Making the Next Move: How Experiential and Vicarious Learning Shape the Locations of Chains' Acquisitions - Statistical Data Included

Administrative Science Quarterly, Dec, 2000 by Joel A. C. Baum, Stan Xiao Li, John M. Usher

We examine acquisitions by multiunit chain organizations to determine why they acquire a particular target rather than others that are available to them and thus better understand chain growth. We advance experiential and vicarious learning processes as an explanation for chains' next spatial move. Our analysis of Ontario nursing home chains' acquisition location choices from 1971 to 1996 provides broad support for a learning perspective, demonstrating how experiential and vicarious processes shape and constrain the locations of chains' acquisitions. Experiential processes lead chains to replicate themselves by acquiring components geographically and organizationally similar to their own most recent and most similar prior acquisitions and their own current components. Vicarious processes lead chains to imitate location choices of other visible and comparable chains' most recent acquisitions, prior acquisitions nearest to potential targets, and their current components. Our study thus establishes organizationa l learning as a conceptual foundation for predicting the location of a chain's next acquisition and, more generally, the spatial expansion of chains over time. [*]

Although the chain organizational form arguably rivals the M-form as the twentieth century's most successful organizational form, organization theorists have only recently begun to study them systematically (e.g., Darr, Argote, and Epple, 1995; Ingram, 1996a, 1996b; Bradach, 1997). And although the chain form renders physical space a conspicuous variable, thus far, little attention has been given to the dynamics of chains' spatial expansion (usher, 1995; Greve, 2000; Ingram and Baum, 1997a, 1997b, 2001). Yet chains' growth and spatial expansion patterns are inherently interesting and important from both organizational and societal perspectives. chains are collections of service organizations, doing essentially the same thing, linked together into larger super-organizations (Ingram and Baum, 1997a). Often, geographic location is the only difference among a chain's components. Location is thus a critical strategic and organizational variable for chains. More generally, the spatial expansion of chains underlies the rise of an organizational form that is coming to dominate every service industry at the same time that service industries are becoming increasingly important to economies around the world.

To date, research on chains' spatial expansion has been left primarily to economic geographers, who have produced an extensive case study literature on the spatial strategies of individual retail chains (Allaway, Mason, and Black, 1991). These include analyses of regional and off-price shopping centers in the U.S. (Lord, 1985), hypermarkets in Europe (Dawson, 1984), and retailers, including McDonald's (Aspbury, 1984), Marks and Spencer (Bird and Witherwick, 1986), Macys (Laulajainen, 1987), Marshall Field (Laulajainen, 1990), Kwik Save (Sparks, 1990), and Wal-Mart (Graff and Ashton, 1994). Although this work provides many useful descriptive insights and identifies common patterns of spatial expansion, it provides little in the way of systematic empirical evidence on the processes underlying them. It is also grounded in theoretical approaches from economics that assume profit maximization and place few limits on organizational choices or decision makers' rationality. Our goal in this paper is to show how chain s' spatial expansion can be understood as a product of organizational learning by boundedly rational decision makers whose attention, search, and choice are shaped by their organizations' experience.

Organizational learning is a complex, multilevel process. At the organization level, boundedly rational decision makers' reliance on attention and search routines that conserve cognitive resources binds their search for alternatives to past choices reinforced by increasing returns to experience (March, 1991; Miller, 1993). Organization-level learning is thus biased against discovering opportunities distant from past choices but does allow organizations that make good initial choices to exploit them until opportunities are exhausted. At the interorganizational level, the same boundedly rational decision makers, faced with insufficient information to learn from their own experience, attempt to reduce uncertainty by attending to visible and comparable organizations' actions for clues about how to interpret their own situation and act (Haunschild and Miner, 1997).

An organizational learning perspective seems particularly germane to an explanation of chains' location choices. Location choices are made repeatedly by growing chains and so are likely subject to an experiential process in which the chain learns by repeating choices that appear successful. Moreover, because chains grow by bringing together and standardizing operations of organizations that do essentially the same thing, reproducing successful routines across components seems vital to effective expansion. Because of this, Ingram and Baum (1997a: 100) referred to chains as "learning communities." Location choices also seem likely candidates for vicarious learning because uncertainty created by a chain's lack of information about unfamiliar locations can be reduced by observing and imitating other chains' location choices.