Transformational Strategies and Productivity Growth: A Transformational‐Activities Perspective on Stagnation in the New‐Normal Business Landscape

• DOI: http://doi.org/10.1111/joms.12519
• Author: Lorenzo Ciari,Jo Seldeslachts,Joseph A. Clougherty,Tomaso Duso
• Date: 01 May 2020
• Published date: 01 May 2020

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

Transformational Strategies and Productivity

Growth: A Transformational-Activities Perspective on

Stagnation in the New-Normal Business Landscape

Joseph A. Cloughertya, Tomaso Dusob, Jo Seldeslachtsc

and Lorenzo Ciarid

aUniversity of Ill inois at Urbana-Cha mpaign; bDIW-Berlin and Technische Universität B erlin; cKU

Leuven a nd University of Am sterdam; dE uropean Bank fo r Reconstru ction and De velopment

ABST RACT Declines in product ivity growth substant ially explain new-normal busi ness stagna-

tion; yet in order to address sit uations of slack productivity grow th, firms can choos e from six

generic tra nsformational str ategies: retirement, r enewal, retrenchment, re plication, redeploy-

ment, and recombination. Wh ile the extant literature focuses on sp ecific transformationa l

strategies th at particular fir ms, or industries, take in resp onding to productiv ity threats,

questions regard ing which transformational st rategies are commonly employed and commonly

successful have been neglecte d. Answering these broader questions al lows factoring how firms

might respond to new-normal cond itions; and yields nor mative implications regardin g the

transformat ional strateg ies – and policies – that enhance productiv ity growth and reverse new-

normal stag nation. Using cross-industry pa nel data, we identif y the transformational strateg ies

that are both common ly employed and commonly successf ul. Our empirical results i ndicate

that fi rms react to productivity thr eats via a variety of strateg ic responses; yet, engaging in

renewal and recombinat ion uniquely address such threats.

Keywo rds: dyna mic capabilities, innovation, organ izational decline, productiv ity,

turna round

‘Productivity isn’t everything, but in the long run it is a lmost everyth ing’. (Paul

Krugma n, 1994, p. 11)

Journal of Man agement Studi es 57:3 M ay 2020

doi:10. 1111/j om s .12 519

Address for re prints : Joseph A. Clougher ty, Gies College of Busi ness, Universit y of Illi nois at Urbana-

Champaig n, 330E Wohlers Hal l; 1206 S. 6th St., MC -706; Champaig n, IL 61820; USA (jaclough@il li-

nois.edu).

INTRODUCTION

The ability to convert inputs into outputs (i.e., productivity) has been central to the

academic and policy discussions spawned by El-Eria n’s (2010) observat ion that a ‘new

538 J. A. Clougherty et al.

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

normal’ best characteri zes the business environment in the developed economies since

2008. Gordon (2015), in particular, argues that slowed productiv ity growth i n the in-

dustrial economies – and the USA especially – represents the underly ing cause of the

financi al crises and slack post-crises g rowth. Indeed, a number of observers (e.g., Storm,

2017; Summers, 2014, 2015) agree that faltering business investment represents a key

factor behind new-normal stagnation in productivity growth. The management litera-

ture is perfectly poised to contribute to the new-normal discourse by generati ng sound

policy prescriptions with respect to which business investments might reverse t he un-

derlining productiv ity causes of new-normal stagnat ion. In order to define the relevant

business investments that enhance productivity growt h, we draw from the literature on

organizational decl ine and transformat ional activit ies (e.g., Bruton et al., 1994; Helfat

and Peteraf, 2003; Trahms et al., 2013) in answering two pertinent research questions.

Specifica lly, which transformational st rategies are commonly employed by fir ms expe-

riencing a sustained la ck of productivity grow th, and which tran sformational strategies

are commonly successful by leading to enhanced productivit y in subsequent years?

While Eisenhardt and Martin (2000) recognize that commonalities exist for firms

across industries, Wang and Ahmed (2007) and Verbeke (2018) lament the fact that these

commonalities have not been consistently identified. The literature on transformational

activities has instead rightly taken a micro-level perspective by analysing particular trans-

formational strategies (e.g., Winter and Szulanski, 2001), or particular responses by spe-

cific firms (e.g., Amiryany and Schijven, 2011) or industries (e.g., Anand and Singh, 1997)

to capability and productivity threats. The preponderance of empirical studies at the

firm-, industry- and strategy-specific levels has led then to a ‘forest from the trees’ issue;

thus, the literature following Helfat and Peteraf ’s (2003) seminal insights on transfor ma-

tional activities presents no definitive evidence with regard to which transformational

strategies are frequently used by firms in response to capability and productivity threats.

Furthermore, this literature has no definitive evidence with regard to which transforma-

tional strategies tend to be successful in addressing capability and productivity threats.

In nesting the dynamic resource-based view within the concept of industr y lifecycles,

Helfat and Peteraf (2003) directly address the issue of transfor mational activities that

alter a firm’s resource base. This research points out that capability threats in the form

of slack productivity improvement represent harbingers of the maturity or decline stage

being reached. Winter (2000) further highlights that such crises can raise aspirations and

motivate firms to upgrade; thus, capability and productivity threats – where the technical

limits of the relevant capabilities have become exhausted – will require transformational

activities by firms in order to alter the firm’s resource base. While dynamic capabilities

underpin such a transformation (Eisenhardt and Martin, 2000; Teece, 2007, 2009; Teece

et al., 1997), Helfat and Peteraf (2003) identify six general paths – i.e., transformational

strategies – via which firms can respond to a situation where the rate of productivity

growth has substantially decelerated; namely, retirement, rene wal, replication, retrenchment, re-

combination, and redeployment represent the six Rs of capability transformation. These sem-

inal insights have spurred a great deal of research considering what activities firms take

when their operations face challenging growth and productivity prospects (for reviews,

see Teece, 2007; Trahms et al., 2013; Wang and Ahmed, 2007).

Transformational Strategies and Pro ductivity Growth 53 9

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

Yet despite these extensive efforts, we do not know which transformational strate-

gies are most commonly employed and which transformational strategies are generally

effective at reversing a decline in productivity growth (Winter, 2003). Thus, research in

organizational decline and dynamic capabilities needs to move beyond the necessary

micro-foundations to also embrace a macro-perspective akin to Fortune and Mitchell’s

(2012) focus on the shaping of macro-level phenomena within firm and industry evolu-

tion. Taking such a broad approach is fundamental if we wish to factor how the new-

normal business environment will generally impact the uptake of transfor mational strat-

egies by firms, and if we wish to ascertain which transformational strategies are generally

effective at addressing the underlining causes of new-nor mal stagnation. In this vein,

Winter (2003, p. 993) highlights that the greater question facing management scholar-

ship ‘is deciding which among the many promising but uncertain investments should be

undertaken’. Yet the micro-level nature of previous empirical scholarship does not facil-

itate our ability to provide definitive and generalizable answers to such salient questions

regarding the new-normal business environment.

With the above in mind, we undertake a broad pan-industry empirical study in order

to better characterize the nature of transfor mational activities. We test our theoretical

priors by compiling data from seven different sources in order to operationalize the six

generic responses to capability threats: with retirement captured by exits from an indus-

try; renewal captured by R&D levels; replication captured by outward cross-border merger

activity; retrenchment captured by horizontal merger activity; redeployment captured by

outward-vertical merger activity that impacts target-industry productivity; and recombina-

tion captured by outward-vertical merger activity that impacts acquirer-industry produc-

tivity. Matching industry-level data which captures the six transformational strategies for

26 US industries over the 1987–2001 period with comprehensive measures of total fac-

tor productivity (TFP) growth allows considering which transformational strategies are

most commonly employed by firms experiencing a sustained lack of productivity growth,

and which transformational strategies tend to be successful by leading to enhanced pro-

ductivity growth in subsequent years. Specifically, we formulate a system of six equations

in order to test our hypotheses by employing the seemingly unrelated regression (SUR)

technique.

As previously noted, slack productivity growth has been central to the academic and

policy discussions concerning the new-normal business environment (e.g., Gordon, 2015).

A number of observers (e.g., Dabla-Norris et al., 2015; Eichengreen, 2015; Mokyr, 2014)

have accordingly called for reversing the flagging pace of innovation and technological

change in order to escape the new-normal business landscape by stimulating produc-

tivity improvements, reviving economic growth, and enhancing living standards. While

Summers (2014, 2015) and Storm (2017) depart from Gordon’s (2015) exclusive prescrip-

tions with respect to the employment of supply-side policies, all of these authors agree

that enhancing business investment represents a key factor behind reversing stagnation

in productivity growth. The literature on organizational decline and transformational

activities potentially yields prescriptions with respect to which business investments repre-

sent effective responses to slack productivity growth. Yet as noted, the micro-level nature

of previous empirical scholarship limits the ability to provide definitive and generaliz-

able insights that might inform these policy debates. The contributions of management