1. This paper proposes that firms continuously search and select to improve their knowledge base and performance through entering new business lines that build on their existing knowledge and exiting underperforming lines. 2. The paper examines how a firm's entry and exit decisions are guided by its existing knowledge base and considers the performance consequences of changing the firm's scope. 3. Poorly performing firms are hypothesized to engage in more organizational search and selection activities to address their performance gaps, including being more likely to enter new businesses or exit existing ones.

1. Chang (1996) FB11001
1. Contribution:
Builds on Evolutionary Theory, Organizational &Learning Perspectivethis paper wishes to
propose a theoretical dynamic perspective that firms engage in continuous search and
selection activities in order to improve their knowledge base and thereby improve
performance, firms not only learn from their past entry experience and approach the next entry
in a focused manner, but additional knowledge is generated while it applies its current
knowledge base (in the context of corporate evolution).This paper argues that each line of
business is a repository of the firm’s operational knowledge base embedded in routines and that
the knowledge base can be approximated by looking at its human resource potential. A well-
directed entry/exit contributes to improved firm profitability,
Key observations are:-
1. A firm is continuously
changing its product market
configuration through
continuous search and
selection, and this paper
conceptually and empirically
distinguishes between
continuous search and
selection.
2. Knowledge as an
important resource for natural
scope economies is clarified.
3. Explicitly incorporates the evolutionary perspective to the study of divesture and
restructuring
4. Human resource profile data is used to explain diversification pattern across industries.
2. Research Question’s:
a) How important is poor firm performance as a motivation to entry/exit?
b) Do firm’s entry decisions build on existing knowledge base, and do exit decisions act to
focus on the knowledge of the firm?
c) What are the sequences of entry and exit?
d) What are the performance consequences of changes in the scope of the firm thru
entry/exit?

2. Chang (1996) FB11001
3. Theory/Relevance of writing this paper:
Research in Diversification and Divestment have been treated separately, and have been cross
sectional and the temporal sequence of entry and exit have been unexplored. Here Chang
considers entry and exit integral and fundamental to Scope of the firm.
So this study builds on Penrose’s view of the firm (A Collection of Resources); Competence
based view (Teece et al.) and incorporates Nelson & Winters evolutionary theory, so the firm
here is just more than an accumulation of knowledge but strives in a continuous search and
selection process to improve its base and hence performance.
4. Postulations:
Motivation and Direction:
Poorly performing firms will try to update their organizational knowledge more than high
performing firms owing to the performance gap. (Potential~Current). Also they will look for
more opportunities and hence enter new lines of business and exit underperforming areas vis-à-
vis successful firms, therefore Chang postulates that Poorly performing firms have greater
pressure for organizational search and selection activities than highly performing ones, poorer
the firms the more likely they are to initiate entry or exit. And the direction of entry or exit is
given by the firms knowledge base, another set of propositions include that a firm will more
likely enter a business/exit a business whose knowledge requirements are similar/different from
the firms knowledge base (FIT).
Sequence:
A firm’s movement over time over the experimentation process (Search/Select; Entry/Exit) is
path dependent and evolutionary. This knowledge base is accumulated and evolutionary, Chang
them proposes that the firms will divest those businesses that are least similar to the current line
of business.
Type of Search (intensive/extensive)
will be sequential and alternate the
other mode. And as a Consequence
of Search and selection a firm will
improve its performance.
Methodology:
Longitudinal Data with no large firm
bias of 772 sample firms from 1981
to 89 was tested by using a Logit
Models.
Results:

3. Chang (1996) FB11001
Performance gap need not simulate entry into new businesses, and reaffirm Fromburn and
Ginsberg’s argument that they may not have the ability to incur new investment. Knowledge
guides search activity.Poor businesses are divested by firms, who do not consider them to be
their core line of activities, and Size did play a role and larger firms did maintain their
profitability before declining levels of profitability.
Future Research:
Human resource profiles variables do not reflect cross firm differences, Knowledge applicability
is approximated to human profiles, an extension of this study the author wishes to analyze the
mode of entry, acquisition vs. internal development in terms of speed and quality of learning in
each option