Relatedness, Organization Structure, and Market Entry: Evidence From a Demand Shock

Prior literature on market entry suggests that a firm’s related knowledge and capabilities explain its entry decisions into new market segments. Yet this literature has generally focused on firm-level entry decisions, without explicitly considering the dynamics of individual divisions within the firm. We argue that a focus solely at the firm-level can obscure critical division-level mechanisms that deepen our insight into the link between organization structure and market entry. Given the limited extent of empirical research on division-level market entry, we conduct an exploratory study to gain insight into patterns of division-level entry over time. We set our analysis in the context of an industry-wide demand shock, the September 11 attacks, which led to the need for firms to reshuffle their product market profiles in order to adapt to new demand conditions. A central finding is that, in contrast with what we might expect from a naïve application of market relatedness logic, a focal division’s propensity to enter a particular market can increase as a result of the market relatedness of its sister division, even when the focal division is less related to the target market than its sister division. We explore the extent to which knowledge sharing among divisions within a firm can explain this finding, focusing on factors such as the presence of a shared customer and relative knowledge dispersion.