Academic journal article Administrative Science Quarterly

The Dynamics of Evolving Markets: The Effects of Business Sales and Age on Dissolutions and Divestitures

Academic journal article Administrative Science Quarterly

The Dynamics of Evolving Markets: The Effects of Business Sales and Age on Dissolutions and Divestitures

Article excerpt

1989 "Whether and when: Probability and timing of incumbents' entry into emerging industrial subfields." Administrative Science Quarterly, 34: 208-230.

1991 "Dual clocks: Entry order influences on industry incumbent and newcomer market share and survival when specialized assets retain their value." Strategic Management Journal, 12: 85-100.

1994 "Newcomer and incumbent entry and success in new technical subfields of the medical diagnostic imaging equipment industry, 1954-1988." In G. R. Carroll and M. T. Hannan (eds.), Organizations in Industry: Strategy, Structure, and Selection. New York: Oxford University Press (forthcoming). The exit of a business from a product market, whether the business is dissolved or is sold to another company, is an important event because of its effect on the evolution of the market. A product market is a set of goods and services that serve similar functions, are created with the use of similar technology, and are used by similar users (see Abell, 1980: 17). It is equivalent to a technical subfield of an industry (Mitchell, 1989) that serves a single set of users. Business exit affects market evolution through the destruction or retention of organizational capabilities. Two key factors that influence the likelihood that a business will exit from a product market are business size and business age, which is the length of time that a firm has sold goods in a particular product market.

While we understand some of the ways in which business age and size influence the likelihood that a business will exit from a product market, several important issues remain unresolved. A substantial body of research has investigated how business age and size affect the likelihood that start-up firms, formed to enter a product market, will be dissolved. The most general conclusion of this research is that the likelihood that a business will exit declines as businesses become larger and as they age (see Jones, 1987; Singh and Lumsden, 1990). Few studies have controlled both age and size, however, so that it is not clear that both influences have independent effects on the dissolution rate. Moreover, start-up firms and business dissolution represent a minority of entrants and exits in most product markets. Instead, many entrants are existing firms that already operate businesses in other product markets (Dunne, Roberts, and Samuelson, 1988) and are diversifying by entering a new market, while many firms end their participation in a product market by selling their businesses to other firms (Aldrich and Auster, 1986). Although business dissolution and divestiture patterns often differ (e.g., Freeman, Carroll, and Hannan, 1983), little research has examined the influence of business age and size on the likelihood that a start-up firm will sell its business to another company or the likelihood that a diversifying entrant will shut down or sell its business. This study takes these factors into account. The analysis helps us understand the processes by which organizational capabilities are retained within a product market as diversifying entrants and start-up firms age and grow. In clarifying these processes, the paper explores the interrelationship of economic, ecological, and evolutionary explanations for business survival, which together form the basis of an organizational economic process of business strategy.

BACKGROUND

Comparing and contrasting the effects of business age and size on the dissolutions and divestitures of start-up firms and diversifying entrants helps us understand how organizational capabilities are retained within a product market. Theorists in many fields view businesses as bundles of productive capabilities embodied in organizational routines (e.g., Penrose, 1959; Cyert and March, 1963; Stinchcombe, 1965; Hannan and Freeman, 1977), which are patterns of activity unique to the particular organizations in which they are found (Winter, 1990). Routine-based capabilities are found within R&D and engineering activities, supply management systems, production processes, sales and service systems, financial structures, management systems, and other organizational processes. …

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