Spillback effects of expansion when product-types and firm-types differ

Journal of Management, Spring, 1995 by Will Mitchell, Kulwant Singh

How readily should firms undertake major expansion to their core businesses? And what impact does such expansion have on their existing core activity? Several ecological studies (e.g., Hannan & Freeman 1977, 1984, 1989; Miner, Amburgey & Stearns, 1989) offer extensive argument and evidence that major organisational changes often result in reduced organisational performance. Other studies have found little impact of major change (e.g, Singh, House & Tucker, 1986; Kelly & Amburgey, 1989; Delacroix & Swaminathan, 1991; Zajac & Shortell, 1989), however, while some researchers have found that major changes are sometimes converted into successful growth or result in longer business survival (Haveman, 1992; Mitchell & Singh, 1993). It is clear, therefore, that organisational change per se is not necessarily harmful. Rather, the impact varies by the nature of the change undertaken and by the depth of resources possessed by organisations. Therefore, identifying conditions that differentiate between positive and negative influences of expansion is an important research goal.

In this paper, we attempt to identify product and firm-type conditions under which organisational change can be beneficial to organisations. We build on Mitchell and Singh (1993) to address how expansion or non-expansion into new technical subfields within an industry affects market share and survival performance in the firms' established businesses. While the earlier study controlled effects of firms' market and organisational strength on the success of expansion, the analysis did not evaluate the impact of new good substitutability and firms' existing product scope. Yet these factors are central issues in defining a firm's business and its capabilities and can be expected to influence the success with which firms undertake major expansion. We argue that cases in which new goods substitute for existing products will have different effects on expansion success than cases when the new goods are neutral with respect to the old. We also predict that firms offering several product lines, which we refer to as generalists, will experience different effects from expansion than specialist incumbents that only offer a single product line. We present several hypotheses and research questions concerning the interaction between these product-types and firm-types. In the analyses, we control for differences in firms' initial strength, which may influence their ability to undertake expansion. We test our predictions on the Mitchell and Singh (1993) data, the population of incumbents of the American market for medical diagnostic imaging equipment over a 35 year period.

Spillback Effects On Established Businesses

Industry incumbents face competing risks as new markets or technical subfields emerge. Failure to expand into these new fields may be perilous, depriving firms of the technical or market know-how and increased resource flows that may be required for continued success in a traditional business (Mitchell, 1989). Moreover, successful expansion into new fields within the industry can have many salutary effects on current operations (Mitchell & Singh, 1993) or overall firm performance (Haveman, 1992). On the other hand, expansion into new parts of the industry may disrupt successful routines in an existing business, strain available resources, cause the organisation to loose its focus, and lead to business failure (Cyert & March, 1963; Hannan & Freeman, 1977, 1984; Nelson & Winter, 1982).

We refer to the benefits that a firm enjoys in its base business as a result of undertaking an expansion into a new business as spillback benefits. Such benefits include economies of scale (Porter, 1980), scope (Teece, 1980), and learning (Amit, 1986). Product improvement opportunities resulting from serendipitous or designed improvements in R&D (Nelson, 1959) and manufacturing capability (Wheelwright, 1985) for the new products often provide useful capabilities that benefit existing products. In addition, expansion into new subfields may provide organisational and financial advantages in the base operations through competition-induced improvements in efficiency (Leibenstein, 1966; Shelton, 1967). Enhancements made to structure and control systems to accommodate the expansion may benefit existing product lines.

The positive effects of expansion are likely to be strongest in the context of low-transilience innovation (Abernathy & Clark, 1985), that is, innovation involving significant changes to the technology of Core products but only incremental change to supporting assets such as reputations and distribution systems. Firms undertaking low-transilience expansion can build on their stock of supporting assets and are likely to face fewer resource and knowledge constraints in their new ventures (Teece, 1986). In addition, improvements and extensions of supporting assets needed for participation in the new product area will often be useful or necessary for the base business. The strains on existing activities are also likely to be less following low-transilience expansion, as organisations will usually need to make relatively few changes to supporting routines and activities (Romanelli & Tushman, 1991). Such changes include developing or acquiring new technologies, new markets, new distribution channels, new resources, and new internal structures and procedures. Hence, expansion in low-transilience cases will often produce large benefits at relatively low cost.