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The existence of a learning curve suggests that early entry provides learning opportunities that create competitive advantage by reducing future production costs relative to later entrants. We argue that this proposition is subject to an under-appreciated limitation — that progress down the learning curve may be uncertain. If there is uncertainty in the learning curve, then the benefits of learning curves may over- or under-emphasize the value of early entry. We consider two forms of uncertainty — prospective and contemporaneous. We demonstrate that while prospective uncertainty in the learning curve enhances the learning benefits of early entry and production, contemporaneous uncertainty reduces these benefits. Further, we examine the implication of these findings for learning curve spillovers between leader and laggard firms.
The Limits of Ambidexterity: Evidence from Netflix’s Entry
Changes to a firm’s business environment can potentially erode sources of competitive advantage, threating a firm’s viability. Firms often experiment with alternative business practices to hedge against such environmental changes, in the hopes that the knowledge gained from this exploratory behavior would be fruitful in the new environment. This paper provides empirically tests the usefulness of this kind of ambidexterity. It uses setting where heterogenous incumbent firms were affected by a common environmental shock and investigates the characteristics of firms that successfully adapted. The paper finds that incumbent firms with prior experience in a product practice intensified by the shock did not fare better than their peers. However, those with existing deep supplier relationships were better able to manage this transition.
Technology Shocks and R&D Collaboration Strategies: How Deep Learning Changed Firm-level Collaboration Strategies in AI
Firms face critical tensions when collaborating R&D with other firms. On one hand, firms need complementary resources to create value. On the other hand, firms attempt to minimize unintended knowledge spillover to potential competitors. This tension between resource complementarity and knowledge leakage becomes particularly salient when technological shock unleashes simultaneous opportunities and challenges. By examining how firms manage the trade-off between collaboration and competition, this study proposes a framework to explain the heterogeneity of tie formation along the technology value chain. Using a novel dataset of 48423 AI publications, we find that after a technological shock, firms increase both downstream vertical collaboration and upstream horizontal collaboration. Further, we find that firms reduce downstream horizontal R&D collaboration to avoid knowledge leakage.
Idling Resources under Downturn Uncertainty: Exploring Heterogeneity in Firm Behavior and Capability Evolution
Toby X. Li,
Texas A&M University Ashton Hawk,
University of Colorado, Boulder Jan-Michael Ross,
Imperial College London
This study examines a tradeoff for firms adjusting to economic downturns characterized by high environmental uncertainty. Prior research has been unclear to what degree firms under greater downturn uncertainty suspend their operations (non-idling, temporary partial idling, or complete idling) - we demonstrate some heterogeneity in their degree of idling choice based on their intrinsic capability. On the one hand, ‘slower’ performing firms having weaker capabilities – compared to their ‘faster’ rivals - are more likely to engage in ‘complete’ idling due to prioritizing cost savings over capability maintenance. However on the other hand, we argue there is a tradeoff in this choice: such action to ‘completely’ idle during a downturn subsequently results in greater capability degradation. Examining oil drillers, we find support for our arguments.
Facing an economic downturn and demand uncertainty creates challenges for decision makers in cyclical industries, as they must decide whether to stay active by riding out bad periods or go into strategic retreat. Using data on oil-drilling contractors in Texas, we find that firms with inferior capabilities are more likely to partially idle drilling rigs, whereas firms with superior capabilities are more likely to non-idle when facing demand uncertainty. We also show that a strategic retreat can lead to capability erosion, putting a firm in a position of a competitive disadvantage during industry recovery. The insights suggest that idling decisions in response to exogenous shocks are more strategically relevant than previously explored, as these decisions shape capability trajectory and access to future growth opportunities.