“The Origins of Firm Strategy: Learning by Economic Experimentation and Strategic Pivots in the Early Automobile Industry”, 2019-11-07 (; similar):
We explore the effectiveness of experimentation as a learning mechanism through a historical exploration of the early automobile industry. We focus on a particular subset of experiments, called strategic pivots, that requires irreversible firm commitments. Our analysis suggests that strategic pivoting was associated with success. We identify lessons that could only plausibly be learned through strategic pivoting and document that those firms that were able to learn from the strategic pivots were most likely to succeed. Even though firms may use lean techniques, market solutions may only be discovered through strategic pivots whose outcomes are unknowable ex-ante. Therefore, successful strategies reflect an element of luck.
We explore the effectiveness of economic experimentation as a learning mechanism through a historical exploration of the early automobile industry. We focus on a particular subset of economic experiments, called strategic pivots, that requires irreversible firm commitments.
Our quantitative analysis suggests that strategic pivoting was associated with success. We then use historical methods to understand whether this association is reasonably interpreted as a causal link. We identify lessons that could only plausibly have been learned through strategic pivoting and document that those firms that were able to learn from the strategic pivots were most likely to succeed.
We discuss the generalizability of our findings to build the hypothesis that strategic pivots and economic experiments originate firm strategy.
[Keywords: automobile, lean startup, learning by economic experimentation, strategic decisions, strategic pivot]
…In this sense, new model introductions are best understood as Rosenbergian Economic Experiments. Rosenberg (199430ya, p. 88) argued that economic experiments are necessary when both the market solution and an understanding of interdependencies are difficult to deduce from “first principles”. We infer that indeed in this context entrepreneurs found it difficult to know the best way forward, because the historical record reveals that even firms that proved, ex post, to be on the right track were, ex ante, unsure that they were making the right choices. The interdependencies associated with producing and selling new models implied substantial irreversible commitments. In this sense, automobile entrepreneurs were subject to the “paradox of entrepreneurship” ( et al 2016).2 That is, the outcome of each experiment was unknowable, and the choice to conduct certain experiments foreclosed future options.