Revisiting the imitation assumption: Why imitation may increase,rather than decrease,performance heterogeneity

Research Summary: Imitation is a central construct in strategy theory because it is assumed to diminish inter‐firm performance heterogeneity within an industry. We revisit this assumption, which is premised on the logic that imitated practices act directly to make the imitator more similar to its target. This logic is incomplete because imitation also acts indirectly—via its effect on an imitator's post‐imitation experiential learning efforts through which it refines imitated practices and fills remaining knowledge gaps. We examine how an imitator's focus of attention during this post‐imitation experiential learning process impacts performance heterogeneity. Employing a computational model, we contrast the heterogeneity resulting from imitative entry with that from de novo (non‐imitative) entry and identify conditions under which imitation may increase, rather than decrease, inter‐firm performance heterogeneity. Managerial Summary: Imitation is commonly assumed to be a low‐risk strategy by which firms can narrow the performance gap to the market leader. This assumption is predicated on an understanding of imitation that neglects the impact of imitation on subsequent, post‐imitation, learning. Such learning serves to refine the imitated practices and fill remaining knowledge gaps. Our theory suggests that imitation is more risky than is typically assumed. Imitation leads to bifurcated performance outcomes. An imitator is more likely to: (a) catch up to the market leader, and (b) perform far worse than it would have without imitation. Key factors driving the riskiness of imitation are the observability of the market leader's practices and an imitator's decision regarding its focus of attention in post‐imitation learning.     

Strategic planning as a complex and enabling managerial tool

Research summary : The role of the strategic planning process in the ongoing generation of innovative knowledge is vital to the survival and growth of a firm, especially when technologies and market conditions are rapidly changing. We analyze data from a survey of firms in high‐technology industries to determine whether it is possible to break the commonly experienced trade‐off between strategic planning's positive influence on firm profitability and its negative influence on firm innovation. We draw on Adler and Borys's (1996) conceptualization of bureaucratic process types to identify several firm characteristics that have the potential to affect whether employees perceive strategic planning as enabling to their creative endeavors. We find that contingent effects between strategic planning and the identified firm characteristics exist that can break the trade‐off. Managerial summary : A tension exits in the literature about whether strategic planning hurts or helps innovative activity. Our analysis of data from 227 business units in high‐technology industries indicates that strategic planning is a complex process that can be perceived by employees as enabling or coercive. Our results confirm that strategic planning negatively affects innovative activity but positively affects profitability for average firms. We find, however, controllable firm characteristics—risk‐taking and knowledge‐based reward systems—affect the trade‐off. Given the higher levels of risk‐taking and knowledge‐based reward systems, firms can use strategic planning to achieve both high returns on investment and a high level of innovative activity. Copyright © 2015 John Wiley & Sons, Ltd.     

Firm‐specific human capital,organizational incentives,and agency costs: Evidence from retail banking

This paper explores conflicting implications of firm‐specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more‐sophisticated ‘gaming’ of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high‐FSHC managers. Finally, profit losses increase more rapidly for high‐FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits. Copyright © 2013 John Wiley & Sons, Ltd.     

A tale of two effects: Using longitudinal data to compare within‐ and between‐firm effects

Research summary : We investigate the theoretical and empirical implications of longitudinal data in strategy research. Theoretically, longitudinal data allow strategy researchers to distinguish between relationships among constructs within versus between firms. Empirically, longitudinal data contain information about two types of relationships: within‐ and between‐firm. We describe how the hybrid approach, a technique used in other disciplines, disentangles within‐ and between‐firm relationships. We reexamine a study of research and development expenditures to illustrate the advantages of the hybrid approach. Based on our theory and reexamination, we offer a series of recommendations for researchers using longitudinal data to test theoretical perspectives . Managerial summary: Strategy research examines two sources of variation over time: what is occurring within the firm (e.g., Do firms perform better over time when investing more in R&D?) and what is occurring between firms (e.g., Do firms investing more in R&D outperform firms investing less in R&D?). These two sources may be similar or different in both direction and magnitude, and when significant differences exist in either direction or magnitude, researchers must carefully consider the implication of these differences to their theoretical rationale and statistical testing. Our article highlights the benefits of theorizing and testing these two sources of variance, providing scholars the ability to broaden both the theoretical and empirical contribution of their research. This distinction is important to how research informs managerial decision making . Copyright © 2016 John Wiley & Sons, Ltd.     

Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary‐level investment and expansion

Research summary : Researchers have increasingly emphasized the need to better understand how context affects the value of experiential learning. We address this gap by investigating when corporate‐level experience can be leveraged across borders and when experience needs to be country‐specific to be valuable. We test our hypotheses using a unique multi‐source panel dataset of 379 large MNCs from 29 home countries and their subsidiaries in 117 host countries over a 10‐year period, 1999–2008. In contrast to prior research, we find that the ability of a firm to leverage its experience with political risk across borders is limited by the type of risk involved. Experience with nonstate violent conflicts may be transferrable, but only country‐specific experience appears to yield measureable benefits for conflicts involving the host country government . Managerial summary : Violent conflicts not only increase social unrest but also impose added costs of doing business. For managers who find themselves in the midst of violent conflicts or who wish to survive and potentially gain a competitive advantage in operating in such challenging environments, is it possible to learn to manage such a seemingly “unmanageable” problem? In contrast to studies that have examined other types of political risk, we find that the ability of a firm to leverage its experience with violent conflict risk across borders is limited. Specifically, only country‐specific experiential knowledge about how the host government prepares and manages such conflict risks yields measureable economic benefits for MNCs and their subsidiaries operating in countries during conflict . Copyright © 2016 John Wiley & Sons, Ltd.     

Policy risk,strategic decisions and contagion effects: Firm‐specific considerations

Research summary : In this article, we investigate the firm‐specific environment and its impact on firm strategy focusing on adverse changes in the policy environment and their effect on divestitures. We argue that experiencing a negative change in the firm‐specific policy environment causes firms to reassess their exposure to policy risk and their ability to manage their policy environment, making them more likely to divest. Operationalizing negative shifts in the firm‐specific policy environment through formal policy disputes between firms and governments, we find that following a dispute, firms are more likely to divest both in the country where the dispute occurs and in other countries in the same region. However, the impact of disputes on divestitures is firm specific, applying only to firms directly involved in a dispute . Managerial summary : What is the impact of change in the firm‐specific environment on firm strategy? We argue that when firms directly experience a negative change in their policy environment that is specific to them, they negatively reassess their exposure to policy risk and their ability to manage their policy environment, which makes them more likely to undertake a divestiture. We analyze formal disputes between firms and governments that arise from adverse changes in policy and find that, following a dispute, firms are more likely to divest in the country where the dispute occurs and in other countries in the same region. However, the impact of disputes on divestitures is firm specific as it applies only to firms directly involved in a dispute . Copyright © 2016 John Wiley & Sons, Ltd.     

The R&D performance in Taiwan's electronics industry: a longitudinal examination

R&D investment has been widely regarded as an important input for firms, particularly for high‐tech firms, to achieve competitive advantage within their industry. Hence, a number of high‐tech firms are now investing substantial amounts into R&D. Since R&D efforts enable firms to raise the competitive advantage, one noticeable and interesting issue expected to know is the degree to which R&D investment influences firm output performance. In Taiwan, much greater emphasis is also being placed into R&D investment in the high‐tech industries; however, R&D output performance has never been seriously examined within this sector. Since the island's electronics industry is widely regarded as the most promising industry in the ‘high‐tech sector’, and is expected to place greatest emphasis on its R&D efforts, we take the electronics firms as our analytical sample. This paper therefore sets out to estimate the impact of R&D on firm performance, in terms of productivity growth and the rate of return on investment, within the electronics industry in Taiwan, whilst also examining the Schumpeterian hypothesis, that R&D performance is an increasing function of firm size. Our examination of R&D performance is based on a panel sample of 83 large electronics firms, completely balanced over the period from 1994 to 2000, with series data of R&D capital also being constructed. Based upon the extended Cobb‐Douglas production function, a random effects model is developed with the estimations revealing that the output elasticity of R&D is around 0.19 and the average rate of return on R&D is around 22%. These findings clearly demonstrate that investment in R&D by these electronics firms has had an impact on their competitive advantage. Compared to the findings of previous studies, where the analytical unit of data was at firm level, here the rate of return on R&D is consistent with similar estimates for the US and UK, but lower than those for Japan. However, our estimations do not provide support for the hypothesis that the impact of R&D on productivity is an increasing function of firm size.     

Firm‐specific knowledge assets and employment arrangements: Evidence from CEO compensation design and CEO dismissal

Research summary : We argue that firms with greater specificity in knowledge structure need to both encourage their CEOs to stay so that they make investments with a long‐term perspective, and provide job securities to the CEOs so that they are less concerned about the risk of being dismissed. Accordingly, we found empirical evidence that specificity in firm knowledge assets is positively associated with the use of restricted stocks in CEO compensation design (indicating the effort of CEO retention) and negatively associated with CEO dismissal (indicating the job securities the firm committed to CEOs). Furthermore, firm diversification was found to mitigate the effect of firm‐specific knowledge on both CEO compensation design and CEO dismissal, as CEOs are more removed from the deployment of knowledge resources in diversified firms. Managerial summary : A firm's knowledge structure, that is, the extent to which its knowledge assets are firm‐specific versus general, has implications for both CEO compensation design and CEO dismissal. In particular, we find that a firm with a high level of firm‐specific knowledge has the incentive to retain its CEO through the use of restricted stocks in CEO compensation. Such a firm is also likely to provide job security for its CEO, leading to a lower likelihood of CEO dismissal. These arguments, however, are less likely to hold in diversified corporations as CEOs in such corporations are more removed from the deployment of knowledge assets. A key managerial implication is that CEO compensation and job security design should be made according to the nature of firm knowledge assets. Copyright © 2016 John Wiley & Sons, Ltd.     

Market orientation,marketing capabilities,and firm performance

Drawing on traditional resource‐based theory and its recent dynamic capabilities theory extensions, we examine both the possession of a market orientation and the marketing capabilities through which resources are deployed into the marketplace as drivers of firm performance in a cross‐industry sample. Our findings indicate that market orientation and marketing capabilities are complementary assets that contribute to superior firm performance. We also find that market orientation has a direct effect on firms' return on assets (ROA), and that marketing capabilities directly impact both ROA and perceived firm performance. Copyright © 2009 John Wiley & Sons, Ltd.     

An examination into the causal logic of rent generation: contrasting Porter's competitive strategy framework and the resource‐based perspective

In this study we revisit some fundamental questions that are increasingly at the heart of current strategic management discourse regarding the relative impact of industry and firm‐specific factors on sustainable competitive advantage. We explore this issue by referring to respective assertions of two major perspectives that dominate the literature over the last two decades: the Porter framework of competitive strategy and the more recent resource‐based view of the firm. A composite model is proposed which elaborates upon both perspectives' divergent causal logic with respect to the conditions relevant for firm success. Empirical findings suggest that industry and firm specific effects are both important but explain different dimensions of performance. Where industry forces influence market performance and profitability, firm assets act upon accomplishments in the market arena (i.e., market performance), and via the latter, to profitability. The paper concludes with directions for future research that will seek to integrate both content and process aspects of firm behavior. Copyright © 2001 John Wiley & Sons, Ltd.     

Self‐selection,endogeneity, and the relationship between CEO duality and firm performance

This study focuses explicitly on the methodological implications of the endogenous theory of governance as applied to firm performance. In particular, if firms choose their governance structures as part of a constrained performance maximization process, then application of an appropriate empirical methodology should reveal statistical evidence of such behavior. In this study we take advantage of the endogenous switching regression model framework to determine whether such predicted optimizing behavior can be corroborated by the data. The model allows us to test explicitly for selection behavior in accordance with comparative advantage and, concomitantly, the presence of selectivity bias, in estimating the impact of CEO duality on firm performance. The selection and performance equations are modeled in accordance with the extant accounting, economics, and management literature on the impact of the dual governance structure on firm performance. Overall, we tested four performance measures for the entire sample of firm‐year observations as well as for the largest three industries in terms of sample sizes. The major finding, robust in all cases, is that there is no evidence to support a contention that CEO duality is a structure purposefully chosen for optimizing performance. If firms are indeed choosing the dual leadership structure, they are doing so for reasons other than improving performance from what it would be otherwise. In fact, for performance measured as market return and earnings per share, there is evidence of a significant selectivity bias that acts to lower performance below what it would have been under random assignment. For performance measured by Tobin's q and return on assets, we found neither evidence of selectivity bias, nor any significant marginal performance impacts of CEO duality. Such findings are inconsistent with an endogenous governance theory, at least when applied to firm performance. Copyright © 2009 John Wiley & Sons, Ltd.     

CEO compensation: A resource advantage and stakeholder‐bargaining perspective

This paper studies how CEO pay and its composition is shaped by strategic factors related to the firm's capacity to generate rents and value, the uncertainty of its resource advantage, and the competitive interaction between firm stakeholders and top management. This is done using an analytical framework in which the CEO and other firm stakeholders interact over the firm's resource surplus as utility‐maximizing claimants based on their relative bargaining power while providing shareholders their market‐based required return. Results from the model yield a number of cogent strategic insights and predictions on the causal interplay between CEO pay, firm growth and risk characteristics, stakeholder management, corporate strategy (e.g., offshoring production), and behavioral biases such as CEO optimism and overconfidence. Copyright © 2012 John Wiley & Sons, Ltd.     

Is R&D risky?

Research summary : Many studies use research and development (R&D) intensity or R&D spending as a proxy for risk taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R&D intensity (R&D spending to sales) and R&D spending on the one hand and 11 different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these nonsignificant results. Our study demonstrates that researchers should avoid casual use of R&D as a proxy for risk taking without explicitly providing a clear definition and measurement model for risk. Managerial summary : Risk is a key construct in strategic management research. Many studies in this area measure risk taking by research and development (R&D) intensity (the ratio of R&D spending to sales) or R&D spending. However, since R&D intensity and spending have also been used to measure various other things such as information processing demands, this raises the question of whether R&D intensity and spending are valid indicators of firm risk. We examine this issue by considering the associations of R&D intensity and R&D spending with conventional measures of firm risk. We find a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different things. Copyright © 2016 John Wiley & Sons, Ltd.     

The influence of executive cognition on competitive dynamics

Prior competitive dynamics research has drawn on theories of information processing to model the subjective antecedents of executives' retaliation choices. This prior work has made great progress in developing our understanding of the retaliation choices most firms will make to a given type of attack. What the information processing perspective has not been able to do is explain firm‐specific behavior to predict which competitive moves individual firms will challenge, or explain why individual firms differ in the types of actions that they are most likely to challenge. The goal of this paper is to sharpen the theoretical and empirical focus on predicting firm‐level retaliation proclivities. We leverage managerial cognition research to examine the relationship between firm‐level differences in the cognitive frameworks that executives possess, and firm‐level differences in whether and how quickly firms challenge a market move. Results from a longitudinal study of the airline industry suggest that the addition of a cognitive perspective provides important insights into competitive retaliation. Copyright © 2010 John Wiley & Sons, Ltd.     

Global Financial Integration and Real Estate Security Returns

Have globalization and increasing economic and financial integration affected the rates of return of publicly traded real estate companies around the world? Using a set of multifactor models for annual data for 946 firms from 16 countries over the sample period, 1995–2002, we estimate the impact of a country's economic openness on returns of publicly traded real estate firms, controlling for the effects of global capital markets, domestic macroeconomic conditions and firm‐specific variables. We find that a country's real estate security excess (risk‐adjusted) returns are negatively related to its openness. The results are robust across different multifactor model specifications and are a testament to increasing global financial integration and its interplay with the real estate sector.     

Revisiting the firm,industry, and country effects on profitability under recessionary and expansion periods: A multilevel analysis

Research summary: Despite voluminous past research, the relevance of firm, industry, and country effects on profitability, particularly under adverse contexts, is still unclear. We reconcile institutional theory with the resource‐based view and industrial organization economics to investigate the effects of economic adversity, such as the 2008 global economic crisis. Using a three‐level random coefficient model, we examine 15,008 firms across 10 emerging and 10 developed countries for the 2005–2011 period. We find that firm effects become stronger under adversity, whereas industry effects become weaker, as well as country main and interaction effects, particularly among the emerging economies. These findings confirm our assumptions that the firm's own fate is, to a great extent, self‐determined; a reality that is even more pronounced during periods of extreme economic hardship. Managerial summary: In this research, we examine how generalized economic adversity affects the balance across the firm‐, industry‐, and country‐specific factors determining firm profitability. We specifically examine 15,008 firms from 10 emerging and 10 developed countries during the 2005–2011 period to investigate the effects of the 2008 global economic crisis on firm performance. We find that in such adverse conditions, the role of the industry and the country are reduced and the firm's own resources and capabilities become more pertinent for firm performance. This phenomenon is more pronounced across emerging markets. We conclude that the firm's own fate is, to a great extent, self‐determined, a reality that is markedly more evident during periods of extreme economic hardship. Copyright © 2015 John Wiley & Sons, Ltd.     

Environmental Performance and the Market for Corporate Assets

Research summary : Scholars and policy‐makers have tended to assume that asset sales have a negative effect on stakeholders, but quantitative evidence to inform the debate has been scarce. In our research, we explored one way such sales could be beneficial: by facilitating the transfer of specialized capabilities used for environmental improvement. Employing quantitative data from a longitudinal sample of U.S. manufacturers, we find evidence consistent with the transfer of capabilities to or from acquired assets. Our results inform theories of ownership change and the conditional flow of capabilities among operations. They provide evidence as well of the existence of environmental capabilities. For policy‐makers they provide needed evidence and insight on the merits of regulations designed to limit asset sales. Managerial summary : It is often assumed that acquisitions harm environmental performance‐‐acquisition leads to greater emphasis on efficiency, while focusing on environmental performance is driven by managerial discretion. We propose instead that acquisitions might lead to improvement in environmental outcomes; the key is in knowing where to look for improvement. We studied thousands of facility‐level acquisitions and find that when a clean firm buys a facility from a dirtier firm, that facility's environmental performance improved. When a dirtier firm buys from a cleaner one, however, it is the dirtier firm's other facilities in the same industry of the target that improved. These results, along with extensions we undertook, suggest that managers and policy‐makers should view acquisitions as conduits rather than impediments in transferring environmental capabilities. Copyright © 2017 John Wiley & Sons, Ltd.     

Business strategy,market structure and risk-return relationships: A structural approach

A structural model is proposed which integrates and extends previous findings on the interrelations between risk—return outcomes, market share, firm conduct attributes, and inter-firm rivalry. It is argued that the relative impact of market share and firm conduct attributes on risk—return outcomes depends on the intensity of rivalry. The empirical setting is commerical banking in Indiana (1975–79). Latent variable path analysis (partial least-squares) is used to estimate the model. The effect of market share is found to be quite important, even when possible ‘spurious’ effects due to differences in individual firm attributes are controlled for. Given consistent indications of oligopolistic coordination found in various parts of the model, it is inferred that the measured effect of market share reflects the exercise of market power.     

Whose experience matters in the boardroom? The effects of experiential and vicarious learning on emerging market entry

Using an organizational learning perspective, we develop arguments about vicarious learning through board interlocks and its relation to experiential learning. Although it is well established that firms learn from board interlocks, little attention has focused on which types of interlocks are most consequential and why. We distinguish between the relative advantages of various tie attributes such as experience, authority, and credibility and argue that these distinctions lead to measureable differences in learning outcomes. We further demonstrate that whether vicarious learning substitutes or complements focal firm experiential learning depends upon the type of interlock involved. After accounting for the endogeneity of ties, we find support for our framework in a longitudinal analysis of foreign investments by German firms in emerging economies between 1990 and 2003. Copyright © 2013 John Wiley & Sons, Ltd.     

The temporal effects of relative and firm‐level absorptive capacity on interorganizational learning

We examine how determinants of absorptive capacity influence learning in alliances over time. Using longitudinal patent cross‐citation data, we find an inverted U‐shaped pattern over time that is influenced by firm‐level and relational factors. Technological similarity only modestly increases learning in the initial stages of a relationship, but moderate levels substantially increase knowledge flows later in the alliance. High technological diversity is related to higher initial learning rates, but the effects diminish over time. Somewhat surprisingly, research and development intensity is negatively related to initial learning rates but has a considerable positive effect later in the relationship. We suggest that initial learning rates in alliances may be constrained by the capacity to absorb knowledge, while later‐stage outcomes are constrained by exploitation capacity. Copyright © 2012 John Wiley & Sons, Ltd.