Knowledge that Transforms

Research Summary This paper develops an inheritance theory explaining the diffusion and persistence of detrimental management practice. Received wisdom, in both management theory and practice, would suggest that a practice that lowers the life expectancy of adopting firms, over time, will vanish because it puts those firms at a competitive disadvantage. In this paper, I challenge this view. I develop a conceptual model that details how a practice that lowers the survival chances of adopting organizations may still spread and continue to exist across a population of firms. I propose that a combination of three basic conditions is sufficient to bring about this phenomenon: if the practice is somehow associated with success, if there exists causal ambiguity, and if the rate of its diffusion is high compared with the rate at which it accelerates firms’ demise, the practice may continue to thrive and become a widespread and persistent feature in an industry. A pivotal conceptual insight is that the endurance of particular management practices and strategies is not merely a corollary of the competitiveness of the organizations that use them but that they have fitness levels of their own. Managerial Summary All organizations have “best practices”: habits that they have picked up in the past or mimicked from others. Managers often believe that these must be the best ways of doing things, because otherwise market forces would have eliminated them. The theory in the paper explains why this belief may be wrong. Some enduring practices may be harmful without managers realizing it because it is not necessarily the most optimal practices that survive (just like harmful viruses persist in nature). As a corollary, the paper discusses how the identification and cessation of detrimental practices can form a new source of and way to understand innovation.

The original article to which this Erratum refers was published in Strategic Management Journal Vol. 38, No. 12, pp. 2390–2423, 2017. DOI: 10.1002/smj.2660 In Table 1, ‘Individuals or firms can set prices by virtue of being a monopoly or through collusion with others’ was cited as (A. Smith, 1904[1904]: I.10.82). It should read (A. Smith, 1904[1776]: I.10.82). We apologize for the error.

Research summary: Based on a detailed database of a beverages producer‐distributor that expanded its product variety by leveraging its logistic network, we show that product diversification generates economies of scope and also higher operational costs. The result is an inverted‐ U relationship between variety and productivity: When the firm offers few additional categories, productivity grows, but as the number of categories rises, the costs of executing the operational routines increase rapidly and productivity falls. The negative effect on productivity increases if the added product category is more dissimilar to previous ones, and decreases with learning from operational experience. Our results highlight how frictions at the operational level can limit the benefits of diversification, even in the absence of other sources of diseconomies, such as increased coordination needs . Managerial summary: One of the prevalent reasons for companies to expand to adjacent product lines is attaining economies of scope. However, such growth strategy also generates operational frictions, even if the day‐to‐day routines do not appear to change at all. Product diversity is disruptive for routine execution, as it requires coordination and exception handling, and may ultimately overcome any efficiency obtained from growth. We estimate the relevance of such operational friction using data from a beverages distribution network. When product variety is low, additional categories do generate efficiency, but after reaching a given threshold, friction prevails. We find that operational friction increases when products are more dissimilar, but is attenuated when workers learn from their own and other's experience .

Research summary : While alliance researchers view prior partner‐specific alliance experience as influencing firms' subsequent alliance or acquisition decisions, empirical evidence on the alliance versus acquisition decision is surprisingly mixed. We offer a reconciliation by proposing and testing an analytical framework that recognizes prior partner‐specific experiences as heterogeneous along three fundamental dimensions: partner‐specific trust, routines, and value certainty. This allows us to use a policy‐capturing methodology to rigorously operationalize and test our mechanism‐level predictions. We find that all three mechanisms can increase the likelihood of a subsequent alliance or acquisition, and in terms of the comparative choice between alliances versus acquisitions, partner‐specific trust pulls towards alliances, and value certainty pulls towards acquisitions. We conclude with a discussion of the theoretical and empirical implications of our approach and method . Managerial summary : This study focuses on an important corporate decision: When a firm has had an alliance with another firm, how would that experience affect the likelihood of a future alliance or acquisition with that same firm? We first suggest that it will depend on three factors: the level of trust that existed in that prior alliance, the extent to which specific work routines were developed, and the degree to which the firm was able to confidently assess the value of the partner firm's resources. We then find that trust is a particularly strong predictor of future alliances, while confidence regarding value more strongly predicts future acquisitions. In this way, we demonstrate more precisely how past corporate choices can affect (consciously or unconsciously) future ones . © 2017 The Authors. Strategic Management Journal Published by John Wiley & Sons Ltd.

Research summary : W e develop and apply a new set of empirical tools consistent with the tenets of value‐based business strategies, leveraging the principle that “no good deal comes undone” and the methods of revealed preferences, to empirically estimate drivers of value creation. We demonstrate how to use these tools in an analysis of value creation in buyer–supplier relationships in the UK corporate legal market. We show that our approach can uncover evidence of subtle mechanisms that traditional methods cannot easily distinguish from each other. Furthermore, we show how the estimates can be used as parameters of biform games for out‐of‐sample analyses of strategic decisions. With readily available data on relationships between firms, this approach can be applied to many other contexts of interest to strategy researchers . Managerial summary : M anagers need to understand the drivers of value creation for customers in order to make competitive positioning decisions and understand when they can capture value under competition. However, estimates of the relative importance of each driver are typically difficult to obtain. In this article, we help remedy this problem by demonstrating a novel method that obtains estimates of the contribution of various drivers of value creation from commonly available data of buyer–supplier relationships. These estimates can then be used to inform the strategy‐making process .

Research summary : The advantages of working with a team to develop an idea are well established, but surprisingly, little is known about why some idea generators ignore these advantages by developing their ideas alone. To answer this question, we study two important trade‐offs. First, working with a team provides access to additional resources but also leads to increased coordination costs. Second, sharing the risks and costs of developing an idea necessitates sharing the potential rewards of a successful idea. We use unique data on idea generators and their submission of ideas to an innovation program in a large European company between 1996 and 2008 to show how the two different trade‐offs affect the decision of idea generators to collaborate with a team. Managerial summary : Organizations usually form teams to develop and execute innovative ideas. When people have the choice, however, will they also form a team or will they develop ideas alone? By studying idea generators and their voluntary submissions of breakthrough ideas to an innovation program, we find that the success rate is much higher for team ideas. Although teamwork has important benefits, idea generators will often develop incremental ideas alone and only accept increased coordination costs for developing radical ideas—this is even more so when they have prior team experiences. Moreover, only when idea generators were successful before and—even more so—when they developed that idea alone, will they be more open to sharing the rewards and risks of developing another idea with a team.

Research summary: This article examines the role of competitive shocks in creating opportunities for new firm foundings. I argue that the sudden dissolution of rival firms may release resources that create opportunities for firm formation, particularly among employees facing impediments to capturing value in their current organizations. Analyzing microdata from the legal services industry, I use unexpected deaths of solo‐practicing attorneys as quasi‐exogenous sources of rival dissolution. Results indicate that these shocks increase the odds of founding by about 30%, with stronger effects among attorneys with weaker social connections or higher competition for promotion. The article thus highlights the role that founders play in reallocating dissolved rivals' resources while demonstrating that founding may be an important outlet for “blocked” employees to capture value from opportunities . Managerial summary: This article finds that the shutdown and dissolution of a rival organization may spur employees to found new firms. As a consequence, managers may find it valuable to pay attention to employees' turnover intentions following the dissolution of a rival. Findings suggest that employees who are having trouble advancing in the firm may be the most likely to found a new organization when a rival dissolves, so managers may want to focus retention efforts on these individuals. To the extent that managers wish to capture customers, employees, and other resources that were formerly attached to a dissolved rival, managers may wish to be aware that they could be in competition with their own employees for these resources and opportunities .

Research summary: This article proposes an approach for modeling competitive interactions that incorporates the costs to firms of changing strategy. The costs associated with strategy modifications, which we term “repositioning costs,” are particularly relevant to competitive interactions involving major changes to business strategies. Repositioning costs can critically affect competitive 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 greater recognition of repositioning costs and illustrate with two simple models how repositioning costs may facilitate differentiation and affect the value of a firm's capability to reduce repositioning costs through investments in flexibility . Managerial summary: This article illustrates how the decision to make a strategic change is affected by both the cost to the firm of making the various strategy modifications, as well as the cost to its rivals of changing their strategies in response. These “repositioning costs” are important 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 strategically to facilitate differentiation, and to assess the value of potential investments in flexibility .

Research Summary : At the intersection of Strategy Process (SP) and Strategy‐as‐Practice (SAP) research lies the focal phenomenon they share—strategy, which manifests itself in a variety of ways: intended, realized, deliberate, emergent, unrealized, and ephemeral strategy. We present a methodology comprised of three stages that, when integrated in the manner we suggest, permit a rich operationalization and tracking of strategy content for all manifestations. We illustrate the utility of our methodology for bridging SP and SAP research by theorizing practices that are more likely to give rise to unrealized and ephemeral strategy, identifying their likely consequences, and presenting a research agenda for studying these transient manifestations. Managerial Summary : Managers know well that, sometimes for good reasons and other times with negative consequences for organizations, not all aspects of strategic plans are implemented with fidelity, resulting in unrealized strategy; and not all bottom‐up projects receive the middle‐management support they need to become realized, resulting in ephemeral strategy making. Surprisingly, however, these transient manifestations of strategy receive little attention in the scholarly literature. Our paper addresses this gap by presenting a methodology for tracking all six manifestations of strategy (intended, realized, deliberate, emergent, unrealized, and ephemeral strategy), highlighting the interdependent relations among them. It also describes strategy making practices that are likely to give rise to the two transient manifestations, i.e., unrealized and ephemeral strategy, as well as their consequences for subsequent strategy making.

Research summary : We develop an integrative approach to the study of strategic management in a four‐step logical sequence. First, we discuss one of the rare conceptual frameworks of integrated firm strategy introduced by Coda (1984). Second, we focus on competitive, growth, and stakeholder strategies and identify four integrative mechanisms underlying the creation of joint outcomes from the combination of different strategic choices. Third, we study how these mechanisms might allow specific binary combinations of strategic choices to create higher levels of value for stakeholders. Lastly, we study the likelihood of alternative three‐way bundles of strategies to generate the highest expected value. This analysis identifies two bundles of strategic decisions that can potentially maximize performance outcomes. Managerial summary : Our integrative approach to strategic management can potentially contribute to the improvement of managerial decision making in three main ways. First, by raising managers’ awareness that decisions in different strategic domains—e.g., competitive, growth, and stakeholder strategies —produce joint effects on value created for stakeholders and, thus, should be selected as an internally coherent bundle. Second, by identifying the factors that influence different strategic decisions and the consequent production of joint results. Some of these factors can be directly learned and leveraged by managers to shape a more internally coherent and effective portfolio of strategic decisions. Third, by proposing specific bundles of internally coherent choices that might provide useful reference points within the context of the three strategies considered.