Evolution : The Impact of Information Infrastructure on Market

This paper explores how organizational structure shapes firm evolution. We examine how structure influences the way firms process information from the environment and between separate units of the firm. We propose that the information infrastructure of a firm acts as a lens, focusing the firm on information from some parts of the environment and leading it to filter information from other parts of the environment. We argue that a firm’s business unit structure shapes how the firm gathers information from the environment. Thus, we predict that the business unit structure of a firm will enable entry into some new markets and constrain entry into others. In addition, we predict that horizontal links between operating units that match a market and other parts of the firm will make a firm more likely to enter that market, while horizontal links between units that do not match a market will reduce the likelihood of entry. Finally, we predict that vertical links from the corporate level to units that match a market will increase the likelihood of entry, while vertical links to units that do not match a market will decrease the likelihood of entry. We test our hypotheses using a sample of U.S. local telephone companies. The data set is composed of structure and service information from the eight largest local telephone service providers in the U.S. from 1984 to 1998. The results confirm that the business units of a company both enable and constrain entry. Horizontal linkages encourage market entry, while vertical linkages often constrain entry.