University of Southern California

Marketing and Wooing Starts Long Before New Product Entry
Corporate Directors Who Shepherd Market Entry Want Firms with Solid Reputations
January 27, 2014 • by News at Marshall

For a company that’s about to launch a product into a new market, its most valuable resource might be its board of directors, according to new research by Professor Nandini Rajagopalan, who holds the Captain Henry Simonsen Chair in Strategic Entrepreneurship at the USC Marshall School of Business.

The study demonstrates that a company’s solid reputation and status are essential to acquiring effective outside directors. That’s because potential directors weigh these factors before joining a company’s board.

While most research into corporate board acquisition, as well as the roles directors play in a company’s success, has been focused on what motivates a firm to choose their directors, this research also examines the significance of the preferences held by the directors themselves.

In other words, what’s in it for an experienced director to join a new board?

Rajagopalan, who co-authored the study with Luis Diestre, Instituto de Empresa Business School, Madrid (who earned his Ph.D. at Marshall) and Shantanu Dutta, professor of marketing at Marshall, said it’s a simple question of benefit versus cost: “Will I gain more by joining a new firm than what I might lose?”

Their research, forthcoming in the Strategic Management Journal, found that there are two aspects to this equation. “As a director, I don’t want to join a firm with a problematic reputation,” said Rajagopalan. “And if a new firm holds a higher status than I’m more likely to abandon the old firm and head to the new one.”

To ascertain a company’s reputation, the researchers examined financial restatement histories. They found that the greater number of financial restatements, such as accounting errors or non-compliance with standard accounting procedures, made a firm less likely to acquire experienced directors.

While Rajagopalan noted the irony of a corporation “needing a good reputation to attract good people, but also needing good people to earn a good reputation,” she added that there are ways for a company to overcome this liability, such as gaining resources to develop new products on their own, as well as strategizing ways to burnish their reputations.

With her colleagues, Rajagopalan, whose work has often examined corporate governance and boards, focused singly on the pharmaceutical industry. “That way we were able to go in-depth,” she said. “We picked a knowledge-intensive industry where in-depth board knowledge would be particularly useful, specifically to new product entry.”

The pharmaceutical industry also provided a window into studying early investment in product research and development that is the precursor to a firm's eventual entry into a new therapeutic area. Rajagopalan and her colleagues examined data from 131 pharmaceutical companies from 2000–2006.

Their research found that firms are more likely to enter new markets when they can tap their own experience, but also the new knowledge from a director, who usually serves on multiple boards, with proven expertise in strategizing within that market.

But here is where firms need to be cautious, warned Rajagopalan. A candidate for the board of directors must have relevant market experience, but not enough to trigger conflict of interest and anti-trust concerns on market overlap, as dictated by the Clayton Act on the federal level.

Rajagopalan also noted that firms should be aware that experienced directors might withhold information if he or she is concerned about damaging their own professional reputations if they appear to have a conflict of interest. In that case, a company could potentially be “paying for an asset that they cannot utilize,” she said.

It’s worth it, she continued, for a low-status firm to enhance its status, to “establish itself with a good reputation as a well-run, high-performing company” in order to appeal to prestigious board directors. Firms should invest in getting their financials in good shape, building a strong portfolio to get to the top of their radar,” she said.

All in all, the expertise provided by a seasoned board of directors, is a best low-cost option for “accessing valuable knowledge” to tap into a new market, versus the more expensive options such as acquiring a company successful in that market or forging an alliance with another company for the same purpose.

These findings, Rajagopalan said, are valuable not just to the pharmaceutical industry, but to “any industry where experience and a source of expertise matters.”

About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.