new product introduction and the corporate governance in turbulent times. evidence from longitudinal...
TRANSCRIPT
New product introduction and the corporate governance in turbulent times.
Evidence from longitudinal data
Marco Cucculelli
Dept. of Management and Industrial OrganisationFaculty of Economics “Giorgio Fuà” – UNIVPM
Introduction
• Decisions of strategic relevance are expected to be based on long-term planning horizon and to vary only marginally with short term exigencies (Devinney, 1990)
• Conventional wisdom argues that short-term factors – especially negative ones (such as low earning, poor economic conditions or short-term changes in GDP growth) - do affect the timing of these decisions, either by speeding them up or slowing them down.
Introduction
• Decisions of strategic relevance are expected to be based on long-term planning horizon and to vary only marginally with short term exigencies (Devinney, 1990)
• Conventional wisdom argues that short-term factors – especially negative ones (such as low earning, poor economic conditions or short-term changes in GDP growth) - do affect the timing of these decisions, either by speeding them up or slowing them down.
Successions and new product introduction
• For example, product development is often – halted in a downturn by some firms, while others– continue to innovate as they want to be positioned when
markets recover (Kauffman, 2009).
• Similarly, when economic conditions deteriorate, (family) CEO successions are – postponed in some firms, as the founder wants to leave the
company in good shape (Adams et at., 2009), or – speeded up in others, in order to renovate the business model
and provide a different way-out of the downturn (Kaplan et al., 2008).
Successions and new product introduction
• For example, product development is often – halted in a downturn by some firms, while others– continue to innovate as they want to be positioned when
markets recover (Kauffman, 2009).
• Similarly, when economic conditions deteriorate, (family) CEO successions are – postponed in some firms, as the founder wants to leave the
company in good shape (Adams et at., 2009), or – speeded up in others, in order to renovate the business model
and provide a different way-out of the downturn (Kaplan et al., 2008).
Aim of the paper
• This paper aims at contributing to this literature by considering the impact of short term factors on two major decisions of strategic relevance:
– the decision of the founder to step out of the company (and transfer the management to an heir), i.e. succession;
– the new product introduction decision (as an output of the innovative process)
Evidence: new product introduction
0
5
10
15
20
25
30
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
80
90
100
110
120
130
140
150
160
170
180
new products
Industrial production
Evidence: new product introduction
0
5
10
15
20
25
30
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
80
90
100
110
120
130
140
150
160
170
180
new products
Industrial production
Evidence: family successions
0
5
10
15
20
25
30
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
80
90
100
110
120
130
140
150
160
170
180
Industrial production
Successions
Evidence: family successions
0
5
10
15
20
25
30
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
80
90
100
110
120
130
140
150
160
170
180
Industrial production
Successions
Questions and data
• Evidence of systematic relationship between the business cycle and these decisions?
• Do these decisions interact?
• We exploit the informative value of a longitudinal analysis on a sample of 204 Italian family-owned firms;
• Data on new product introductions and CEO turnovers from 1970 to 2006
Literature
• Some questions for the literature review:
• Successions and innovations (introduction of new products) lead the cycle or lag it?
• Are they pro-cyclical or counter-cyclical?
• Are they substitute or complements?• Is there a micro- or strategic effect to be taken
into account?
(Product) Innovation
• Counter-cyclical:– “Pit stop” view of recessions: firms introduce innovation
because low opportunity cost of devoting efforts to alternative investments
– “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system
• Pro-cyclical– “finance contraints” (Stiglitz, 1993): internal cash flow rises with
economic activity -> product introduction– “strategic timing effect” (Barlevy, 2004): as new product gives
a definite benefit, it is better to introduce it when market recovers than when declines
(Product) Innovation
• Counter-cyclical:– “Pit stop” view of recessions: firms introduce innovation
because low opportunity cost of devoting efforts to alternative investments
– “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system
• Pro-cyclical– “finance contraints” (Stiglitz, 1993): internal cash flow rises with
economic activity -> product introduction– “strategic timing effect” (Barlevy, 2004): as new product gives
a definite benefit, it is better to introduce it when market recovers than when declines
(Product) Innovation
• Counter-cyclical:– “Pit stop” view of recessions: firms introduce innovation
because low opportunity cost of devoting efforts to alternative investments
– “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system
• Pro-cyclical– “finance contraints” (Stiglitz, 1993): internal cash flow rises with
economic activity -> product introduction– “strategic timing effect” (Barlevy, 2004): as new product gives
a definite benefit, it is better to introduce it when market recovers than when declines
CEO turnover and performance
• Firms reorganize in bad times (Nickell et al , 2001)• More time for organizational issues and higher probability of
bankruptcy -> productivity
• CEO turnover is usually counter-cyclical …– CEO turnover is negatively related to
• firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08)
• … but also “cycle-neutral”• when CEO is also owner and ownership is concentrated, the
probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)
CEO turnover and performance
• Firms reorganize in bad times (Nickell et al , 2001)• More time for organizational issues and higher probability of
bankruptcy -> productivity
• CEO turnover is usually counter-cyclical …– CEO turnover is negatively related to
• firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08)
• … but also “cycle-neutral”• when CEO is also owner and ownership is concentrated, the
probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)
CEO turnover and performance
• Firms reorganize in bad times (Nickell et al , 2001)• More time for organizational issues and higher probability of
bankruptcy -> productivity
• CEO turnover is usually counter-cyclical …– CEO turnover is negatively related to
• firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08)
• … but also “cycle-neutral”• when CEO is also owner and ownership is concentrated, the
probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)
Family CEO change and innovation• CEO change probably leads the cycle:
– New top management is positively related to strategic change and innovation (Kesner & Sharma, 1994).
– Newer generations tend to push for • new ways of doing things (Kepner, 1991), • are the driving force behind innovation (Zahra, 2005) • entrepreneurship (Kellermans et al, 2008)
– The involvement of subsequent generations increases the firm’s chance to identify and seize entrepreneurial opportunities (Salvato, 2004), even trough a “rebellious successor” (Miller et al, 2003), who can change/renovate the business model
Family CEO change and innovation• CEO change probably leads the cycle:
– New top management is positively related to strategic change and innovation (Kesner & Sharma, 1994).
– Newer generations tend to push for • new ways of doing things (Kepner, 1991), • are the driving force behind innovation (Zahra, 2005) • entrepreneurship (Kellermans et al, 2008)
– The involvement of subsequent generations increases the firm’s chance to identify and seize entrepreneurial opportunities (Salvato, 2004), even trough a “rebellious successor” (Miller et al, 2003), who can change/renovate the business model
Optimal timing of succession
• Kimhi (1994) and Miljkovic (1999)– The optimal transfer time varies according to economic
perspectives and firm financial position
• Adams et al (2009)– Good past performance increases the likelihood of the founder
to leave the firm, as he wants to leave the company in good shape (“controlled succession effect”)
• Wasserman (2003)– the founder’s success in achieving a critical milestone (such as
new product introduction) makes it more likely that he will step down (“entrepreneurial success paradox”).
The sample
– 204 manufacturing firms (Fondazione A.Merloni)• All are family-owned• 87% are family-managed
– Firm size• About 168 employees• 30 million Euro sales
– Firm age, about 38 years, good fit with the market
– Firm performance : slightly better than the performance of Italian companies of similar size
Sample and definitions
– Longitudinal data on product portfolio (number and year of introduction) and successions (family or outside) from 1970 to 2006
– New product: radical change in the product portfolio and a significant enlargement of firm’s technical and commercial competencies. (Sutton J., Competing in capabilities: An informal overview, Clarendon Lecture, 2005).
• We define the product at a five-digit level (Bernard et al, 2006. 2010)
– Succession; change in the management of the company (the person in charge of major decisions)
Descriptive statistics
Number of firms by
generation
Number of successions
Number of firms by products
Number of new product introductions
First gen. 70 - Single product 98 -
Second gen. 91 91 Two products 34 34
Third gen. 25 50 Three products 45 90
Fourth (+) 8 26 Four (+) prd. 9 30
Total 194 167 Total 186 154
Source: Fondazione A.Merloni
Descriptive statistics
Number of firms by
generation
Number of successions
Number of firms by products
Number of new product introductions
First gen. 70 - Single product 98 -
Second gen. 91 91 Two products 34 34
Third gen. 25 50 Three products 45 90
Fourth (+) 8 26 Four (+) prd. 9 30
Total 194 167 Total 186 154
Source: Fondazione A.Merloni
Descriptive statistics
Number of firms by
generation
Number of successions
Number of firms by products
Number of new product introductions
First gen. 70 - Single product 98 -
Second gen. 91 91 Two products 34 34
Third gen. 25 50 Three products 45 90
Fourth (+) 8 26 Four (+) prd. 9 30
Total 194 167 Total 186 154
Source: Fondazione A.Merloni
Descriptive statistics
Number of firms by
generation
Number of successions
Number of firms by products
Number of new product introductions
First gen. 70 - Single product 98 -
Second gen. 91 91 Two products 34 34
Third gen. 25 50 Three products 45 90
Fourth (+) 8 26 Four (+) prd. 9 30
Total 194 167 Total 186 154
Source: Fondazione A.Merloni
Empirical model
• As I have several additional and ordered failures (second, third, …) after the first, I have used a conditional risk set model (Prentice et al. 1981)
– Failure events are ordered: the firm is not at risk of a further product introduction (or a further succession) until the previous one has been verified.
• Differently from standard Cox model, this allows:– to stratify data by risk level (each firm can adopt more than a
product or succession in its entire life)– to cluster observations by firm (all events for the same firm are
collected in the same cluster)
The empirical model
)(exp)()( ,0, ttt kikki Standard Cox model
Hazard function
Common baseline
Regression coefficients
The empirical model
)(exp)()( ,0, ttt kikki Standard Cox model
Hazard function
Common baseline
Regression coefficients
)(exp)()( ,1,0, tttt kikkkki Conditional risk set model
Different baselines by failure
Gap time between failures
The empirical model
)(exp)()( ,0, ttt kikki Standard Cox model
Hazard function
Common baseline
Regression coefficients
)(exp)()( ,1,0, tttt kikkkki Conditional risk set model
Different baselines by failure
Gap time between failures
The empirical model
)(exp)()( ,0, ttt kikki Standard Cox model
Hazard function
Common baseline
Regression coefficients
)(exp)()( ,1,0, tttt kikkkki Conditional risk set model
Different baselines
Gap time between failures
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
The hazard ratio is the effect of the explanatory
variable on the risk of occurrence of the event
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
For example: a negative production in t-1 makes
the failure (i.e. new product introduction) 40% more likely to occur than
in average times
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
1. The effect of the negative cycle
The impact of negative conditions on product adoption and successions
-69
40
84
3
-85
154
4
22
-100
0
100
200
t0 t1 t2 t3 t0 t1 t2 t3
years
Pro
ba
bili
ty (
haz
ard
ra
te)
New product introduction
Successions
The impact of negative conditions on product adoption and successions
-69
40
84
3
-85
154
4
22
-100
0
100
200
t0 t1 t2 t3 t0 t1 t2 t3
years
Pro
ba
bili
ty (
haz
ard
ra
te)
New product introduction
Successions
After the stop in the current year, they seem to be pro-cyclical
-69
40
84
3
-85
154
4
22
-100
0
100
200
t0 t1 t2 t3 t0 t1 t2 t3
years
Pro
ba
bili
ty (
haz
ard
rat
e)
New product introduction
Successions
The impact on smaller firms
-69
40
84
3
-85
154
4
22
-100
0
100
200
t0 t1 t2 t3 t0 t1 t2 t3
years
Pro
ba
bili
ty (
haz
ard
rat
e)
New product introduction
Successions
Stronger postponement
The impact on smaller firms
-69
40
84
3
-85
154
4
22
-100
0
100
200
t0 t1 t2 t3 t0 t1 t2 t3
years
Pro
ba
bili
ty (
haz
ard
rat
e)
New product introduction
Successions
Delayed adoption
The impact on smaller firms
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
Cumulative portfolio effect: firms learn to introduce new
products
2. The other covariates
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
“External” successions shorten the average failure (succession) time
2. The other covariates
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
Successions a more likely to stall if they
are delayed
2. The other covariates
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
Successions are independent from the
product portfolio strategy
2. The other covariates
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
?prod in t0 0.31*** 0.15***
?prod in t-1 1.40** 2.54**
?prod in t-2 1.84* 1.04*
prod in t-3 1.03** 1.22**
Number of products 5.01*** 1.04* Type of succession* 1.49 1.86*
Years from last succession 1.03 0.96*
Years from last product introduction 1.14 1.00***
Young workforce 2.44*** 0.64*
Log-pseudolikelihood -102.41 -148.62 Wald chi2 test 229.14*** 212.01***
Legenda: prod = Percentage change in the industrial production index. prod = 0 when the change in the index is positive and 0 otherwise. *Type of succession = 0 if the firm has never had a succession; type = 1 if the firm has had a family succession; type =2 if the firm has hired an external CEO; type = 3 if the firm has been sold.
Young workforce and young firms:
more products and less successions
2. The other covariates
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
Succession t0 0.64***
Succession positive years 1.24***
Succession negative years 0.50**
Succession t-1 0.87***
New product introduction 0.22***
New products in positive years 0.35***
New product in negative years 0.09**
New product t-1 0.33***
. - Both coefficients are lower than one:
The two strategic decisions are substitutes (not complements).
3. Substitutes or complements?
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
Succession t0 0.64***
Succession positive years 1.24***
Succession negative years 0.50**
Succession t-1 0.87***
New product introduction 0.22***
New products in positive years 0.35***
New product in negative years 0.09**
New product t-1 0.33***
. - Both coefficients are lower than one:
The two strategic decisions are substitutes (not complements).
- However, new products are more likely after a succession than
viceversa
3. Substitutes or complements?
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
Succession t0 0.64***
Succession positive years 1.24***
Succession negative years 0.50**
Succession t-1 0.87***
New product introduction 0.22***
New products in positive years 0.35***
New product in negative years 0.09**
New product t-1 0.33***
.
“Controlled successions” (Adams et al 2009) help the
introduction of a new product
3. Substitutes or complements?
Table 4 – Conditional risk set model from time to entry. Failures: new products introduction and succession. prod = the variation of the industrial production index.
Failure =
new product
Failure =
succession
Succession t0 0.64***
Succession positive years 1.24***
Succession negative years 0.50**
Succession t-1 0.87***
New product introduction 0.22***
New products in positive years 0.35***
New product in negative years 0.09**
New product t-1 0.33***
.
Forced, or “not controlled”
successions (Adams et al
2009) don’t…
3. Substitutes or complements?
Final remarks
• Both succession and product introductions are affected by the business cycle. Strong impact for SMEs.
• Decisions about products and governance are strategic substitutes rather than complements.
• “Controlled successions” help product introductions (Adams et al.2009), whereas new products don’t help successions (Wasserman, 2003)
Final remarks
• Both succession and product introductions are affected by the business cycle. Strong impact for SMEs.
• Decisions about products and governance are strategic substitutes rather than complements.
• “Controlled successions” help product introductions (Adams et al.2009), whereas new products don’t help successions (Wasserman, 2003)
Final remarks
• Both succession and product introductions are affected by the business cycle. Strong impact for SMEs.
• Decisions about products and governance are strategic substitutes rather than complements.
• “Controlled successions” help product introductions (Adams et al.2009), whereas new products don’t help successions (Wasserman, 2003)
…and in the aftermath of the crisis…
• The present negative business cycle …– stops product innovation and successions– no “controlled succession”: so, no benefits
for product introduction
• … and when the economy recovers– Successions first, – Then innovation, and new products,
displaced again.
…and in the aftermath of the crisis…
• The present negative business cycle …– stops product innovation and successions– no “controlled succession”: so, no benefits
for product introduction
• … and when the economy recovers– Successions first, – Then innovation, and new products,
displaced again.
Family succession, new product introduction and the business cycle.
Evidence from longitudinal data
Marco Cucculelli
Dept. of Management and Industrial OrganisationFaculty of Economics “Giorgio Fuà” – UNIVPM
Successions and new product introduction
• For example, product development is often halted in a downturn by some firms, while others continue to innovate as they want to be positioned when markets recover (Kauffman, 2009).
• Similarly, when economic conditions deteriorate, (family) CEO successions are postponed in some firms, as the founder wants to leave the company in good shape (Adams et at., 2009), or speeded up in others, in order to renovate the business model and provide a different way-out of the downturn (Kaplan et al., 2008).