Underperforming Companies Lose Focus on Innovation

Research findings show that the length of time a firm has been underperforming contributes to shaping that firm’s innovative search patterns and its expenditure in research and development. Over time, the relationship between the two variables is nonlinear.

Maria Minniti, Bantle Chair in Entrepreneurship and Public Policy at Syracuse University‘s Martin J. Whitman School of Management, partnered with Wei Yu ’18 Ph.D. (National University of Singapore) and Robert Nason ’14 Ph.D. (Concordia University) to conduct the study.

The group sought to understand how strategic choices are made in times of budget decline during periods of underperformance.

“Previous research suggests that the gap between current performance and desired performance is an important trigger for firms’ innovative action,” according to the research report’s managerial summary. “Our study shows that how long the firm has been underperforming also plays an important role in firm innovation.”

Indeed, the research’s findings show that firms that are underperforming are conflicted between short-term profit goals and long-term strategic goals. Over time, those pressures build up and start influencing the nature and extent of innovative activities.

“We found that the length of time a firm has been underperforming matters a great deal for strategic decisions, and can mislead managers into making the wrong choices,” Minniti said.

“Fortunately, managers can learn a lot from observing best practices and types of behavior to avoid.”

The study, “Underperformance duration and innovative search: Evidence from the high-tech manufacturing industry,” examined a sample of 1,610 high-tech manufacturing companies between 1986 and 2006. For the study, innovative search was split into three categories: magnitude (research and development expenditures), search scope (the use of new knowledge) and search depth (the use of familiar knowledge).

“Among other things, when experiencing sustained and prolonged underperformance, high-tech firms tend to be reluctant to decrease innovation activities significantly, even against pressure from shareholders who may want to reduce risky activities with uncertain payoffs such as R&D expenditure,” said Minniti. “High-tech firms are forced to maintain their focus on continuous innovation due to the pressure of competition. In turn, this shows that if firms ought to remain competitive and innovative, policy makers need to maintain open market structures that favor competition.”

According to Minniti, results of the research are important for companies and managerial actions, but also for industrial policy makers.