BUSINESS UNIT REORGANIZATION AND INNOVATION IN NEW PRODUCT MARKETS - SAMINA KARIM (JUL, 2009)Presented By : Ajit KunwarPresented To: Prof. Young-Kon Kim

OUTLINEOverviewIntroductionPurposeResearch GapBackground and Literature ReviewHypothesis DevelopmentMeasures and MethodologyResults, Findings and discussion

OVERVIEWExamines how business unit reorganization affects innovationExplores how the learning Process may mediate this relationship250 medical firms studied over a 20 year periodTheoretical support: dynamic capabilities and organizational learningDegree of innovation (dependent variable)Degree of reorganization (independent variable)Learning (Mediating variable)Control variables: firm level and industry level

INTRODUCTIONStructural organization determines:Resource allocations, use of internal routines and communication networks,

flow of information and tasks Reorganization changes these circumstancesCreating a new environment for learning and the potential for resources to

be used in new combinations leading to innovationPast findings suggest that firms are attempting to create value by

realigning units’ resources and activities within the firmThere is an underlying belief that reorganization is potentially beneficial

PURPOSETo determine if there are any innovative benefits of reorganization

Determine how learning occurs in the presence of unit-level structural change

To find whether firms learn immediately from a few reorganization attempts

If not, how many experiences are needed before there is learning?

RESEARCH GAP Reorganization has been explored at the resource level, divisional level,

and activity level

No study has explored how business unit reorganization affects innovation

Research to date has revealed very little about the underlying structures and processes by which firms actually achieve continuous innovation and ultimately, change

BACKGROUND; LITERATURE REVIEWLiterature on ReorganizationReorganization has been explored in various contextsChosen unit of analysis has varied between: resource, divisional and activity

levelInnovation literature has addressed how new resource combinations or similar

resources combined in new ways (i.e., recombination) may result in innovation.

Brown and Eisenhardt (1997) theorize, based on complexity theory, that an inverted U-shape relationship may exist between structural flexibility and innovation

Eisenhardt and Brown (1999, p. 73) observe patching, “ the adding, deleting, splitting, transferring, combining chunks of businesses,” as firms frequently remap their divisional structures to react to changing market opportunities

HYPOTHESIS DEVELOPMENTBusiness Unit Reorganization and InnovationReorganization leads to grafting and cross functional teams which lead to new

opportunities and innovation as well as faster product developmentBoth dynamic capabilities and organization learning theories caution against

too much change or disorder. Huber (1991, p. 103) warns that firms may experience information overload if

“the information to be interpreted exceeds the units’ capacity to process the information adequately

Fiol and Lyles (1985, p. 806) predicted an inverted U-shape relationship between level of change and level of learning, regardless of whether or not the intent for change was thoughtful

As with general change and learning, excessive amounts of reorganization may lead to disruption, inefficiency, and misinterpreted information that result in declining innovative performance

Hypothesis 1A. Business unit reorganization (within a given period) will have an inverted U-shape impact on future innovation (in the next period).

Learning as a Mediating Factorlearning how to reorganize alone may not be enough to innovate in a new

product marketClassic learning literature has focused on a model of learning-by-doing,

exemplified by the learning curve where the inputs needed per item of output decline at a declining rate due to experiential learning (Arrow1962).

Experimental learning supports U shape relationship between change and performance

Time affects learning because learning is built on memories, associations, and the ability to recognize useful information (Huber 1991)

Learning is highly path dependent which can lead to competency trapHaleblian and Finkelstein (1999) examined the effect of acquisition

experience on acquisition performance found it to be U-shaped

Based on these arguments, firms may not have success innovating after reorganization until they have experienced several reorganization events and practiced the appropriate application of what is learned to various circumstances

Hypothesis 1B. Business unit reorganization (within a given period) will have a U-shape impact on its future innovation (in the next period).

METHODS AND MEASURESData and SampleData gathered from several editions of ‘The Medical & Healthcare

Marketplace Guide’Operating in US medical industry250 medical firms studied over a 20 year period Including their units and product marketsPharmaceutical, health care service & medical device industryOf 250 only 85 firms were still alive in 1977866 business units and 1274 product lines

VARIABLES AND OPERATIONALIZATIONDependent and Independent VariablesDegree of innovation( DV)is a count variable that is calculated as the number of entries into new

product markets by the firm within a time period.Degree of Reorganization( IV)counts the number of unit boundary changes that occur in a firm within a

time periodIndustry and firm level control variablesFirm level control variables include number of employees, medical sales,

percent medical sales, age, public status & foreign status. Industry level variable includes category of pharmaceutical or healthcare

services, it is a dummy variableDummy variables are used to test the appropriateness of various models

and generate descriptive statistics

METHODOLOGYPoisson regression model for goodness of fit testTime-varying lagged values of independent variables are used as the

regression in the estimated equationsLinear lagged model :

study is comprised of seven panels with six periods of data observedIncorporating a two period lag the following four equations (at most) are

observed for each firm j:

observed for each firm j:

RESULTS, FINDINGS AND DISCUSSIONHypothesis 1A not supportedHypothesis 1B supportedFirms’ level of product activity and acquisition activity were significantMajor FindingsFirst; reorganization has a U-shape relationship with innovationSecond; only current reorganization experiences affect innovation, past

reorganization experiences do not affect future innovation Third; Acquisition active firms innovate more than non- acquisition active

firmsOther findingsHighly active in reorganization activity, larger firms, acquisition active

firms radically innovate more

Managerial ImplicationsDistinguish between reorganization events and be wary not to generalizeLearn from a cohort of several experiencesIncrease the memory capacity; codify the past experienceAcquisition active managers should not neglect internal units

Limitations and Future Researchexamined radical innovation only at the product levelStudy includes only healthcare related organizations Future studies should be more granular, incremental innovationsMore accurate timings of events can provide more clear results

CONCLUSIONThis research indicates that firms create value & pursue successful change

when there is a U shape relationship between reorganization & innovative performance, where learning is a mediating factor.

My AnalysisPast experiences are as important as current experiences. I think it is important that organizations to arrange training in change

managementToo much acquisition is not always good. Concentrating on development of internal units in organizations is as

important as acquisitionBusiness unit reorganization is one way in managerial innovation

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