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Corporate Proximity and Product Market Re-entry: The Role of Corporate Headquarters in Business Unit Response to Product Failure

What Makes Company Resilient After Product Failure

11 January 2024 • 7 mins read

In today’s competitive market, businesses strive for the top spot by launching new inventions. While product failures are prevalent, a new study finds why only a few can keep afloat

By Pan Jingyi, Principal Writer, China Business Knowledge@CUHK

The famous saying from American author Peter Drucker “innovate or die” has fuelled many of the global companies to pioneer new ideas. Perhaps this also inspired giants like Samsung, Apple, Google, Microsoft, and Meta, which though having experienced product failures, keep revolutionising themselves to stay relevant in the market.

Product failure is, in fact, not an uncommon occurrence in modern businesses. Following a flop, companies can either permanently withdraw from the market or make a comeback once they address the issue. Understanding how organisations respond to failure is crucial in effective management and for companies to get back on their feet.

There are many factors to consider for a company re-entering the market after experiencing failure. In a new study, Corporate Proximity and Product Market Re-entry: The Role of Corporate Headquarters in Business Unit Response to Product Failure, a group of researchers focused on corporate proximity, or the distance between the headquarter and business unit, in dealing with the mess as failures often occur within a multiunit organisation.

“Business units that are positioned to be more proximate to the corporate headquarters are better able to respond to failure as they receive greater levels of attention and support.”

Prof. Kim Cheon Mok

“Business units that are positioned to be more proximate to the corporate headquarters are better able to respond to failure as they receive greater levels of attention and support,” says Kim Cheon Mok, Assistant Professor of the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, who led the study.

Corporate proximity was found to provide business units greater attention that will help ensure the problems stay atop the corporate agenda until a satisfactory solution is found. In turn, this increases the likelihood of re-entry following a product failure.

“Our research implies that firms do not always learn from failure,” Prof. Kim adds. Instead, many times, firms decide to give up on their product and exit the market when they experience a product failure.”

Technical Failure vs. Market Pressure

Prof. Kim, in collaboration with Prof. Colleen Cunningham of the University of Utah and Prof. John Joseph of the University of California, Irvine, found support for their hypotheses through data on re-entry in the U.S. medical device industry. This sector provides an ideal sample because the researchers can closely track product failures as medical devices are regulated by the Food and Drug Administration. Additionally, corporate proximity varies significantly within and across medical device firms.

Previous studies of companies’ failure response have yielded inconsistent results. Some failures lead firms to change, while others lead them to persist with existing strategies, technologies, or products. There are various reasons for the discrepancy, such as experience and resources for solutions, firm size, and the content of the failure itself.

travel-memory — Businesses can locate units proximate to the headquarters, either structurally, physically or by managerial hiring across units.

In this study, Prof. Kim and the team focused on whether companies re-enter product markets after a prior exit. They first identified the differences between product failure-related exits and market-related exits. The former refers to the situation in which products fail to meet predefined technical or usage requirements, while the latter refers to exits caused by external factors such as competitive pressures.

Failure can act as feedback, prompting a process of search to identify alternative solutions. Following the failure, whether companies choose to abandon or re-enter the market is likely to depend on whether they can find alternative solutions to the problem through local search within the same product market.

Prof. Kim notes that product-related failure is usually associated with technology or its usage, which is mostly within the business’s control. In contrast, the causes of market-related exits generally do not fall within the firm’s immediate control. As a result, such exits are more inclined towards permanently abandoning the existing product and pursuing an entirely new one.

“Compared to market-related exits, product failure-related exits are associated with a greater likelihood of product market re-entry,” says Prof. Kim. He notes that their analyses support this hypothesis, showing that product failure-related exit is associated with a higher likelihood of re-entry.

Problem Shared is Problem Halved

Complex organisations consist of different business units and a corporate office with executives who monitor performance and develop strategies. This hierarchy shapes business units’ activities and their responses to failure. The researchers argued that a business unit’s corporate proximity would affect its response to product failure-related exits, where they identified three dimensions of proximity: hierarchical, geographic, and cognitive.

Hierarchical proximity is the distance between the corporate office and its business units in terms of vertical structure. Geographic proximity is the spatial distance between the business unit and corporate headquarters. Cognitive proximity reflects the extent to which headquarters and business units share similar types of experiences.

travel-memory-creativity — Preventing isolation of business units is crucial, as it hinders their ability to learn from failure without corporate support.

The study also examines the role of two mechanisms that were found to positively affect the likelihood of re-entering a market. These two are vertical linkages, which refer to the degree of integration between the business unit and headquarters, and corporate attention, which refers to the degree of focus and resources allocated to the business unit by headquarters. Vertical linkages were measured by tracking senior executives’ career paths, while corporate attention was measured by the frequency of mentioning units in the firm’s annual reports.

“Given the costs of product development in the first price and considering that re-entry with an improved product is possible, firms should allocate high levels of attention and resources to support units so these units can learn from the failure and re-enter the market,” Prof. Kim says. “This is especially important in established markets, or when product failure is more severe, where the corporate headquarters are likely to possess more in-depth knowledge and can offer greater levels of support to the business unit.”

“It is critical to prevent the business units from getting isolated, as these units will be less likely to learn from the failure due to the lack of support from the corporate,” he adds.

Better Design for Organisations

Prof. Kim highlights one implication from this research is that businesses should be able to better design organisations to learn well. “Businesses can locate units where learning and innovation take greater importance proximate to the headquarters, either structurally, physically or by managerial hiring across units,” he says.

Furthermore, these findings are especially salient in industries where failure is more prevalent, and where the magnitude of failure can be significant, as well as those with high levels of innovative activity, e.g., automobile and medical device industries. Prof. Kim explains the effect of corporate proximity is greater when failure is more technical and of greater magnitude.

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Although the sample of this study was limited to U.S. companies, Prof. Kim believes the findings can also be implemented among Asian firms or firms operating in Asian markets. “Asian firms are known to have a relatively more hierarchical structure,” says Prof. Kim. “It is thus even more important for them to structurally position the business unit proximate to the corporate if learning from failure is critical.”

For multinational firms operating in Asian markets, Prof. Kim recommends that headquarters provide sustained attention and support to business units, especially as these units are geographically distant from the headquarters.

“By providing a sustained level of attention and support to business units in Asian markets, these units will be better able to respond to and learn from failure and provide improved products in their market,” he adds.