New product introduction and the corporate governance in turbulent times. Evidence from longitudinal data

1. New product introduction and the corporate governance in turbulent times.Evidence from longitudinal data Marco Cucculelli Dept. of Management and Industrial Organisation Faculty of Economics “Giorgio Fuà” – UNIVPM

2. Introduction • Decisions of strategic relevance are expected to be based on long-term planning horizon and to vary only marginally with short term exigencies (Devinney, 1990) • Conventional wisdom argues that short-term factors – especially negative ones (such as low earning, poor economic conditions or short-term changes in GDP growth) - do affect the timing of these decisions, either by speeding them up or slowing them down.

3. Introduction • Decisions of strategic relevance are expected to be based on long-term planning horizon and to vary only marginally with short term exigencies (Devinney, 1990) • Conventional wisdom argues that short-term factors – especially negative ones (such as low earning, poor economic conditions or short-term changes in GDP growth) - do affect the timing of these decisions, either by speeding them up or slowing them down.

4. Successions and new product introduction • For example, product development is often • halted in a downturn by some firms, while others • continue to innovate as they want to be positioned when markets recover (Kauffman, 2009). • Similarly, when economic conditions deteriorate, (family) CEO successions are • postponed in some firms, as the founder wants to leave the company in good shape (Adams et at., 2009), or • speeded up in others, in order to renovate the business model and provide a different way-out of the downturn (Kaplan et al., 2008).

5. Successions and new product introduction • For example, product development is often • halted in a downturn by some firms, while others • continue to innovate as they want to be positioned when markets recover (Kauffman, 2009). • Similarly, when economic conditions deteriorate, (family) CEO successions are • postponed in some firms, as the founder wants to leave the company in good shape (Adams et at., 2009), or • speeded up in others, in order to renovate the business model and provide a different way-out of the downturn (Kaplan et al., 2008).

6. Aim of the paper • This paper aims at contributing to this literature by considering the impact of short term factors on two major decisions of strategic relevance: • the decision of the founder to step out of the company (and transfer the management to an heir), i.e. succession; • the new product introduction decision (as an output of the innovative process)

7. Evidence: new product introduction

8. Evidence: new product introduction

9. Evidence: family successions

10. Evidence: family successions

11. Questions and data • Evidence of systematic relationship between the business cycle and these decisions? • Do these decisions interact? • We exploit the informative value of a longitudinal analysis on a sample of 204 Italian family-owned firms; • Data on new product introductions and CEO turnovers from 1970 to 2006

12. Literature • Some questions for the literature review: • Successions and innovations (introduction of new products) lead the cycle or lag it? • Are they pro-cyclical or counter-cyclical? • Are they substitute or complements? • Is there a micro- or strategic effect to be taken into account?

13. (Product) Innovation • Counter-cyclical: • “Pit stop” view of recessions: firms introduce innovation because low opportunity cost of devoting efforts to alternative investments • “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system • Pro-cyclical • “finance contraints” (Stiglitz, 1993): internal cash flow rises with economic activity -> product introduction • “strategic timing effect” (Barlevy, 2004): as new product gives a definite benefit, it is better to introduce it when market recovers than when declines

14. (Product) Innovation • Counter-cyclical: • “Pit stop” view of recessions: firms introduce innovation because low opportunity cost of devoting efforts to alternative investments • “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system • Pro-cyclical • “finance contraints” (Stiglitz, 1993): internal cash flow rises with economic activity -> product introduction • “strategic timing effect” (Barlevy, 2004): as new product gives a definite benefit, it is better to introduce it when market recovers than when declines

15. (Product) Innovation • Counter-cyclical: • “Pit stop” view of recessions: firms introduce innovation because low opportunity cost of devoting efforts to alternative investments • “Cleansing effect” of recession (Caballero Hammour, 1994), when non-profitable techniques and products exit the productive system • Pro-cyclical • “finance contraints” (Stiglitz, 1993): internal cash flow rises with economic activity -> product introduction • “strategic timing effect” (Barlevy, 2004): as new product gives a definite benefit, it is better to introduce it when market recovers than when declines

16. CEO turnover and performance • Firmsreorganize in bad times(Nickell et al , 2001) • More time for organizational issues and higher probability of bankruptcy -> productivity • CEO turnover is usually counter-cyclical … • CEO turnover is negatively related to • firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08) • … but also “cycle-neutral” • when CEO is also owner and ownership is concentrated, the probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)

17. CEO turnover and performance • Firmsreorganize in bad times(Nickell et al , 2001) • More time for organizational issues and higher probability of bankruptcy -> productivity • CEO turnover is usually counter-cyclical … • CEO turnover is negatively related to • firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08) • … but also “cycle-neutral” • when CEO is also owner and ownership is concentrated, the probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)

18. CEO turnover and performance • Firmsreorganize in bad times(Nickell et al , 2001) • More time for organizational issues and higher probability of bankruptcy -> productivity • CEO turnover is usually counter-cyclical … • CEO turnover is negatively related to • firm performance (Murphy,1999; Jensen et al, 2004; Morck et al, 1989) • poor industry and market performance (Kaplan Minton ‘08) • … but also “cycle-neutral” • when CEO is also owner and ownership is concentrated, the probability of CEO change (conditional to performance) is close to zero (Brunello et al., Journal of Banking and Finance 2003)

19. Family CEO change and innovation • CEO change probably leads the cycle: • New top management is positively related to strategic change and innovation (Kesner & Sharma, 1994). • Newer generations tend to push for • new ways of doing things (Kepner, 1991), • are the driving force behind innovation (Zahra, 2005) • entrepreneurship (Kellermans et al, 2008) • The involvement of subsequent generations increases the firm’s chance to identify and seize entrepreneurial opportunities (Salvato, 2004), even trough a “rebellious successor” (Miller et al, 2003), who can change/renovate the business model

20. Family CEO change and innovation • CEO change probably leads the cycle: • New top management is positively related to strategic change and innovation (Kesner & Sharma, 1994). • Newer generations tend to push for • new ways of doing things (Kepner, 1991), • are the driving force behind innovation (Zahra, 2005) • entrepreneurship (Kellermans et al, 2008) • The involvement of subsequent generations increases the firm’s chance to identify and seize entrepreneurial opportunities (Salvato, 2004), even trough a “rebellious successor” (Miller et al, 2003), who can change/renovate the business model

21. Optimal timing of succession • Kimhi (1994) and Miljkovic (1999) • The optimal transfer time varies according to economic perspectives and firm financial position • Adams et al (2009) • Good past performance increases the likelihood of the founder to leave the firm, as he wants to leave the company in good shape (“controlled succession effect”) • Wasserman (2003) • the founder’s success in achieving a critical milestone (such as new product introduction) makes it more likely that he will step down (“entrepreneurial success paradox”).

22. The sample • 204 manufacturing firms (Fondazione A.Merloni) • All are family-owned • 87% are family-managed • Firm size • About 168 employees • 30 million Euro sales • Firm age, about 38 years, good fit with the market • Firm performance : slightly better than the performance of Italian companies of similar size

23. Sample and definitions • Longitudinal data on product portfolio (number and year of introduction) and successions (family or outside) from 1970 to 2006 • New product: radical change in the product portfolio and a significant enlargement of firm’s technical and commercial competencies. (Sutton J., Competing in capabilities: An informal overview, Clarendon Lecture, 2005). • We define the product at a five-digit level (Bernard et al, 2006. 2010) • Succession; change in the management of the company (the person in charge of major decisions)

24. Descriptive statistics Source: Fondazione A.Merloni

25. Descriptive statistics Source: Fondazione A.Merloni

26. Descriptive statistics Source: Fondazione A.Merloni

27. Descriptive statistics Source: Fondazione A.Merloni

28. Empirical model • As I have several additional and ordered failures (second, third, …) after the first, I have used a conditional risk set model (Prentice et al. 1981) • Failure events are ordered: the firm is not at risk of a further product introduction (or a further succession) until the previous one has been verified. • Differently from standard Cox model, this allows: • to stratify data by risk level (each firm can adopt more than a product or succession in its entire life) • to cluster observations by firm (all events for the same firm are collected in the same cluster)

29. The empirical model Standard Cox model Hazard function Common baseline Regression coefficients

30. The empirical model Standard Cox model Hazard function Common baseline Regression coefficients Conditional risk set model Different baselines by failure Gap time between failures

31. The empirical model Standard Cox model Hazard function Common baseline Regression coefficients Conditional risk set model Different baselines by failure Gap time between failures

32. The empirical model Standard Cox model Hazard function Common baseline Regression coefficients Conditional risk set model Different baselines Gap time between failures

33. The hazard ratio is the effect of the explanatory variable on the risk of occurrence of the event

34. For example: a negative production in t-1 makes the failure (i.e. new product introduction) 40% more likely to occur than in average times

35. 1. The effect of the negative cycle

36. The impact of negative conditions on product adoption and successions

37. The impact of negative conditions on product adoption and successions After the stop in the current year, they seem to be pro-cyclical

38. The impact on smaller firms

39. The impact on smaller firms Stronger postponement

40. The impact on smaller firms Delayed adoption

41. 2. The other covariates Cumulative portfolio effect: firms learn to introduce new products

42. 2. The other covariates “External” successions shorten the average failure (succession) time

43. 2. The other covariates Successions a more likely to stall if they are delayed

44. 2. The other covariates Successions are independent from the product portfolio strategy

45. 2. The other covariates Young workforce and young firms: more products and less successions

46. 3. Substitutes or complements? - Both coefficients are lower than one: The two strategic decisions are substitutes (not complements).

47. 3. Substitutes or complements? - Both coefficients are lower than one: The two strategic decisions are substitutes (not complements). - However, new products are more likely after a succession than viceversa

48. 3. Substitutes or complements? “Controlled successions” (Adams et al 2009) help the introduction of a new product

49. 3. Substitutes or complements? Forced, or “not controlled” successions (Adams et al 2009) don’t…

50. Final remarks • Both succession and product introductions are affected by the business cycle. Strong impact for SMEs. • Decisions about products and governance are strategic substitutes rather than complements. • “Controlled successions” help product introductions (Adams et al.2009), whereas new products don’t help successions (Wasserman, 2003)