The Alliance Experience Transfer Effect: The Case of Industry Convergence in the Telecommunications Equipment Industry
| Published date | 01 July 2017 |
| Date | 01 July 2017 |
| Author | John E. Prescott,Sean T. Hsu |
| DOI | http://doi.org/10.1111/1467-8551.12175 |
British Journal of Management, Vol. 28, 425–443 (2017)
DOI: 10.1111/1467-8551.12175
The Alliance Experience Transfer Eect:
The Case of Industry Convergence in the
Telecommunications Equipment Industry
Sean T. Hsu and John E. Prescott1
Department of Management, Mihaylo College of Business and Economics, California State University
Fullerton, Fullerton, CA 92831, USA, and 1Katz Graduate School of Business,246 Mervis Hall, University of
Pittsburgh, Pittsburgh, PA 15260, USA
Email: tshsu@fullerton.edu; prescott@katz.pitt.edu
A central premise of the industry change literature is that firms change their strategic
actions when an industry changes. Industry convergence (IC), the blending of boundaries
between industries creating competition among firms that previously did not compete,
is increasingly impacting many industries and is a salient case of industry change. Ac-
quisitions are an important action shaping the course of IC because they trigger imi-
tation and bandwagon eects further accelerating IC. This paper focuses on why and
when learning from alliances reduces uncertainty resulting in acquisitions during IC: an
‘alliance experience transfer eect’. Wedemonstrate the utility of this mechanism for the
substitution-based form of IC that occurred between the telecommunications equipment
and computer networking industries. Our key insight is that when the extentof IC is low
there are significant transfer eects but, as the extent of IC increases, firms haveaccess
to an expanding volumeand diversity of information sources that reduce uncertainty, thus
weakening the transfer eect mechanism. Wecontribute to the alliance–acquisition rela-
tionship and learning literatures by demonstrating that the alliance experience transfer
eect mechanism explains changes in firm strategic action (alliancing and acquiring) as
the extent of IC changes. We also introduce a semi-convergence perspective by directly
measuring the extent of IC.
Introduction
Industry convergence (IC) is defined as the blend-
ing of boundaries between previously separate
industries creating new opportunities and threats
among firms that previously had not competed
with one another (Burgelman and Grove, 2007;
Katz, 1996). A conservative estimate of the
breadth and financial impact of IC reveals that
50% of the industries in which the Standard and
Poor’s 500 firms compete have either undergone
or are undergoing IC.1To address the uncer-
tainties posed by IC, scholars have highlighted
1Based on published articles and cases which identified
convergingindustries, we identified the set of industries in
the importance of understanding why and when
firms use dierent types of strategic action during
IC (Gambardella and Torrisi, 1998; McGahan,
Argyres and Baum, 2004). Two major forms of
IC are complementarity, where two industries’
products work better together, and substitution,
where buyers perceive the industries’ products
as interchangeable (Greenstein and Khanna,
1997).
Despite recent progress in understanding strate-
gic action in the complementarity form of IC
(Christensen, 2011; Srinivasan, Haunschild and
Grewal, 2007) research on the use of dierent
the S&P 500 that are facing industry convergence. Details
are available from the authors.
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
426 S. T. Hsu and J. E. Prescott
types of strategic action during the substitution-
based form has lagged. The substitution form of
IC is particularly pernicious because it has the
potential to eliminate a firm’s markets, creating
uncertainty that stimulates problematic search for
adaptive solutions (Cyert and March, 1963) to
acquire capabilities necessary to compete in the
converging industries. While there are a variety
of viable adaptation mechanisms that can be used
to address converging markets, such as internal
development (Tripsas and Gavetti, 2000), internal
corporate venturing (Keil, Autio and George,
2008) and divestment (Barkema and Schijven,
2008), we focus on alliances and acquisitions.
Alliances and acquisitions are less vulnerable
to time compression diseconomies and self-
inertia forces (Dyer, Kale and Singh, 2004; Lee,
2007) and the alliance and acquisition litera-
tures have increasingly paid attention to their
inter-relationships (Yang, Lin and Peng, 2011).
Focusing on why and when firms learn to use
alliancing and acquisitions as adaptive mecha-
nisms to compete in an IC context fraught with
uncertainty we address a central premise of the
industry change literature: when an industry
changes, the likelihood of firms undertaking
dierent types of strategic action such as al-
liances and acquisitions also changes (Hsu,
Ryan and Cohen, 2015; Thomas and Pollock,
1999).
Acquisitions are an exceptionally important
action shaping the course of IC, because they
are highly visible to competitors and can trigger
imitation and bandwagoneects as rivals compete
for scarce targets further accelerating IC (Bower,
2001; Carow, Henron and Saxton, 2004; Tox-
vaerd, 2007). Yet, there is no empirical evidence
of the determinants of acquisitions during IC.
Focusing on alliances as a key determinant of
acquisitions, we ask why and when during IC do
firms make an acquisition through learning from
alliances.
We develop two hypotheses. First, we theorize
that during substitution-based IC learning from
inter-industry alliancing results in acquisitions:
an ‘alliance experience transfer eect’. Alliances
provide valuable experience that reduces uncer-
tainties about the blurring industry landscape
including new and unfamiliar competitors who
might be acquisition targets. We further theorize
that over time, as the extent of IC increases, an
expanding volume and variety of information
sources available to all players2reduces IC uncer-
tainties weakening the alliance experience transfer
eect. We define the extent of IC as the degree
that the converging industries’ product markets
are related: an endogenously driven outcome of
increasing cross-industry product-market entry
undertaken by the collective set of firms.
Our empirical setting is the substitution-based
form of convergence in the telecommunications
equipment and computer networking industries
between the years 1989 and 2003. Beginning in
1989, the technological base (circuit-switching
technology) in the equipment industry was chal-
lenged and increasingly subsumed by internet-
protocol-based technology (packet-switching
technology). We developed a unique longitudinal
database composed of equipment and networking
firms’ product-market portfolios, alliances and
acquisitions.
We contribute to the literature in two unique
ways. First, we add novel and important evidence
to the alliance−acquisition relationship literature
that has largely been dominated by a trade-o
perspective (Villalonga and McGahan, 2005;
Wang and Zajac, 2007). Our theoretical devel-
opment builds on learning theory (Al-Laham,
Amburgey and Bates, 2008) to explain why and
when an alliance experience transfer eect leads
to acquisitions in a substitution-based IC context,
questions that do not require alliance or acquisi-
tion trade-os. We found that the positive impact
of alliance experience on acquisition likelihood
diminished as the extent of IC increased. Interest-
ingly, acquisitions were not with previous alliance
partners. Our second contributionis empirical and
conceptual. We directly measured the extent of IC
as it unfolds over time addressing an important
analytical challenge in the IC literature. Once IC
is initiated, as firms increasingly enter product
markets across the industries the extent of conver-
gence increases. However, it is our contention that
few industries fully converge and thus IC is more
appropriately conceptualized as semi-convergence.
2We want to thank thoughtful reviewers for suggesting
that, as the extent of IC increases, uncertainties for all
players are reduced as additional sources of informa-
tion become increasingly available. Those sources include
competitors, the exchangeof personnel, investments from
suppliers,complementors among others, and industry ob-
servers such as analysts, consultants, trade associations
and the media.
© 2016 British Academy of Management.
To continue reading
Request your trial