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Article Excerpt
Introduction
Research on business evolution suggests that firms that compete in the same environment commonly assess the environment differently and make very different competitive choices, such as the choice of new market segments in which to operate (Nelson and Winter 1982, Axelrod 1997). However, evolutionary research rarely examines the mechanisms that cause variation in the ways that competitors respond to emerging opportunities. This paper studies how firm structure shapes market entry. Combining the structural insights of information-processing contingency theory (Galbraith 1973) with an evolutionary approach to organizations, we argue that the structure of organizations acts as a lens that shapes the flow of information from the environment through the firm. This information infrastructure will encourage or inhibit market entry, depending on whether the structure directs attention toward or away from an opportunity in the marketplace.
The information infrastructure approach to evolution helps explain how firms change. Evolutionary research shows that firms tend to be stable (Hannan and Freeman 1989, Helfat 1994) and change incrementally (Allen 1977, Arrow 1974, Rosenbloom and Christensen 1994, Helfat and Lieberman 2002, Ramanujam and Varadarajan 1989). In addition, though, research suggests that information from outside an organization can contribute to change (Rosenkopf and Nerkar 2001, von Hippel 1988). By focusing on the evolutionary impact of information processing, we are able to study the direction of firms' ongoing adaptation in dynamic environments.
We treat the grouping of activities into operating units and the linking of those units as two key elements of structure (Galbraith 1973, Mintzberg 1979). We predict that firms are more likely to enter market segments that share the same customers, products, functions, or locations targeted by the firm's operating units; we call these fit units. The presence of units that do not share characteristics with a given market, which we call nonfit units, will reduce entry to that market. We further propose that links between units, as well as links between units and the corporate level, amplify the effects of fit and nonfit units.
We test our hypotheses using a sample of U.S. local telephone companies from 1984 to 1998. The firms begin the sample period with nearly identical structures and services and then actively adapt through a period of rapid industry change. The results are consistent with the proposition that unit structure and linkages both encourage and constrain market entry. The findings also suggest intriguing areas for future exploration. We find that links between operating units consistently increase entry, thereby increasing firm dynamism, while links to the corporate level contribute to inertia by inhibiting entry.
Background: Information Infrastructure
An extensive literature addresses the relationship between strategy and structure. Early work argued that structure followed strategy. In his landmark history, Strategy and Structure, Alfred Chandler (1962) argues that American corporations created the multidivisional form to meet the administrative challenges of diversification. Four decades of research in this tradition suggest that firms choose between specialization efficiencies from functional structures and reduced coordination costs of product division autonomy in multidivisional corporations (Armour and Teece 1978, Fligstein 1985, Palmer et al. 1993, Williamson 1975).
Strategy researchers who emphasize the decision-making aspects of strategy argue that organization structure also affects the direction of change in a firm. Conceptual work has long recognized "the organizational reality that strategy also follows structure" (Andrews 1971, p. 15). Scholars propose that the structure of a firm influences the nature of decision making (Fredrickson 1986), which information firms use in planning (Hall and Saias 1980), and the distribution of managerial attention (Ocasio 1997). While the influence of structure on strategy has been widely noted, this insight has not been conceptually or empirically developed in depth.
Our central argument is that organization structure acts as a lens on the environment, gathering information and shaping its flow through the organization to inform managers' choices. This shaping of information flow happens through the organization's operating units, which selectively process information from the environment, and through the links that transmit information between units. These two elements--the units into which a firm divides itself and the links between those units--are the basic elements of our theory of structure and information processing. We refer to these elements as a firm's information infrastructure.
Information infrastructure builds on information-processing and behavioral theories of the firm (Galbraith 1977, March and Simon 1958, Stinchcombe 1990, Tushman and Nadler 1978). As it searches for opportunities and threats in changing markets (Cyert and March 1992, Nelson and Winter 1982), an organization must reduce the boundless mass of potential information to a manageable and meaningful set of signals (Arrow 1974). A firm's operating units act as a locus of information gathering, because units interact frequently with suppliers, customers, industry associations, regulators, and other key sources of information (Stinchcombe 1990).
Different types of units tend to gather different types of information. For example, customer units monitor and evaluate the expectations of customers and focus on meeting those needs (Mintzberg 1979). Functional units gather and process information that affects their operation: demand trends concerning their functions, changes in administrative techniques that pass through related professional circles, and technical innovations that change their tasks (Lawrence and Lorsch 1967).
The idea that operating units gather information builds on Thompson's (1967) argument that some units specialize in monitoring portions of the marketplace. The theory also generalizes the argument that R & D component design groups gather information related to their particular component (Henderson and Clark 1990). We view each unit of the firm as oriented to aspects of the environment that correspond to the unit's characteristics.
The links within a firm serve to further process and transmit information. Links between units allow a firm to coordinate interdependent activities (Galbraith 1973, Mintzberg 1979). In effect, links pass information that units require to adjust their activities toward a common goal (Thompson 1967). Links arise when personnel in different units develop informal and formal ties: personal networks based on historical relationships, cross-unit teams, formally defined linking managers, dual-hierarchy systems, and other matrix-type systems (Galbraith 1977). When two units orient to similar elements of the environment, links allow them to share information and coordinate their responses. When two units orient to different parts of the environment, links combine complementary information from different areas. To foreshadow our analysis, we operationalize linkages in terms of managerial career paths, which measure unit and corporate managers' historical links to other business units.
Our approach to information infrastructure distinctly complements the activity-based approaches of absorptive capacity and related diversification. Absorptive capacity suggests that maintaining specific activities, such as basic R & D, within the firm will make the firm more able to use relevant information from the environment (Cohen and Levinthal 1990). The diversification literature explains market entry as a function of sharing related activities across different product markets (Ramanujam and Varadarajan 1989). In contrast, we propose that structuring the same activities differently will lead to contrasting information infrastructures and divergent evolutionary paths.
Hypotheses
We develop two sets of hypotheses. We first consider how the relationship between a firm's units and potential markets influences market entry, then how horizontal and vertical links from unit to unit and to the corporate level of a firm influence market entry.
Fit and Nonfit Business Units
Evolutionary theories argue that organizations favor local information search (Cyert and March 1992, Nelson and Winter 1982). Local search suggests that firms perceive opportunities that arise where units scan. For instance, a firm with a unit that focuses on a geographic area is most likely to recognize opportunities that arise within the focal area (e.g., Latin America). Similarly, a firm with a unit devoted to new media is more likely to recognize opportunities to serve consumers in entertainment markets such as cable television or Internet-based services.
A firm will also be more able to evaluate and act on information about an opportunity when more units gather information about that opportunity. Through frequent interaction and fine-grained information sharing, members of a group tend to develop several things: a shared understanding about the key signals from the environment, a language to communicate their understanding of these signals, and judgments about the relative importance of different types of information. Through this learning process, units develop an information short hand, which becomes the body of common knowledge within the group (Arrow 1974). This common knowledge makes an organization more able to evaluate and act on opportunities that appear uncertain to others. In turn, the ability to perceive and act on relevant information will influence whether a firm enters new market segments.
To again foreshadow our analysis, we develop industry-specific information dimensions arising out of Gulick's (1954/1937) four categories of organization grouping: customer, product, function, and location. These categories reflect an orientation to different aspects of the environment. A customer unit focuses information gathering on a set of clients; a product grouping focuses information gathering on a product market and competitors; a functional unit focuses information gathering on process technologies and administrative techniques; and a geographic unit focuses attention on regional markets and local demand. Specific opportunities that arise will relate to different subsets of these dimensions of the information environment. Thus, we describe an organization's units and its potential markets by the customers to which they relate, the products they provide, the functions they require, and the regions they serve.
We label units that share one or more of a market segment's information dimensions as fit units in relationship to that market. (1) For instance, a corporate data services unit is fit in relation to the mobile data market because both serve business customers and provide data services. With more fit units in relation to a market segment, a firm will gather and share more information relevant to that market. We predict that fit units will increase the likelihood of entry.
HYPOTHESIS 1A. The more fit units a firm has in relation to a market segment, the more likely the firm will enter the market segment.
On the other hand, the existence of business units that do not share information dimensions with a given market segment makes it less likely that a firm will act on opportunities related to that segment. As Hall and Saias (1980, p. 156) argue, "Structural characteristics act like filters and limit what the organization...
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