Chen, Pao-Lien, Charlie Williams and Rajshree Agarwal, Growing Pains

25 Pages·2011·0.23 MB·English

Strategic Management Journal
Strat.Mgmt.J.,33:252–276(2012)
PublishedonlineEarlyViewinWileyOnlineLibrary(wileyonlinelibrary.com)DOI:10.1002/smj.954
Received15July2009;Finalrevisionreceived27July2011
GROWING PAINS: PRE-ENTRY EXPERIENCE AND THE
†
CHALLENGE OF TRANSITION TO INCUMBENCY
PAO-LIENCHEN,1 CHARLESWILLIAMS,2 andRAJSHREEAGARWAL3*
1Institute of Technology Management, National Tsing Hua University, Hsinchu,
Taiwan
2BocconiUniversity,Milan,Italy
3RobertH.SmithSchoolofBusiness,UniversityofMaryland,CollegePark,Maryland,
U.S.A.
Weexaminehowentrepreneurialentrybydiversifyinganddenovofirmsinnewindustriesleadsto
differentlevelsofperformance.Weproposethatthesetypesoffirmsdifferindynamiccapabilities,
which help them overcome growth impediments and transition to incumbency in the industry.
Growthimpedimentsariseatlargersize,oldertenurelevelsinindustry,andaftertechnological
discontinuities.Becauseoftheirpriorexperience,diversifyingfirmsarebetterequippedtohandle
thechallengesofimpedimentstogrowth.Meanwhile,denovofirms,ostensiblytailor-madefor
the targeted industry, are more likely to stumble over these growth challenges, and eventually
lagbehinddiversifyingfirms.Wefindsupportforourhypothesesusinganearcensusoffirmsin
the U.S. wireless telecommunications industry over the 1983–2004 period. Copyright  2011
John Wiley & Sons, Ltd.
INTRODUCTION Ganco and Agarwal, 2009; Helfat and Lieberman,
2002; Holbrook et al., 2000; Klepper and Simons,
Studies of industry evolution largely sort firms 2000;Lane,1989;Mitchell,1991).Leftunstudied,
along separate dimensions of incumbency and however, is the question of how pre-entry experi-
experience. Some studies focus on the survival ence impacts diversifying and de novo entrants as
of incumbents and entrants, extolling the virtues they evolve and become incumbents.
of entrepreneurial firms that displace incumbents Prior studies examining the static effects of pre-
(Christensen and Rosenbloom, 1995; Cooper and entry experience on survival have generally found
Schendel, 1976; Gort and Klepper, 1982; Hen- asurvivaladvantageforfirmswithpre-entryexpe-
derson and Clark, 1990; Tushman and Anderson, rience,thoughthereareconflictingapproachesand
1986;Utterback,1994).Otherstudiescomparethe findings(GancoandAgarwal,2009).Totheextent
performance of diversifying (pre existing firms in that researchers have considered dynamic pat-
otherindustries)anddenovo (newfirmscreatedin terns,thedominantmodelsineconomics(Klepper,
thefocalindustrycontext)entrantsinanewindus- 2002b) and organization studies (Carroll and Han-
try(BayusandAgarwal,2007;Carrollet al.,1996; nan, 2004) predict gradual convergence between
diversifying and de novo firms. Convergence
remains the dominant model, despite little empiri-
Keywords:growth;evolution;entrepreneurship;dynamic
calvalidation(Carrollet al.,1996)andeveninthe
capabilities; reconfiguration.
*Correspondenceto:RajshreeAgarwal,RobertH.SmithSchool face of contradictory evidence (Bayus and Agar-
ofBusiness,DepartmentofManagementandOrganization,Uni- wal, 2007; Holbrook et al., 2000; Klepper, 2002a;
versity of Maryland, 4512 Van Munching Hall, College Park,
Klepper and Simons, 2000).
MD20742,U.S.A.E-mail:[email protected]
†Allauthorscontributedequallytothestudyandthenamesare Clearly the dynamic pattern of advantage
listedinrandomorder. between experienced and de novo firms merits
Copyright  2011 John Wiley & Sons, Ltd.
Growing Pains 253
more focused exploration. To study this dynamic, By undertaking a study of growth of firms
we examine how diversifying and de novo firms as they face the challenges of incumbency, we
confront impediments to growth as they tran- integrate firm and industry evolution and extend
sition to incumbency in the industry. Harking the literature in research streams in entrepreneur-
back to an earlier tradition (Penrose, 1959), we ship, strategy, and organizational theory. In entre-
treat growth as a primary challenge for firms preneurship, we highlight once again that
as they evolve in the context of a focal indus- established firms can be an important source of
try (Caves, 1998; Sutton, 1997). Prior literature entrepreneurial activity when they enter new mar-
has identified three particular characteristics of kets and compete in technology-intensive indus-
incumbents (Acs and Audretsch, 1990; Gort and tries. Our analysis and findings stand in stark
Klepper,1982;HelfatandLieberman,2002;Tush- contrast to most theories of industry evolution,
man and Anderson, 1986)1 that represent a serious entrepreneurship, and strategy, which predict an
impediment to growth: size (Penrose, 1959; Sut- initial advantage for diversifying firms that erodes
ton,1997),tenureinindustry(Stinchcombe,1965; over time (Carroll et al., 1996; Klepper, 2002a).
Tripsas, 2009), and changing technology regime Instead, the results are consistent with the
(Dowell and Swaminathan, 2006; Tushman and widespread but little studied notion that growth
Anderson, 1986). Firms that successfully over- is a particular challenge for entrepreneurial or de
cometheseimpediments—risingtoincumbencyin novo firms. In particular, the pattern of slow-
thenewindustry—mustreconfigureexistingoper- ing growth in the face of impediments suggests
ations (Karim, 2006) in order to plan and execute that the capability to renew and reconfigure oper-
growth (Penrose, 1959). ations is one of the key deficits that de novo
We propose that de novo firms will have fewer firms face in competition with firms that possess
integrative capabilities (Helfat and Raubitschek, prior experience. This finding suggests that pre-
2000) and less transformational experience (King entry experience helps diversifying firms develop
and Tucci, 2002) to draw upon than diversifying superior dynamic capabilities (Carroll et al., 1996;
firms when they must integrate new resources to Eisenhardt and Martin, 2000; Ganco and Agarwal,
face these impediments. We test this prediction in 2009; Teece, Pisano, and Shuen, 1997), engage
theempiricalcontextoftheU.S.wirelesstelecom- in strategic renewal (Agarwal and Helfat, 2009),
munications industry in 1983–2004, when a mix and successfully transition to incumbency. One of
ofdenovo anddiversifyingfirmsracedtoestablish the essential tasks for future research, then, is to
and grow service networks through a tumultuous understand how firms transform experience into
period of growth and change. We find that size, this ability, and whether the process can be accel-
tenure in industry, and technology regime change erated through effective knowledge management.
did,infact,slowthegrowthofdenovo firmsmore
than they slowed comparable diversifying firms.
Our results are consistent with the proposition that THEORETICAL FRAMEWORK AND
de novo entrants may be able to overcome infe- HYPOTHESES
rior resources initially because their core knowl-
edge better fits the new industry’s needs (Helfat SincetheseminalworkofPenrose(1959)andNel-
and Lieberman, 2002; Helfat and Raubitschek, son and Winter (1982), a rich line of research
2000; Teece, 1986). However, de novo firms have has focused on the importance of routines and
less general experience (Teece, 1986), developed path dependence in the persistence of heteroge-
routines (Nelson and Winter, 1982), and integra- neous firm capabilities and performance. Broadly,
tive or transformational experience (Helfat and de novo and diversifying firms2 differ in two
Raubitschek, 2000; King and Tucci, 2002) than
diversifying firms, and this gap appears to exact a
2We note that this definition relies on pre-entry experience at
‘growth penalty’ as they transition to incumbency.
the firm level of analysis, rather than pre-entry experience of
individuals/teams of individuals who found a firm or represent
itstopmanagementteam.Sincefounderpre-entryexperienceis
1This is also consistent with entrepreneurship literature, where animportantdeterminantofheterogeneouscapabilitiesandper-
the entrepreneurial or established firm distinction is based on formance(Klepper,2002a;Phillips,2002;Agarwaletal.,2004),
size, firm tenure, and technological shocks (e.g., Agarwal, such spin-outfirms could also be classified as possessing pre-
Ganco,andZiedonis,2009). entry experience, or at least a hybrid organization between the
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
254 P.-L. Chen, C. Williams, and R. Agarwal
important dimensions: access to core knowledge industry, Holbrook et al. (2000) describe how de
specific to the industry (Helfat and Lieberman, novo firmsShockleyandFairchildSemiconductor,
2002; Teece, 1986), and development of inte- unfettered by past electrochemical technological
grative knowledge (Hannan and Freeman, 1984; and manufacturing traditions, chose entirely new
Helfat and Lieberman, 2002; Helfat and technologies and experimented with alternative
Raubitschek, 2000). While both types of knowl- materials and processes. In the process, Fairchild
edge have performance consequences, the latter Semiconductor coinvented and mastered the dom-
type of knowledge is particularly important in inant design of the monolithic integrated circuit,
terms of capabilities that help overcome impedi- in which all components are manufactured on a
ments to growth, the focal issue examined in our single piece of silicon.
paper. Theory also suggests that diversifying firms
Webeginwithabriefreviewofextantliterature might be more constrained and less flexible than
on the differences between de novo and diversi- de novo firms upon entering a new market. While
fying firms and the anticipated impact of those diversifying firms often enjoy better resource
traits on firm performance. We then develop our endowments than de novo firms because they can
core theoretical proposition comparing the ability leverage existing firm resources (Farjoun, 1998;
ofdenovo anddiversifyingfirmswhenconfronted Markides and Williamson, 1994; Miller, 2006;
withimpedimentstogrowthastheytransitionfrom Teece et al., 1994), they typically must negotiate
entrants to incumbents. This leads us to hypothe- resource gaps because the new market requires
size about how pre-entry experience interacts with a specific capability they lack, or because some
size, tenure in industry, and change in technology pre-entry resources and capabilities are dysfunc-
regime leading to different patterns of growth. tional in the focal market (Helfat and Lieberman,
2002). This initial lack of fit to the focal indus-
try context requires significantly more adaptation
Initial capabilities and performance after entry
than de novo firms, which do not have to negoti-
Popular wisdom frequently credits de novo firms ateinternalsourcesofinertiaorhavelong-standing
with being more focused and nimble, suggesting commitments to established value networks (Hill
that they will outmaneuver their more experienced and Rothaermel, 2003). For example, while diver-
rivals and grow more quickly in new industries. sifyingfirmsSpragueandMotorolabroughtrelated
De novo firms, by definition, start with a ‘clean experience from electrochemistry into semicon-
slate’ and enter by configuring their resources to ductor manufacturing, they faced serious chal-
match the focal industry’s competitive environ- lengesastheydevelopedhybridcircuitsthatcould
ment. Given their singular focus on this indus- be used in conjunction with electrochemical tran-
try context, de novo firms can better cater to the sistors. In addition to the challenges of reconfig-
demands of customers, suppliers, and other insti- uring technological capabilities, both firms had to
tutionalplayers.Theircoreknowledge(Helfatand balance conflicting needs of existing and new cus-
Raubitschek, 2000) is more likely to be suited to tomer segments and address managerial cognitive
thetechnologyandstateofthemarketintheindus- biases and coordination problems that arose due
try at time of entry. Denovo firms can also lever- todifferencesingeographiclocationsofR&Dand
agetheirflexibilitytogeneratehigherratesofnew production (Holbrook et al., 2000).
product innovations (Khessina and Carroll, 2008) Nonetheless, diversifying firms possess supe-
and to avoid the myopic learning (Levinthal and riorresourceendowments fromothermarkets,and
March, 1993) and competency traps (Levitt and havebetteraccesstofinancing,managers,technol-
March, 1988) inherent to more established firms. ogy,andrelationships,(Carrollet al.,1996;Helfat
Anecdotally, in the context of the semiconductor and Lieberman, 2002; Klepper and Simons, 2000;
Lane, 1989). Further, early diversifying firms can
also influence the competitive landscape to bet-
two(Qian,Agarwal,andHoetker,forthcoming).Whileacknowl-
ter fit their own resources and capabilities (Carroll
edgingthisissue,weretainthedistinctionatthefirm-levelunit
of analysis since our interest is in examining the evolution of et al., 1996; Helfat and Lieberman, 2002; Klepper
firm-level routines, capabilities and growth trajectories. As a and Simons, 2000; Mitchell, 1991; Tripsas, 1997).
stand-alone firm, spin-outs lack the experience of functioning
For instance, IBM followed Apple and other de
inacompetitiveenvironmentandproducinggoodsandservices
(HelfatandLieberman,2002). novo firms into the PC industry, but leveraged
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
Growing Pains 255
its extensive core and complementary resources (Baker and Nelson, 2005; Le´vi-Strauss, 1967).
to ensure that DOS-based PCs became the domi- Thus, diversifying firms are more likely to pos-
nantstandard(BayusandAgarwal,2007;Steffens, sess ‘transformational experience’ developed dur-
1994). ingtheirreorganization andredirectionofeffortto
Empirical studies of diversifying and de novo new markets (King and Tucci, 2002).
firm advantages find patterns of performance and Carroll et al. (1996) assume that de novo firms
survival that match each of these theoretical sto- have greater structural flexibility than diversify-
ries.GancoandAgarwal’s(2009)literaturereview ingfirms,eventhoughdiversifyingfirmsovercome
documents evidence for a diversifying firm advan- inertial tendencies to enter a new industry. In con-
tage (Barnett and Freeman, 2001; Klepper and trast, we posit that superior integrative knowledge
Simons, 2000), a de novo advantage (Agarwal and transformational experience provides diversi-
et al., 2004; Khessina and Carroll, 2008), and a fying firms with a better ability to deal with the
combinationofthetwo(BayusandAgarwal,2007; impediments to growth. In this sense, diversifying
Carrollet al.,1996;Hannanet al.,1998;Khessina, firms possess both structural and strategic flexi-
2006;Klepper,2002a).Withthesecontraryexpec- bility (Volberda, 1996). Volberda (1996) defined
tations in mind, we make no prediction for the structural flexibility as managerial capabilities for
relativegrowthratesofthetwotypesoffirmswhen adapting an organization’s structure and its deci-
they are new entrants in the focal industry, and in sion and communication processes to suit evolu-
the absence of impediments to growth. However, tionary changes, and strategic flexibility as man-
as both types of firm transition into incumbency, agerialcapabilitiesthatallowmodificationofgoals
differences in their ability to undertake strategic in light of disruptive changes.
renewal may result in performance differentials, Holbrooket al.(2000)documentthedifferences
an issue we now turn to. between the two types of firms when navigat-
ing changes in the semiconductor industry. De
novo firms Shockley and Fairchild were able to
Renewal ability of de novo and diversifying
leverage their initial fit for an early competitive
firms
advantage, but were less successful when changes
The above attribution of potential diversifying rendered their core information advantage obso-
firms’ advantage to superior resource endowments lete. At Shockley, for example, top management’s
ignores the potential value of a diversifying firm’s focus on research and treatment of production as a
integrative knowledge—its ability to reconfigure subordinate turned into a disadvantage when man-
firm resources for new challenges or, as defined aging the growing importance and complexity of
by Helfat and Raubitschek (2000), the knowledge production. Similar problems plagued Fairchild,
ofhowtointegratedifferentactivities,capabilities, which could not keep up with new competition
and products in one or more vertical chains. Inte- and new technologies (Malone, 1985). In contrast,
grating knowledge and activities across the firm is diversifying entrant Motorola’s skillful manage-
essential for strategic renewal. ment and coordination of R&D, production, and
To understand whether diversifying firms or marketing enabled successful adaptation to mar-
de novo firms will be more capable of strategic ket changes. Similarly, while de novo Fairchild
renewal, we need to examine how their resources initiallyledthewayinthedevelopmentoftheinte-
and capabilities enable or constrain integrative grated circuit dominant design, diversifying firm
knowledge. In navigating the change to a new Texas Instruments—credited with coinventing the
environment before or immediately after entry, integrated circuit—ultimately outpaced Fairchild.
diversifying firms amass integrative knowledge. In sum, we believe that prior experience over-
They learn to scout and evaluate new market coming impediments to growth in other mar-
opportunities, for example, to integrate demand kets, and the transformative experience of entry
and technology signals and to restructure exist- into the focal industry, provides diversifying firms
ing resources to enter a new market (Ganco with more effective integrative knowledge. This
and Agarwal, 2009; Helfat and Lieberman, 2002; integrative knowledge enables strategic renewal,
Mitchell, 1989). By recombining firm resources to and thus helps diversifying firms navigate the
fit new problems and opportunities in the focal transition to incumbency in the focal industry
market, diversifying firms engage in bricolage better than de novo firms. In contrast to the
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
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256 P.-L. Chen, C. Williams, and R. Agarwal
mixed predictions for performance immediately 1997) tenure in industry (Agarwal et al., 2009;
after entry into the industry, this theory suggests Stinchcombe, 1965; Tripsas, 2009), and expe-
an unequivocal advantage for diversifying firms rience with prior technological regime (Dowell
as they face situations requiring strategic renewal, and Swaminathan, 2006; Tushman and Anderson,
and particularly as they face the impediments to 1986).
growth that arise in the transition to incumbency. Thesethreecharacteristicsofincumbents—size,
This represents the foundational proposition of the tenure, and technological experience—also repre-
paper. sent impediments to growth. Growth stresses the
oldsystembythreateningitwithinformationover-
Proposition: Diversifying firms are more capa- load or inconsistent activities. To accommodate
ble of strategic renewal than de novo firms. the coordination and decision-making demands of
growth,firmsmustsocializenewmembers,extend
routines, and reassign decision making to main-
Transition to incumbency and impediments to
tain consistency while still limiting the informa-
growth
tion and decision-making demands on existing
Separatefromtheresearchondenovo anddiversi- managers (Penrose, 1959). Size, age, and technol-
fying firms, a rich literature on incumbent-entrant ogy regime experience amplify these challenges
dynamics examines the challenges of incumbency because they require reconfiguration of the firm’s
in the face of ‘creative destruction’ represented by existing resource base (Karim, 2006; Karim and
entrants(AgarwalandGort,1996;Christensenand Mitchell, 2000; Penrose, 1959; Puranam, Singh,
Rosenbloom, 1995; Cooper and Schendel, 1976; and Chaudhuri, 2009). As a result, diversifying
Gort and Klepper, 1982; Henderson and Clark, and de novo firms negotiating the transition to
1990; Tushman and Anderson, 1986; Utterback, incumbency must face impediments to growth by
1994). Notwithstanding a few exceptions (Bayus purposefully modifying their resource base. In the
and Agarwal, 2007; Ganco and Agarwal, 2009; following sections, we explain why each char-
Methe, Swaminathan, and Mitchell, 1996; Sosa, acteristic of incumbency represents an impedi-
2006), this research stream largely lumps together ment to growth, and we hypothesize that de novo
both diversifying and de novo firms that enter firms—which have a relative disadvantage in the
the industry (Cooper and Schendel, 1976; Gort abilitytorenewthefirmandmodifytheirresource
and Klepper, 1982; Henderson and Clark, 1990). base—will grow more slowly than diversifying
No research, however, has examined how the two firms as they face the impediments.
types of firms transition to the status of incumbent
after entry.
The impediment of size
While entrants are easily classified by appear-
ance at a point in time, the status of incumbent is The effect of size on growth has occupied
less distinct. In precise usage, incumbents are the researchers since Gibrat proposed his ‘law’ that
establishedfirmsthatexistwhenanewfirmenters. firms will grow at the same rate no matter their
In practice, when firms enter a market continu- size(Gibrat,1931).Penrose’sseminalwork(1959)
ously, it is less clear which firms are ‘established arguedthatgrowthwouldpeakformid-sizedfirms
incumbents’ at the time of entry since some exist- and then fall for large firms. Since then, many
ing firms will be other recent entrants. Theoreti- studies have compared the growth rates of small
cally,theconceptofincumbencyiscloselyrelated and large firms. While the topic is still debated
to the concepts of market power, resources, and (Geroski, 1995; Sutton, 1997), studies that include
legitimacy. Firms are accorded legitimacy, garner private firms (Dunne, Roberts, and Samuelson,
resources, and gain power as they spend more 1988,1989;Evans,1987a,1987b)andthataccount
time in the industry, as they grow in size, and for selection bias (Hall, 1987) generally find that
as they survive major transitions in the industry. small firms grow more quickly than large firms
Accordingly, incumbency status has been linked (Caves, 1998).
to three characteristics across literature streams in Large firms need well-developed systems for
entrepreneurship, organizational demography, and decentralized decision making to sustain creativity
industry evolution: firm size (Acs and Audretsch, and entrepreneurship while reducing the demands
1990; Agarwal et al., 2009; Caves, 1998; Sutton, on top management. Concurrently, these firms
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DOI:10.1002/smj
Growing Pains 257
must provide information, incentives, and infor- Tenure in the industry represents a growth chal-
mal organization that ensure decisions do not lenge because historic industry-specific practices
clash across different functions, units, or levels accumulate in an interdependent activity system;
of the company. Thus, size increases the chal- these practices create overlapping relationships
lenge of growth because new techniques and prac- within the firm that are difficult to alter. Once
tices are required to maintain the management firms acquire the capital and social resources to
system in the face of larger scale. Specific bureau- launch operations, they tend to imprint powerfully
cratic challenges arise for large firms in terms of withparticulardemandsandstructureoftheextant
adding additional resources and people. Top exec- environment (Stinchcombe, 1965). Organizations
utives necessarily sacrifice the depth of informa- hold an imprint because the external environment
tion they can obtain about firm activities when demands consistent and reliable execution of the
the activities’ breadth is large (Williamson, 1967). firm’smission,whileinternalorganizationalforces
The administrative intensity of organizations is demand strong commitments to the firm’s mis-
also higher for large firms, as they must devote sion, core technology, and structure (Hannan and
proportionally more resources to monitoring and Freeman, 1984). For instance, firms that enter an
coordination (Caplow, 1957; Sutherland, 1980). industry before a dominant design emerges are
The higher administrative intensity and controls significantly less likely to embrace that design
in the firm will generally dampen incentives for (Dowell and Swaminathan, 2006). In addition, as
entrepreneurialbehavior.Asaresultofthesechal- firm tenure in the industry increases, their mem-
lenges, new roles, structures, and practices must bers increase their commitment to cultural scripts
be created to maintain the coherent management that dictate beliefs and actions concerning ways of
system (Chandler, 1962; Stinchcombe, 1990). doing things and the firm’s mission (Harrison and
In response to higher bureaucratic challenges, Carroll, 2006). For example, Tripsas (2009) dis-
firmsmustreconfigureactivitiestomaintaineffec- cusses the challenges faced by denovo firms over
tive administration in the face of noisier infor- time as they navigate through identity and iner-
mation, weaker incentives, and rising complexity. tial pressures both within and outside firm bound-
Large firms must deploy integrative knowledge to aries. Evolutionary theories of organization sug-
recombine skills and knowledge held by the dis- gest that these accumulated automatic behaviors,
parate members of the organization (Grant, 1996). connections, and inertia have both benefits and
Thenatureofadministrationacrosssmallandlarge costs (Nelson and Winter, 1982). In the context of
firms becomes so radically different ‘that in many growth, however, a firm’s historic commitments
ways it is hard to see that the two species are of and operations tend to increase the challenge of
the same genus’ (Penrose, 1959: 19). The growth incorporating new resources and people.
of the firm at larger sizes demands reconfiguration These commitments increase the challenge of
of firm resources to match the increased adminis- incorporating new resources because they rep-
trativechallenges. Ourcorepropositionthatdiver- resent an interdependent system of connections
sifying firms possess more developed capabilities between activities and knowledge in the firm
for renewal then suggests: (Argote and Ingram, 2000). This interdependence
makes it more costly and difficult to adopt new,
Hypothesis 1: At larger sizes, de novo firms complementary systems of production, such as the
will face a larger growth penalty compared to system of flexible manufacturing practices that
diversifying firms. arose in the 1980s and 90s (Milgrom and Roberts,
1990). In addition, the interdependence of activi-
ties makes knowledge transfer more costly within
The impediment of tenure in industry
the firm (Rivkin, 2000) and between partners
While size represents an impediment to growth (Williams,2007).Theseoverlappingcommitments
because of the bureaucratic costs of growth,
increased tenure or age in industry represents an
firms.Ourargumentsfortimeasanimpedimenttogrowthrelate
impediment because of the challenge of inertia.3 tofocalindustryenvironmentalconditionsandtheaccumulation
of routines and commitments within the industry. Diversifying
firms’ efforts at altering existing capabilities to enter the focal
3As noted above, we define firm tenure to be ‘time in focal industryimpliesa‘restartingoftheirclock’forabetterfitwith
industry’tomaintainconsistencyacrossdiversifyinganddenovo thefocalindustryconditions(HelfatandLieberman,2002).
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
258 P.-L. Chen, C. Williams, and R. Agarwal
and connections mean that incorporating new peo- given existing technological and demand commit-
ple and resources in one area of the firm requires ments (Christensen, 1997). The critical impedi-
changes to other areas. Empirical studies also pro- ment to growth in the face of a changing technical
vide strong evidence that firm growth slows with environment is the need to reconfigure the exist-
age and tenure in an industry (Dunne et al., 1988, ing managerial system while incorporating novel
1989; Evans, 1987a, 1987b; Sutton, 1997). resources and practices. Given that technological
Beyond the focal industry context, it is true regime changes are often competence destroying
that diversifying firms are older and have exist- (Tushman and Anderson, 1986), firms need to
ing commitments and activities from other indus- take stock of which competences to divest, and
tries. These prior commitments, however, will which ones still retain value. This is particularly
affect diversifiers’ growth rate at entry. With hard if the external change renders core capabil-
increased industry tenure and concomitant transi- ities of the firm obsolete. Even seemingly small
tion to incumbency, we predict that denovo firms changes may require reconfiguration of embedded
will struggle more with growth challenges even practices in ways that are difficult to perceive and
though they are younger in absolute terms than react to (Henderson and Clark, 1990). Agarwal
diversifyingfirms,becausetheypossesslessdevel- and Helfat (2009) document, in the case of the
oped integrative knowledge. Specifically, diversi- digital technology shock in the camera industry,
fying firms have valuable prior experience manag- that once dominant firms Konica and Minolta had
ing interdependence, which is likely to make them to exit the industry. Even though Kodak survived
more proficient at modularizing activities (Bald- the regime change, it faced significant hurdles in
win and Clark, 2000; Henderson and Clark, 1990) regaining part of its earlier market position. Simi-
and are more likely to have administrative sys- larly, Dowell and Swaminathan (2006) found that
temsthatcancopewithincreasedcomplexity.Fac- entrants to the bicycle industry were constrained
ing impediments from increasing age in the focal by early technological choices: those that entered
industry, we believe diversifying firms can deploy before the dominant design emerged had a hard
this integrative knowledge to manage interdepen- time transitioning to the new design. Often the
dence more effectively than de novo firms. This technological change is accompanied by changes
leads us to hypothesize: in customer demand (Adner, 2002; Agarwal et al.,
2004; Tripsas, 2009), requiring firms to under-
take strategic renewal along multiple dimensions:
Hypothesis 2: At greater levels of industry
business model, technological base, organizational
tenure, de novo firms will face a larger growth
structure,andorganizationalmindset(Agarwaland
penalty compared to diversifying firms.
Helfat, 2009).
Within this context, diversifying firms can use
theirexperienceandintegrativeknowledgetoreact
The impediment of technology regime
to the need for novel configurations when mar-
A change in technology regime represents a dis- kets go through technology regime changes. Their
continuous shock to the industry that demands transition from entrant to incumbency status when
new configurations of organizational and manage- confronted with the impediment of a changing
rial resources. This is also a key context within technological regime is enabled by their prior
which the dynamics between entrants and incum- experience in negotiating such transformations in
bentshavebeenstudied.Technologicalshiftscause order to enter the industry, an experience that is
newentrantinformationtobecomemoreimportant lacking among de novo firms that are facing such
(Gort and Klepper, 1982), require incorporation of a transition perhaps for the first time. In different
new resources that conflict with accepted routines industries, Bayus and Agarwal (2007) and Dowell
in the industry (Abernathy and Utterback, 1978), and Swaminathan (2006) show that diversifying
and devalue the existing resources of the incum- firms are better able to switch technologies after a
bent firm (Tushman and Anderson, 1986). Firms dominant design is established than denovo firms.
may have a hard time perceiving that reconfigura- Accordingly, we argue that diversifying firms will
tionisnecessary(HendersonandClark,1990),and betterweatherthediscontinuouschangerelativeto
even if they do so, face the innovator’s dilemma de novo firms. Thus,
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
Growing Pains 259
Hypothesis 3: After a shift to a new technology technology regime, so exposure to this change is
regime, de novo firms will face a larger growth likely to rise with tenure. Since we believe these
penalty than diversifying firms. are three specific instances of the more fundamen-
tal concept of an impediment to growth, we test
Insummary,wearguethatsize,tenureinindus- fortheeffectofeachseparately, andthen examine
try, and change in technology regime represent their joint effect.
important impediments to growth. As firms transi-
tion from entrants in the focal industry to become
more established incumbents, their growth in the EMPIRICAL CONTEXT AND
faceoftheseimpedimentsrequiresthattheyrecon- METHODOLOGY
figuremanagementsystemsandinformalorganiza-
tionsothattheycanmaintaincoherentandreliable Industry context
behavior in the face of these changing demands
(Nelson and Winter, 1982; Penrose, 1959). Diver- We test our hypotheses using data from the U.S.
sifying firms possess more developed renewal wireless telecommunications industry from 1983
capabilities through their experience in other mar- to 2004. Firms provide wireless radio communi-
kets and the experience of entering the focal mar- cations services based on regional licenses from
ket, so we hypothesize that de novo firms will the Federal Communications Commission (FCC).
incur a larger growth penalty in the face of these The industry emerged in 1983, when Ameritech
impediments. Mobile Communications launched the first com-
It is important to distinguish this predicted mercial wireless telecommunications in Chicago.
advantage for diversifying firms from an overall Fueled by the FCC granting hundreds of new
growth advantage. All firms face limits to growth licenses, the industry experienced significant entry
in any period (Penrose, 1959). We make no com- and rapid growth in sales (number of cellular sub-
parative prediction about the baseline growth rates scribers). Figure 1 depicts the number of wire-
of the two types of firms immediately after entry. less telecommunications firms in the industry and
Theorysuggestsmanyalternativeendowmentsthat the total number of subscribers in each year. We
diversifying firms possess that might give them a include both composite data from the Cellular
uniformadvantageoverdenovo firms.Theoryalso Technology Industry Association (CTIA) and the
suggests, however, that de novo firms are able to aggregatestatisticsforthefirmsinoursample.The
match their core operations more closely to the trends conform to patterns documented in prior
demandsoftheindustryatthetimeofentry.Thus, industry evolution studies (Agarwal and Bayus,
we leave open the possibility that de novo firms 2002; Gort and Klepper, 1982). Additionally, the
will grow faster than diversifying firms when the industry experienced a major discontinuous tech-
firms do not face these impediments, that is, when nological regime change from analog to digital
the two types of firms are small, young in the transmission, which first entered the market in
industry, and founded in the current technology 1991 and took off around 1993.
regime.Fastergrowthratesfordenovo firmscould
arise in the absence of impediments to growth
Development and reconfiguration of capabilities
if de novo firms possess a flexibility advantage
for entry in the analog era of wireless
that allows them to match their core operations
communications
more closely to the competitive demands of the
environment. The focus of our predictions, how- The 1984 FCC lottery selection process resulted
ever, is that when both firms face impediments in significant variation in the types of firms that
to growth, diversifying firms will face a smaller entered the wireless communications industry. In
growth penalty than de novo firms. addition to de novo firms, firms from related
Finally, size, tenure in industry, and chang- industries such astelevision, broadcasting, paging,
ing technology regime are naturally highly corre- and landline-telephones also offered wireless ser-
lated. Size and tenure tend to increase together, vices. De novo firms developed their capabilities
especially in an evolving industry with growing fromscratch,investingintechnicalandoperational
demand. In addition, increased tenure in industry capabilities, and several also engaged in alliances
will expose firms to more chances for a change in with firms related in the value chain. Many of
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
260 P.-L. Chen, C. Williams, and R. Agarwal
250000000 80
70
200000000
60
s
er of subscribers 110500000000000000 345000 Number of firm
b
m
u
N
20
50000000
10
0 0
198319841 9851986198719881989199019911992199319941995199619971998199920002001200220032004
Year
CTIA subscriber
Sample subscriber
Total firms
Figure 1. Industry subscribers and number of firms
the denovo firms showed the entrepreneurial flex- failed to follow the churn and exit of existing cus-
ibility that is broadly hailed in popular culture. tomers (Galambos and Abrahamson, 2002). Pactel
For example, Nashville Cellular Telephone (NCT) also exemplifies the necessary managerial recon-
competed by building a sales force that under- figuration efforts. While many diversifying firms
stoodthenewmarket’suniqueaspects,andtightly created new divisions to increase flexibility for
integrated billing, installation, and repair with its new wireless operations, Pactel went so far as to
service. NCT’s sales force was young and worked temporarily transfer control of wireless operations
out of the trunks of their cars to sell to potential from its corporate headquarters in California to
the headquarters of an acquired wireless firm in
clients. On the corporate financing side, McCaw
Texas. These changes allowed the firm to develop
Cellular leveraged cash flow from each network
managerial capabilities appropriate to the compet-
acquisitiontosupportmoreacquisitionsusinghigh
itive wireless market, and created knowledge for
yield debt (Corr, 2000).
renewal that the firm could draw on as it faced
Diversifying firms were both enabled and con-
new challenges to growth.
strained by their existing capabilities, since they
had to determine which capabilities had to be
developedanew,andwhichcouldbereconfigured. Confronting impediments to growth and transition
Even the wireline telephone firms, with closely to incumbency
related pre-entry experience and resources, had
Firms that entered the wireless telecommunica-
to undertake significant capital investments at the
tions industry had to engage in continuous stra-
time of entry, and sometimes address poor service
tegic renewal to grow within the evolving indus-
reputation in their major telephone markets. They try as they transitioned to becoming incumbents.
oftenfoundthattheirsalespracticesandincentives The industry’s evolution and increase in demand
werelesseffectiveforpopularizingthenovelwire- were fueled by multiple incremental innovations
less phones. Diversifying firms had higher over- andnewbusinessmodeldevelopments,whichcol-
head costs, often twice as high as for many of the lectivelyimpactedkeyperformancecharacteristics
de novo firms. Additional reconfiguration issues such as voice quality, range of coverage, interfer-
related to understanding new patterns of demand. ence of signal, and encryption for privacy. These
Pactel, for instance, tracked new subscribers but innovations implied that firms confronted inertial
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj
Growing Pains 261
pressures of the technology that they entered with, industry was confronted with a ‘war’ where sev-
and had to engage in strategic renewal to stay eral standards (e.g., NAMPS, IS-45 TDMA, IS-
abreast of the evolving technology. 136 TDMA, GSM, IS-95 CDMA) competed for
Firms also engaged in other strategic renewal dominance. Further, existing internal and external
efforts as they exploited opportunities for increas- value chains had to be significantly restructured.
ing their customer base and coped with increas- Internal value chain restructuring required firms to
ingcompetition.Forinstance,roamingagreements alter equipment, reconfigure wireless transmission
werekeytoincreasinggeographicscopeandcaller sitesforoptimalspaceallocation,developrulesfor
network base while staying price competitive. To efficient and effective digital conversion, migrate
enable subscribers to receive calls while travel- customers from analog to digital service, educate
ing, firms needed to address the technical chal- sales force and reshape front-line operations to
lenges of how to connect subscribers’ handsets meetincreasingdemandsforcustomerservice.For
when they were in a partner’s territory. Firms example, the introduction of personal communi-
also needed to develop systems to record and cation systems (PCS) digital technology required
appropriately bill/share revenues for such roam- internalcollaborationbetweenafirm’sassetsman-
ing calls. Other incremental innovations related to agement department and technical department to
servingcustomerneedscosteffectively,sometimes reconfigure radio sites due to the reduction of
through the development of outsourcing agree- the size of transmission equipment. While analog
ments. Larger firms had to invest disproportion- technology required significantly more real estate
ately in developing capabilities related to their to set up giant towers, higher-density PCS cell
subscriber base: some coordinated with external sites required significantly less space and could be
billing companies to handle the increased volume placed inside a building. There was also signifi-
ofsubscribers,whileothersdevelopedbetterinter- cant variation in the rules used by firms for digital
conversion. Bell Atlantic Mobile systems opened
nal capabilities related to automatic billing and
a new, $5-million regional operations center and
credit checking systems. Indeed, as the wireless
switching facility in the University Research Park
telecommunications industry matured, key suc-
nearCharlotte,NorthCarolina,andquadrupledcall
cess factors shifted away from reliability, tech-
processing capability when converting to digital
nology, and interoperability and toward brand,
technology. Meanwhile, U.S. Cellular relied on an
reputation, and service. As a result, successful
alliance with Numerex for expertise in migrating
operators shifted from a business configuration in
customers from analog to a digital network. In
which technology and operations dominated deci-
the context of front-line sales and customer ser-
sion making to one in which marketing and cus-
vice, AT&T Wireless introduced new retail outlets
tomer service dominated.
offeringcellularphoneandtelephoneservicewhen
converting to digital technology, and Ameritech
Transformationandreconfigurationofcapabilities opened 21 new ‘One-Stop Communications Cen-
due to regime change to digital technology ters’ in several states while rebranding its remain-
ing99retailoutletsasAmeritechCellularCenters.
Theindustrytransitionfromanalogtodigitalwire- The technological regime change also caused
less telecommunications represented a major dis- significant changes in the external value chain of
ruption that required firms to undertake significant the industry, causing disruptions in existing part-
reconfigurationand,thus,wasanadditionalimped- nerships and supply chain relationships as they
iment to growth. Unlike the continuous signal of related to technology sourcing, complementary
analog service, digital service converted speech products, and distribution channels. For example,
intobinarybitsthatimprovedperformancecharac- to attract new subscribers and evolve its exist-
teristicsandenabledmoreefficientuseoftheradio ing network, Vanguard Cellular Systems switched
spectrum. Moreover, digital technology increased partners to work closely with Nortel and BNR
the scope of potential services from voice alone for the switch and radio units that provided the
to images, music, and data (Calhoun, 1988; PR flexibility of operations in both analog and digital
Newswire; Gruber, 2005). mode.Firmsoftenswitchedtonewsupplierswhen
Multiple challenges were encountered in the existingsupplierswerereluctanttomovetodigital
transformation to digital transmission. First, the technology, endorsed a different digital standard,
Copyright2011JohnWiley&Sons,Ltd. Strat.Mgmt.J.,33:252–276(2012)
DOI:10.1002/smj