Knowledge that Transforms

[Research summary: Among themost difficult firm strategic choices is the trade-off between making a long-term commitment or holding off on investment in the face of uncertainty. To operationalize strategic management theory under demand, technological and competitive uncertainty, we develop a Strategic Net Present Value (NPV) framework that integrates real options and game theory to quantify value components and interactions at the interface between NPV, real options, and strategic games. Our approach results in new propositions clarifying the way learning-experience conditions, technological uncertainty, and proprietary information interact to tilt the balance in the interplay between wait-and-see flexibility and strategic commitment. As such, Strategic NPV adds to our understanding of the conditions where NPV, real options, or strategic thinking are more relevant. Managerial summary:This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade-off between making a long-term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning-experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait-and-see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision making.]

[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 aremore dissimilar, but is attenuated when workers learn from their own and other’s experience.]

Research summary : A ttaining optimal distinctiveness—positive stakeholder perceptions about a firm's strategic position that reconciles competing demands for differentiation and conformity—has been an important focal point for scholarship at the interface of strategic management and institutional theory. We provide a comprehensive review of this literature and situate studies on optimal distinctiveness in the broader scholarly effort to integrate institutional theory into strategic management. Our review finds that much extant research on firm‐level optimal distinctiveness is grounded in the strategic balance perspective that conceptualizes conformity and competitive differentiation as a trade‐off along a single organizational attribute. We argue for a renewed research agenda that draws on recent developments in institutional theory to conceptualize organizational environments as more multiplex, fragmented, and dynamic, and discuss its implications for core strategic management topics . Managerial summary : T his article aims to provide managers with a more comprehensive and contemporary view of how firms can become optimally distinct—being different enough from peer firms to be competitive, but similar enough to peers to be recognizable. We aim to equip managers with an understanding of firms as complex, multidimensional entities, and encourage them to identify and orchestrate various types of strategic resources to reconcile conformity versus differentiation tensions, address the multiplicity of stakeholder expectations, and aptly modify their positioning strategies in order to succeed in dynamic environments .

[Research summary: Pursuing sources of entrepreneurial and competitive advantage, researchers have been exploring cognition. We examine how cognitive capabilities affect competitive performance, drawing on two constructs rooted in psychology and economics. A familiar one is analytic skill, the ability to solve abstract problems. To that, we add strategic intelligence — the ability to anticipate competitors' behavior and preempt it. Using incentivized experiments, we measure the constructs in participants, then let them compete for cash in a highly competitive market. Although the market is designed to eliminate any advantages, whether from market structure or strategic resources, some profit much more than others. We trace performance differences to heterogeneity in analytic skill and strategic intelligence, and show how the two fuel superior performance, even against tough competition. Managerial summary: Why do some entrepreneurs outperform others? How can companies succeed against tough competition? Certainly, some benefit from unique resources, such as patents, and others can winnow competition, as through mergers. But some have entered highly competitive markets, lacking obvious resources, yet managed to achieve impressive success: think Under Armour, Wal-Mart or Home Depot. Here we test how advantage can stem from managerial cognition. We measure two kinds of cognitive skill in market participants, and then let them vie for cash in intensely competitive markets. Some end up with far more profit than others. Tracing the root of high performance, we find it is predicted by a combination of analytic skills, the ability to solve abstract problems, and strategic intelligence—ability to anticipate competitors' behavior and preempt it.]

Research summary : We use a novel theoretical framework to synthesize ostensibly disparate streams of nonmarket strategy research. We argue that faced with weak institutions, firms can create and appropriate value by either adapting to, augmenting, or transforming the existing institutional environment, and can do so either independently or in collaboration with others. We use the resulting typology of six distinct nonmarket strategies to provide an integrative review of nonmarket strategy research. We then extend this framework to examine the choice between nonmarket strategies, arguing that this choice depends upon whether the existing institutional environment is incomplete or captured, and discussing other drivers of nonmarket strategy choice, the relationship between these strategies, and their social impact, so as to provide an agenda for future research . Managerial summary : The pursuit of competitive advantage often requires firms to operate in contexts where existing rules and regulations provide inadequate protection. Disruptive technologies open up new opportunities for value creation, but it takes years before appropriate regulations are introduced. Economic reforms open up new markets, but these are often regulated to favor incumbents and politically connected insiders. In such environments, managers must decide whether to adapt their strategies to the existing institutional environment, devote resources to improve it, or try to transform it altogether. In this article, we develop an integrative theoretical framework that connects and synthesizes research examining each of these options, and offers some preliminary thoughts on how managers may choose among these different approaches .

[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.]

Research summary : This study draws on the resource‐based view and the behavioral theory of the firm to gain new insights about the effect of performance relative to aspiration level (i.e., performance feedback) on the decision to enter new markets. Results show an inverted U‐shaped relationship between performance both below and above aspiration level, and the probability of firms to enter new markets. That is, when firms are well below or well above their aspiration level, they significantly change their behavior. This article develops a theoretical framework to clarify and organize these findings . Managerial summary : This study examines the effect of performance feedback, and particularly, large discrepancies between firm performance and aspiration level on the decision to enter new markets. It provides support to the role of performance feedback in affecting the decision to enter new markets, a factor that has received relatively little attention in the extensive literature that has examined the inducements of such moves. Results show that, as performance falls below or rises above aspiration, a firm's probability of entering new markets increases up to a certain point after which this relationship decreases. This shows that the tendency to enter new markets is different for firms that are in the neighborhood of aspiration level compared to those that are well below or above it .

Research summary: We analyze the effects of board industry expertise on corporate strategic change and the moderating role of institutional quality. We suggest that country‐level contingency factors mitigate the effect of experienced boards on strategy formation by providing alternative sources of information and control in strategic matters. We develop institutional quality as institutional information provision and institutional control provision to test our hypotheses on a sample of firms from MSCI E urope and the S&P 500. Our findings confirm that industry expertise is a salient driver of strategic change across countries. The strength of the effect, however, depends on the institutional quality. We submit that weak institutions require greater board industry expertise as an alternative channel of information and control . Management summary: This study provides new empirical evidence that experience in the firms' industries enables directors to increase strategic change. Our findings show that this effect is even stronger in countries with weak regulatory environments. We hereby provide guidance for multiple stakeholders. First, shareholders seeking a more active adjustment of their firms' strategies may want to compose boards that leverage such experienced directors. Second, directors can use their industry experience to control and to challenge managers better to move beyond the status quo. Third, managers lacking access to information on potential strategic change can use such experienced directors for strategic advice and as a source of information. Overall, we add to the understanding of the corporate board's role in shaping strategy and the influence of weak regulations .

Research summary: Exploiting opportunities is critical to a firm's competitive advantage. Not surprisingly, there has been considerable interest in the processes by which top managers allocate attention to potential opportunities. Although such investigations have largely focused on top‐down processes for allocating attention to the environment, some studies have explored bottom‐up processes. In this article, we consider both top‐down and bottom‐up processing to develop a model by which top managers form opportunity beliefs for strategic action depending on the allocation of transient and sustained attention. Specifically, this attentional model provides insights into how a top manager's attention is allocated to identify potential opportunities from environmental change and explores how different modes of attentional engagement impact the likelihood of forming beliefs about radical and incremental opportunities requiring strategic action . Managerial summary: Managers are interested in noticing and exploiting opportunities because the exploitation of an opportunity represents an important strategic action. Noticing and exploiting opportunities depends on how and where top managers allocate their attention. Managers can focus attention based on their knowledge and experience or as a result of something in the environment capturing their attention. In this paper, we consider both knowledge‐driven and environment‐driven processes for allocating attention to form opportunity beliefs. This opportunity belief arises from a two stage process. The first stage explains how a top manager identifies environmental changes as potential opportunities. The second stage explains how the top manager forms a belief that these identified environmental changes represent a radical or incremental opportunity worthy of exploitation .

Research summary : Inconclusive findings about the effect of national cultural differences on post‐acquisition performance may be created by the failure to distinguish among the different cultural dimensions and the asymmetry of cultural differences. To demonstrate a different approach, this study focuses on one dimension of national cultural values—power distance value ( PDV ) and develops a framework for the asymmetric effect of PDV differences in creating two types of conflicts. The analysis of 2,115 cross‐border acquisitions in the global information technology industry shows that PDV differences undermine the long‐term post‐acquisition performance of acquirers. This effect is stronger when acquirers are higher than targets in PDV than when the opposite is the case. This asymmetric effect of PDV difference depends on national status difference, business relatedness, and acquisition experience . Managerial summary: National cultural differences can create “cultural clashes” to undermine the value creation by cross‐border acquisitions. During integration, individuals react to the acquirer–target hierarchy according to their respective power distance value ( PDV ): the extent to which they value equality (low PDV ) or hierarchy (high PDV ). PDV divergence results in two types of conflicts, depending on whether acquirers are higher or lower than targets in PDV . The two types of conflicts vary in the magnitude of their harmful effect on post‐acquisition performance. Both types of conflicts are more detrimental when acquirers are higher than targets in country status and when individuals need to interact more intensely. Acquisition experience can both help and harm post‐acquisition performance. These findings offer important implications for managing cross‐border acquisitions .