Knowledge that Transforms

Research Summary Here, I document the governing copyright law and process of digitizing print records with specific application to the Jaques Cattell directories of U.S. R&D. This novel dataset covers 2,805 companies with 8,525 facilities, including location, reporting line within the organization, numbers of professional staff and technicians, and R&D fields over the years 1975–1998. The dataset includes a match to the Compustat identifier, gvkey. As an illustration, I use the new dataset to investigate the effect of organization structure on innovation. By contrast with previous research based on smaller samples, I find no significant relation between organization structure and innovation. Managerial Summary Here, I document the governing copyright law and process of digitizing print records with specific application to the Jaques Cattell directories of U.S. R&D. This novel dataset covers 2,805 companies with 8,525 facilities, including location, reporting line within the organization, numbers of professional staff and technicians, and R&D fields over the years 1975–1998. The dataset is matched to Compustat. It can be used to study novel issues including (a) the effect of complementary manufacturing and marketing assets on how a company exploits its technological capabilities; (b) the relation between the centralization of the R&D organization and productivity of innovation; (c) how clusters influence the location of R&D facilities; and (iv) how state law affects the geography of R&D. Resources This article has earned an Open Data badge for making publicly available the digitally‐shareable data necessary to reproduce the reported results. The data is available at http://five.dartmouth.edu/datasets and https://doi.org/10.25540/3wd8-dffw . Learn more about the Open Practices badges from the Center for Open Science: https://osf.io/tvyxz/wiki .

Research Summary Firms exhibit heterogeneity in size, productivity, and internal structure, and this is true even within the same industry. Our paper provides evidence of a link between an organization's culture—specifically the trust environment—and its level of specialization. We show experimentally that exogenously‐imposed culture endogenously leads to variation in organizational form. We prime trust and demonstrate that the level of trust within an organization affects division of labor and consequently productivity in nonhierarchical teams. This evidence is consistent with a cross‐country link between trust and the division of labor that we observe in data from the European Social Survey. Managerial Summary Firms vary among many dimensions such as culture and internal organization even within the same industry. Trust is one component of corporate culture that is crucial for cooperation within organizations. In this paper, we show that the trust dimension of corporate culture can affect firm performance through internal structure, in particular the degree of division of labor. Using evidence from a game‐theoretic model, a lab experiment, and country‐level data, we show that an increase in trust leads to increased worker specialization. Our results suggest that increasing trust in work environments where division of labor is beneficial is one way to boost team productivity. RESOURCES This article has earned an Open Data badge for making publicly available the digitally‐shareable data necessary to reproduce the reported results. The data is available at https://osf.io/pr39h/ . Learn more about the Open Practices badges from the Center for Open Science: https://osf.io/tvyxz/wiki .

Research Summary Game theory suggests that, in oligopolistic markets characterized by nonprice competition, dominant incumbents can use product proliferation to occupy a region of the product space (i.e., a subspace) and deter rivals from imitating their products. In part, this is because product proliferation makes the introduction of close substitutes comparatively less profitable; in part, it is because the strategy conveys a threat of retaliation to potential imitators. Yet this threat is only credible if the proliferator has high costs of exit from the occupied region of space. We hypothesize that complexity, as a property of product (sub)spaces, generates exit costs for the proliferator and increases the deterrent power of its strategy. We test this hypothesis by studying sequential product introductions in the U.S. recording industry, 2004–2014. Managerial Summary Differentiated‐product markets are often concentrated in the hands of a few dominant organizations, which strive to keep on equal footing by offering similar products. In these markets, a product proliferation strategy can help one of the dominant incumbents claim a particular submarket as its territory. Investing heavily in that submarket communicates a threat that the proliferator will retaliate against invaders to protect these investments. However, this threat is not credible enough to deter rivals unless the occupied submarket is sufficiently complex in terms of product attributes, as precisely this kind of complexity makes it harder for proliferators to back down if challenged. We find evidence of this mechanism in an analysis of product competition among major record companies and discuss implications for strategic decision‐making. RESOURCES This article has earned an Open Data badge for making publicly available the digitally‐shareable data necessary to reproduce the reported results. The data is available at https://github.com/piazzai/smj-18-19552 . Learn more about the Open Practices badges from the Center for Open Science: https://osf.io/tvyxz/wiki .

Research Summary An initial public offering (IPO) ushers in many changes to the organization's boards of directors, including the installation of a formal and comprehensive board leadership structure. This paper shows that higher board undervaluation , that is, the average degree to which directors' qualifications based on normatively accepted criteria for board leadership are not duly reflected in their appointments to the board chair and committee chair positions, is associated with higher director turnover, and with lower qualifications among new directors in the subsequent years. Further, the effect of board undervaluation on firm performance is mediated both by director turnover and new directors' qualifications. But these two mediators operate as opposite forces on performance—director turnover is associated with lower firm performance, but counter‐intuitively lower new‐director‐qualifications are associated with higher firm performance. Managerial Summary How should a privately‐held entrepreneurial firm design its board leadership structure at IPO? What are the implications for board evolution and even firm performance? We find that higher board undervaluation, that is, the average degree to which directors' qualifications based on normatively accepted criteria for board leadership are not duly reflected in their appointments to the board chair and committee chair positions, is associated with higher director turnover, and with lower qualifications among new directors in the subsequent years. These two evolutionary paths act in opposite ways on performance—director turnover lowers firm performance, but lower new‐director‐qualifications improve firm performance. This has important implications for boards, investors, and stock exchange guidelines on board leadership structure.

Research Summary Incumbent firms often reposition themselves in response to entrants, but when doing so they incur repositioning costs. Incumbent repositioning costs and the associated decision biases have been identified in the economics, operations, and strategy literatures as critical aspects of the competitive interactions between incumbents and entrants, but they have received limited attention in game‐theoretic treatments at the strategy level. To fill this gap, we develop a strategic mental model to analytically characterize the impacts of repositioning costs and decision biases on firms' equilibrium strategies and profits. Including these costs and biases changes, the nature of strategic dynamics as well as introduces new implications for strategic choice. Managerial Summary Our analysis shows that although biases by themselves are unequivocally harmful for firms, both the entrant and incumbent can earn more when they are biased than when neither one is. In particular, when an entrant is biased in estimating an incumbent's repositioning ability, this unequivocally reduces its own performance, if the incumbent is aware of the entrant's bias and has correctly assessed it. In a similar vein, when an incumbent is biased in its estimation of the entrant, this hurts the incumbent. However, both the entrant and the incumbent can earn more than they would in a setting where both firms are unbiased. Furthermore, the incumbent is not necessarily better off by being less biased—that is, aware of but with an inaccurate assessment of entrant bias.

Research Summary This paper examines how incumbent firms' market positions and interdependencies across their submarkets influence their responses to entry threats. We adapt a model of capacity deterrence to show that because premium and low‐cost incumbents face different demand functions and operating costs, they experience different tradeoffs between ignoring, deterring, and accommodating threatened entry. In addition, the interdependencies within and between a premium incumbent's submarkets influence its responses. Using data on incumbent responses to entry threats from Southwest Airlines between 2003 and 2012, we find that (a) full‐service incumbents expanded capacity while low‐cost incumbents did not respond significantly, and (b) full‐service incumbents expanded capacity less aggressively in submarkets that had less substitutable customer segments and submarkets that were more complementary with their unthreatened submarkets. Managerial Summary An immutable market position is a core competitive advantage. Using data on incumbent responses to entry threats from Southwest Airlines between 2003 and 2012, we find that (a) full‐service (FSC) incumbents expanded capacity while low‐cost (LCC) incumbents did not respond significantly, and (b) FSCs expanded capacity less aggressively on routes that were expected to have a large number of business passengers and routes that connected to their international hubs. These results suggest two sources of positional immutability: While one set of past choices (e.g., those about submarket substitutability or complementarity) provide a barrier against imitation, another set of past choices (e.g., those about products and costs) generate incentives for a tough defense, both deterring entry by firms from a different position.

Research Summary A number of studies examine the extent to which boards compensate CEOs for their firm's performance (i.e., pay‐for‐performance), but these studies typically do not incorporate what CEOs actually do to bring about those performance outcomes. We suggest that directors will make stronger internal attributions about firm performance when the CEO engages in high levels of corporate strategic investment. CEOs that invest in firm growth essentially “place their bets,” so the pay‐for‐performance relationship is stronger for them than it is for CEOs who do not invest as much in firm growth. We also theorize and find that directors make internal attributions about firm performance more for prestigious, but not less prestigious, CEOs and more when the directors collectively exhibit conservative, but not liberal, political ideologies. Managerial Summary Shareholders and other stakeholders often demand that CEOs should be paid for performance. In other words, CEOs should be paid well when the company is performing well and paid less when the company is not performing well. We add an additional dimension: boards might also consider what CEOs actually do to bring about performance outcomes. Our findings suggest that when CEOs make heavy corporate investments, they essentially “place their bets.” In this scenario, boards attribute performance to the CEO so that CEO compensation rises and falls with company performance. When CEOs make fewer corporate investments, their compensation is not as strongly associated with company performance. This primary relationship is particularly true when CEOs have high social recognition or when the directors are collectively conservative.

Research Summary We study the effect of coordination between businesses on the adaptation of diversified firms. Using a simulation‐based approach, we show that coordination between businesses limits adaptation, causing the relative performance of diversified firms to decline relative to their focused counterparts over time, with this effect being strongest for moderate levels of relatedness between, and complexity within, businesses. Given complexity, firms diversifying into moderately related businesses may therefore be better off limiting coordination between businesses to a few key activities—if they diversify at all—sacrificing short run synergies for long run flexibility. Our study thus offers a novel argument for conglomerate diversification, while linking work on the costs of coordination in diversified firms to the literature on organizational adaptation. Managerial Summary While coordination of activities between businesses enables a diversified firm to realize synergies, it may also limit the flexibility of each business to adapt to changing conditions over time. Thus, the very cross‐business coordination that gives a diversified firm an advantage relative to its single business competitors in the short run may cause it to fall behind them in the long run. Using a mathematical simulation, we show that this negative effect is strongest for firms coordinating across moderately related businesses with activities that are highly interdependent. Multibusiness firms—especially moderately related diversifiers in complex businesses—may thus be better off coordinating only those activities that yield the greatest synergies, foregoing more marginal synergies in the short run for the sake of long run flexibility.

Research Summary Research on necessity entrepreneurship has generated important insights, yet it views necessity entrepreneurs in developed countries as one encompassing group of unemployed individuals—ignoring that the level of need is not uniform but instead increases with time spent in unemployment. We begin to unpack the role of unemployment duration in necessity entrepreneurship by asking how it affects one of the most fundamental decisions in start‐ups: “what business should I be in?” Analyzing primary data on 576 necessity entrepreneurs combined with three secondary data sets, we find that unemployment duration affects whether ventures are launched in “home” or in external industries, and moderates the extent to which founders' industry experience and the attractiveness of external opportunities relative to those in the “home” industry shape industry choice. Managerial Summary Necessity entrepreneurs—individuals who create new firms because they have no other options for work—represent a substantial proportion of world‐wide entrepreneurial activity, and, in developed countries, often come from the ranks of the unemployed. We analyze these entrepreneurs by answering the question “what business should I be in?,” a fundamental strategic decision that founders make. Our findings reveal that duration in unemployment is a key, hitherto unexamined factor that systematically affects the industry‐choice decision in startups. Moreover, we find that duration of unemployment moderates the founder's industry experience and the attractiveness of external opportunities relative to those in the “home” industry, with a markedly different picture for the long‐term unemployed—suggesting the need for customized government policies for formerly unemployed entrepreneurs.

Research Summary : Multinational enterprises (MNEs) invest significant resources in corporate social responsibility (CSR), but their attempts to build a global “social brand” may clash with the execution of operational strategies at a subsidiary level. Using a game‐theoretic model, this research addresses the complex interplay of different contingencies that shape the coordination and control challenges facing MNEs when they implement global CSR strategies, including brand spillovers, the risk of public scandals caused by irresponsible behavior, the size of the MNE network, as well as the roles played by nongovernmental organizations and altruistic managers. Challenging the view of CSR as insurance against lapses of responsible conduct, our model shows that investment in social brands helps avoid irresponsible practices across the MNE network, thereby inducing subsidiaries to “walk the talk.” Managerial Summary : Global social brands are increasingly valuable to multinational enterprises (MNEs), which makes the control and coordination of responsible behavior across their network of foreign subsidiaries a relevant managerial challenge. Indeed, lapses of responsible conduct at the subsidiary level often generate reputational damage at the multinational level. This research explores several mechanisms that help MNEs manage this coordination and control challenge. First, it shows under what conditions MNEs can leverage their investments in social brands to induce responsible practices across their global network. Second, it illustrates how MNEs can exploit collaborations with nongovernmental organizations to reduce the costs of coordinating and controlling their subsidiaries. Finally, it identifies conditions under which MNEs benefit from hiring altruistic managers to run their subsidiaries.