Tag Archives: strategy

Managing in the Presence of Hidden Influences

Michael D. Ryall and Olav Sorenson

Theoretical research on organizations generally presumes that their leaders have the ability to direct the organization towards a set of goals. But that presumption depends crucially on the ability of leaders to understand how particular actions or directives would influence organizational outcomes, a problem of causal inference. We develop a formal model of this problem. Our model reveals that hidden (unobserved) influences can stymie inference. However, these hidden influences only become problematic under a specific set of local conditions. That fact further suggests that organizational design features can help to mitigate this problem. We introduce three types of solutions to the problem of inference in the presence of hidden influences — experimentation, illumination, and substitution — and discuss how these solutions relate to a variety of organizational design features.

Competitive threats, constraint, and contagion in the multiunit firm

Gabriel Natividad and Olav Sorenson

Do unexpected events experienced by one line of business adversely affect other lines of business in diversified firms? We use fine-grained data on the film industry in the United States to show that such contagion frequently occurs when a distributor opens a film in theaters and concurrently releases an older title to home video: Being exposed to a competitive threat – a period of unexpected volatility – in the theatrical market at the time of a film opening leads the distributor to suffer a loss in sales on the concurrent home video release. Further analysis revealed that managers responded to these competitive threats by intensifying the advertising and promotion of their films in theaters, suggesting that they diverted resources and attention away from home video. Our results therefore suggest that the effects of unexpected events do spread across lines of businesses within firms and consequently that resource constraints may limit the ability of firms to engage effectively in multiple markets.

Organization Science, 26 (2015): 1721-1733 (OPEN ACCESS)

Biases in the selection stage of bottom-up strategy formulation

Markus Reitzig and Olav Sorenson

We propose that the failure to adopt an idea or innovation can arise from an in-group bias among employees within an organizational subunit that leads the subunit’s members to undervalue systematically ideas associated with members of the organization outside their subunit. Such biases in internal selection processes can stymie organizational adaptation and therefore depress the performance of the firm. Analyzing data on innovation proposals inside a large, multinational consumer goods firm, we find that evaluators are biased in favor of ideas submitted by individuals that work in the same division and facility as they do, particularly when they belong to small or high-status subunits.

Strategic Management Journal, 34 (2013): 782-799

The competitive dynamics of vertical integration: Motion picture producers in the United States, 1912-1970

Giacomo Negro and Olav Sorenson

We investigate the competitive consequence of vertical integration on organizational performance using a comprehensive dataset of U.S. motion picture production companies, which includes information on their vertical scope and competitive overlaps. Vertical integration appears to change the dynamics of competition in two ways: (i) it buffers the vertically integrated ﬁrms from environmental dependence and (ii) it intensiﬁes competition among non-integrated organizations. In contrast to the existing literature, our results suggest that vertical integration has implications well beyond both the level of the individual transaction and even the internal efﬁciency of the integrated ﬁrm.

Advances in Strategic Management, 23 (2006): 367-403

Tradeoffs in the organization of production: Multi-unit firms, geographic dispersion and organizational learning

Pino G. Audia, Olav Sorenson, and Jerald Hage

Firms face a choice in the organization of production. By concentrating production at one site, they can enjoy economies of scale. Or, by dispersing production across multiple facilities, firms can benefit from product-specific efficiencies and enhanced organizational learning. When choosing to organize in multiple units, firms must also decide where to locate these units. Concentrating production geographically can enhance economies of scale and facilitate organizational learning. On the other hand, dispersing facilities might allow the firm to lower transportation costs, reduce risks, and forbear competition. To examine these tradeoffs, we compare exit rates of single-unit organizations to multiunit organizations and their constituent plants in the U.S. footwear industry between 1940 and 1989. Our results suggest that, multiunit organizations benefit primarily from enhanced organizational learning, competitive forbearance and the diversification of risk. Nevertheless, these benefits appear to come at the expense of organizational adaptability.

Advances in Strategic Management, 18 (2001): 75-105

Preprint available

Finding the right mix: Franchising, organizational learning, and chain performance

Olav Sorenson and Jesper B. Sørensen

Franchising provides an increasingly important vehicle for entrepreneurial wealth creation and accounts for a large and growing share of business in the retail and service sectors. Chains—which operate in dispersed markets—most frequently use this form of governance. These ﬁrms must balance the centralization and standardization required for efﬁciency with the adaptation needed for success in varied local markets. By adopting an organizational learning perspective, we argue that the mix of company-owned and franchised units affects this balance, thereby inﬂuencing chain performance. In particular, the different incentives facing company managers and the entrepreneurs that manage franchises encourage distinct patterns of organizational learning. Franchised establishments provide better opportunities for the ﬁrm to learn through experimentation; however, companies ﬁnd it easier to diffuse this information and enforce standards through their company-owned units. Analyses of franchised restaurant chains in the United States provide empirical evidence of this trade-off.

Strategic Management Journal, 22 (2001): 713-724

Letting the market work for you: An evolutionary perspective on product strategy

Olav Sorenson

Managers must choose to allocate scarce resources either to the maintenance of a range of products tailored to heterogeneous consumer preferences or to the efﬁcient production of a small number of products. In addition, managers must choose the degree to which they periodically cull the product line. Vigorous selection removes poor performers from the product line, but this action simultaneously impairs the ﬁrm’s ability to monitor changes in consumer preferences. Empirical evidence from the computer workstation industry reveals that the ideal choice of product variety depends on the competitive ecology of the industry. Product variety becomes less valuable as the total number of products on the market increases, but it increases in value as uncertainty makes the accurate prediction of demand difﬁcult.

Strategic Management Journal, 21 (2000): 577-592

Link to data at FIVE Project