Vikas A. Aggarwal, INSEAD, and Brian Wu, University of Michigan
Abstract: We investigate the role of internal interdependence in influencing the ability of firms to adapt following an industry-wide shock. Focusing on the organizational drivers of heterogeneity in post-shock adaptation ability, we propose that variance in the pre-shock nature of interdependence between a firm’s upstream production and downstream commercialization activities can explain how and why the firm is more or less successful in adapting to sudden external change. Our findings uncover an asymmetry in the effects of interdependence at the product-level as compared to the customer-level. Using a large-sample panel dataset of firms in the U.S. defense industry during the years 1996 through 2006 (with September 2001 as the external shock), we find that greater product-level interdependence can impede adaptation; customer-level interdependence, however, can reduce this disadvantage, with post-shock benefits arising from the ability to reposition old products for new customers. Identifying the locus of coordination within an organization can thus help explain the differential adaptation abilities of incumbent firms following an industry shock.