Relatedness, Organization Structure, and Market Entry: Evidence from a Demand Shock

Abstract

Prior literature on market entry suggests that a firm’s related knowledge and capabilities explain entry decisions into new market segments. Yet this literature has generally focused on entry decisions at the firm-level, without explicit consideration of the dynamics of individual divisions within the firm itself. We argue that a focus solely on firm-level factors can obscure division-level mechanisms that can deepen our insight into the link between organization structure and market entry decisions. Given the limited degree of empirical research on division-level market entry outcomes, we conduct an exploratory study to gain insight into patterns of division-level entry over time. We set our analysis in the context of an industry-wide demand shock, the September 11 attacks, which led to the need for firms to reshuffle their product market profiles in order to adapt to new demand conditions. A central finding is that, in contrast with what we might expect from a naïve application of market relatedness logic, a focal division’s entry into a particular market can increase as a result of the market relatedness of its sister division, even when the focal division is less related to the target market than its sister division. We explore the extent to which knowledge sharing among divisions within a firm can explain this finding, focusing on factors such as the presence of a shared customer and the relative knowledge dispersion.