Read the working paper
INSEAD Working Paper 2013/72/EFE revised version of 2012/46/EFE
This study examines the sources of heterogeneity in the ability of firms to adapt to an exogenous, industry-wide demand shock. Such a shock differs from technology-based change in that the magnitude and composition of customer preferences undergoes a rapid and sudden shift. We aim to understand the sources of heterogeneous incumbent firm abilities to adapt to such a change. We propose that alternate pre-shock organization designs can influence postshock adaptation ability via the different coordination challenges they present: namely, the need to coordinate across and within product-related activities (inter- and intra-product coordination). Building on an information processing view of the firm, we investigate the influence of this locus of coordination on a firm’s post-shock adaptation ability. We hypothesize that inter-product coordination can impede adaptation, with this effect enhanced by greater product complementarity and mitigated by greater organizational grouping. We find empirical support for our predictions and conceptual mechanisms using a large-sample panel dataset of firms in the U.S. defense industry during the years 1996 through 2006.