Intraindustry executive succession, competitive dynamics, and firm performance: through the knowledge transfer lens.

A substantial body of research has documented the role of human resource flows in the diffusion of innovation across organizations (Almeida and Kogut, 1999; Baty et al., 1971; Boeker, 1997; Ettlie, 1980, 1985; Pfeffer and Leblebici, 1973; Rogers, 1995; Rosenkopf and Almeida, 2003; Saxonhouse, 1991; Song et al., 2003; Young et al., 2001). To the extent they carry relevant knowledge, employees who move between firms facilitate the adoption of an innovation or technology by a particular organization. Although the primary focus of this research has been on determining why and how innovations are spread across firms, from an organizational perspective, personnel flows can also be construed as an organizational learning mechanism. That is, hiring rivals' employees can potentially serve as a means by which a firm both absorbs new knowledge from its external environment and adapts to changing contexts.

With certain exceptions (e.g., Baty et al., 1971; Boeker, 1997; Young et al., 2001), research examining the effect of employee mobility and the diffusion of innovation has focused on the acquisition of technical managers, particularly scientific and engineering talent. There has been little emphasis on the possible effect of changes to the executive ranks of a firm on knowledge flows, rivalry, and competitive strategy. Yet as the following quotation indicates, organizations operating in dynamic, technology-intense environments may be under pressure to hire senior executives from rivals in order to acquire new technologies, or enter new markets rapidly:

In [Silicon] Valley and tech in general, employees are bought and

sold like commodities. If you have trouble with the competition,

simply raid its talent. Just last Fall, German software maker SAP

sued Siebel Systems Inc. after more than a dozen executives jumped

ship for its Silicon Valley rival (Kerstetter, 2000: 43).

Additionally, this phenomenon does not seem to be limited to technical talent. For example,

SAP, AG, the world's largest maker of business-application

software, has hired a number of executives away from Oracle Corp

and other major rivals as competition in the industry

intensifies....

The software industry has a tradition of poaching talent from

competitors, particularly sales people. What makes the recent hires

by SAP noteworthy, however, is the number and that it includes

development and marketing executives (Bryan-Low, 2005: B2).

Widely regarded as an important organizational adaptation mechanism (Gabarro, 1987; Vancil, 1987), the study of change to a firm's executive ranks, or "executive succession," is perhaps one of the most frequently investigated phenomena in management research (Finkelstein and Hambrick, 1996; Kesner and Sebora, 1994). A rich tradition in executive succession research bifurcates successor-type into insider and outsider categories (Allen et al., 1979; Behn et al., 2006; Boeker and Goodstein, 1993; Cannella and Lubatkin, 1993; Carlson, 1961; Dalton and Kesner, 1985; Grusky, 1964; Ocasio, 1999; Pfeffer, 1972; Pfeffer and Leblebici, 1973; Salancik and Pfeffer, 1980). Formal, well-ordered transition processes and promotion from within (i.e., "inside succession") tend to result in the selection of new leaders that fit well within the organizational context and perpetuate continuity in strategic decision making. Under stable conditions, they will also likely maintain or increase the extent to which an organization fits its external environment. In contrast, outside successors tend to disrupt the status quo and established decision-making patterns. In theory, the successful implementation of change by outside successors will help reverse economic decline by making organizations responsive to discontinuous change in turbulent environments. Investigations of the direct relationship between outside succession and subsequent (i.e., post-succession) firm performance, however, appear somewhat more equivocal. Empirical studies reveal both positive and negative performance implications for outside succession (Beatty and Zajac, 1987; Behn et al., 2006; Lubatkin et al., 1989; Reinganum, 1985; Shen and Cannella, 2002). Negative organizational performance subsequent to outside succession has been ascribed to a variety of factors including a lack of firm-specific knowledge by the inchoate executive (Behn et al., 2006; Gabarro, 1987; Kotter, 1982), adverse selection problems faced by the board of directors (Zajac, 1990), and the generally disruptive effect of leadership transitions on both the top management team and the organization as a whole (Shen and Cannella, 2002). This suggests there may be mediating factors that affect the relationship between outside succession and firm performance which have yet to be acknowledged in the existing executive succession literature.

One such factor might be the strategic changes made by a new, external executive. While there is a significant body of research concerning the relationship between outside succession and post-succession organizational performance, the direct examination of the influence of succession on strategic change has been more limited. For example, at the corporate level, firms that appoint outside successors appear to become more diversified (Wiersema, 1992). Several studies have also examined the relationship between executive succession and changes to business-level, or competitive, strategy. CEO succession appears to be associated with increased "competitive aggressiveness" (Miller, 1993). Executive succession exhibited a positive association with firm performance when combined with "strategic reorientation," including the addition or deletion of a major product line, as well as a significant market entry (Tushman et al., 1985; Virany et al., 1992). Boeker (1997) found that semiconductor producers were more likely to enter a specific product market when they hired a top manager from an organization that competes in that same product market. This phenomenon, described as "executive migration," can be viewed as a mechanism for the transmission and diffusion of knowledge across firms, and affects strategic change and competition (Boeker, 1997). Thus, changes to a firm's executive ranks may influence its competitive strategy. In turn, this may have implications for firm performance.

Accordingly, the paragraphs that follow draw upon recent developments in knowledge management and competitive dynamics research to further explore the potential relationship between executive succession, competitive strategy, and firm performance (see Figure 1). External succession, particularly what has been described as "intraindustry succession" (Zhang and Rajagopalan, 2003), is recast as a mechanism for the transfer of knowledge between organizations, and the influence of this phenomenon on competitive strategy and firm performance is examined. The central research question posed is how does the knowledge transfer associated with intra-industry succession potentially influence competitive strategy and, ultimately, firm performance? A conceptual model is developed below that suggests that intra-industry succession allows firms to obtain often hard to access forms of tacit knowledge in order to remain competitive. However, it is also recognized that the use of succession in this manner potentially has strategic costs. That is, by promoting imitation, intraindustry succession may cause firms to become strategically similar. Thus, in the long-run it may actually reduce firm performance as industry rivalry becomes more intense. It is further suggested that this phenomenon is influenced by power dynamics, as well as the integration process associated with the executive's new role.

[FIGURE 1 OMITTED]

EXECUTIVE SUCCESSION AND INTER-ORGANIZATIONAL KNOWLEDGE TRANSFER

A significant stream of management research suggests that existing stocks of knowledge, as well as the capacity to absorb new knowledge from the environment, determine an organization's ability to achieve and sustain a competitive advantage vis-a-vis its rivals (Cohen and Levinthal, 1990; Grant, 1996; Kogut and Zander, 1992; Liebeskind, 1996; Nonaka, 1994). One form of organizational knowledge that is difficult for a firm to obtain is "tacit" knowledge, which is acquired through experience or learned-by-doing (Polanyi, 1966). Tacit knowledge has been theorized to be an important factor in obtaining and maintaining a competitive advantage (Droege and Hoobler, 2003). Because it is difficult to codify, or transform into symbolic language amenable to interpersonal communication, the transfer of tacit knowledge across individuals, groups, and organizations is likely to be slow, costly, and uncertain (Kogut and Zander, 1992). In contrast, explicit knowledge, or knowledge about facts and theories, is highly subject to transfer because it can be readily codified, articulated, and communicated. In organizations, tacit knowledge exists in a variety of forms. At the individual level, tacit knowledge is similar to the concept of skills, or knowing "how" to accomplish a task. Interactions among members of a group, or routines, are also often guided by tacit knowledge (Berman et al., 2002; Nelson and Winter, 1982).