Problem-Solving or Self-Enhancing? Influences of Diversification and Bright Spot on Corporate Resource Allocation Responses to Performance Shortfalls

Abstract

How corporate decision makers respond to firm performance shortfalls has key implications for strategic change in corporate resource allocations. Performance feedback theory assumes problem-solving decision makers faced with performance below aspirations pursue problemistic search and greater strategic change to improve performance. Research on self-enhancement, however, assumes decision makers respond by engaging in lower levels of search and change to portray a favorable self-image. We contribute to advancing this dialogue by investigating contextual features of decision making that prompt self-enhancing behaviors. Specifically, we examine the moderating effects of product and geographic diversification, which reflect indicators of task complexity, and bright spots (defined as the greatest increases in percentage sales of product and geographic segments within a diversified firm’s respective portfolios) on the linkage between performance below aspirations and strategic change. We argue that diversification and bright spots create greater opportunities for corporate decision makers to make self-enhancing interpretations, thereby weakening the relationship between performance below aspirations and strategic change. Empirical tests on Standard & Poor’s 1,500 firms from 1998 to 2006 largely supported the hypotheses.