Mental models, reflecting interdependencies among managerial choice variables, are not always correctly specified. Mental models can be underspecified, missing interdependencies, or overspecified, containing non-existent interdependencies. Using a simulation model, we find that under- and overspecification have opposite effects on exploration, and thereby performance. The effects are also opposite depending on whether the manager controls all choice variables. The mechanism underlying our results is a feedback loop: misspecificed mental models influence managerial learning about the effectiveness of choices; this learning guides how the environment is explored, which in turn affects which information will be generated for future learning. We explore implications of these results for strategic management and introduce the notion of “cognitive fit” between the mental model of the decision maker and the strategic environment.
This paper proposes an approach for modeling strategic interactions that incorporates the costs to firms of changing their strategies. The costs associated with strategy modifications, which we term “repositioning costs,” are particularly relevant to interactions involving grand strategies. Repositioning costs can critically affect competitive dynamics and, consequently, the implications of strategic interaction for strategic choice. While the literature broadly recognizes th eir importance, game-theoretic treatments at the grand strategy level, with very limited exceptions, have not focused on them. We argue for greater recognition of repositioning costs and demonstrate the fertility of this approach with a simple model th at illustrates how repositioning costs may facilitate differentiation and affect the value of dynamic capabilities.
In research on strategic networks, the addition or deletion of ties is the primary mechanism through which firms alter their networks. Prior work overlooks another mechanism that is at least equally important from a strategic standpoint: the ability of a firm to acquire another firm in the network and inherit its network ties. Such 'node collapse' can radically restructure the network in a single transaction, constituting a revolutionary change compared to the more evolutionary effect of tie additions and deletions. Moreover, acquisitions occur in highly competitive markets, making it crucial to account for the fact that multiple firms may simultaneously seek to reach advantageous network positions. We explore how these issues affect the dynamics of the network at the firm and industry levels through a simulation in which actors acquire one another to span more structural holes. We find that acquisition-driven network change affects the distribution of individual firms' performance and the structural properties of the industry-wide network.
I investigate the factors explaining the variance of firms helping communities in the aftermath of natural catastrophes with a theoretical model comprising firm-, community-, and event-specific factors. In this model, corporate decision makers follow a mix of social preferences and strategic considerations. I use unique data of corporate donations to the relief fund of natural catastrophes that affected different countries in the period of 2002-2012 and a panel of 2011 multinational enterprises from 61 countries. The preliminary results show that firm’s visibility and economic connection with the affected community, and the relative development of the community exert a nontrivial influence in the magnitude and frequency of corporate donation. Additionally, I find that the salience of the event is significantly more influential in the corporate decision than the associated human loss.
When firms decide to engage in the provision of collective goods that benefit social welfare (i.e., to behave pro-socially), they may consider the economic relevance of such goods for their own market operation. The bigger the stake of the firm in a given market, the greater its reliance on the market’s collective goods (e.g., communication networks, transportation infrastructure). Therefore, a market’s relative importance for a firm should be a significant predictor of corporate pro-social behavior—an association that is not explained by theories on social preferences or strategic considerations. I test this argument by constructing a measure of corporate economic reliance on market systems based on the literature on club goods and analyzing data on corporations’ philanthropic responses to 3,115 natural disasters between 2003 and 2013, inclusive. I show that accounting for variation in economic reliance leads to a more accurate prediction of the frequency and magnitude of corporate pro-social behavior than widely invoked arguments rooted in the strategic philanthropy and institutional literatures, which neglect such firm-market connection.
Internal hiring matches current employees to new jobs within an organization and represents a critical yet overlooked source of value creation, enabling managers to generate greater value from their existing stock of human resources by creating complementary matches between people and jobs. Yet despite the fact that more than half of all jobs are filled internally, our knowledge of how workers are allocated to jobs within organizations remains grounded in work on bureaucratic internal labor markets and intraorganizational careers describing internal labor markets that bear little resemblance to their contemporary counterparts. In this paper, I describe the effects of two processes that have emerged to replace the use of bureaucratic rules for facilitating internal mobility – market-oriented posting and relationship-oriented sponsorship – on two sets of outcomes which link directly to value creation and value capture – quality of hire and compensation. Using data on over 11,000 internal hires made over a five year period within a large US health insurance company, I find that market-oriented posting results in better hires but at a higher cost. In addition to providing a more complete picture of hiring and mobility, this work sheds light on the tradeoffs associated with the use of markets and networks for allocating resources within firms.
When high-stake organizational decisions that affect market competition have to be conducted in a short time intervals with information insufficiency of the social need, the probability of stakeholder reactions, and even the organizational capacity to respond, what is the relative economic efficiency of leading vis-à-vis following (i.e., imitating, abstaining, or choosing a different response)? I investigate this question using a specific form of non-market strategy: the organizational decision to donate to the relief fund of highly disruptive earthquakes. About 95 percent of corporate pledges to earthquakes come within a month of the disaster date, and because earthquakes are the most socially salient type of natural disasters, philanthropic responses to these shocks can generate media visibility and, in some cases, market rents. The original dataset is comprised by 10 years of donation behavior of 2,000 firms from 65 countries for earthquakes that affected 57 countries.
The management literature has emphasized the role that imitation plays on corporate strategy. Firms tend to align to the social norms observed by reference peers. A widely invoked argument is that the community where firms are originally headquartered imprints them with a longstanding influence toward similar patterns of behavior. In this paper, I suggest that this argument is not easily generalizable once the organization internationalizes. Using the context of philanthropic responses in the aftermath of natural disasters, I show that the non-market activity of multinational firms that share the metropolitan area as headquarters may be significantly different. I find that firms tend to mimic the characteristics of the response of peers from the same industry despite that such organizations have different countries of origin. Furthermore, organizations that share metropolitan region as headquarters show dissimilar responses in a frequency that is not explained by chance. This study extends the global strategy and community literatures by proposing that the influence of geographic location on organizational behavior is less stable than institutional scholars tend to suggest. The systems of social norms and beliefs that firms join as they internationalize become more salient for organizational decision making than those learned in their communities of origin. The study also provides a more nuanced awareness of the role of the non-market activity of multinational enterprises in the context of geographically located systemic shocks.
This study examines the institutional role of transnational ethnic communities in MNEs’ location choice. Research has revealed that ethnic communities facilitate international expansion by serving as conduits of knowledge. We propose that ethnic communities also fulfill a governance role by facilitating entry into locations that present high transaction hazards for foreign firms. This effect is based on community norms and social enforcement, and becomes particularly helpful in places with weak formal institutions and high transaction hazards. We test these ideas on the location choices of Korean banks across Chinese provinces during 1992-2013. Taking advantage of a historical event that created a quasi-random distribution of Koreans across provinces, we find support for our ideas.