Capability Renewal from Organizational Learning

Research that examines capability renewal from a learning perspective differs from the research discussed above that addresses renewal through the acquisition of a specific capability. Research examining renewal through a newly acquired capability is grounded in the tenets of RBV and its concern with creating specific resources that are valuable, rare, inimitable, and nonsubstitutable (Barney, 1991). Alternatively, literature examining acquisitions’ impact on organizational learning is grounded in the tenets of learning theories suggesting that over time organizations have a tendency to become rigid, narrow, and simple (Levitt and March, 1988; Levinthal and March, 1993; Leonard-Barton, 1992; Miller, 1993). Acquisition research grounded in the learning tradition is concerned with acquisitions as an opportunity to break rigidities in the organization and overcome inertial tendencies.

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Organizational research has long recognized that over time organizations tend to become progressively simple and inert (March, 1991; Levitt and March, 1988). Population ecologists have suggested that over time organizations become tied to their existing routines because the environment favors organizations that are highly stable, reliable, and accountable (Hannan and Freeman, 1984). Inopportunely, the same factors that promote the selection of these organizations also promote inertia (Hannan and Freeman, 1994). Organizational research has further revealed that through the ongoing use of organizational routines, firms refine routines and filter out those that are less useful or that failed to produce the desired results (Cyert and March, 1963; Nelson and Winter, 1982; Levitt and March, 1988). With each successive execution, organizational members’ beliefs about cause and effect relationships become more entrenched (Cyert and March, 1963). As managers’ mental maps become more firmly established, managers’ perceptual filters become more discriminating, filtering out a greater quantity of extraneous information (Hambrick and Mason, 1984). Furthermore, the organizational culture becomes more homogenous leading to a progression towards conformity and reduction in variety, inquiry, and experimentation (March, 1991). Consequently, organizations become myopic and obtuse and are unable to adapt to changes in their environment. Rather than alter their response to a change in environmental cues, organizations will tend to respond with their typical routines as rigidity causes managers to overlook or disregard environmental changes and constrain the organizations’ repertoire of potential responses (Nelson and Winter, 1982; Cyert and March, 1963; Kiesler and Sproull, 1982). Thus, rigidity becomes a particular threat for organizational survival and performance with changes in the environment.

Punctuated equilibrium research has found that organizations will go through long periods of inertia followed by a period of shake-up, radical change, and reorganization (Romanelli and Tushman, 1994). Long periods of equilibrium allow the firm to refine routines and enjoy efficiencies, while punctuated periods of radical change allow the firm to question assumptions, amend mental maps and routines, and adapt to environmental changes. Other research has found that some firms are able to manage continuous change by staging ongoing, but less radical shocks to the organization (Brown and Eisenhardt, 1997). Continuous change allows the organization to remain flexible and responsive to the environment and avoid periods of chaos and instability.

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Extant research has revealed that acquisitions are one means by which organizations introduce continuous change. Acquisitions are often a difficult and painful process in which two dissimilar firms attempt to come together to accomplish a joint goal. Combining dissimilar cultures and processes often leads to culture clash and forces firms to question their existing routines, culture, and structures (Haspeslagh and Jemison, 1991). Tension and inquiry into past assumptions leads organizations to unfreeze mental maps and amend their processes and structures (Haspeslagh and Jemison, 1991; Vermeulen, 2005). Even when integration proceeds smoothly, acquisitions provide firms with an opportunity to inject new knowledge into their existing programs and prompt the development of new knowledge. Case studies of acquisitions have found that as the acquiring firms introduce new practices to the target and vice versa, the acquirers begin questioning the efficacy of their practices and past assumptions (Vermeulen, 2005; Haspeslagh and Jemison, 1991). Thus, acquisitions provide the acquirer with a unique opportunity to learn as the firms move beyond their regular context.

Research has also revealed that acquisitions positively impact long-term survival and growth. Specifically, research has shown that firms that have recently acquired have a higher probability that subsequent greenfields and acquisitions would survive (Vermeulen and Barkema, 2001). These findings suggest that as acquiring firms are exposed to a large variety of ideas and events, they develop richer knowledge structures helping the firms manage subsequent growth. Using survival as a proxy for organizational performance is particularly noteworthy because while much of the acquisitions research uses financial ratios or stock price reaction to indicate performance, the positive impact of acquisitions on survival suggests that an acquisition should not be judged on its individual performance because equal, if not greater, importance is the acquisition’s impact on managing the corporation for long-term growth and success. Therefore, managers’ performance objectives for the acquisition may not necessarily concern the immediate or even long-term performance of the acquisition per se but may instead concern the injection of new knowledge and the increased flexibility that it provides.

Research has further revealed that firms will oscillate between periods in which they pursue acquisitions and periods in which they pursue greenfields. Specifically, research by Vermeulen and Barkema (2001) revealed that the likelihood of acquisition is positively related to the number of a firm’s preceding greenfields and that the likelihood of a greenfield is positively related to the number of a firm’s preceding acquisitions. These findings support March’s (1991)

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arguments about organizational forces for exploitation and exploration. While successful exploration through acquisition can provide considerable benefits for strategic renewal, exploration is also associated with a significant investment and a greater amount of risk as firms are unsure where exploration will lead them. Thus, it is important that when firms renew their knowledgebase and routines through exploration, they subsequently fully exploit the value of that knowledge (Vermeulen and Barkema, 2001). Research by Vermeulen and Barkema (2001) suggests that following periods of acquisitions, firms will exploit their renewed knowledge base by setting up subsidiaries from scratch (i.e. greenfields). Additionally, as firms repeatedly exploit their knowledge through successive greenfield entries, they implement habitual ways of organizing and managing and concentrate on aspects of their routines that have been most successful in other situations. Through repetition, firms become more myopic and narrow. This research further illustrates that after successive greenfields firms will seek acquisition to inject new knowledge, practices, and skills into the firm (Vermeulen and Barkema, 2001).

While the research above illustrates the positive effects of acquisition for organizational learning, other research has revealed some negative implications of acquisition. Research has revealed that as firms increase their debt position and devote greater managerial attention to acquisition, they increasingly neglect reinvesting in their existing capabilities (Lei and Hitt, 1995). Furthermore, as the organization becomes larger and more complex, it moves away from strategic controls and towards financial controls emphasizing a short-term perspective (Hoskisson and Hitt, 1988). Thus, managers increasingly adopt a short-term perspective, become more risk averse, and avoid projects with greater uncertainty and longer time horizons. Additionally, as firms pursue an acquisition strategy, the top management team (TMT) becomes more heterogeneous and is less likely to achieve a consensus regarding which core competencies to cultivate (Lei and Hitt, 1995).

These organizational changes following acquisition are likely to have several effects on organizational learning. First, the decrease in managers’ risk propensity and the increased propensity for managers to adopt a short-term orientation decreases the likelihood for managers to actively invest in learning (Hitt et al., 1990). Both the payoff and the time frame for learning are largely uncertain (March, 1991) and so internal learning is associated with a significant amount of risk. Second, the diversity of TMT goals following acquisition and the lack of consensus concerning which core competencies to develop further decreases the likelihood that

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managers will actively invest in learning as they defer reinvesting in core competencies or investing in the development of new competencies (Lei and Hitt, 1995). Thus, while some research has found that acquisitions provide an opportunity to inject learning into the organization (Vermeulen and Barkema, 2001), other research suggests that acquisitions may block learning by changing the nature of the organization and managers’ commitment to purposeful learning (Lei and Hitt, 1995).

Additionally, research suggests that the reduced commitment to organizational learning following acquisition increases managers’ propensity to pursue future acquisitions (Lei and Hitt, 1995). As acquisitive firms fail to reinvest in their capabilities, the firms become more inclined to grow through acquisitions to quickly gain market share and new products (Haspeslagh and Jemison, 1991). This research suggests that subsequent acquisitions may lead to a further decline in the firm’s commitment to internal learning, and as a result, lock the firm into a trajectory of continued acquisitions at the expense of internally driven growth.

Research also suggests that directed learning may be neglected as acquisitive firms begin to focus on managing SBUs and product positions rather than managing and improving core competencies (Laurie, Doz and Sheer, 2006; Vermeulen, 2005). For example, research suggests that in acquisitions, managers tend to focus intently on industry position and market expansion rather than identifying new relationships and linkages between business units for resource sharing and exchange (i.e. learning) (Porter, 1987). When managers select acquisition targets with a perspective on product and market positions as opposed to a focus on complementary capabilities or opportunities for learning, the potential for capabilities to span multiple lines of business become more and more diluted and harder to achieve. As acquisitive firms lose sight of the development of capabilities spanning multiple lines of businesses, they may become more and more inclined to pursue future acquisitions to gain new products and market share as the only avenue of growth available to them.

In summary, this stream of research has made several significant contributions to understanding the impact of acquisitions on capabilities renewal. First, research suggests that the opportunity for acquisitions to contribute to learning provides one potential avenue for organizations to renew their capabilities (Vermeulen and Barkema, 2001). Furthermore, acquisitions as a form of exploratory learning provide the firm with an opportunity to add substantially different capabilities to a company’s repertoire. However, research also suggests

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that the organizational changes commonly accompanying acquisitions may actually block learning and subsequently may negatively impact a firm’s capabilities (Lei and Hitt, 1995). Furthermore, as acquisitions block internal learning, firms pursuing acquisitions are likely to become locked into a trajectory in which the firm neglects the development of its capabilities (Haspeslagh and Jemison, 1991). As the acquiring firm’s capabilities gradually weaken and the firm can no longer rely on leveraging its capabilities in new areas for growth, the firm is forced into another acquisition for growth. Thus, while acquisitions may provide a useful avenue for exploratory learning and capability renewal, it may also be used as a substitute for learning and have a negative impact on capabilities. Interestingly, to date, it remains unclear why some firms fall into a trajectory of pursuing acquisitions at the expense of internal development, while other firms are able to strike a balance between internal development and acquisition.