DIVERSIFICATION AS REAL OPTIONS AND THE IMPLICATIONS ON FIRM-SPECIFIC RISK AND PERFORMANCE

The management literature posits that firms can create value through diversification. In contrast, the established finance literature concludes that diversified firms destroy value.

This paper suggests a way to reconcile these two warring camps by articulating a new theory of the way in which diversification can add value not by increasing performance, but by reducing risk in ways mat investors cannot replicate.

Specifically, diversification, understood dynamically, provides a way for companies competing in especially turbulent industries to hedge the competitive risk attendant to “convergence” phenomena. That is, in industries where the optimal operating scope of a firm is in question because the promise of convergence cannot be exploited using market-mediating mechanisms, firms will “over diversify” as a hedge against uncertain future reconfigurations of industry boundaries.

In other words, these firms diversify as a way to create “real options” on future integration. These options create a form of “strategy insurance” that investors can not recreate with a portfolio of focused firms: investments in two separate, focused firms do not create an option on a single firm that encompasses the activities of those two companies. As uncertainty spawned of convergence begins to fade, strategically-hedged firms will re-focus their operations by exercising or abandoning their options on integration in a manner appropriate to the demands of their newly-defined marketplaces.

Option-creating diversification has potentially profound implications on operating performance and risk profile. Most significantly, options-based diversification is asserted to cause the operating performance of such firms to fall as they diversify and increase as they focus, in keeping with the observations of the finance literature. Yet the firms will have created value for shareholders by compensating for significant strategic risks that investors cannot otherwise hedge.     

Capabilities,technologies, and firm exit during industry shakeout: Evidence from the global solar photovoltaic industry

Research Summary: Explanations of entrants’ survival in an emerging industry are premised on pre‐entry capabilities or technology entry choices prior to the emergence of the dominant design. We consider how these drivers interact to strengthen or nullify firms’ pre‐entry advantage, and facilitate adaptation as the industry evolves. We also expand the treatment of exit by separating dissolution from acquisition, in which firms’ capabilities continue to be utilized in the industry. Studying a recent shakeout in the global solar photovoltaic industry, we find that pre‐entry capabilities and technology choices act in a complementary manner for some firms, thereby enhancing survival, and as buffers against exit for others. Nearly half of exits were via acquisitions, and technology choice at entry played an important role in determining how firms exited. Managerial Summary: New industries are often characterized by intense technology competition that culminates in a dominant technology followed by industry shakeout. Although prior research underscores the central role of technology choice and firm capabilities to survival, we do not actually know how firms with different capabilities and who have made competing technology choices survive an industry shakeout. In this article, we show how entrants’ capabilities and technology choices can act in a complementary manner for some firms, enhancing their chance of survival, and as buffers against failure for others. Moreover, we explain why some firms that do exit are acquired, when others are dissolved.     

Exploring the sociocultural determinants of de novo versus de alio entry in emerging industries

The influence of institutional factors on firm entry has long interested strategy scholars. However, we have limited understanding of how the sociocultural environment, defined as the unwritten, decentralized “rules of the game,” influences founding rates in emergent industries; we know even less about how these noneconomic factors differentially influence entry by new entrepreneurial (de novo) firms versus diversifying incumbent (de alio) firms. Utilizing a unique dataset on entry in the green building supply industry, we find that, while economic and policy factors are highly correlated with de alio entry, the sociocultural environment exerts a greater influence on de novo firms. Our findings contribute to the literature on corporate demography, institutions and entrepreneurship, and industry emergence. Copyright © 2013 John Wiley & Sons, Ltd.     

The effects of environmental focus and program timing on green marketing performance and the moderating role of resource commitment

Should firms adopt sustainable marketing policy and develop green products? Most popular press says yes, but industry remains slow to act upon such initiatives. Drawing upon recent research in the Industrial Marketing Management Sustainability Special Issue, this research investigates the impact of green initiatives on firm performance and how the related commitment of resources impacts the effectiveness of those initiatives. The goal of this paper is to explore the effectiveness of green marketing on firm performance, in terms of financial performance, market performance, and service quality. Further, resource commitment is examined as a possible boundary condition of these relationships. Using multi-source data, the findings suggest that the commitment of proper resources is critical to the success of any green initiative. This study also supports the notion that being the first firm in an industry to initiate a green program provides few tangible benefits. More importantly, even firms with an environmental focus neglect to realize superior performance unless the specific strategy is matched with consistent support from top management.     

Services,industry evolution,and the competitive strategies of product firms

Services of different types have become increasingly important for product firms. While these firms mainly focus on products, managers and researchers lack a comprehensive framework to understand when to make significant investments in particular kinds of services. We identify three categories of product‐related services from a product firm—smoothing and adapting services, which complement products, and substitution services, which enable customers to pay for the use of a product without buying the product itself. We develop propositions about the relative level of these different kinds of services vis‐a‐vis industry evolution, as well as suggest how these services affect industry structure. We draw upon various literatures, though we conclude that the relationship between products and services is more complex and richer than any one literature suggests. Copyright © 2014 John Wiley & Sons, Ltd.     

Conceptualizing and measuring capabilities: methodology and empirical application

This paper attempts to operationalize and measure firm‐specific capabilities using an extant conceptualization in the resource‐based view (RBV) literature. Capabilities are conceived as the efficiency with which a firm employs a given set of resources (inputs) at its disposal to achieve certain objectives (outputs). We expand on extant theoretical literature on relative capabilities, by delineating the conditions that have to be met for relative capabilities to be measured non‐tautologically. We then proceed to suggest an estimation methodology, stochastic frontier estimation (SFE), that allows us to infer firm capabilities. We illustrate this technique with a sample of firms in the semiconductor industry. Our findings underscore the heterogeneity in R& D capability across firms in this industry, as well as the persistence in these capabilities over time. We also find that the market rewards high R& D capability firms, in that they show the highest average values of Tobin's q. Copyright © 2004 John Wiley & Sons, Ltd.     

Strategic human capital management in the context of cross‐industry and within‐industry mobility frictions

Research Summary: We develop and test a theory examining how frictions that restrict mobility across industries and frictions constraining mobility within an industry can co‐occur to effectively isolate individual human capital, ultimately changing the firm's make‐versus‐buy decision for human capital. Empirically, we demonstrate that when cross‐industry frictions in the form of limited skill transferability and within‐industry frictions in the form of noncompete enforceability are both present, employees exhibit longer tenures, firms hire workers with less initial experience, firms change the amount and nature of training provided, and wages marginally increase. These findings suggest that sufficiently strong and complementary mobility frictions shift the emphasis of firms’ human capital management practices toward internal development of human capital relative to acquisition on the external market. Managerial Summary : In the face of frictions to employee mobility both within and across industries, which we capture empirically using measures of noncompete enforceability and limited skill transferability across industries, firms tend to hire less experienced workers, such workers exhibit longer tenures, and firms invest more in their training, particularly in the development of new skills. Our findings imply that for firms operating under such complementary frictions, better hiring and internal development capabilities are particularly important for performance, while those firms without such capabilities may benefit from considering ways to circumvent the mobility frictions, including moving out of the focal state or lobbying for different noncompete laws.     

Incubation of an industry: Heterogeneous knowledge bases and modes of value capture

Research summary : We examine firms' technological investments during an industry's incubation stage—the period between a technological breakthrough and the first instance of its commercialization. Using the agricultural biotechnology context, we develop stylized findings regarding the understudied knowledge evolution preceding product evolution in an industry's life cycle, the trend and diversity of firms undertaking technological investments in anticipation of industry emergence, their leverage of markets for technology and corporate control, and their use of alternative modes of value capture. We juxtapose these stylized findings with existing literature to identify new theoretical insights, and set the stage for future scholarly work to develop and test new theories for the incubation period, examine its existence in other industries, and study its impact on subsequent firm and industry evolution. M anagerial summary : New technological breakthroughs present managers of existing firms and aspiring entrepreneurs with opportunities to create altogether new industries. During the vibrant incubation period, we find that multiple firms capitalize on diverse knowledge bases to shape the industry's knowledge evolution and also capture economic value in diverse ways. Existing firms in the obsolescing industry are more likely to become targets in acquisitions given their complementary knowledge. Science‐based start‐ups are more likely to engage in acquisitions and collaborations with established firms. Diversifying firms are more likely to commercialize products after leveraging of internal development, acquisitions, and alliances. Our study highlights the importance for managers to think about “success” and “failure” across multiple yardsticks of performance, rather than only as product commercialization as the sole goal. Copyright © 2016 John Wiley & Sons, Ltd.     

Surviving the gales of creative destruction: the determinants of product turnover

Innovative industries are often characterized by rapid product turnover. Product longevity may be driven by both a product's position within a market as well as its position within a firm's larger product portfolio. However, we have little understanding of the relative importance of these factors in determining product turnover and how they interact as an industry evolves. Although researchers have invested substantial effort in analyzing firm survival and turnover, there are far fewer studies of the determinants of product survival and turnover. We use hazard rate models and count regression models to describe the behavior of firms and their products with a new and detailed database on the laser printer industry. We show, first, that competition and market structure variables have a large impact on both speeding product exit and delaying product entry. Second, there is some evidence that firms that have maintained a high market share for a number of years keep their products on the market longer than those with lower market share. Finally, firms with high innovative capacity tend to enter markets frequently, but withdraw their products at average rates. Firms with strong brands tend to introduce few products and withdraw their products slowly. With these findings, the paper links product entry and exit decisions to the broader literature on firm strategic and product management. Copyright © 2006 John Wiley & Sons, Ltd.     

Weak links and the management of reputational interdependencies

This paper builds on a growing literature that takes into account the fact that firms in an industry may be interdependent with regard to their corporate reputations, thus sharing a “reputation commons.” We argue that the theory of public goods can help us to understand the interdependencies that link corporate reputations and to frame the contexts and requirements for collective action that they induce. In particular, we suggest that more and more frequently these interdependencies make industry reputation a “weak link” public good. We show that this raises new challenges for the strategic management of industry reputation by communities of firms. The discussion of these challenges is based on the case study of the collective action of the European chlorine companies towards restoring their reputation after being accused of not being safe, and on a model of the production of reputation by companies. Copyright © 2013 John Wiley & Sons, Ltd.     

Follow the leader (or not): The influence of peer CEOs’ characteristics on interorganizational imitation

Research Summary: We argue that because charisma and narcissism represent widely held prototypes of effective and ineffective forms of leadership, respectively, the likelihood that a focal firm will imitate the practices of its peer firms is affected by these peer firms’ CEO characteristics. We theorize that peer firm CEO charisma enhances the focal firm’s imitation of peer firms’ behaviors, while peer firm CEO narcissism diminishes it. We further posit that the uncertainty of the context affects these imitation processes: industry dynamism and prior experience in a given strategic domain, respectively, strengthens and dampens focal firms’ susceptibility to these peer CEOs’ attributes. We test and find support for these ideas using a longitudinal sample of Fortune 500 firms in two distinct domains, corporate strategy and corporate social responsibility. Managerial Summary: When companies are uncertain about the costs and benefits of strategic actions this may lead them to imitate the actions of peer companies. But given the uncertainty, the challenge for executives is: which companies to emulate and which to ignore? In a sample of Fortune 500 companies, we find that the charisma or narcissism of a peer company’s CEO positively or negatively influences, respectively, the degree to which the peer company’s strategic actions are imitated. We reason that this is because these particular CEO attributes are widely believed to drive leadership effectiveness or ineffectiveness, respectively. We also find that the effects of these CEO characteristics on imitation are stronger in dynamic industry environments and weaker for companies that already have experience with the given strategy.     

Hidden but in plain sight: The role of scale adjustment in industry dynamics

While much is understood about the general pattern of industry dynamics, a critical element underlying these dynamics, the rate of the expansion of individual firms, has been largely overlooked. We argue that the rate at which firms can reliably increase their scale of operations is a critical factor in understanding the structure of industries. Further, success at scaling‐up the firm's operations provides a dynamic‐isolating mechanism that insulates established firms from new competition. We show that the bases of profitability in the industry (monopoly‐like profits stemming from the restriction of output, efficiency rents based on firm‐specific productivity differences, or transitory Schumpeterian profits) can be traced to the scale adjustment process. We explore these issues in a computational model of industry dynamics. Copyright © 2013 John Wiley & Sons, Ltd.     

Recognition of entrepreneur’s social ties and firm innovation in emerging markets: explanation from the industrial institutional environment and survival pressure

Despite the extensive attention to the role of entrepreneurs’ business or political ties, few studies have distinguished the basis of those social ties. The aim of this study is to explore the different roles of the entrepreneurs’ personalized and formal social ties on the firms’ innovation performance. Based on renqing and formal rules, this study extends the social ties’ typology into four categories, namely, transactional business ties, transactional political ties, guanxi business ties, and guanxi political ties. Using data collected from 209 Chinese firms, we further identify the distinctive contributions of the different ties on the entrepreneurial firm’s innovation performance under different institutional environments and entrepreneurs’ survival pressure. This paper will help researchers and managers better understand the function of social ties in innovation in emerging markets, such as China.

     

How Much Does Ownership Form Matter?

Research summary : Previous studies have emphasized firm and industry effects on variation in firm performance, but the relationship between forms of ownership and firm performance has been the focus of limited research. This article examines the extent to which ownership form (i.e., public or private ownership) and ownership structure (including diffused ownership and blockholding) affect firm performance. The results of an analysis of 30,525 European Union (EU) firms indicate that form of ownership is an important explanatory factor in the difference in performance among firms. These results underscore the need to study firms characterized by different ownership arrangements and to provide empirical evidence for the study of firm ownership in strategic management. Managerial summary : Motivated by growing evidence on the involvement of different types of owners in the strategies of firms, we studied the extent to which a firm's ownership form (type of legal incorporation, such as public and private ownership forms) and ownership structure (diffused ownership and blockholding) affect its performance. Our study of more than 30,000 firms from the European Union shows that ownership form differences explain some of the performance differences between firms. Our results also indicate that firms with different ownership forms are differently affected by their competitive environment. Overall, the study suggests that choosing the right ownership form can have important strategic consequences. Copyright © 2017 John Wiley & Sons, Ltd.     

Domestic mindsets and early international performance: The moderating effect of global industry conditions

We develop and test a sensemaking model of early internationalization that ties domestic mindsets to international industry conditions and early international performance. Our central contention is that the fit between international industry conditions and domestic mindsets will lead to superior early international performance. We test this contention with a sample of 178 large and established domestic firms from 20 industries. Our results highlight the role of domestic mindsets in the early phases of internationalization and prescribe the types of domestic mindsets needed to maximize early international performance in global, multi‐domestic, and transnational industry conditions. Our results also provide valuable insights to top managers of large and established firms on how to reduce the risk of failure and how to successfully prepare for and cope with international environments by matching their domestic mindsets with international industry environments. Copyright © 2010 John Wiley & Sons, Ltd.     

Competition and Managerial Incentives: Board Independence,Information and Predation

We show that the choice of an independent board serves as a commitment by management that it will abstain from ex post decisions that are not in shareholder interests. However, an independent board, relying on product market information to make or approve strategic decisions, also makes the firm more vulnerable to predatory information manipulation by its industry rivals. The optimal board type trades off the cost of the agency problem with that from predation. We show that only for weaker firms is an independent board the better choice, and for such firms, increased competition makes board independence even more beneficial.     

Making the news: Heterogeneous media coverage and corporate litigation

Research summary: This study explores how relative prominence shapes rivalry between firms. Corporate litigation, an increasingly costly domain of interfirm rivalry, is threatening not just because of the immediate legal stakes but because of the indirect losses that unwanted negative publicity inflicts on defendants. I argue that potential defendants' incentives to avoid such losses create a source of value that firms can capture by agreeing to forgo litigation. The more prominent a firm is relative to rivals, the greater its threat and the more value it stands to capture from potential targets by sparing them from litigation. Managerial summary: The power to attract media attention can be valuable to firms beyond its role in managing relations with investors or the public. It can also provide leverage against industry rivals. Being sued by a prominent firm carries the threat of potential damaging publicity, especially for lesser‐known rivals. Firms may be able to leverage this threat to elicit concessions in return for sparing rivals from litigation. Prominent firms stand to benefit not just from eliciting concessions from rivals but from the ability to do so while avoiding costly litigation. Data from the semiconductor industry show that firms that command much higher levels of media coverage than rivals are able to avoid litigation more often than firms with comparable or lower levels of media coverage. Copyright © 2015 John Wiley & Sons, Ltd.     

Entry into Nascent Industries: Disentangling a Firm's Capability Portfolio at the Time of Investment Versus Market Entry

Research summary : This article examines the capability antecedents of firm entry into nascent industries. Because a firm's technological investments in nascent industries typically occur before market entry, this study makes a distinction between firm capabilities at the time of market entry and at the time of initial investment. At the time of market entry, core technical capabilities and complementary assets influence the likelihood of entry. However, at the time of investment, a firm's integrative capabilities as well as the initial stocks of related technical capabilities and complementary assets become critical, as they enable endogenous development of core technical capabilities and complementary assets by the time of entry. The empirical sample consists of firms involved in field experiments in agricultural biotechnology during the period 1980–2010. Managerial summary : New product commercialization in a nascent industry typically requires access to not only core technologies of the focal industry, but also supporting commercialization assets. However, firms may not possess these critical capabilities when they first invest in the industry. Instead, empirical evidence from the context of agricultural biotechnology shows that at the time of first investment, a firm's integrative capabilities partly explain their likelihood of entry. Integrative capabilities encompass a set of practices that enable effective coordination and communication, and in turn put firms in an advantageous position to develop the needed capabilities by the time of entry. Copyright © 2017 John Wiley & Sons, Ltd.     

When is dependence on other organizations burdensome? The effect of asymmetric dependence on internet firm failure

Although critical resource providers offer ample access benefits to deficient firms, dependence on these resource providers is burdensome because dependency places deficient firms into a vulnerable position, especially when the dependency is asymmetric. Thus, we ask: Is it better to balance dependence among critical resource providers or asymmetrically depend on one if there is more than one resource provider? We use a unique context of the internet industry where satellite internet firms depend on portals that provide Web traffic and find that asymmetric dependence on portals increases the likelihood of failure, but market leaders suffer less from asymmetric dependence, while satellite internet firms with higher dependence on portals suffer more from asymmetric dependence. Copyright © 2014 John Wiley & Sons, Ltd.