Responding to a declining product market: A study of defense contractors using resource based, evolutionary and agency perspectives

This is an empirical study of corporate strategies in the decline phase of an industry. The U.S. defense industry is used as a setting; the years before the end of the cold war as the growth phase, and the years after the end of the cold war as the decline phase. Firm choices are broadly divided into consolidation strategies and diversification strategies. In the former, firms allow capital and other resources to be reallocated through the market process; in the latter this reallocation is made within the firm. Based on resource based and evolutionary perspectives on one hand, and agency theory on the other, the factors responsible for firm choices are identified and analyzed. Further, the performance of these strategies is analyzed at the transaction and corporate levels. Results indicate that firm resources are important determinants of firm choices; though non-technological assets appear to be more salient than technological assets. The corporate governance variables do not appear to explain the firm choices in terms of main effects, but show significant interaction effects with the resource variables. In other words, firms with tighter shareholder control adopt strategies more consistent with their resources. Generally, consolidation oriented strategies show better performance outcomes than diversification strategies. These results show that the integration of competence based and corporate governance based perspectives is justified. There is no difference in the stock market based measures of performance between the growth and decline phases when it comes to diversification. The market does not reward reallocation of capital within the firm.