Evan Rawley

Firm Focus, Routines and Performance: A Natural Experiment

Coauthor(s): Gabriel Natividad.

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Abstract:
How and why do changes in firm scope affect performance? This paper advances routine dynamics as a fundamental dimension of the link between diversified scope and performance, a widely discussed theme in strategy research that has mostly presumed the existence of interrelated organizational actions. Theoretically, we incorporate interdependencies and rigidities into a simple framework that connects routines with firm scope decisions. Empirically, we exploit a natural experiment to examine how an exogenous reduction in firm scope influences product-level performance through a rigidity-adaptation mechanism. Using micro-data on every Peruvian fishing firm before and after a regulatory shock that banned mackerel fishing, we find that reducing the scope of the firm led to sharply lower productivity in multi-species firms' legacy anchovy fishing business. The results suggest that firm scope decisions are intertwined with the enactment of positive interdependencies that become suboptimal after the firm refocuses its operations. However, we also find that the productivity decline attenuates over time, suggesting that while routines are rigid in the short run, in the long run firms adapt in response to changes in scope. Interestingly, the firms that adapt faster after the productivity slump are those that were least productive (or least routine-efficient) before the shock.

Source: Working Paper
Exact Citation:
Natividad, Gabriel, and Evan Rawley. "Firm Focus, Routines and Performance: A Natural Experiment." Working Paper, Columbia Business School, 2012.
Date: 2012