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The first research question addressed in this dissertation involves understanding how cumulative acquisition experience impacts the renewal of capabilities through subsequent acquisitions. As discussed in the literature, a great deal of research has examined how cumulative acquisition experience impacts subsequent acquisition performance (e.g. Zollo and Singh, 2004; Fowler and Schmidt, 1989; Bruton, Oviatt and White, 1994; Hayward, 2002). Much of this research has utilized learning curve arguments to propose that cumulative acquisition experience positively impacts subsequent performance (e.g. Bruton et al., 1994; Fowler and Schmidt, 1989). While some researchers have found support for these arguments (e.g. Bruton et al., 1994; Fowler and Schmidt, 1989), others have found that models that adopt a more holistic approach to understanding experience and incorporate a more fine grained analysis of that experience, better explain the relationship between acquisition experience and subsequent acquisition performance (e.g. Hayward, 2002; Zollo and Singh, 2004). Consistent with that research, this dissertation advances a model in which cumulative acquisition experience is examined with regards to the firm’s overall growth strategy.

Furthermore, past research provides preliminary evidence that cumulative acquisition experience is likely to impact a firm’s ability to renew its capabilities in subsequent acquisitions by impacting the structure of the organization. Early diversification research by Pitts (1974; 1977) examined the impact that acquisition experience had on structure. This research revealed that firms pursuing diversification through acquisitions were more likely to use strict formula based quantitative measures for manager assessments and were unlikely to use policies to promote resource sharing across business units. In addition, Pitts’ (1974; 1977; 1980) work reveals that firms pursuing only internal development adopt very different structures. Specifically, he found that firms pursuing only internal development were more likely to use subjective measures in assessing managers’ performance and have policies in place to encourage resource sharing.

Consequently, Pitts (1980) proposes that as a firm considers future growth opportunities, a firm that has previously expanded through internal development is more likely to grow through future internal development because it is organized for resource sharing and synergy. Alternatively, he proposes firms that have grown through past acquisitions are more likely to pursue acquisition for future growth because of their limited ability to leverage internal synergies

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to find new domains. Thus, Pitts (1980) concluded that few firms would be able to pursue a mixture of internal growth and acquisition and those firms able to balance the two would have lower performance than those pursuing either internal development only or acquisition only.

Counter to this proposition, however, subsequent research has revealed that many firms pursue a mixture of the two strategies and that the performance of those firms pursuing a mixture of the two growth strategies is not significantly different from those pursuing a pure growth strategy (Lamont and Anderson, 1985). In fact, later research revealed that firms utilizing both internal development and acquisition outperform those firms that rely on one form of growth (Busija, O’Neill, and Zeithaml, 1997). Consequently, researchers have found that firms may adopt a growth strategy of (1) pure acquisition (Lei and Hitt, 1995; Haleblian, Kim, and Rajogopalan, 2006; Hasepslagh and Jemison, 1991), (2) pure internal development (e.g. Saxenian, 1994; Prabhu, Chandy, Ellis, 2005), or (3) a mixture of the internal development and acquisition (Vermeulen and Barkema, 2001; Blonigen and Taylor, 2000).

Due to the variety of ways firms utilize acquisitions and internal development for growth, and the distinct structures associated with acquisitions and internal development, this dissertation advances the perspective that to understand how acquisition experience impacts capabilities renewal from subsequent acquisition, research must examine that acquisition experience in light of the firm’s overall growth strategy. Consequently, this dissertation examines the potential for various growth strategies to contribute to the learning structures associated with absorptive capacity.

Pure Acquisition Strategies

Firms that pursue pure acquisition strategies grow solely through the acquisition of other firms. While only a limited amount of research on firms that have pursued pure acquisition growth strategies has been conducted, a handful of studies have revealed a few key insights about the nature of these firms. First, Berg (1973) found that corporate staff size relative to sales was small for acquisitive diversifiers. The author suggests that the small corporate staff size is an indication of decentralization and the more limited opportunities to create synergies across the lines of business in firms that have pursued acquisitive growth due to their greater diversity. Although his sample size was notably small, Berg (1973) also found greater diversity among SIC codes in the acquisitive diversifiers than in the internally developed firms. A second key insight

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was provided by Pitts (1974) who found that firms pursuing pure acquisition strategies were more likely to use strict formula-based quantitative measures for manager assessments. Furthermore, firms utilizing pure acquisition strategies utilized very few subjective criteria and exerted very little discretion in performance payouts. Lastly, Pitts (1977) revealed that firms pursuing pure acquisition strategies were unlikely to use policies to promote resource sharing across business units and managers in these firms had little past experience working with managers in other units of the same corporation. In sum, past research has revealed that firms pursuing pure acquisition growth strategies are more likely to function as a collection of diverse, autonomous business units, with little resource sharing across business units and little use of job rotation or cross-unit interfaces.

While the research cited above all suffered from small sample sizes, additional research has generally been consistent with these findings. For example, research suggests that when making acquisitions, firms will generally pursue targets that are highly compatible with the firm’s culture, business operations, and resources (Larsson and Finkelstein, 1999; Greenwood, Hinings, and Brown, 1994; Capron, Dussauge, and Mitchell, 1998; Ramaswamy, 1997). However, with each successive acquisition, the pool of potential acquisition targets becomes smaller and thus a firm may be forced to look to potential candidates offering less overlap and fewer complementarities. Consequently, over time firms that have pursued pure acquisition strategies exhibit a decrease in the amount of overlap and in the number of similarities between business units and as a result, business units are more likely to function as loosely connected operating units (Child, 1973). Furthermore, consistent with research by Pitts (1977), other researchers have found that as a firm grows through acquisition, it increases its variety by incorporating new managers and employees with different backgrounds, experiences, and beliefs (Greenwood et al., 1994). Consequently, with each acquisition, the overall organization increases its variety of knowledge and beliefs. One implication of the introduction of greater variety is the greater information processing demands placed on top management (Lawrence and Lorsch, 1967). Consequently, top managers are more likely to implement financial controls upon business unit managers (Hitt et al., 1990) while at the same time providing business level managers with greater autonomy in decision making (Pitts, 1980).

Research has further illustrated that pure acquisition strategies are likely to influence the firm’s goals by shaping the nature of the firm. The variety introduced by pure acquisition

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strategies is associated with increases in the diversity of the top management team (Michel and Hambrick, 1992; Herrmann and Datta, 2005). As a result, the top management team is much more likely to possess diverse goals (Hitt et al., 1990). Accordingly, the overall organization may pursue multiple goals simultaneously as opposed to pursuing one overarching organizational goal. Furthermore, financial controls implemented in acquisitive firms increase the pressure on managers to achieve short-term, financial goals (Hitt et al., 1990; Hoskisson and Hitt, 1988). As a result, managers are likely to pursue projects with short time horizons (Haspeslagh and Jemison, 1991).

In sum, prior research suggests several ways in which a firm’s cumulative experience with pure acquisition strategies can impact the firm’s absorptive capacity. First, the variety introduced by pure acquisition strategies increases the diversity of experiences among employees and business units. This diversity of experience increases the likelihood that organization members recognize the value of external information by increasing the likelihood that the new knowledge will be related to its existing knowledge (Cohen and Levinthal, 1990). Second, the variety introduced through acquisitions decreases the likelihood that the organization has settled on a uniform code of beliefs (March, 1991). As new managers and employees with different backgrounds and beliefs are incorporated into the organization through acquisition, the likelihood that organization members question a firm’s internal code of beliefs increases (March, 1991). Consequently, the unrest and fluctuation introduced by incorporating new ideas into the organization increases the likelihood that organization members will explore external sources of knowledge, creating organizational openness to external knowledge.

Third, the greater autonomy associated with pure acquisitive growth is likely to impact the acquisition of external knowledge. Business units with greater autonomy are likely to have more power to pursue external sources of important knowledge through mechanisms such as collaboration, acquisition, and licensing (Fiol, 1989). Furthermore, an organization’s routines shape the potential alternatives that business units explore (Nelson and Winter, 1982). Firms that have pursued pure acquisition strategies are more likely to have routines for evaluating external knowledge, negotiating how external knowledge will be acquired, and bringing external knowledge into the organization. As a result, these routines are likely to positively impact the acquisition of external knowledge. Also, the openness to new, external knowledge decreases the likelihood that organization members will suffer from the Not-Invented-Here (NIH) syndrome

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(Katz and Allen, 1982). NIH is the result of organization members narrowly defining their domain and rejecting the potential to find useful knowledge in seemingly unrelated domains. Consequently, pure acquisition strategy experience is likely to increase the acquisition of external knowledge by preventing firm members from narrowly filtering information.

Finally, the diversity of these firms is likely to assist with assimilation by increasing the likelihood that new knowledge is related to existing knowledge and consequently increasing comprehension of new knowledge. Decentralization in these firms may further contribute positively to assimilation by allowing frontline employees to have greater access to the new knowledge.

Consequently, the following hypothesis is offered:

H1a: Firms that have historically utilized a pure acquisition strategy will have high externally- oriented absorptive capacity.

A firm’s past experience with a pure acquisition strategy is also likely to impact the development of the firm’s internally-oriented absorptive capacity. As mentioned earlier, pure acquisition strategies are associated with greater variety in the organization (Hennart and Park, 1993), little use of policies to promote resource sharing across business units (Pitts, 1977), and little use of job rotation and cross-unit interfaces (Pitts, 1977). Research by Nahapiet and Ghoshal (1998) suggests social capital is an important mechanism in the diffusion and creation of new knowledge because it helps foster motivation, access, and ability to transfer knowledge by influencing interorganizational networks, cognitive understandings, trust, and norms for knowledge sharing. Firms that have pursued pure acquisition strategies are less likely to have the social capital in place to facilitate the diffusion and transformation of knowledge. The greater variety introduced by pure acquisitive growth decreases the likelihood of a shared and uniform culture, shared experiences, shared language, and shared practices (Greenwood et al., 1994) as well as increases the diversity of goals among organization members (Hitt et al., 1990). Additionally, because firms pursing pure acquisitive growth are less likely to utilize job rotation and cross-unit interfaces (Pitts, 1977), fewer opportunities exist for managers and employees to build social capital.

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Additionally, as stated above, firms that have pursued pure acquisition strategies are more likely to have financial controls in place and as a result, managers are more likely to have shorter time orientations (Hitt et al., 1990; Hitt et al., 1996). The transformation and exploitation of knowledge are associated with great uncertainty as a firm engages in trial-and-error learning (March, 1991). Similarly, the transformation and exploitation of knowledge are also associated with a significantly delayed payout period (Pennings et al., 1994). Consequently, firms that have pursued pure acquisition strategies are likely to have neglected transformation and exploitation capabilities because of the significant investments required, the long-time horizon and the uncertainty associated with transforming knowledge. Accordingly, the following hypothesis is offered.

H1b: Firms that have historically utilized a pure acquisition strategy will have low internally- oriented absorptive capacity.

Pure Internal Development Strategies

Firms that pursue pure internal development strategies use various lines of existing businesses or existing resources to form new business units with distinct goals and operations. Accordingly, firms pursuing pure internal development strategies develop routines for leveraging existing knowledge resources in new contexts (Gupta and Govindarajan, 1986; Govindarajan and Fisher, 1990). Past research on firms that pursue pure internal development growth strategies has provided several insights about the nature of these firms. First, research has revealed that firms pursuing pure internal development growth strategies tend to have large corporate staffs, particularly in R&D areas (Berg, 1973). Berg (1973) suggested that greater corporate staffs are likely to reflect the opportunities to realize resource synergies in internally diversified firms due to the overlap created through internal development. As firms grow through internal development, the organization’s various business units share a common foundation of knowledge and experiences (Berg, 1973; Miller, 2004; Hennart and Park, 1993). Additional research found that firms pursing pure internal growth were more likely to use subjective measures in assessing managers’ performance and used substantial discretion in granting incentive pay (Pitts, 1974). Furthermore, research revealed that firms pursing pure internal development strategies were likely to have explicit policies to encourage divisions to relinquish employees whose capabilities

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might be better suited for an alternative business unit (Pitts, 1977). Additionally, Pitts (1977) found that in firms pursing pure internal development, a high percentage of each firms’ business unit managers had previously worked together in another business unit of the same firm. Consequently, organization members in firms pursuing pure internal development strategies are likely to share a common culture, understanding, and language. Similarly, the social relationships between individuals in the various business units are likely to help build trust and shared norms (Nahapiet and Ghoshal, 1998).

While the generalizability of early studies (i.e. Berg, 1973; Pitts, 1974, 1977) on pure internal diversifiers is debatable due to the small sample sizes, other research has generally been consistent with these findings. For example, research by Kuratko, Montagno, and Hornsby (1990) has revealed that firms pursuing internal development strategies have routines for rewarding managers who successfully find uses for existing knowledge in new contexts. Similarly, research has revealed that these firms have routines for transforming existing knowledge and managing an ongoing pipeline of new products (Hornsby, Kuratko, and Montagno, 1999). These routines often include mechanisms to help buffer development projects from immediate market tests (Kogut and Zander, 1992; Garud and Van de Ven, 1992). In addition, these firms have routines for establishing spinoffs (e.g. structuring, staffing) (Thornhill and Amit, 2001; Hornsby et al., 1999).

Prior research thus suggests several reasons why a firm’s past experience pursuing a pure internal development strategy is likely to impact the development of its absorptive capacity for several reasons. First, firms that have pursued pure internal development are more likely to suffer from myopia (Vermeulen and Barkema, 2001). Firms have a tendency to look to nearby experiences in their search practices (March and Levinthal, 1993) and those that have pursued pure internal development strategies have had less diversity in their experiences, limiting the expanse of the firm’s search. Likewise, firms that have pursued pure internal development strategies lack variety in their knowledge base, decreasing the likelihood that valuable external knowledge will be related to its existing knowledge. Consequently, firms that have pursued pure internal development strategies are less likely to acquire and assimilate valuable external knowledge.

Second firms that have pursued pure internal development strategies are also likely to have a highly developed and understood organizational code of beliefs (March, 1991). Firms

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pursing pure internal diversification leverage their existing knowledge and resources in new business domains. While new external employees may be incorporated into the firm as it assesses its needs in new domains, the greatest source of staffing is likely to be from internal sources (Pitts, 1980). Similarly, leadership of the new business unit is likely to be hired from within the organization as the firm leverages its existing resources (Pitts, 1980). Consequently, firms pursing pure internal development strategies limit their exposure to fluctuation and inquiry into current understandings and solidifying their highly developed organizational code by limiting the incorporation of external employees and using internal managers to head new ventures (March, 1991). As a result, a firm’s highly developed code of beliefs further reinforces the lack of external search by imposing norms and standards for external search. Consequently, firms that have pursued pure internal development strategies are more susceptible to NIH syndrome and may lack the motivation to develop external search routines. Accordingly, the following hypothesis is presented.

H2a: Firms that have historically utilized a pure internal development strategy will have low externally-oriented absorptive capacity.

As stated earlier, firms that have pursued pure internal development strategies are likely to have a shared knowledge base and exhibit social capital between individuals across business units due to past work experiences, job rotations, and cross-unit interfaces. The shared experiences, culture, understandings, and language facilitate the transformation and exploitation of knowledge between various business units (Nahapiet and Ghoshal, 1998). Furthermore, organizational routines for leveraging existing knowledge in new contexts support the transformation and exploitation of knowledge (Nonaka, 1994). Accordingly, the following hypothesis is offered.

H2b: Firms that have historically utilized a pure internal development strategy will have high internally-oriented absorptive capacity.

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Mixed Internal Development and Acquisition Growth Strategies

Firms that use a combination of internal development and acquisition develop routines for leveraging existing knowledge internally and acquiring new firms. Researchers have suggested that some firms use internal development and acquisition as complementary forms of growth (Prabhu, Chandy, and Ellis, 2005; Hagedoorn and Duyster, 2002; Vermeulen and Barkema, 2001). These researchers suggest that after leveraging their existing knowledge through internal development, firms may eventually deplete their opportunities to transform their existing knowledge and as a result require acquisitions as a means to inject new knowledge into the organization. Internal development capabilities help the firm to utilize and transform the knowledge gained through the acquisition. As the organization internalizes the knowledge gained through acquisition, the firm may be inclined to again pursue growth through internal development because of the excess knowledge resources in the organization and the lack of suitable acquisition candidates due to its superior knowledge resources. Thus, the acquisition of new knowledge facilitates future internal development.

For firms that grew through a combination of acquisition and internal development, past experience with acquisitions has increased the firms’ requisite variety. The increase in requisite variety increases the firm’s ability to recognize and acquire external knowledge as well as its appreciation for external knowledge (Pennings and Harianto, 1992). The fluctuation introduced through acquisition further increases the firm’s propensity to seek external knowledge (March, 1991). These effects are further reinforced by routines that the firm has developed through its acquisition experience for seeking, evaluating, and acquiring external knowledge. Collectively, these forces are likely to increase the firm’s ability to recognize and evaluate external knowledge (Cohen and Levinthal, 1990). Accordingly, the following hypothesis is offered.