Demand-side Account on Firm Strategies in Response to Technological and Regulatory Changes

Abstract

The focus of my dissertation is to understand how firms adapt to a new demand environment by leveraging their vertical and horizontal scope, the change triggered by an arrival of either new technological or regulatory regime. I follow an abductive approach to understand mechanisms using both quantitative and qualitative data in the context of the medical diagnostic imaging industry. In the first chapter, I document the process of an important technological regime change occurred in the early 1990s—standardization in medical image communication. Identifying users as an important actor, the chapter describes how the emergence of a medical image sharing platform and its underlying standard was triggered and influenced by user group’s (i.e., radiologists) request for interoperability across various imaging equipment. The chapter reveals that users can actively shapes both standard-setting process and a resulting competitive landscape for firms. The second chapter examines how the emergence of the standardized open platform affects firms’ product diversification, which connects pre-existing standalone products that were technologically independent but complementary for users. Compatibility and modularization reduced the benefit of internal coordination, but also lead to an increase in end-users’ heterogenous needs thanks to their ability to mix and match products, which in turn increased the benefit of internal coordination. I find the pattern of increasing product diversity in the post-standard period, which was particularly driven by the firms that became integrators to create customized systems around their platform software. The third chapter studies how and why prior differences in vertical structure affects firms’ ability to adapt to sudden and exogenous decreases in demand. Exploiting a major Medicare reform that created an unexpected negative derived demand shock for imaging device manufacturers, the analysis suggests that integrated firms were more likely to exit treated markets than nonintegrated firms. Drawing on literature conceptualizing firms’ vertical boundaries as a representation of existing resources and governance choices, the study explains that integrated firms with dedicated sales force were not able to shed costs associated with downstream sales functions effectively, while non-integrated firms were poised for timely reconfiguration by working closely with distributors in the locations unaffected by the shock. Together, the three chapters acknowledge the demand-side factors as an important source of change in firms’ external environment that firms (should) actively incorporate when deciding their scope of activities, which has been overlooked in the standard-setting, ecosystem, and diversification literature.