Cog in the wheel: Resource release and the scope of interdependencies in corporate adjustment activities

• Author: Dongil D. Keum
• Date: 01 February 2020
• DOI: http://doi.org/10.1002/smj.3093
• Published date: 01 February 2020

RESEARCH ARTICLE

Cog in the wheel: Resource release and the scope of

interdependencies in corporate adjustment activities

Dongil D. Keum

Management Division, Columbia Business

School, New York, New York

Correspondence

Dongil D. Keum, Management Division,

Columbia Business School, 726 Uris Hall,

3022 Broadway, New York, NY 10027.

Email: d.keum@columbia.edu

Funding information

Strategy Research Foundation Dissertation

Grant, Grant/Award Number: SRF-2015DP-

0038

Abstract

Research Summary: This study characterizes and tests

interdependencies in corporate activities used to adjust

resources and implement change. Because each activity

contributes only a partial result and depends on others to

complete an intended change, constraining one can create

a bottleneck that traps multiple other activities. For my

empirical analysis, I leverage the staggered adoptions of

employment protection laws intended to constrain one

specific adjustment to one specific resource: dismissing

employees. The constraint, however, not only affects the

contraction but also the expansion in labor as well as capi-

tal investments, acquisition, divestiture, CEO turnover,

and other adjustments, and increases (shortens) the persis-

tence of negative (positive) performance. The expansive

interdependencies are critical to understanding firm rigid-

ity and resilience, implementation failures, and the persis-

tence of firm performance.

Managerial Summary: This study shows how executing

even a seemingly straightforward improvement requires

piecing together a series of interdependent corporate stra-

tegic activities. As a result, a constraint on just one is suf-

ficient to foil a successful firm response. Using changes in

employment laws, I show that a firm's ability to dismiss

employees not only affects firing, but also hiring, capital

investments, acquisition, divestiture, and CEO turnover,

and increases (shortens) the persistence of negative (posi-

tive) performance. Underestimating the complex and

interdependent nature of these activities can lead to bias-

for-action and contribute to implementation failures, such

Received: 15 June 2018 Revised: 31 August 2019 Accepted: 3 September 2019 Published on: 13 November 2019

DOI: 10.1002/smj.3093

Strat Mgmt J. 2020;41:175–197. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 175

as cost overruns, schedule delays, and a post-merger inte-

gration process that fails to realize expected synergies.

KEYWORDS

adaptation, corporate strategy, employment protection,

interdependencies, rigidity

1|INTRODUCTION

One of the fundamental premises in organizational research is the idea that a firm is more than a sim-

ple sum of its parts due to the many interactions among them. To the extent that a firm can be charac-

terized as a bundle of interdependent resources and activities (e.g., Chandler, 1962; Milgrom &

Roberts, 1995; Penrose, 1959), even a seemingly small shock can spread to a broader system through

interdependencies. In particular, “a failure in a particular component may engender a broader system

failure (Levinthal, 1997, p. 949).”This study explores the dark side of interdependencies, specifically

how a constraint on one specific activity can create a bottleneck that traps other activities and slow

firm response to declining performance.

Interdependencies have often been considered cross sectionally with respect to the complementarity

or substitutability of static resources or businesses, for example, between technological and market

resources or between fishing for mackerel and anchovies (e.g., Gartenberg, 2014; Natividad & Rawley,

2015; Teece, 1986). A large literature argues that these interdependencies both disincentivize and compli-

cate the “search”for new resources and lead to rigidity (e.g., Levinthal, 1997; Wu, Wan, & Levinthal,

2014). I shift the analytical focus from search to the “implementation”process and interdependencies in

corporate activities used to adjust resources and execute change (more simply, adjustment activities)

(Capron, Mitchell, & Swaminathan, 2001; Kaul, 2012; Vidal & Mitchell, 2015; Lieberman, Lee, & Folta,

2017).

1

Specifically, I explore how the comparatively mundane activity of releasing human resources

interacts with hiring, capital investments, acquisitions, joint ventures and alliances, divestitures, and even

CEO turnover. These activities have been examined individually under a wide range of names, including

resource reconfiguration, restructuring, renewal, and strategic assembly, each emphasizing a specific

aspect in the broader process of adjusting firm resources. While providing critical building blocks for my

study, this body of research conducts a local examination that focuses on the antecedents and perfor-

mance consequences of one or two specific activities. As a result, little is known about the extent to

which they work together to enable or constrain firm response to declining performance.

Explicating whether low performance persists due to rigid strategy (from interdependencies in

resources), slow implementation (from interdependencies in adjustment activities), or both presents

significant challenges (Harrigan, 1980; Lee & Puranam, 2016). In my empirical analysis, I leverage

the staggered adoptions of a particular class of employment protection laws by the state supreme

courts called the implied contract exception (or simply IC) (Autor, Kerr, & Kugler, 2007). This law

is intendedly narrow in scope and constrains one specific adjustment to one specific resource: dis-

missing employees. In a difference-in-differences setup that adopts Arora (1996) and Natividad and

Rawley's (2015) framework for testing complementarity between two businesses, I show how this

1

I adopt the historical distinction between strategy formulation and implementation (e.g., Pearce, Robinson, & Subramanian,

2000) and more recently, sensing versus reconfiguring (Teece, 2007).

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