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Niche width revisited: Organizational scope, behavior and performance

Olav Sorenson, Susan McEvily, Charlotte Rongrong Ren, and Raja Roy

Although strategy research typically regards ﬁrm scope as a positional characteristic associated with performance differences, we propose that broad contemporary scope also provides insight into the routines that govern ﬁrm behavior. To attain broad scope, ﬁrms must repeatedly explore outside the boundaries of their current niche. Firms with broad niches therefore operate under a set of routines that repeatedly propel them into new market segments, expanding their niche. These niche expansions, however, involve risky organizational changes, behavior that disadvantages generalists relative to specialists, despite the positional value of broad scope. Empirical analyses of machine tool manufacturers and computer workstation manufacturers support this conjecture: (i) generalists introduce new products at a higher than optimal rate, thereby increasing their exit rates; and (ii) generalists also more frequently launch new models with novel features or targeted at new consumer segments rather than improving only incrementally on existing products, further accelerating their odds of failure. After adjusting for these behavioral differences, broad niche widths reduce exit rates, suggesting that they provide positional advantages. The paper discusses how this phenomenon may help to explain the diversiﬁcation and multi-nationality discounts.

Strategic Management Journal, 27 (2006): 915-936

Link to workstation data at FIVE Project

Complexity, networks and knowledge flow

Olav Sorenson, Jan W. Rivkin, and Lee Fleming

Because knowledge plays an important role in the creation of wealth, economic actors often wish to skew the ﬂow of knowledge in their favor. We ask, when will an actor socially close to the source of some knowledge have the greatest advantage over distant actors in receiving and building on the knowledge? Marrying a social network perspective with a view of knowledge transfer as a search process, we argue that the value of social proximity to the knowledge source depends crucially on the nature of the knowledge at hand. Simple knowledge diffuses equally to close and distant actors because distant recipients with poor connections to the source of the knowledge can compensate for their limited access by means of unaided local search. Complex knowledge resists diffusion even within the social circles in which it originated. With knowledge of moderate complexity, however, high-ﬁdelity transmission along social networks combined with local search allows socially proximate recipients to receive and extend knowledge generated elsewhere, while interdependencies stymie more distant recipients who rely heavily on unaided search. To test this hypothesis, we examine patent data and compare citation rates across proximate and distant actors on three dimensions: (1) the inventor collaboration network; (2) ﬁrm membership; and (3) geography. We ﬁnd robust support for the proposition that socially proximate actors have the greatest advantage over distant actors for knowledge of moderate complexity. We discuss the implications of our ﬁndings for the distribution of intra-industry proﬁts, the geographic agglomeration of industries, the design of social networks within ﬁrms, and the modularization of technologies.

Research Policy, 35 (2006): 994-1017

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

Science and the diffusion of knowledge

Olav Sorenson and Lee Fleming

Scientists, social scientists and politicians frequently credit basic science with stimulating technological innovation, and with it economic growth. Despite a substantial body of research investigating this general relationship, relatively little empirical attention has been given to understanding the mechanisms that might generate this linkage. This paper considers whether more rapid diffusion of knowledge, brought about by the norm of publication, might account for part of this effect. We identify the importance of publication by comparing the patterns of citations from future patents to three groups of focal patents: (i) those that reference scientiﬁc (peer-reviewed) publications, (ii) those that reference commercial (non-scientiﬁc) publications; and (iii) those that reference neither. Our analyses strongly implicate publication as an important mechanism for accelerating the rate of technological innovation: Patents that reference published material, whether peer-reviewed or not, receive more citations, primarily because their inﬂuence diffuses faster in time and space.

Research Policy, 33 (2004): 1615-1634

Science as a map in technological search

Lee Fleming and Olav Sorenson

A large body of work argues that scientiﬁc research increases the rate of technological advance, and with it economic growth. The precise mechanism through which science accelerates the rate of invention, however, remains an open question. Conceptualizing invention as a combinatorial search process, this paper argues that science alters inventors’ search processes, by leading them more directly to useful combinations, eliminating fruitless paths of research, and motivating them to continue even in the face of negative feedback. These mechanisms prove most useful when inventors attempt to combine highly coupled components; therefore, the value of scientiﬁc research to invention varies systematically across applications. Empirical analyses of patent data support this thesis.

Strategic Management Journal, 25 (2004): 909-928

Asymmetric selection among organizations

William P. Barnett, Aimee-Noelle Swanson, and Olav Sorenson

We discuss the creation of organizations and their survival as distinct selection processes, and consider the significance of their divergence. In particular, to understand the implications of entrepreneurial booms, we propose the possibility of asymmetric selection, where entry selection and exit selection differ from each other in strength. An observed increase in founding rates hence may reveal a decline in the selection threshold for entry—implying lower average fitness among boom-time entrants. When such an expansion occurs, organizations born during these periods of heightened entry should suffer higher failure rates in the fitness threshold required for survival remains stable or becomes more stringent. We also discuss other processes that might educe founding waves, and explain the different implications of these accounts for our empirical model. Estimates of the model support our theory of asymmetric selection in two out of three markets using a comprehensive dataset describing organizations in the U.S. computer industry.

Industrial and Corporate Change, 12 (2003): 673-695

Liquidity events and the geographic distribution of entrepreneurial activity

Toby E. Stuart and Olav Sorenson

In this paper, we examine the ecological consequences of initial public offerings (IPOs) and acquisitions, specifically how the spatial distribution of these events influences the location-specific founding rates of new companies. We explore whether relatively small spatial units (metropolitan statistical areas) in close geographic proximity to firms that recently have been acquired or experienced an IPO exhibit high new venture creation rates and whether the magnitudes of these effects depend on regional differences in statutes governing the freedom of employees to move between employers. Count models of biotechnology firm foundings establish three findings: (1) IPOs of organizations located contiguous to or within an MSA accelerate the founding rate within that MSA, (2) acquisitions of biotech firms situated near to or within an MSA accelerate the founding rate within the MSA, but only when the acquirer enters from outside of the biotech industry, and (3) the enforceability of post-employment non-compete covenants, which is determined at the state level, strongly moderates these effects.

Administrative Science Quarterly, 48 (2003): 175-201

From conception to birth: Opportunity perception and resource mobilization in entrepreneurship

Jesper B. Sørensen and Olav Sorenson

Studies consistently find regions dense in concentrations of similar firms to be fecund sources of new firms of the same kind. This pattern persists even in industries with negative returns to geographic concentration. Why do these patterns persist? On the one hand, social networks may constrain entrepreneurs’ opportunities, making it difficult to mobilize resources in more attractive locations. On the other hand, nascent entrepreneurs may systematically misperceive opportunities in such a way as to lead them to continue founding attempts in overcrowded regions. To distinguish between these two processes, we analyze a unique set of data on television stations that contains information on both attempts to start new stations, as well as successful foundings. Our exploratory analysis suggests that nascent entrepreneurs do consistently misinterpret information related to population dynamics. These patterns could easily contribute both to industrial agglomeration and to the fragility of Red Queen dynamics. We discuss the implications of these results for both future research and for public policy.

Advances in Strategic Management, 20 (2003): 89-117

Interdependence and adaptability: Organizational learning and the long-term effect of integration

Olav Sorenson

A growing body of research documents the role that organizational learning plays in improving ﬁrm performance over time. To date, however, this literature has given limited attention to the effect that the internal structure of the ﬁrm can have on generating differences in these learning rates. This paper focuses on the degree to which interdependence—and in particular one structural characteristic that generates interdependence, vertical integration—affects organizational learning. Firms face a trade-off. In stable environments, vertically integrating severely limits the organization’s ability to learn by doing because boundedly rational managers ﬁnd the optimization of operations difﬁcult when making highly interdependent choices. As the volatility of the environment increases though, integration can facilitate learning-by-doing by buffering activities within the ﬁrm from instability in the external environment. Thus, ﬁrms with a high degree of interdependence suffer less in these environments. Tests of these hypotheses on the growth and exit rates of computer workstation manufacturers support this thesis.

Management Science, 49 (2003): 446-463

Link to data at FIVE Project