Entering new markets: The effect of performance feedback near aspiration and well below and above it
| Author | Zur Shapira,Ohad Ref |
| Published date | 01 July 2017 |
| DOI | http://doi.org/10.1002/smj.2561 |
| Date | 01 July 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 1416–1434 (2017)
Published online EarlyView 25 October 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2561
Received 2 September 2014;Final revision received30 June 2016
ENTERING NEW MARKETS: THE EFFECT OF
PERFORMANCE FEEDBACK NEAR ASPIRATION AND
WELL BELOW AND ABOVE IT
OHAD REF1,*and ZUR SHAPIRA2
1Faculty of Business Administration, Ono Academic College, Kiryat Ono, Israel
2Department of Management, Stern School of Business, New York University, New
York, New York, U.S.A.
Research summary: This study draws on the resource-based view and the behavioral theory
of the rm to gain new insights about the effect of performance relative to aspiration level (i.e.,
performance feedback) on the decision to enter new markets. Results show an inverted U-shaped
relationship between performance both below and above aspiration level, and the probability of
rms to enter new markets. That is, when rms are well below or well above their aspirationlevel,
they signicantly change their behavior. This article develops a theoretical framework to clarify
and organize these ndings.
Managerial summary: This study examines the effect of performance feedback, and particularly,
large discrepancies between rm performance and aspiration level on the decision to enter new
markets. It provides support to the roleof performance feedback in affecting the decision to enter
new markets, a factor that has received relativelylittle attention in the extensive literature that has
examined the inducements of such moves. Results show that, as performance falls below or rises
above aspiration, a rm’s probabilityof entering new markets increases up to a certain point after
which this relationship decreases. This shows that the tendency to enter new markets is different
for rms that are in the neighborhood of aspiration level compared to those that are well below
or above it. Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
The strategy literature has given considerable atten-
tion to the various inducements for entering new
product markets and new geographic markets (i.e.,
new countries), such as exploiting underutilized
excess resources, spreading risk, increasing man-
agers’ benets, and accumulating market power
(e.g., Chatterjee, 1990; Delios and Beamish, 1999;
Grant, Jammine, and Thomas, 1988; Helfat and
Eisenhardt, 2004; Hitt et al., 2006; Montgomery,
Keywords: entering new markets; resource-based view;
behavioral theory of the rm; performance feedback; well
below or above aspiration level
*Correspondence to: Ohad Ref, Ono Academic College, 104
Tzahal Street, Kiryat Ono, 55000, Israel. E-mail: refo@ono.ac.il.
Copyright © 2016 John Wiley & Sons, Ltd.
1994; Penrose, 1959; Rumelt, 1974). Relatively few
of these studies, however, have explored the effect
of a rm’s performance as a factor in the deci-
sion to enter new markets. These few studies have
mainly focused on the effect of poor performance on
the propensity of rms to enter new markets. They
have argued that poor performance, which is often
a result of failure to cope with competition in cur-
rent markets, or the result of a decline in demand for
a rm’s existing products/services, may motivate
rms to search for new markets (new alternatives)
for their existing resources (e.g., Campa and Kedia,
2002; Matsusaka, 2001; Miller, 2004). Rumelt
(1974) called this situation “the escape paradigm.”
Poor performance may also motivate rms to enter
new markets for other reasons, such as gaining
access to resources unavailable in their existing
Entering New Markets: the Effect of Performance Feedback 1417
markets that may help them compete in a better way.
Studies that have examined the effect of rm
performance on the probability of entering new
markets have usually operationalized rm perfor-
mance using its actual values. That is, they consider
absolute performance. New insights can be drawn,
however, from the behavioral perspective, and
specically, from the behavioral theory of the rm
(BTOF) (Cyert and March, 1963). Key to this
perspective is the insight that absolute levels of
performance are less meaningful than performance
relative to some reference point that actors (man-
agers) aspire to meet or exceed (e.g., Cyert and
March, 1963; Fiegenbaum, Hart, and Schendel,
1996; Greve, 2003b; March and Shapira, 1992;
Mishina et al., 2010). According to this perspective,
using actual values as a measure of rm perfor-
mance does not provide a clear delineation of good
or poor performance (Greve, 2003b).1Instead, man-
agers look to benchmarks to form their decisions,
such as rm performance relative to historical or
peer performance. They evaluate rm performance
as a positive or negative deviation from target or
goal (aspiration), and this deviation affects their
behavior.2We believe that it is this relative perfor-
mance that drives the decision to enter new markets.
As implied above, relatively little is known about
the effect of performance relative to aspiration level
(i.e., performance feedback) on the decision to enter
new markets. To the best of our knowledge, only
two studies have empirically examined this issue.
Chang (1996) has studied entry into new product
markets, but has not found support for his hypothe-
sis that the poorer the performance relative to aspi-
ration level, the more likely it is that rms will enter
new product markets.3Lin (2014) has examined
entry into new countries (i.e., enlarging geographic
scope) and has found support for her hypothesis
that the more an organization’s performance falls
below its aspiration, the greater the probability that
it will enter new geographic markets. With regard
1For example, for a rm that has historically been achieving a
15 percent return on assets, a 5percent return may mark the lowest
point in its performance record. In contrast, for a rm with a poor
performance history,a ve percent return on assets may be a great
achievement.
2The difference between actual performance and aspiration level
is called the attainment discrepancy,which is considered negative
if rm performance falls short of the level of aspiration, and
positive, if it rises above the level of aspiration (Lewin etal.,
1944).
3It should be noted that Chang (1996) has not used a spline
specication to capture performance below and above aspiration.
to performance above aspiration levels, Lin has not
found conclusive results. In short, the effect of per-
formance below aspiration level, and particularly,
above it on the decision to enter new markets is
still not clear. Furthermore, some scholars havesug-
gested that when decision makers, or their rms, are
well below or well above their aspiration level, they
may change their search behavior (e.g., Audia and
Greve, 2006; Harris and Bromiley, 2007; Hu, Blet-
tner, and Bettis, 2011; March and Shapira, 1992;
Shimizu, 2007). However, we are unaware of any
research that has studied the effects of large dis-
crepancies between rm performance and aspira-
tion level (i.e., well below or well above aspiration
level) on a rm’s propensity to enter new markets.4
Thus, the following questions remain unanswered:
(1) Does rm performance relative to aspiration
level, either below or above it but still in the neigh-
borhood of aspiration, affect entry into newmarkets,
and if so, in what way? (2) What are the effects of
large discrepancies between rm performance and
aspiration level (i.e., well below or well above aspi-
ration level) on a rm’s propensity to enter new
markets?
To answer the above questions, we also draw on
the resource-based view (Penrose, 1959; Peteraf,
1993; Wernerfelt, 1984). The resource-based view
(RBV) suggests three main motivations for entering
new markets: (1) searching for better alternatives
for existing resources (e.g., Helfat and Eisen-
hardt, 2004; Matsusaka, 2001; Penrose, 1960);
(2) searching for a way to utilize excess resources
(e.g., Chatterjee, 1990; Morck and Yeung, 1991;
Penrose, 1959; Teece, 1982); and/or (3) searching
for new resources to help cope with challenges
in existing markets (e.g., Hitt et al., 2006). The
RBV complements the BTOF by explaining, based
on the above three motivations, specically why
the propensity to enter new markets may either
increase or decrease in both underperforming rms
(in the neighborhood of aspiration and well below
it) and outperforming rms (in the neighborhood
of aspiration and well above it).
The present study makes two contributions. Its
primary contribution is to the literature on entry
into new markets. It provides support to the role of
performance feedback in affecting the decision to
4Note that the studies that have used absolute performance to
examine the effect of prior rm performance on the decision to
enter new markets havenot distinguished between poor and “very
poor” and good and “very good” performance.
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1416–1434 (2017)
DOI: 10.1002/smj
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