Entry, exit, and the potential for resource redeployment
| Date | 01 March 2017 |
| DOI | http://doi.org/10.1002/smj.2501 |
| Author | Gwendolyn K. Lee,Timothy B. Folta,Marvin B. Lieberman |
| Published date | 01 March 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 526–544 (2017)
Published online EarlyView 23 March 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2501
Received 9 July 2014;Final revisionreceived 10 December 2015
ENTRY, EXIT, AND THE POTENTIAL FOR RESOURCE
REDEPLOYMENT
MARVIN B. LIEBERMAN,1†GWENDOLYN K. LEE,2†*and
TIMOTHY B. FOLTA3,4†
1UCLA Anderson School of Management, Los Angeles, California, U.S.A.
2Warrington College of Business Administration, University of Florida, Gainesville,
Florida, U.S.A.
3University of Connecticut, School of Business, Storrs, Connecticut, U.S.A.
4University of Strasbourg Institute for Advanced Study, BETA, Strasbourg, France
Research summary: Combining the concept of resource relatedness with the economic notion of
sunk costs, we assess how the potential for resource redeploymentaffects market entry and exit by
multi-business rms. If the performance of a new business falls below expectations, a diversied
rm may be able to redeploy its resources back into related businesses. In effect, relatedness
reduces the sunk costs associated with a new business, which facilitates exit. This, in turn, has
implications for entry: By decreasing the cost of failure,the potential for redeployment justies the
undertaking of riskier entries and greater experimentation. These dynamic benets of relatedness
are distinct from standard notions of “synergy.” To show support for this idea, we provide a
mathematical model, descriptive data, and company examples.
Managerial summary: The ability to redeploy resources inside the rm reduces the cost of entry
“mistakes.” If a new business turns out to have poor protability, the ability to redeploy more of its
resourcesback into the rm’s other businesses allows recycling of investment and can speed up the
retreat. This reducesnot only the cost of exit, but also the cost of entry. Managers should therefore
be more willing to experiment and take risks in developing businesses that aremore related to the
rm’s existing businesses, whereas if redeployment is likely to be difcult, managers should be
cautious about entering. New businesses should be chosen in ways that facilitate redeployment,
and managers should consider the implications of redeployment when setting the performance
thresholds that justify entry and exit. Copyright © 2016 John Wiley& Sons, Ltd.
INTRODUCTION
Researchers in corporate strategy have long
argued that resource relatedness contributes to
a rm’s competitive advantage by promoting
intra-temporal economies of scope, also known as
“synergy.” In this article, we build on recent devel-
opments that distinguish between inter-temporal
Keywords: resource redeployment; market entry/exit;
diversication; corporate strategy
*Correspondence to: Gwendolyn K. Lee, University of Florida,
Chester C. Holloway Professor, PO Box 117150, Gainesville, FL
32611-7150 U.S.A. E-mail: glee@alum.mit.edu
†All authors contributed equally.
Copyright © 2016 John Wiley & Sons, Ltd.
and intra-temporal scope economies to extend
our understanding of the potential advantages of
multi-business rms in entering and exiting new
businesses. We show that relatedness can reduce
the cost of exit by facilitating the redeployment of
resources back into the rm’s existing businesses.
Such ability to redeploy within the rm has two
important implications: It speeds up exit from
underperforming businesses, and it lowers the
cost of experimenting with new businesses in the
vicinity of the rm’s existing businesses.
The mechanism we propose— resource
redeployment— synthesizes the resource-based
view of the rm with the economic theory of
Entry, Exit, and the Potential for Resource Redeployment 527
sunk costs in the context of optimal entry and exit
(Dixit, 1989, 1992). To enter a new business, it
is necessary for a rm to make an investment, a
proportion of which will be sunk or irrecoverable
upon exit. We submit that rms whose existing
businesses are more closely related to the new
business are likely to have a higher potential for
resource redeployment. Typically, such rms have
greater opportunities to redeploy resources inter-
nally upon exiting the new business, with lower
redeployment costs and shorter redeployment
delays. All else equal, the higher the potential for
resource redeployment, the lower the sunkness of
the rm’s investment in the new business, since a
larger portion of the investment can be recovered
by redeploying the resources internally within the
rm. Therefore, more related diversiers are likely
to have de facto lower sunk costs, which imply
faster exit from low-performing businesses.
This sunk-cost logic has theoretical and empiri-
cal implications for the study of both entry and exit.
First, a decrease in sunk costs— arising from greater
ability to redeploy a business’s assets internally or
sell them externally— reduces the minimum thresh-
old of expected performance that is required to jus-
tify entry. As a consequence, a rm that recognizes
these incentives will attempt more entries; the aver-
age quality of its entries will be lower; and the aver-
age probability of success of the entries is also lower
(holding the distribution of entry opportunities con-
stant). Second, a greater potential for resource rede-
ployment raises the level of performance required to
maintain a business after the rm has entered. This
leads the rm to cut off a new business sooner if
its performance falls below expectations. The com-
bined effect of these performance thresholds means
that diversied rms should be more inclined to
enter related businesses as well as to exit them. It
also follows that conglomerates will be slow to exit
businesses because they will have fewopportunities
for internal redeployment. Furthermore, it implies
that the prominent effect of relatedness on entry is
due not only to the potential for synergy, but also
to the potential for folding resources back into the
rm to facilitate exit if the performance of the new
business proves mediocre or poor.
Our story around sunk costs also helps to connect
corporate strategy with research on entrepreneur-
ship. In the event of poor performance— a
common outcome given the uncertainty of new
businesses— an entrepreneurial start-up faces three
options. It can persist in the business, redeploy
its resources into a new business, or exit by sell-
ing (or in extreme cases, abandoning) the assets
of the business. A multi-business rm with a
low-performing business also faces these options.
It may, however, have a further option: to redeploy
resources back into the rm’s existing businesses.
Multi-business rms that anticipate and exploit
the exibility associated with this option enjoy
signicant advantages in market entry, relative to
start-up rms.
In the next section, we briey review the empir-
ical studies on the relation between relatedness
and exit. Then, we develop connections between
sunk costs and resource redeployment within a
multi-business rm. To support our theory, we
present a simple mathematical model and some
empirical evidence consistent with our theory from
a sample of 1,575 entries (481 exits) in the U.S.
telecommunications and Internet sector. Given the
difculty of distinguishing the dynamic effects of
sunk costs from the more conventional effects of
synergy, we triangulate with multiple pieces of evi-
dence. We elaborate on managerial implications of
our theory in the discussion section.
LITERATURE REVIEW
Sunk costs, exit, and entry
The traditional resource-based view of the
multi-business rm focuses on intra-temporal
or static economies of scope, which are derived
from the contemporaneous sharing of resources
across businesses. In this article, we refer to
these economies, which reduce the joint costs of
production, by the common name of “synergy.”
By contrast, inter-temporal economies of scope
are derived from the redeployment of resources
between businesses over time, as resources are
withdrawn from one business and transferred to
another (Helfat and Eisenhardt, 2004).
Synergy implies a negative relation between
relatedness and exit: The more related a business
is to the rm’s other businesses, the less likely the
rm will exit that business. The empirical evidence,
however, shows surprisingly weak support. Sharma
and Kesner (1996), Chang and Singh (1999), and
Karim (2006) found no relationship between exit
and relatedness, whereas Chang (1996) found rms
more likely to exit less-related businesses. O’Brien
and Folta (2009) observed that, after controlling for
business unit protability, rms were more likely
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 526–544 (2017)
DOI: 10.1002/smj
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