Academic journal article Journal of Management and Organization

The Role of Legitimacy for the Survival of New Firms

Academic journal article Journal of Management and Organization

The Role of Legitimacy for the Survival of New Firms

Article excerpt

Abstract

Using a content analysis on a sample of 77 internet companies that went public in the late 1990s, this paper tested the factors surrounding the legitimacy of new firms in a turbulent environment. Support was found for most of the hypotheses as to which factors were legitimating and which had the opposite effect. Legitimating factors included CEO Duality and Alliance inclusion while delegitimating factors included Capital Raising, Acquisitions, Restructuring, Delisting and Geographic Diversification. This paper adds to the theoretical issues surrounding legitimacy as a precursor to reputation. At the same time, this work fills a gap in the literature which currently lacks empirical testing of the notion of legitimacy.

Keywords: legitimacy, reputation, start-ups

(ProQuest: ... denotes formulae omitted.)

BACKGROUND

Competitive advantage is a term used all too often in the Strategy and Entrepreneurship literature. In essence, the overuse of the word has led to a dilutive effect upon the notion both theoretically and semantically. Porter (1980) is most famous for introducing the notion of competitive advantage in his studies of competition amongst firms and within industries. This line of thought progressed through the 1990s especially within the resource-based view (RBV) literature (Barney, 1991; Conner, 1991; Wernerfelt, 1984). In general, it can be said that competitive advantage is obtained by firms which have superior performance usually denoted by profit measures. In other words, looking at an industry, cluster or other environment, firms with competitive advantage would be in the right tail of that space's general distribution.

The problem with usual notions of competitive advantage is that they do not coincide with the themes taught in contemporary business schools. For example, and in the context of the industrial organization (IO) model, if a firm has superior profits but has a dysfunctional corporate culture which is highly centralized, does this firm have a competitive advantage deriving from its profits only? A shareholder may rationalize so but a firm is much more complex than its equity base. Likewise, if a company has a common bond, low turnover or high morale yet is only at the mean of an industry's profit benchmark, does it not have an advantage which has value to stakeholders?

From the perspective of an internal theory of the firm (Peteraf, 1993), RBV scholars argue that firms which possess resources and capabilities that are valuable, rare, inimitable and non- substitutable (VRIN) have the potential for competitive advantage (Barney, 1991). However, RBV is too non-specific and does not account for firms which either (1) have resources that are VRIN and yet are below optimal profit or (2) firms which do not seem to have VRIN resources yet which are extremely profitable. Additionally, both RBV and its close cousin, the knowledge based view (KBV) of the firm (Grant, 1996), rely on abstract capabilities to push results. These abstract capabilities include traits such as knowledge transfer (Kogut, 1992; Kogut & Zander, 2003), knowledge creation (Nonaka, 1994) and knowledge absorption (Cohen & Levinthal, 1990). While it is difficult to dispute the intuitive logic of these attributes, there is a lack of falsifiability in measuring these propositions (Priem & Butler, 2001).

I would argue that competitive advantage is highly sensitive to the relative ranking of firms in a competitive space. In essence, firms can have competitive advantage in two alternative ways. First, a firm has a competitive advantage with respect to performance relative to any and all firms in their competitive space which lie underneath them. Thinking back to a standard distribution, any firms that survive from one time period to another has an advantage over any that did not survive during the same period. Therefore, even firms which are below the mean profit levels of an industry may have an advantage because of this relativity principle. …

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