, 1991) and (Bahrami and Evans, 2011). According to Evans (1991), Strategic flexibility is a modern concept describes the classical principle of strategy. He defined strategic flexibility as an organization’s ability to adjust strategies or formulate possible strategies to be adopted by the company in case of an emergency. According to Evans (1991), Strategies implement as a series of manoeuvres, and organization must have many scenarios and depends on forecasting before implementing its strategies. Moreover, he presented his model as four kinds of maneuvers. Pre-emptive, expletive, protective and corrective. Pre-emptive maneuvers (proactive) used to accelerate the changes that help the organization to achieve its goal, it requires the swift execution of a number of actions at auspicious moments” like react before competitors and surprise them or establish new rules to participate in a specific field. According to (Evans, 1991. p, 78) “One way to achieve strategic flexibility (pre-emptive) maneuver is to create a range of options before they are needed”. Exploitive maneuvers: Firms, which often work in a competitive environment, find themselves in unexpected situations where circumstances and preferences are not as good as wanted. Strategic flexibility in this opportunistic sense achieved by means of exploitive maneuvers (Evans, 1991, p82). That means to catch the opportunity as quickly as possible. Corrective maneuvers refer to an organization ability to recover and rebalance from the effects of trauma occurring and occasional events that threaten the survival of the organization (Evans, 1991). There are many factors motivate the company to adopt corrective maneuvers like competitors’ strategies and their unexpected movements, past mistakes and contingency incidents, so implementation corrective maneuvers help a company moving toward stability. Finally, protective manoeuvres: when organization seeks to achieve sustainable competitive advantage then it has to consider the potential consequences which happened as a result of entering in risky situations like new alliances, new business, or when expecting excessive difference in competitive landscape, then protective flexibility is the way to achieve, organization must guard against the potentially damaging not having all eggs in one basket’; in other words, by pursuing a hedging strategy (Evans, 1991).

Research hypotheses

Based on what had mentioned before we can form the follow hypotheses:

1. Uncertainty positively affects a company’s decision to adopt proactive strategic flexibility.
2. Uncertainty positively affects a company’s decision to adopt reactive strategic flexibility.
3. Risk positively affects a company’s decision to adopt proactive strategic flexibility.
4. Risk positively affects a company’s decision to adopt reactive strategic flexibility.

Research methodology

This research is a causal study, it aimed to investigate the effect of environmental instability on the decision of Strategic Flexibility adoption in the insurance sector in Syria. A questionnaire used to collect the primary data needed for the study of the five-dimensional Likert scale used in it. According to uncertainty measurement, both (Duncan, 1971 a) (Schulz and Chow, 2010) models used to measure environmental uncertainty, also (Riabacke, 2006) model used to measure risk. Whereas strategic flexibility measurement was developed by the researcher depending on (Evans, 1991) model, the developed model tested for the first time in 2015, then retested in 2018–2019 (it is a cross-sectional study for one a year between 2018–2019) in this study, in both cases is characterized by a high level of reliability. The research community consists of insurance companies operating in Syria (fourteen companies). The purposive sample used all the companies (fourteen) who participated in this study. The sample of the research: managers, heads of departments and members of the board of directors in the insurance companies. The questionnaire forwarded to the managers at the target companies, the number of participants in this study (70 managers and heads of departments responded and answered the questionnaire), we expected 110 respondents, but we got only 70, the respondent rate 63%.

Analysis and results

Reliability and validity

The reliability test was done by doing Cronbach’s alpha test, which provides the result of the internal consistency of the questionnaire, it means how much the questions and the variables are related to each other. (Table 1)  According to the results of this study, the used measurement is reliable, because of the results of alpha equals (.70) or more so it is accepted (Li et al, 2010).

According to the loadings all the values are higher than (.55) which refers to the weight of each item according to the group which belongs to.

The descriptive statistics in Table 2 show the values of mean and standard deviation for each variable, and it provides the results of the correlations among these variables. According to Ratner (2009), values between (0.30 and − 0.70) indicate a moderately positive (negative) correlation. Table 2 shows that correlations between uncertainty and proactive strategic flexibility equal to .40, and uncertainty with reactive strategic flexibility equals .378 so it is a weak but significant correlation, whereas there is no significant correlation between risk and proactive strategic flexibility and reactive strategic flexibility.

Table 3: Regression analysis

	Dependent Variables
	Proactive strategic flexibility	Reactive strategic flexibility
Constant	2.380***	1.412***
Uncertainty	.327***  .469	.460***   .669
Risk	.164  .131	.303***   .245
R	.450	.644
R2	17.9%	39.8%

Levels of significance: *p < .05; **p < .01; ***p < .001

Source: Author‘s Calculation (2020)

• According to the results of regression analysis (table3), the link between uncertainty and proactive strategic flexibility is statistically significant because (sig. < 0.05), Therefore, hypothesis H1 is supported (Uncertainty positively affects a company’s decision to adopt proactive strategic flexibility). That is to say, uncertainty has positive and significant effects on the decision of proactive strategic flexibility adoption.
• The link between risk and proactive strategic flexibility is not statistically significant (sig. > 0.05). Thus, hypothesis H3 (risk positively affects a company’s decision to adopt proactive strategic flexibility.) is rejected.

Moreover, for the relationship between environmental instability in general represented by uncertainty and risk, we can note that (R2= .179) it means environmental instability explains 17.9% of the change in the decision of proactive strategic flexibility adoption.

Y1 = 2.380 + .327X1
Y1: proactive strategic flexibility
X1: uncertainty.

• According to the results of regression analysis, the link between uncertainty and reactive strategic flexibility is statistically significant because (sig. < 0.05). Therefore, hypothesis H2 is supported (Uncertainty positively affects a company’s decision to adopt reactive strategic flexibility)
• At the same time, the link between uncertainty and reactive strategic flexibility is statistically significant because (sig. < 0.05). Therefore, hypothesis H4 is supported (risk positively affects a company’s decision to adopt reactive strategic flexibility).

Moreover, for the relationship between environmental instability in general represented by uncertainty and risk, we can note that (R2= .398) it means environmental instability explains 39.8% of the change in the decision of reactive strategic flexibility adoption, we can note that uncertainty has higher effect on the adoption of reactive strategic flexibility (66.9%), whereas risk has lower effect on the adoption of reactive strategic flexibility (24.5%).

Y2 = 1.412 + .460X1 + .303 X2
Y2: reactive strategic flexibility
X1: uncertainty.
X2: risk.

Discussion

This study agreed with (Greenley and Oktemgil, 1998) (Evans, 1991) (Sharfman and Dean, 1997) (Bowman and Hurry, 1993) (Johnson and Lee, 2003), which emphasized the effects of both uncertainty and risk on adopting strategic flexibility. In addition, consider strategic flexibility as a way to maintain the company’s continuation in an environment characterized by uncertainty and risk. Also, the results of the study agreed with (Sharfman and Dean,1997) who clarified that managers are more flexible when their decisions making under uncertainty, that emphasizes the effect on uncertainty to push managers to be flexible and adopting strategic flexibility as a mechanism to cope with uncertainty. In the same context (Hatch and Zweig, 2001) explained that having strategic flexibility enables companies to maintains and adapting to environmental changes and massive competition. Also (Shimizu.K & Hitt.M. A., 2004) mentioned that in light of a fast-changing work environment and uncertainty, managers need strategic flexibility to respond quickly to new situations, so Environmental turbulence 9uncertinty and risk) effect on organization decision to adopt strategic flexibility, that is what our study found.

(Widati.E, 2015) emphases in his research that take place in Jakarta that environmental turbulence pushed BNI to adopt strategic flexibility. According to previous conclusion and the results of statistical analysis, this research encourages authors to do another research to investigate the relationship between strategic flexibility and performance, also the relation between strategic flexibility and competitive advantage, because Syrian insurance sector has strategic flexibility according to results, and looking for another factor affects the decision for adopting strategic flexibility.

Conclusion

According to descriptive analysis, the results showed insurance companies in Syria work at turbulent environment characterized by uncertainty and risk that is related to the unstable economic and political situation in Syria. In addition to that Insurance companies have strategic flexibility (proactive – reactive), maybe that is the reason, which enables them to continue working despite an unstable situation for nine years in Syria despite the war there.

According to regression analysis, environmental turbulences affect Syrian insurance companies to decide to adopt strategic flexibility.  there are other reasons differ from environmental turbulences push Syrian insurance companies to adopt strategic flexibility, which stimulates researchers to investigate find another influencer’s factors in future researches. According to the above explanation, we can accept the main idea; “environment instability positively affects a company’s decision to adopt strategic flexibility”.

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Allam Yousf
University of Debrecen, Faculty of Economics and Business, Institute of Applied Informatics and Logistics

Vivien Kerekes
University of Debrecen, Faculty of Economics and Business, Institute of Applied Informatics and Logistics

János Felföldi
University of Debrecen, Faculty of Economics and Business, Institute of Applied Informatics and Logistics

Vahid  Lorestani
University of Debrecen, Faculty of Economics and Business, Institute of Management