Incumbent Firms Research Articles

Cross-industry innovation for sustainable repositioning through cluster collaboration

ABSTRACT Recent literature on sustainable transitions seeks to bridge macro – and micro-level dynamics; this study examines how agents at different levels interact, and what implications these lower-level dynamics have on sustainable repositioning. A new normal characterized by frequent industry crises, coupled with green policy initiatives, creates push and pull opportunities for sustainable repositioning; thus, incumbent firms must continuously adjust to changing conditions. Cross-industry innovation (CII) has emerged as a favorable option for sustaining competitiveness. To illustrate this development, this study provides insights into how firms from the oil and gas industry attempt CII in the aquaculture industry based on cluster-to-cluster collaboration and facilitation. Our findings indicate a form of tandem development for both industry clusters and incumbent firms, with the cluster responding to bottom-up changes in its firms. Moreover, cluster collaboration lowers initial CII obstacles in terms of knowledge and entry points and offers a gateway for incumbent firms looking to enter different industries. This facilitates an outbound and coupled CII that emerges to maintain a knowledge continuum for incumbent actors within sustainable repositioning. On a larger scale, these cluster initiatives can act as agents for stepwise sustainability transitions and further evolve into a cross-industry cluster.

Noncompete Agreements and the Welfare of Consumers

Employee spin-offs harm incumbent firms by increasing competition (benefiting consumers) and preventing firm owners from making beneficial investments in workers who may later spin off (harming consumers). We model noncompete agreements (NCAs) as solutions for the firm and analyze the resulting trade-off for consumers. We show that market structure and the nature of investment play large roles. Counterintuitively, increased investment benefits have the potential to harm consumers such that industries where firms value NCAs the most are those where harm is greater. Finally, we draw two analogies between NCAs and antitrust and show how those areas inform NCA policy. (JEL D42, D43, J41, K21, L26, M13, M53)

Institutional Imprints and Corporate Misconduct: Unravelling the Interplay of Economic History and Firm Choices on Earnings Manipulation in an Emerging Economy

This study investigates the impact of firms’ legacy institutional imprints on its engagement in corporate misconduct. We discover that a closed economic regime’s protectionist policies inscribe imprints in the form of opaque organizational routines and cause incumbent firms to develop competitive limitations. Utilizing the theoretical principles of the organizational imprinting theory, this research attests to the endurance of corruptive routines and argues that the degree of closed economy imprints increases firms’ engagement in income-increasing earnings management in the post-liberalization period. Furthermore, we find that the impact of imprints is weakened by firms’ choices on international exposure and internal innovation. By utilizing the historical data on Indian economic policies from 1956 to 1991 and analyzing a sample of 18,432 firm-year observations for 2,396 listed Indian manufacturing firms from 1997 to 2007, we find support for our hypotheses.

Incumbents’ marketing deterrence strategies and potential entrants’ time-to-entry: evidence from the US airline industry

Purpose The purpose of this study is to investigate how incumbent firms’ marketing deterrence strategies, price-cuts and quality improvement, influence potential entrants’ (PEs) entry timing into incumbents’ markets and examine the moderating role of incumbents’ market-level resources and capabilities (R&Cs). Design/methodology/approach To test the hypotheses, an accelerated failure time model is applied to a rich data set of entry threats between 1997 and 2019 in the US airline industry. Findings The findings show that while quality improvements delay PEs’ entry, price-cuts expedite it. Furthermore, PEs are more likely to be deterred by price-cuts when incumbents possess high market-level R&Cs. However, such R&Cs do not moderate the link between incumbents’ quality improvement and PEs’ entry timing. Research limitations/implications Market entry in this research is conceptualized and defined as a large resource deployment into a market and operationalized as a binary variable. However, PEs might rather choose a minor resource deployment instead to establish a foothold in new markets. It would be fruitful for future research to examine various levels of participation in a new market and examine how the incumbents’ marketing deterrence strategies affect PEs’ entry timing. Doing so would provide us with a deeper understanding of the difference between actual/full market entry and micro/minor market entry. Practical implications This research examines the impact of incumbents’ marketing deterrence strategies in a contingency framework and highlights the crucial role of R&Cs in implementing such deterrence strategies. Doing so provides actionable insights to managers who craft strategies to protect their markets against PEs. Originality/value Previous research illustrates that incumbent firms commonly respond to competitors’ entry threats by cutting prices and improving quality. While antecedents of these deterrence strategies have been extensively investigated, the consequences have yet to be empirically examined.

Knowledge-based dynamic capabilities for managing paradoxical tensions in circular business model innovation: an empirical exploration of an incumbent firm

PurposeThis paper aims to gain insights into the paradoxical tensions emerging from circular business model innovation (CBMI) and how to overcome them by developing a theoretical framework drawing on two theoretical streams: firstly, the paradox theory for shedding light on the often “invisible” contradictions generated by the implementation of circular economy (CE) principles in business model transformation; and secondly, the dynamic capability theory that can contribute to the investigation of how to manage these contradictions.Design/methodology/approachThe study uses a longitudinal case study approach to gain an in-depth understanding of the transformation and challenges faced by an incumbent firm in adopting a circular business model. Qualitative research methods are used to explore the paradoxical tensions and dynamic capabilities involved in the process.FindingsThe study finds that incumbent firms face numerous challenges and paradoxical tensions in the CBMI process. These tensions arise from difficulties in implementing organizational changes, balancing competing priorities and managing conflicting goals. Dynamic capabilities are crucial in managing these tensions and facilitating the transition to a circular business model.Research limitations/implicationsThis paper contributes to the theoretical development of paradox theory by applying it to the new field of CBMI which is currently slightly investigated and responds to the call for studies looking at more fine-grained types of sustainable business models. The study adds to previous literature that how the firm handles paradoxes and tensions influences the pace and results of the process. If the firm becomes discouraged during the early stages of identifying new opportunities, the pace slows down, and the firm becomes hesitant to collaborate more with partners. Furthermore, the ability to capitalize on these opportunities is affected by these tensions and contradictions.Originality/valueThis paper contributes to the literature by empirically investigating the process of CBMI in incumbent firms. It fills the gap in existing research by examining the existence of paradoxical tensions in a real-life setting and exploring the role of dynamic capabilities in managing these tensions. The findings provide practical insights for firms seeking a transition towards a CE and highlight that the ability to sense the external context should be developed as the new business model entails a central role of external actors.

Developing industrial AI capabilities: An organisational learning perspective

Incumbent industrial firms are putting in a lot of effort in developing capabilities for machine learning (ML) systems that help them better predict and perform a variety of industrial and business processes and decisions. Given the data-, process-, and organizational structure-related requirements for effective implementation of such systems, these organizations encounter a major challenge in developing capabilities in this context. However, the existing literature has yet to unravel the organizational processes and practices associated with artificial intelligence (AI) capability development and deployment in industrial incumbent firms. The present study frames AI adoption in established industrial firms as a process of history-embedded, situated organizational learning involving explorative and exploitative learning. Based on a qualitative study of seven firms utilizing ML algorithms in their industrial and business processes, we develop a grounded model that explains AI capability building as both enabled and constrained by perceptual and functional triggers and barriers, leveraged via communicative and structural practices, and resulting in ongoing and interdependent processes of exploration and exploitation. The study contributes to the literature by showing how the convergence of organizational learning and AI technology's unique features promotes a distinct dynamic of AI capability building and deployment.

Corporate risk disclosure in response to heightened entry threat: Evidence from a quasi-natural experiment in China

Using the deregulation of market entry barriers in China as a quasi-natural experiment, this study examines how increased entry threats affect incumbent firms' risk disclosure. We find that firms respond by increasing their market-related risk disclosures. This effect is stronger among firms facing higher economic uncertainty, lower financial constraints, greater product market competition, and higher information transparency. Mechanism analysis shows that increased risk disclosure weakens the link between deregulation of market entry barriers and new firm entry, suggesting that such disclosures can effectively deter potential competitors. Moreover, while market reactions to market risk disclosures are neutral, they are negative for operational and financial risk disclosures. Our findings suggest that firms strategically disclose market risks to mitigate entry threats, thus enhancing their resilience and adaptability in dynamic markets.

Pivoting to Manage the Integration of Two Initially Separate Business Models: The Case of the Digital Transformation of Established Retailers

Due to increasing digitalization, most companies have added online retail as a new business model (BM) separate from their initial physical BM, requiring them to manage a portfolio of BMs. The literature points out that companies choose between a separation or integration strategy to manage their multiple BMs. However, business cases show that companies adopting a separation strategy may then plan for a possible integration strategy. Despite the growing knowledge in the BM portfolio literature, scholars and practitioners still lack a comprehensive understanding of the integration process of two BMs that were initially managed separately. This qualitative research draws on a cumulative multiple case study of five retailers to analyze how incumbent firms with different BMs manage their integration. We show that these firms pivoted the management of their BM portfolio. The notion of pivoting has been studied from the perspective of a single BM. In this research, we demonstrate that the process of pivoting also applies to the management of several BMs. Our results provide a generic model of the BM integration process that underlines barriers and enabling pivoting factors. Finally, by considering pivoting at this corporate level, our research adds to the ongoing discussion in strategic management regarding the way companies manage the dynamics of their BM portfolio.

Harnessing the innovative potential of start‐ups for corporate entrepreneurship in incumbent firms: a study of asymmetric buyer–supplier relationships

Corporate entrepreneurship is critical for incumbent firms to ensure continuous organizational renewal. Asymmetric buyer–supplier relationships with start‐ups, known as “venture clienting,” serve as an entrepreneurial process wherein incumbent firms integrate innovative technologies acquired from start‐ups into their processes and products to drive organizational renewal. Prior research, however, lacks insights into how incumbent firms manage these asymmetric buyer–supplier relationships and overcome the challenges that differences in culture, governance structure, and negotiating power pose. We address this gap by drawing on data from 52 semi‐structured interviews with key decision makers in a multi‐case study of six incumbent firms engaging in venture clienting. Based on the results of our cross‐case analysis, we inductively distill three maturity stages of venture clienting within incumbent firms (i.e., initiation, complexification, and pruning) and the triggers for each stage. We also shed light on the dynamic capabilities that firms develop in each maturity stage and outline the enablers that foster their development. Furthermore, we reveal how these dynamic capabilities affect corporate entrepreneurship in the incumbent firm, in terms of opportunity recognition and technology integration success.

How “Ceremonial Openness” Prevents Organizational Change: An Analysis of Corporate Earnings Calls in the Oil and Gas Industry, 2007–2020

ABSTRACT Incumbent firms resist change as they have much to lose if things go wrong. But inertia can also be costly, particularly in times of crisis. In a world on fire, does corporate transparency foster engagement with external threats to future organizational success? To answer this question, we conduct a mixed-methods analysis of 887 public earnings-calls meetings between executives, investors, and outside analysts from 24 major oil and gas companies in 2007–2020, a period marked by extreme weather events and increased popular and political pressure to slow global warming. We find that formal rituals that promote openness and debate to protect investors reproduce the status quo by cultivating narratives that deny the need for change.

Price dispersion in dynamic competition

In product markets, substantial price dispersion exists for transactions of physically identical goods. Moreover, in these markets, incumbent firms sell at higher prices than entrants. This paper presents a theory of price formation under dynamic competition that explains these facts by assuming both that consumers have imperfect access to firms and that their degree of access depends on each firm’s sales history. The model has a unique equilibrium that features randomized pricing strategies, with incumbents always posting higher prices than entrants. For a fixed underlying environment, the equilibrium converges to a stationary equilibrium over time. As firms’ entry and exit rates approach zero, this stationary equilibrium converges to perfect competition.

Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

ABSTRACT A firm’s initial public offering (IPO) generates negative externalities for industry competitors. To mitigate this threat, incumbent firms manage their earnings downward, issue more negative management forecasts, and use a more negative disclosure tone when their industry peers file for an IPO. Negative accruals reverse when the threat subsides. Incumbents manage earnings more aggressively when costs are small and benefits are large, and when they follow negative disclosures of industry leading incumbents. Such strategic disclosure lowers incumbent firm valuation multiples and associates with more negative IPO firm media sentiment. IPO firms obtain lower offer prices, raise less capital, and are more likely to withdraw from the offering. They also invest less, hoard more cash, and experience lower profitability post-IPO, whereas incumbents experience higher profitability and market share growth. Our results highlight the role of strategic reporting on product market competition and identify a new cost of going public.

“Where and How to Play” A Typology of Exploratory Innovation for Large Incumbent Firms

“Where and How to Play” A Typology of Exploratory Innovation for Large Incumbent Firms

Where to invest? Effects of technological capabilities on corporate venture capital investments

AbstractResearch SummaryWe investigate why a corporate investor makes more corporate venture capital (CVC) investments in certain areas than in others. Focusing on firms' different technological capabilities across distinct technology domains, we argue that a corporate investor's technological capabilities in a given domain affect its likelihood of investing in (1) ventures within the domain in an inverted U‐shaped manner and (2) ventures operating in other technologically complementary domains in a positive manner. We further claim that these two suggested relationships between technological capabilities and the likelihood of CVC investments are shaped by the technology growth rate of the focal domain. We test these arguments in the US medical sector, where incumbent firms are active in CVC investments as a means to acquire external knowledge.Managerial SummaryWe argue that firms exhibit different patterns in their choice of CVC investment areas based on their technological capabilities within a given technology domain. Our findings in the US medical sector indicate that firms are most likely to invest in ventures within domains where their technological capabilities are moderate—neither too weak nor too strong. This suggests that CVC investments serve gap‐filling purposes for technology intermediates. Moreover, corporate investors tend to invest in ventures within domains that are technologically complementary to their areas of strength. However, when a given domain experiences rapid growth, technology leaders in that domain shift their CVC investment focus from complementary areas to that domain to maintain their leading position.

Three incumbents restructuring the Swedish energy and steel regimes: the case of Hybrit

ABSTRACT This paper addresses the role of incumbent firms in driving transitions that entail multiple sectors, conditioned by multiple regimes. We analyse the case ‘HYBRIT’, a radical innovation venture championed by three incumbents from the steel and energy regimes. We investigate what conditions the incumbents’ agency and how they enacted their agency targeting restructuring of the regime elements – actors, institutions, and materiality. We find that eight endogenous and exogenous factors coincide and condition the incumbents’ agency, from which they act in a novel direction of change. We contribute by showing how the collaboration within and across regimes enabled the accomplishment of actions that would have been challenging for individual incumbents to achieve alone. In this setting of scale-intensive industries, incumbents have characteristics that give them a significantly larger capacity to stimulate change than newcomers. The timing and combination of endogenous and exogenous factors, enabling incumbents to collectively drive a transition.

The Indirect Effect of Entrepreneurship on Pay Dispersion: Entry Cost Reduction, Mobility Threat, and Wage Redistribution Within Incumbent Firms

Past research has examined the link between initiatives promoting entrepreneurship and compensation, but scholars have predominantly focused on earnings of individuals directly engaged in the founding process, such as founders, cofounders, and start-up employees. Shifting our focus to incumbent workers, we instead propose that a decline in the cost of entrepreneurship increases the variance in pay among incumbent workers who are not involved in entrepreneurial activities. We posit that, as entrepreneurship becomes a more attractive career option, due to institutional changes, the outside option value of entrepreneurship increases. The resulting increase in mobility threat will disproportionately benefit high earners or those employees who are more difficult to replace: As their bargaining power increases, incumbents will disproportionately reward these workers, especially when they are systematically more inclined to leave for entrepreneurship. We explore these arguments using a difference-in-differences methodology, based on the enactment of an entry reform that reduced the cost of entry in Portugal between 1995 and 2009. We find that an exogenous decrease in the administrative costs of establishing a new venture led to high earners capturing disproportionate rewards relative to low earners. We further show that this relationship was especially pronounced among high earners who (a) exhibited a higher ex ante propensity to transition into entrepreneurship; (b) had fewer credible outside options in paid employment; and (c) operated in industries with decentralized wage bargaining arrangements. By documenting the impact of institutional changes that promote entrepreneurship on incumbent workers’ pay, our study contributes to recent debates about the impact of entrepreneurship on individual earnings. Funding: This work was supported by the CY Initiative, the FCT—Portuguese Foundation of Science and Technology, and the Knowledge, Technology and Organization Research Center at Skema. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16201 .

Transition policy mixes and business model adaptation: Incumbent firms' response to zero‐carbon policy in the housing sector

AbstractThis paper provides a firm‐level perspective on sustainability transitions by analysing how government can use transition policy mixes to entice industry incumbents to adapt their business model to integrate sustainable technologies. It examines firm‐level barriers to policy implementation, why these exist, and how government can use transition policy mixes to overcome them. The empirical analysis provides an in‐depth case study of the UK Zero Carbon Homes (ZCH) as a transition policy mix and considers the point of view of policymakers and incumbent housebuilders. The paper sheds light on the question of how transition policy mix designs can support incumbents' business model adaptation to bring about transformational change for sustainability. The results show that the interaction between various policy shortcomings and business model adaptation barriers led to a failure of government to move the housebuilding sector towards a stronger integration of sustainable technologies. The paper concludes by arguing that decarbonising housing in the UK was a system failure, rather than a market or policy failure, as the government failed to address the underlying reasons of incumbents' resistance to changing their business model. The findings suggest that taking incumbents' business models into consideration while designing policies for sustainability transitions is necessary to entice established firms to actively take part in the process of transitions and adapt to new sustainable norms.

Job Flow Patterns and Productivity Dynamics in Turkish Manufacturing

In this paper, we analyze the job creation and destruction process, and the productivity dynamics in Turkish manufacturing by size, export status, import status and ownership by using a comprehensive firm-level dataset for the period of 2010–2015. Our focus is on the effect of turnover, which is due to the entry and exit of firms, on both job flows and industrial productivity growth. Our results show that while small firms contribute most to job creation, it is the large firms that contribute most to productivity growth. Regarding ownership, domestic private firms perform better than foreign firms in both job creation and productivity growth. With respect to export status, even though non-exporters outperform exporters in job creation, exporters dominate the productivity growth. As for import status, in job creation, like in the case of export status, non-importers do better but in productivity growth, unlike in the export status, no group of firms dominate, more specifically importers’ and non-importers’ contributions are close to each other. Another interesting finding is that, turnover effect on industry productivity is positive but very low. The role of incumbent firms in generating productivity growth is much higher than that of entering and exiting firms.

Antitrust regulation, innovation and industry dynamics

This paper presents a framework for identifying the impacts of antitrust regulation on innovation and industry dynamics. I consider two inventor types: multi-product incumbent firms and startups not yet in product markets. They pursue external innovation, which results in Schumpeterian competition; and internal innovation, which incumbent firms use to refine current products in their portfolios. I find that weaker regulation gives incumbent firms greater market power to block competition, reducing incentives for external innovation, but raising incentives for internal innovation. Less heavy-handed regulation slows industry dynamics and raises industrial concentration; however, more lenient regulation may increase aggregate innovation depending on parameter value.

Nurturing strategic agility through corporate venturing advisory: An exploratory analysis

This article investigates the role of corporate venturing (CV) advisory firms in fostering strategic agility in their clients, which are typically established, incumbent companies. While strategic agility, defined as the ability of a firm to adapt its strategic direction to create new value, is gaining prominence, the mechanisms for achieving agility through CV remain rather underexplored. Furthermore, traditional CV service providers have been categorized into “inside-out” and “outside-in” players, but a new category of service providers, i.e., the CV advisory firm, transcends these distinctions by offering integrated CV services. Hence, this paper focuses on the case study of Gellify, an international CV advisory firm supporting corporations in developing strategic agility. The results suggest the existence of four distinct CV services that nurture strategic agility, namely venture clienting, venture acquisition, venture building, and venture builder building. Each of these services influences the three key dimensions of strategic agility (i.e., resource fluidity, strategic sensitivity, and leadership unity) in distinct ways and provides different impacts on incumbent firms. This paper contributes to the understanding of how the CV services offered by advisory firms nurture strategic agility in established corporations, thus providing valuable insights into the evolving landscape of CV and strategic agility.