Strategic Renewal Over Time: The Enabling Role of Potential Absorptive Capacity in Aligning Internal and External Rates of Change - A Longitudinal Analysis of Royal Dutch Shell (1980-2007)

Top managers of multinational corporations are increasingly confronted with an accelerating rate of change in the external environment. Yet strategic renewal literature has devoted limited attention to the organizational mechanisms enabling firms to align internal with external rates of change, so as to achieve a dynamic firm-environment fit over time. This paper addresses that gap by taking a knowledge-based perspective. We develop a framework clarifying how a firm's potential absorptive capacity enables it to align internal with external rates of change. We illustrate the framework empirically by analyzing the rate of change in strategic renewal actions of Royal Dutch Shell as an indicator of the company's internal rate of change in the period 1980-2007, and by comparing it with external rates of change in the oil industry over the same period. The findings show that Shell's potential absorptive capacity was positively related to the alignment of internal and external rates of change. In addition, we find evidence that the degree of alignment was positively related to the company's performance during the observation period. Our study implies that managers who are aiming to align internal and external rates of change over time should: 1) monitor external rates of change through environmental scanning and boundary spanning, 2) create shared understanding of the long-term implications of change, 3) identify drivers of internal rates of change and understand how to pace the rate of strategic renewal actions, and finally, 4) maintain baseline levels of potential absorptive capacity, since increasing potential absorptive capacity takes time and requires a long-term perspective.