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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More generally, the time-based path dependencies associated with exploration and exploitation may apply to a variety of strategic choices. Firms that exploit their brand image in a single geographic or product area may age differently than firms that explore extensions into new ones. Chain hotels (Ingram and Baum, 1997) or franchised restaurants that exploit proven designs may age differently than independents that explore unique alternatives. And firms that use substantial R&D spending to explore new opportunities may age differently than those that emphasize cost reduction to exploit their existing positions.

Conclusion

The theory and results presented here indicate that instead of describing an entire population as exhibiting a liability of newness or adolescence or obsolescence, it may be more accurate to discuss the multiple age dependencies that simultaneously exist across strategies and outcomes. To be sure, this view lacks the simplicity of earlier theory (e.g., Hannan and Freeman, 1984). Yet it may provide a better answer to the fundamental question posed by Hannah and Freeman (1977: 936): "Why are there so many kinds of organizations?" In particular, this study demonstrates how strategy-driven trade-offs between the risks of failing and the prospects of financial gain may create important differences in how firms age.

This study follows Baum's (1996) advice to treat the liabilities of newness, adolescence, and obsolescence as complementary rather than competing organizational processes, an approach that requires an understanding of the contingencies that cause one process or another to dominate. Technology strategy is one such contingency, but there are surely others. An important step in identifying other contingencies will be to expose the major constructs associated with aging - e.g., reliability, reproducibility, social legitimacy, adaptation, and technology development - to more rigorous theoretical and empirical scrutiny. Doing so should improve our understanding of aging as well as the other time-based path dependencies associated with organizational development, selection, and performance.

This research is from my dissertation, and I am indebted to committee members Alison Davis-Blake, Jim Fredrickson, David Jemison, Daniel Levinthal, and Paul Mang. In addition, Eric Abrahamson, Chris Ahmadjian, Jerry Davis, Don Hambrick, Heather Haveman, Paul Ingram, and Mike Tushman provided valuable comments on earlier drafts of this paper, as did Associate Editor Mark Mizruchi and three anonymous reviewers. This research has benefited from generous financial support by the State Farm Companies Foundation, the Richard D. Irwin Foundation, and the Eugene and Dora Bonham Memorial Fund.

1 Barron, West, and Hannan (1994) and Ranger-Moore (1997) distinguished between the "liability of obsolescence," in which a firm's founding imprint becomes increasingly outdated relative to its changing environment, and the "liability of senescence," in which accumulating rules, routines, and structures place an increasing drag on the efficiency of older firms. Thus, senescence is a threat in both stable and changing environments. These liabilities are somewhat different, but both create a positive relationship between age and failure rates and a negative relationship between age and growth. Barron and colleagues noted that they could not empirically distinguish between obsolescence and senescence, and that is also true here. Because the personal computer industry is characterized by rapid and ongoing technological change (Steffens, 1994; Anderson, 1995), however, the threat of technological obsolescence is considerable, regardless of whether senescence is also at work (Ranger-Moore, 1997). Given this, the term "liability of obsolescence" is used throughout this paper.