Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions

• Published date: 01 October 2017
• Date: 01 October 2017
• DOI: http://doi.org/10.1002/smj.2635

Strategic Management Journal

Strat. Mgmt. J.,38: 1953–1963 (2017)

Published online EarlyView 23 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2635

Received 18 April 2014;Final revision received5 September 2016

Elevating Repositioning Costs: Strategy Dynamics

and Competitive Interactions

Anoop R. Menon1and Dennis A. Yao2*

1Management Department, Wharton School, Philadelphia, Pennsylvania

2Strategy Unit, Harvard Business School, Boston, Massachusetts

Research summary:This article proposes an approachfor modeling competitive interactions that

incorporates the costs to rms of changing strategy. The costs associated with strategy modica-

tions, which we term “repositioning costs,” are particularly relevant to competitive interactions

involving major changes to business strategies. Repositioning costs can critically affect compet-

itive dynamics and, consequently, the implications of strategic interaction for strategic choice.

While the literature broadly recognizes the importance of such costs, game-theoretic treatments

of major strategic change, with very limited exceptions, have not addressed them meaningfully.

We advocate greaterrecognition of repositioning costs and illustrate with two simple models how

repositioning costs may facilitatedifferentiation and affect the value of a rm’s capability to reduce

repositioning costs through investmentsin exibility.

Managerial summary:This article illustrates how the decision to make a strategic change is

affected by both the cost to the rm of making the various strategy modications, as well as the

cost to its rivals of changing their strategies in response.These “repositioning costs” are impor-

tant because they shape the responses each competitor would likely make to a move by the other

competitor, and should be anticipated when considering an initial change to one’s own strategy.

The paper shows how repositioning costs can be used strategicallyto facilitate differentiation, and

to assess the value of potential investments in exibility. Copyright © 2017 John Wiley & Sons,

Ltd.

Introduction

Strategic change is daunting. To go “all in” requires

a commitment to developing and integrating new

capabilities across a rm’sactivity system and aban-

doning parts of the existing system that do not

support or might actively undermine the strategic

change. The costs associated with such change,

what we term repositioning costs, affect the net

value of the change through the immediate effect

on the focal rm and the effects on the future

Keywords: capabilities; game theory; repositioning costs;

strategy dynamics; strategic interaction

*Correspondence to: Dennis A. Yao, Harvard Business School,

Soldiers Field, Boston, MA 02163. E-mail: dyao@hbs.edu

Copyright © 2017 John Wiley & Sons, Ltd.

moves and countermoves of the focal rm and

its rivals. Repositioning costs are those “inter-

nal” costs incurred by the rm in order to tran-

sition from the status quo activity system to the

new one. For example, the size of reposition-

ing costs associated with a change to a decen-

tralized, customer-focused business strategy could

depend on how the rm’s previous strategy had

been implemented, the organizational costs associ-

ated with changing routines and culture, as well as

the physical asset costs associated with the devel-

opment of a supporting information technology

infrastructure.

This paper constitutes an initial attempt to for-

malize the role of repositioning costs within anal-

yses of competitive interactions. Our model applies

to strategic choices that range from changes to a sin-

gle activity (Porter, 1996) to changes that involve