Knowledge that Transforms

Research Summary : Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary : Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.

Research Summary : This article examines the adaptation process of a large manufacturer in the Indian steel industry faced with radical sociopolitical shifts in the external ecosystem. It uses the Bower‐Burgelman process model in combination with Bourdieu's praxis theory to explain the emergence of competing managerial initiatives and associated contests in the company's internal ecology of strategy‐making in terms of socially acquired dispositions. It illuminates process–practice pathways through which top management's resource allocation supported changes in the efficacy of the different forms of capital of the contesting managerial classes, thereby legitimizing the daily “doings” of the rising class and institutionalizing a (re)defined adaptive rule structure. Managerial Summary : How do managers’ early influences, including family upbringing and schooling, bear upon organization's renewal strategy? Our study finds that during discontinuities imposed by socioeconomic upheavals, when organizational performance flounders, managerial initiatives are driven by deepest dispositions derived from early age socialization. Competing managerial fractions jostle to impose practices favorable to their longstanding preferences by putting their weight behind preferred product‐market choices and seeking appropriate changes in the ineffective internal rule structure. Administration's challenge lies in leveraging internal contests to iteratively allocate resources in search of winning dispositions and configurations aligned with evolving social relations in the external environment. Internal availability of managerial groups from diverse social origins is crucial for the administration to reclaim organizational advantage by arbitrating between contesting practices and practitioner fortunes.

Research Summary : “Value creation” is central to strategy. Even so, confusion arises because it can be defined in different ways, e.g., as the sum of producer and consumer surplus in a given time period, or as the change in surplus over time. To formalize the latter notion, we introduce the concept of economic gain, defined as the increase in total surplus. Economic gain can arise through innovation or when a superior firm displaces competitors. We provide a firm‐level measurement framework to quantify economic gain and its distribution among stakeholders, including the firm's shareholders, employees, suppliers, and customers. As an empirical illustration, we compare the creation and distribution of economic gain by Southwest Airlines and American Airlines between 1980 and 2010. Managerial Summary : Most managers and the business press regard “value creation” as the increase in shareholder wealth represented by a rise in corporate profit or stock price. A broader conception of value creation goes beyond shareholders to include the value that is distributed to additional stakeholders of the firm, including employees, suppliers, and customers. We develop a mathematical framework that allows this broader notion of value creation and distribution to be assessed and quantified in many cases. We illustrate the framework using historical data on Southwest Airlines and American Airlines over 3 decades.

Research Summary : This article proposes a formal organizational economics approach to strategic management. Using a Property Rights Theory (PRT) framework, it rationalizes and provides a constructive contribution to two of the main strategy theories: the Resource‐Based View (RBV) and Porter Generic Strategies (PGS). The article shows that the welfare maximizing PRT conditions that characterize the existence and boundaries of a firm parallel both the RBV and Porter conditions for a sustainable competitive advantage, and provides a formal rationalization of Barney’s categorization of resources and Porter’s generic strategies. The article reveals some underexplored aspects of current informal theories, and extends their scope with the integration of strategic networks of complementors and social welfare considerations, opening up new avenues for research. Managerial Summary : This article brings two new insights for managers. First, showing that a firm can garner rents when it is a socially optimal form of organization for the assets it controls, it rationalizes the importance of control and adds a social welfare perspective to strategy. The Resource‐Based View (RBV) and Porter Generic Strategies (PGS), besides theories of competitive advantage, can also be viewed as theories of control. Second, taking into consideration the growing importance of networks and complementors in the knowledge economy, this article highlights the strategic importance of two resource characteristics—collaborative and easy to combine—and opens up new doors for the consideration of two business strategies for managers—platform and coordination—in addition to the traditional cost, differentiation, and focus strategies.

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 . Copyright © 2017 John Wiley & Sons, Ltd.

Research summary : Separating the individual from the social effects of incentives has been challenging because of the possibility of synergies in team production. We observe a unique natural experiment in a South Korean e‐commerce company in which a switch from pay‐for‐performance to fixed (but different) salaries took place in a staggered and effectively random manner across employees. In this case, social and individual effects perspectives make opposing predictions, enabling a critical test. We find evidence consistent with social effects of incentives, particularly as predicted by goal framing theory. The results have implications for the design of incentives to foster collaboration, organizational learning, and organizational performance . Managerial summary : Managers often neglect the deeper hypothesis behind pay‐for‐performance schemes—that people primarily care about how much they are individually paid. An opposing school of thought contends that incentives have social effects too—that individuals care about not only what they receive but also what their peers receive. It is difficult to say whether individual or social effects would be more salient in a context, without a proper experiment with randomization. We exploit a rare opportunity provided by a company that changed its incentive system in a random order, thus unintentionally creating a natural experiment. The results strongly validate the existence of social effects of incentives, but also make the general case for the opportunity to learn from experimenting with organization design in a systematic manner . Copyright © 2017 John Wiley & Sons, Ltd.

Research summary : Startups often compete with diversifying entrants in the technology race to define dominant designs, which can be platform technology‐based or non‐platform technology‐based. However, little research has examined the relative risk of technological exits for startups vs. diversifying entrants in such “dominance battles.” We develop a contingency framework that links a firm's technology exit to its pre‐entry experience and the characteristics of the dominance battle. With a sample of 134 technologies involved in 31 dominance battles in the information technology industry from 1979 to 2007, we show that technologies of startups were more likely than those of diversifying entrants to exit from platform technology‐based dominance battles; however, this relationship did not exist in non‐platform technology‐based dominance battles, or after the emergence of dominant designs. Managerial summary : How can a startup that tries to create a dominant design strategize to survive the fierce technology race? This study demonstrates that choosing the right battlefield is of paramount importance. Two aspects of a battlefield are shown as relevant: the type of technology and the stage of industrial evolution. Our results show that technologies sponsored by startups tend to have higher exit rates than those sponsored by diversifying entrants in dominance battles characterized by platform technologies, but this penalty is not evident in dominance battles characterized by non‐platform technologies or after the emergence of dominant designs. Furthermore, our study suggests that lack of organizational legitimacy, complementary assets, and integrative capabilities may explain why startups have a higher risk of technology exit than diversifying entrants. Copyright © 2017 John Wiley & Sons, Ltd.

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 . Copyright © 2017 John Wiley & Sons, Ltd.

Research Summary : Organizations face tensions to conform to industry norms for legitimacy yet differentiate for competitive advantage when implementing strategies. We suggest this tension is due to and resolved through organizations’ cognitive negotiations of multiple levels of identity. Through an inductive study in the recreational vehicle industry, we find that organizations concurrently draw on identities at the organizational, industry, and strategic group levels to formulate and enact specific competitive actions. Specifically, we find that organizational identity relates to decisions on product offerings; industry identity relates to downstream strategy; and strategic group identity relates to upstream strategy, firm boundaries, and expansion mode. Our findings highlight the importance of strategic group identity and inform a grounded model describing how organizations draw upon different levels of identity to influence strategy. Managerial Summary : Many managers experience tensions of differentiating their firms’ competitive actions from rivals, while conforming with industry norms and practices. In this article, we argue that a manager can navigate these tensions by understanding their firm, strategic group, and industry identities and how these identities interrelate. Through a qualitative case study of the U.S. recreational vehicle industry, we show that each level of identity influences different competitive actions, with firm identity connected to product offerings, industry identity related to managing downstream distribution, and strategic group identity related to firm boundary and acquisition strategies. Overall, strategic group identity is the most critical for managers as this level filters how they view competitors and provides the rules of competition.