Growing with the market: How changing conditions during market growth affect formation and evolution of interfirm ties

• DOI: http://doi.org/10.1002/smj.2740
• Author: Pinar Ozcan
• Date: 01 February 2018
• Published date: 01 February 2018

RESEARCH ARTICLE

Growing with the market: How changing conditions

during market growth affect formation and

evolution of interfirm ties

Pinar Ozcan

Department of Strategy and International

Business, Warwick Business School, Coventry,

U.K.

Correspondence

Pinar Ozcan, Department of Strategy and

International Business, Warwick Business School,

Scarman Road, Coventry, CV47AY, U.K.

Email: cpozcan@gmail.com

Research Summary: Market conditions are known to

matter for firm performance and growth. This study

explores how changing levels of uncertainty and competi-

tion affect interfirm ties of entrepreneurial firms as mar-

kets transition from nascent to growth stage. Tracing six

entrepreneurial game publishers during the growth stage

of the U.S. wireless gaming market, the findings reveal

that in a growth stage market, as uncertainty decreases,

certain ties of entrepreneurial firms are terminated. First,

existing partners may cut ties and become competitors

after entering the market directly. This is a “winner’s

curse”as more successful firms are more likely to entice

their partners to enter the market directly. Second, ties

may be terminated as prominent firms that are “over-

whelmed”with too many partners cut ties with low to

mediocre performance, while their remaining partners

enter a positive spiral of tie strength and performance.

Finally, as uncertainty decreases, new firms may enter the

market as competitors to prominent firms. While entre-

preneurial firms with high- and low-performing ties to

prominent partners may find ties with these new entrants

attractive, those with mediocre ties to few prominent part-

ners find this move too risky and wait for a first mover to

legitimate it. Overall, the findings show that changing

levels of uncertainty and competition in growth stage

markets can have different consequences for firms due to

heterogeneity in their ties and power relative to partners.

The findings provide several contributions to literature

regarding the relationship among interfirm ties, firm per-

formance, and market evolution.

Managerial Summary: Based on interviews at six entre-

preneurial game publishers in the United States and their

partners, this study shows how changing levels of

Received: 24 November 2014 Revised: 25 July 2017 Accepted: 28 August 2017 Published on: 16 January 2018

DOI: 10.1002/smj.2740

Strat Mgmt J. 2018;39:295–328. wileyonlinelibrary.com/journal/smj Copyright © 2017 John Wiley & Sons, Ltd. 295

uncertainty and competition in growing markets can have

different consequences for firms based on the different

types of alliances in their portfolio and their power rela-

tive to partners. The findings highlight the importance of

managing partners differently based on alliance type and

goal of the partner. They advocate remaining flexible in

alliance management as information asymmetries, inten-

tions and bargaining power of partners can change and

lead to abrupt alliance dissolution. They show that alli-

ance portfolio management goes beyond a firm’s capabil-

ity of managing individual alliances, and provide a tool

for managers to evaluate their alliance portfolios and take

the necessary precautions.

KEYWORDS

competition, entrepreneurial firms, interfirm ties, market

growth, uncertainty

1|INTRODUCTION

Market conditions are known to matter for firm performance and growth (Anderson & Tushman,

1990; Gort & Klepper, 1982; Hite & Hesterly, 2001; Koka & Prescott, 2008). While extant work

has widely explored firms’chances of survival as markets evolve, for example, during industry

shakeouts (Argyres & Bigelow, 2007; Klepper & Grady, 1990), the question of how changing mar-

ket conditions affect interfirm ties has received much less attention (Balland, De Vaan, & Boschma,

2013). On the one hand, scholars suggest that changing environmental conditions and external

shocks are likely to affect the formation and evolution of interfirm ties (Koka & Prescott, 2008),

and that there might even be a coevolutionary relationship between these factors (Jacobides & Win-

ter, 2005). On the other hand, extant literature, discussed in the following section, focuses mostly on

how ties can help firms mitigate uncertainty and competition, but not how the formation and evolu-

tion of network ties are, in turn, affected by these conditions.

This study is based on the premise that understanding the effects of changing market conditions

on firms’ties requires consideration of firm, partner, and tie heterogeneity as prior work has shown

that firms’different positions, resources and power relative to partners affect their ability to form

and manage ties (Ozcan & Eisenhardt, 2009; Powell, White, Koput, & Owen-Smith, 2005; Santos &

Eisenhardt, 2009). Thus, with a longitudinal and qualitative approach, this study explores the com-

plex dynamics of how changing levels of uncertainty and competition during market growth affect

the formation and evolution of interfirm ties during the transition of the U.S. wireless gaming mar-

ket from nascent to growth stage. The findings uncover what might await entrepreneurial firms that

depend on interfirm ties for survival in a rapidly growing market; for example, which of their ties

will strengthen or break due to the changing levels of competition and uncertainty. They reveal that

in a growth stage market, as uncertainty decreases, certain ties of entrepreneurial firms are termi-

nated. First, existing partners may cut ties and become competitors after entering the market directly.

296 OZCAN

This is a “winner’s curse”as more successful firms are more likely to entice their partners to enter

the market directly. Second, ties may be terminated as prominent firms that are “overwhelmed”with

too many partners cut ties with low to mediocre performance while their remaining partners enter a

positive spiral of tie strength and performance. Finally, as uncertainty decreases, new firms may

enter the market as competitors to prominent firms. While entrepreneurial firms with high- and low-

performing ties to prominent partners may find ties with these new entrants attractive, those with

mediocre ties to few prominent partners find this move too risky and wait for a first mover to legiti-

mate it. Overall, the findings show that changing levels of uncertainty and competition in growth

stage markets can have different consequences for firms due to heterogeneity in their ties and power

relative to partners.

The findings provide several contributions to literature. Leveraging the rich data of a longitudi-

nal, qualitative study, this article provides a comprehensive picture of how market conditions affect

entrepreneurial firms directly through their interfirm ties and indirectly through the actions of other

firms in the network. The findings reveal, for instance, that during market growth stage, prominent

firms that operate in multiple markets may experience a lag in allocating resources to the new mar-

ket, which, along with reduced market uncertainty, leads them to cut off most of their partners. This

suggests that entrepreneurial firms and large corporations may experience market growth differently

and that these experiences are intertwined through the ties that they form, manage, and cut. The

interaction of such firm, interfirm, and market level dynamics improve our existing knowledge on

the coevolution of firm strategy, interfirm ties and market networks

1

(e.g., Hoffmann, 2007; Koka,

Madhavan, & Prescott, 2006; Koza & Lewin, 1998).

By tracing the different growth trajectories of entrepreneurial firms with similar starting posi-

tions, this study also contributes to extant literature in entrepreneurship (e.g., Eisenhardt & Schoon-

hoven, 1990; Ozcan & Eisenhardt, 2009) by showing that entrepreneurial growth not only depends

on how the executives “prepare their firm”before the competition intensifies, but also on the strate-

gies and limitations of their partners. It shows, for instance, that large and resourceful partners may

not be as beneficial as previously thought (Baum, Calabrese, & Silverman, 2000; Powell et al.,

1996; Stuart, 2000) as it takes them time to divert their attention and resources from other markets.

Finally, this study builds on extant work on the external (Balland, 2012; Broekel & Boschma,

2011) and internal forces (Glückler, 2007; Volberda & Lewin, 2003) that drive network structures

by providing a glimpse at network dynamics during market growth. While confirming that decreas-

ing uncertainty leads to more firms entering the market (Aldrich & Fiol, 1994; Baron, Burton, &

Hannan, 1999), the findings also highlight endogenous counterforces driving the market toward a

small world (Watts & Strogatz, 1998). One implication of this for work on industry shakeouts

(Gort & Klepper, 1982; Klepper & Grady, 1990) is that in interdependent (i.e., networked) environ-

ments, a partner shakeout may precede the industry shakeout. More generally, this field study

reveals that market conditions driving change are more complex than just a joint increase in compe-

tition and reduction in uncertainty. Firm and interfirm level factors also fuel network dynamics and

create heterogeneity in how environmental conditions affect firm survival. Overall, the theoretical

model emerging from the findings is a step toward understanding the relationship among firm strat-

egy, interfirm ties, and market evolution.

1

A market network is the entire collection of firms operating in a structured context for exchange (Fligstein, 2001) in order to deliver

a product/service to customers. This definition emphasizes collaboration among firms, which is common in nascent markets that lack

an agreed-upon architecture (Eisenhardt & Schoonhoven, 1996) and “networked”or “platform”markets where high interdependence

among multiple firm types contribute to an entire product system (Eisenmann, Parker, & Van Alstyne, 2006; Ozcan & Eisenhardt,

2009) or knowledge-intensive fields (e.g., biotech, Powell, Koput, & Smith-Doerr, 1996).

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