A Day At The Races

Based on research by Anastasiya Zavyalova, Brent Goldfarb and Sandeep Pillai 

• A 1994 study examined whether participating in certification contests affected the survival of automobile companies during the industry’s inception.
• Recently, researchers replicated the study and found that cumulative contest victories had a legitimizing effect on automobile firms, leading to increased chances of firm survival.
• Even when firms didn’t win, simply participating in contests had a positive impact on firm survival.

If customers don’t trust it, companies can’t sell it.

Fear of the unknown is an issue for anyone peddling new technology — and at the turn of the 20th century, the automobile industry was struggling to assuage consumer concerns. The “horseless carriage” represented a complete departure from the past, and people then were as wary of it as many of us today are of driverless cars. Then and now, firms have had to prove that a new technology is safe and reliable before they can hope to make a sale.

The future of the automobile was uncertain until 1906, when sales began to take off. Before that, the industry’s survival depended, in part, on its ability to demonstrate the technology was reliable. One way automakers did so was to hold organized races — think NASCAR meets pre-Model T’s — where spectators could see the safety and efficiency of these state-of-the-art machines. Popular magazines of the day reported the results.

In 1994, Hayagreeva Rao, a Stanford University professor of organizational behavior, studied the impact these contests had on the survival of different auto companies. He found that companies whose cars won the races had a higher likelihood of survival overall, thanks to the resulting reputation boost. Rao’s research is frequently cited as a defining study of the relationship between social approval and actual firm performance.

Given the study’s ongoing popularity and influence, Rice Business management professor Anastasiya Zavyalova, along with Brent Goldfarb and Sandeep Pillai of the Robert H. Smith School of Business at the University of Maryland, recently replicated it using the same sources as the 1994 study. They also included additional contemporary sources, studying a total of 1,176 car manufacturers over the years 1895-1912.

Rao’s original study hypothesized that cumulative contest victories contributed to an increasingly better reputation, and could serve as a predictor of automobile firm survival. This hypothesis held true both in his study and the replication. However, Zavyalova and her team discovered something more – that it wasn’t just victories in the races that predicted firm survival. In fact, firms that placed second or third, or even farther behind, were more likely to survive than firms that didn’t enter the contests at all. This supports the concept of “loose coupling,” in which firms that simply participate in a race are viewed more favorably by the public, leading to better business outcomes.

In fact, firms that placed second or third, or even farther behind, were more likely to survive than firms that didn’t enter the contests at all.

Another contribution of the second study was to control for the variables related to the quality of the firms in the dataset. After all, one could argue that the more successful firms produced better automobiles, leading to increased chances of race victories and firm survival alike. To address this, the researchers used several proxies for firm quality to level the playing field. Even with these controls in place, however, the hypothesis held.

Rao’s original study also included a second hypothesis: that companies facing greater uncertainty, such as start-ups, should benefit the most from contest victories. However, neither study’s outcome supported this hypothesis. While start-ups and more established manufacturers both benefited from competing in races, there was no difference in firm survival between the two groups.

So it looks like participating in contests is a fairly clear path to success. But is that always the case?

Zavyalova and her team point out that there’s still room for further research — for example, examining whether contest participation has the same positive effect on firms that make products such as luxury goods or art, where the criteria for “good quality” are far more subjective.

And despite the clear connection between contest participation and firm survival among automobile manufacturers, neither study controlled for two other variables that may have driven both participation and survival: the quality of the cars being raced and the effectiveness of the managers running the firms.  

As modern-day organizations think about whether to enter similar contests, however, these findings suggest that they’re better off at least throwing a hat in the ring. The replication study shows that, win or lose, just showing up at a race counts as a victory.

Anastasiya Zavyalova is an associate professor of strategic management at Jones Graduate School of Business at Rice University.

To learn more, please see: Goldfarb, B., Zavyalova, A. & Pillai, S. (2018). Did victories in certification contests affect the survival of organizations in the American automobile industry during 1895–1912? A replication study. Strategic Management Journal, 39(8), 2335-2361.