The origins of firm strategy: Learning by economic experimentation and strategic pivots in the early automobile industry

• Published date: 01 March 2020
• Author: Brent Goldfarb,David A. Kirsch,Sandeep D. Pillai
• DOI: http://doi.org/10.1002/smj.3102
• Date: 01 March 2020

SPECIAL ISSUE ARTICLE

The origins of firm strategy: Learning by economic

experimentation and strategic pivots in the early

automobile industry

Sandeep D. Pillai

1

| Brent Goldfarb

2

| David A. Kirsch

2

1

Department of Management and Technology, Bocconi University, Milan, Italy

2

Department of Management and Organization, Robert H. Smith School of Business, University of Maryland, College Park,

Maryland

Correspondence

Sandeep D. Pillai, Department of

Management and Technology, Bocconi

University, Via Roentgen 1, 20136 Milano,

Italy.

Email: sandeep.pillai@unibocconi.it

Abstract

Research Summary:We explore the effectiveness of eco-

nomic experimentation as a learning mechanism through a

historical exploration of the early automobile industry. We

focus on a particular subset of economic experiments,

called strategic pivots, that requires irreversible firm com-

mitments. Our quantitative analysis suggests that strategic

pivoting was associated with success. We then use histori-

cal methods to understand whether this association is rea-

sonably interpreted as a causal link. We identify lessons

that could only plausibly have been learned through strate-

gic pivoting and document that those firms that were able

to learn from the strategic pivots were most likely to suc-

ceed. We discuss the generalizability of our findings to

build the hypothesis that strategic pivots and economic

experiments originate firm strategy.

Managerial Summary:We explore the effectiveness of

experimentation as a learning mechanism through a histori-

cal exploration of the early automobile industry. We focus

on a particular subset of experiments, called strategic pivots,

that requires irreversible firm commitments. Our analysis

suggests that strategic pivoting was associated with success.

We identify lessons that could only plausibly be learned

through strategic pivoting and document that those firms

that were able to learn from the strategic pivots were most

Received: 29 September 2017 Revised: 28 April 2019 Accepted: 1 June 2019 Published on: 29 November 2019

DOI: 10.1002/smj.3102

Strat Mgmt J. 2020;41:369–399. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 369

likely to succeed. Even though firms may use lean tech-

niques, market solutions may only be discovered through

strategic pivots whose outcomes are unknowable ex-ante.

Therefore, successful strategies reflect an element of luck.

KEYWORDS

automobile, lean startup, learning by economic experimentation, strategic

decisions, strategic pivot

1|INTRODUCTION

Perhaps the canonical, and most well-known, instance of an economic experiment in the early auto

industry was Henry Ford's decision to focus on Model T:

In 1909 I announced one morning, without any previous warning, that in the future we

were going to build only one model, that the model was going to be ‘Model T’, and that

the chassis would be exactly the same for all cars, and I remarked: Any customer can

have a car painted any colour that he wants so long as it is black. I cannot say that any

one agreed with me. The selling people could not of course see the advantages that a

single model would bring about in production. More than that, they did not particularly

care. They thought that our production was good enough as it was and there was a very

decided opinion that lowering the sales price would hurt sales, that the people who

wanted quality would be driven away and that there would be none to replace them.

The general comment was: ‘If Ford does that he will be out of business in six months.’

(Ford, 1922, p. 72)

Ford's historically famous statement about color is, well, colorful, and perhaps retrospectively

self-serving. However, the focus on color misses the more important strategic decision to focus

on a single model. Ford committed to this strategic direction based on the entirety of his experi-

ence producing cars—an experience that included founding three firms, launching 10 models,

and making numerous prototypes. It was not possible, however, to predict the outcome of the

single-model experiment; it was unknown if there would be sufficient demand to replace higher-

value customers.

1

Ford's fundamental strategy that is the moving assembly line was discovered

through an extended process of high stakes trial and error at Ford's prior firms, and its imple-

mentation was itself an audacious bet. We reason that this is the best explanation of strategy

origination and implementation in the early automobile industry and then hypothesize the condi-

tions under which we should expect a similar pattern of strategic discovery through economic

experimentation.

Entrepreneurs in the early automobile industry occupied a messy space. An initial reading of

the historical record revealed that entrepreneurs offered a variety of products as they sought to

figure out what to produce. That is, like Ford, they experimented. However, this behavior

highlighted a puzzle: prior research on early automotive races conjectured that firms entered

competitions to certify competence (Rao, 1994). Nevertheless, firms that won races entered

1

We thank an anonymous reviewer for suggesting we focus on this particular economic experiment as a canonical example.

370 PILLAI ET AL.