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Firm strategy and age dependence: a contingent view of the liabilities of newness, adolescence, and obsolescence

Administrative Science Quarterly, June, 1999 by Andrew D. Henderson

How does firm performance vary with age? Organizational ecologists have addressed this question, primarily in terms of failure rates. Their research has used several labels to describe the relationship between age and failure, including (1) the liability of newness (Stinchcombe, 1965; Hannan and Freeman, 1984), (2) the liability of adolescence (Levinthal and Fichman, 1988; Bruderl and Schussler, 1990), and (3) the liability of obsolescence (Baum, 1989; Ingram, 1993; Barron, West, and Hannan, 1994). A liability of newness suggests that selection processes favor older, more reliable organizations, so failure rates are expected to decrease monotonically with age (Freeman, Carroll, and Hannan, 1983; Hannan and Freeman, 1984). Liability of adolescence arguments suggest that organizations can survive for a time with little risk of failure because they can draw on the initial stock of assets they typically acquire at founding, so failure rates are predicted to have an inverted, U-shaped relationship with age (Bruderl and Schussler, 1990; Fichman and Levinthal, 1991). The liability of obsolescence argument is that firms are highly inertial and tend to become increasingly misaligned with their environments. Consequently, failure rates are expected to increase with age (Baum, 1989; Ingram, 1993; Barron, West, and Hannan, 1994).

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Ecologists thus have different views about age dependence. Despite this, prior research shares two common themes. First, the newness, adolescence, and obsolescence perspectives each claim to describe pervasive selection pressures that affect essentially all populations. As stated by Carroll and Hannan (1989a: 546), "We are interested in developing and testing general arguments, ones that apply to all kinds of populations in all kinds of contexts." Thus, those three perspectives tend to be mutually exclusive of one another (Baum, 1996), and empirical discrepancies across studies are attributed to methodological issues rather than actual differences in the aging process (see Fichman and Levinthal, 1991; Barron, West, and Hannan, 1994). Second, earlier studies have largely focused on failure rates, so other performance outcomes, like sales growth or profitability, have received little attention.

This study departs from these customary approaches in two ways. First, age dependence is viewed not as a universal tendency but as a pattern of performance outcomes that is contingent on a firm's strategy, specifically, on whether a firm's strategy emphasizes the use of industry-standard technologies or proprietary technologies that are internally developed and firm-specific. Thus, the first purpose of this study was to identify firm-level contingencies that explain, for example, why some firms exhibit a liability of adolescence, while others exhibit a liability of obsolescence. This is consistent with Baum's (1996) recommendation that the liabilities of newness, adolescence, and obsolescence be treated as complementary rather than competing theoretical perspectives.

Second, this study examines rates of sales growth as well as failure rates. This is conceptually important because there may be trade-offs between growth and failure that are jointly influenced by age and strategy. As an example, older proprietary strategists may have higher sales growth and higher failure rates than standards-based strategists of a similar age. Proprietary strategists take substantial risks by exploring new, unproven technologies. Some are eventually rewarded with high sales growth, but many others fail entirely. So the second purpose of this study was to consider how strategy creates long-term trade-offs between sales growth and failure that are revealed by the aging process. I tested hypotheses about the influence of technology strategy on age dependence with data on the population of firms in the U.S. personal computer industry.

AGE DEPENDENCE

According to the liability of newness perspective, older organizations have an advantage over younger ones because it is easier to continue existing routines than to create new ones or borrow old ones (Stinchcombe, 1965; Nelson and Winter, 1982). Hannan and Freeman (1984) argued that selection processes tend to favor firms that exhibit high levels of reliability and accountability in their performance, routines, and structure. Because reliability and accountability tend to increase with age, failure rates tend to decrease as firms grow older. Young firms are particularly likely to fail because they must divert scarce resources away from operations to train employees, develop internal routines, and establish credible exchange relationships. Several empirical studies have provided support for the liability of newness (e.g., Carroll, 1983; Freeman, Carroll, and Hannan, 1983).

More recently, other authors have argued that firms suffer not from the liability of newness but from a liability of adolescence, evidenced by failure rates having an inverted U-shaped relationship with age (Levinthal and Fichman, 1988; Fichman and Levinthal, 1991). These arguments suggest that new organizations survive for a time with little risk of failure by drawing on the initial stock of resources they typically acquire at founding (e.g., venture capital funding, bank loans). As a result, firms face their highest mortality rates several years after their births. In a large study of West German firms, Bruderl and Schussler (1990) found that the length of time between organizational founding and the time when a class of organizations experienced its peak mortality rate was resource-dependent. Firms with larger initial endowments enjoyed lower overall failure rates and were able to postpone the time when peak failure rates occurred. Other studies have also provided empirical support for an initial honeymoon period (e.g., Singh, House, and Tucker, 1986; Mitchell, 1991).

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Firm strategy and age dependence: a contingent view of the liabilities of newness, adolescence, and obsolescence

Administrative Science Quarterly, June, 1999 by Andrew D. Henderson

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