Strategic responses to three kinds of uncertainty: Product line simplicity at the Hollywood film studios

Journal of Management 1999, Vol. 25, No. 1, 97-116

Strategic Responses to Three Kinds of Uncertainty: Product Line Simplicity at the

Hollywood Film Studios D a n n y Mi l l e r

Ecole des Hautes Etudes Commerciales, Montreal and Columbia University, New York

J a m a l S h a m s i e University of California, Los Angeles

This paper explores the impact of Milliken's (1987) three kinds of uncertainty on product line simplicity--specifically on the range of product variations a firm offers. Environmental state uncertainty represents an inability to forecast industry or market events; it results in part from the demand and competitive volatility facing aU firms equally in an industry. Organizational effect uncertainty represents an inability to predict the effect of any given environmental state or event on one's own firm; it results in part from a lack of skills, knowledge and resources that couM help managers understand or influence market reactions. Finally, decision response uncertainty represents an inability to predict the consequences of a specific decision. It derives from the ignorance and risks perceived in making individual decisions. The thesis of this research is that whereas environmental state uncertainty will give rise to product variations, paradoxically, organization effect and decision response uncertainty will discourage such variations. These ideas are explored and largely supported in a study of the film genres of the major Hollywood film studios between the years 1936 and 1965.

Although there has been a great deal of research into strategic responses to uncertainty, much of the literature and many of the findings are contradictory. Some scholars claim that strategy becomes more complex and multifaceted to cope with the many contingencies posed by uncertainty: for example, more product variations are offered or a broader range of competitive tactics are used (Allaire & Firsirotu, 1989; Ghemawat & Costa, 1993; Khandwalla, 1976; Miller, 1993; Miller & Chen, 1996; Porter, 1991; Wernerfelt & Kamani, 1987). But other studies suggest that uncertainty induces firms to simplify their product lines or to focus on fewer competitive tactics (Miller, Droge, & Vickery, 1997; Prahalad & Hamel, 1990; Swarm, 1985; Tan & Litscbert, 1994; Whitney, 1995). We believe that such

Direct all correspondence to: Danny Miller, 4642 Melrose Avenue, Mont/eal, P.Q. Canada, H4A2S9.

Copyright © 1999 by JAI Press Inc. 0149-2063

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98 D. MILLER AND J. SHAMSIE

disagreements arise in large part because the notion of uncertainty remains too aggregate (Jauch & Kraft, 1986; Milliken, 1987), and because different kinds of uncertainty will have very different effects on strategy. This thesis is explored in a study of the film genres of the major Hollywood film studios between the years 1936 and 1965.

One of the most important aspects of strategy is product line simplicity--that is, the range of product variations offered by a firm (Ireland, 1985; Lancaster, 1990; Miller, 1993; Whitney, 1995). Some companies sell many variations of a given type of product, while others focus on just a few. It has been suggested that manipulating product line variety/simplicity can be a vital adaptive tool (Hofer & Schendel, 1978; Kekre & Srinivasan, 1990; Lancaster, 1990). Scholars have argued that uncertainty causes firms to increase their range of product variations to hedge their bets on future states of the market (Ireland, 1985; Lancaster, 1990; Kekre & Srinivasan, 1990; Raubitschek, 1988). But this claim is disputed by studies noting that firms simplify their product lines when uncertainty is high in order to concentrate scarce resources, develop distinctive competencies, and avoid cognitive overload (Hammer & Champy, 1993; Lancaster, 1990; Miller, Droge, & Vickery, 1997; Whitney, 1995).

We suspect that these disagreements over the impact of uncertainty have arisen largely because researchers have failed to distinguish among several different types of uncertainty, each occurring at a different level of analysis, and each having an impact on the perceptions of managers making product variety decisions (Milliken, 1987). Much of the literature on uncertainty and on product variety has concentrated almost entirely on objective indicators or managerial perceptions of uncertainty in the external environment: for example, fluctuations in customer demand and changes in competitive responses that confront all firms in an industry (Downey, Hellriegel, & Slocum, 1975; Duncan, 1972; Kekre & Srinivasan, 1990; Swann, 1985). But perceived uncertainty may also be a function of factors that are specific to a particular firm or even an individual decision or decision-maker.

These distinctions were perhaps best captured by Milliken (1987). In her inci- sive critique of the literature, Milliken argued that most studies had concentrated on environmental uncertainty, and even those that identified different sources of uncertainty failed to distinguish among three very different types of uncertainty pertaining to: (1) general external events; (2) cause-effect relationships between an organization and its environment; (3) and decision outcomes. Milliken argued that the nature, sources and action implications of these three kinds of uncertainty were very different, and that the failure to distinguish among them had led to myriad conflicting research findings. Certainly, managers must grapple with each of these kinds of uncertainty in making product variety decisions. The appealing logic of Milliken's (1987) typology, and the fact that it draws distinctions that have an important bearing on product line simplicity, make it an appropriate organizing scheme for our analysis. Following Milliken (1987: 136-138) we address three kinds of uncertainty: environmental state uncertainty, organizational effect uncertainty, and decision response uncertainty. ENVIRONMENTAL STATE UNCERTAINTY confronts all members of an industry and occurs when administrators perceive their environment or one of its components to be unpredictable: for example, it

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STRATEGIC RESPONSES 99

might be difficult to forecast overall demand, competitive behavior, socio-cultural trends, or other general industry characteristics (Milliken, 1987: 135). This may be in part a function of the inherent degree of volatility or change in the industry. ORGANIZATIONAL EFFECT UNCERTAINTY, on the other hand, occurs when it is difficult for managers to understand or predict "what the impact of environmental events or changes will be on their organization" (Milliken, 1987: 137). This is often a function of the knowledge, skills, and resources available to a specific firm. Finally, DECISION RESPONSE UNCERTAINTY derives from the ignorance or risks managers perceive in predicting the consequences of individual decisions (Milliken, 1987: 137; Taylor, 1984). This uncertainty depends on the qualities of the decision maker and decision in question.

Although this study employs objective indicators of all three kinds of uncertainty, we expect each of these to have an impact on product variety through its influence on the perceptions of individual managers (Milliken, 1987). Conceptu- ally, however, the three types of uncertainty are quite distinct: we shall argue that they have different meanings, sources, and consequences, and that they are relatively independent both in theory and in fact.

Paradoxically, although much of the literature suggests that environmental state uncertainty will give rise to greater product variety to reduce risk, we expect that organizational effect uncertainty and decision response uncertainty will actu- ally have opposite effects--they will be associated with less product variety because of the complexities, costs and risks associated with creating and managing such variety. The thesis of this research, then, is that whereas environmental state uncertainty may give rise to product variety, organizational effect uncertainty and decision response uncertainty will discourage such variety.

The Concept of Product Line Simplicity~Variety

Product line simplicity is defined as the range of product variations a firm offers. By variety, we do not mean diversification into very different kinds of product lines or businesses. Rather, we are concerned with variations within a specific product group representing different product types or categories (Lancaster, 1990: 189). Soft drink makers may opt, for example, to expand beyond one kind of cola into several colas or sodas. Power tool makers may decide to move beyond drills into related tools. And film companies must decide whether to concentrate on making comedies and dramas, or to also produce other types of films. In essence, product variety represents the extent to which a firm develops and promotes a full line of products that cater to different segments of the market.

Prior research has shown that product line variety or simplicity is an important component of a firm's business level strategy for a number of reasons. First, the low level of variety inherent in a focussed product line may allow companies to concentrate their resources on what they are good at. It may keep firms away from products that might take them into fields that are beyond their expertise (Porter, 1980, 1985). Such focus also entails economies as it allows greater routinization, more cumulative learning, and economies of repetition, specialization, and concentration (Lancaster, 1975, 1990). Indeed the literature on reengineering

JOURNAL OF MANAGEMENT, VOL. 25. NO. 1. 1999


sometimes stresses that a great percentage of profits and revenues come from a small percentage of products (Hammer & Champy, 1993).

But researchers have established also that too simple a product line can be dangerous. It forces companies to place excessive resources and too much reliance on a single class of offerings that might go sour (Kekre & Srinivasan, 1990). Vari- ety increases a firm's chance of "hitting the jackpot" (Raubitschek, 1988). Also, broadening the product line may put a company in touch with a wider array of customers and competitors, thereby enabling it to learn from its markets and keep itself up-to-date (Wernerfelt & Karnani, 1987).

Hypotheses

Product Variety and Environmental State Uncertainty

Environmental state uncertainty exists for an industry as a whole and, thus, confronts all companies to the same degree. It reflects the general level of complex volatility in the environment as manifested, for example, by unpredictably changing customer tastes, patterns of demand, competitive actions, and socio-cultural trends. These challenges may trigger frequent alterations in products or technologies that make an industry even more complicated and volatile. So it becomes harder to understand how the components of the environment are changing (Milliken, 1987: 136) or to assign probabilities to the likelihood of future external events (Duncan, 1972). Environmental state uncertainty also makes it harder to know just which products will continue to be successful and for how long. Chang- ing customer tastes and strong competition, for example, obscure trends in the market (Wemerfelt & Karnani, 1987), and make it more difficult to discern which product features or styles will be in demand (Shaw, 1982; Raubitschek, 1988).

We expect that firms operating in industries where there is a good deal of environmental state uncertainty will offer a wider array of product variations than will firms in industries where demand is stable and robust and where managers know which kinds of products will continue to be winners. Product variations give firms a better chance of hitting an obscure or moving target. They also reduce the risks of concentrating on the wrong market segment, and they allow firms to obtain information on developing market trends (Kekre & Srinivasan, 1990; Nayyar & Bantel, 1994; Raubitschek, 1988; Wernerfelt & Karnani, 1987). These are important advantages in uncertain environments. By contrast, in predictable settings, where managers are more certain of which products will succeed, the benefits of product diversity may not justify their costs (Lancaster, 1990; Whitney, 1995).

There are numerous causes and indicators of environmental state uncertainty. For example, uncertainty may arise from changing customer preferences and intense competition and be manifested by market share volatility and shrinking demand, among other things (Jauch & Kraft, 1986; Lawrence & Lorsch, 1967; Miller & Friesen, 1984; Porter, 1980, 1985).

HI: Environmental state uncertainty will relate positively to product variety.



Product Variety and Organizational Effect Uncertainty

Organizational effect uncertainty arises from the inability of managers to anticipate the impact of environmental events or trends on their own organization (MiUiken, 1987). This uncertainty makes it hard to know what effect a given environmental state or event will have on a particular organization. According to Milliken, "if state uncertainty involves uncertainty about the future state of the world, then effect uncertainty involves uncertainty about the implications of a given state of events in terms of its likely impact on the organization's ability to function in that future state" (1987: 137).

To a large degree, such effect uncertainty arises from a firm's inability to anticipate or influence how its customers and competitors will shape its own future (Miller & Shamsie, 1996). Companies may face great uncertainty simply because they lack the information, skills, and resources to understand or moderate the effects of their environments on themselves. Some organizations have such a range and depth of technical and creative knowledge, or have so much control or power over their markets, that they confront relatively little effect uncertainty. They possess the knowledge, skills or power, even in a competitive setting, to handle the complexity and ensure the success of many product variations--variations that can build market share and increase profits (Allaire & Firsirotu, 1989; Collis, 1992; Kekre & Srinivasan, 1990). Other companies, by contrast, confront more effect uncertainty because they have less knowledge of, or control over, their competitive environments. These firms are compelled to focus their more limited resources on the few familiar product varieties and customers that they understand best. In short, organizational effect uncertainty will evoke product line simplicity instead of diversity.

Effect uncertainty may be influenced in part by a firm's creative, technical and administrative skills. Companies that, vis-a-vis their competitors, have more skill in product conception, design and production, in general, find it easier to predict market reactions because they can better understand or even influence such reactions (Itami, 1987; Wernerfelt & Karnani, 1987). They, thus, experience less effect uncertainty, and so can more confidently introduce product line variations--they feel more able to ensure the success of these variations. But companies that are thin in creative, technical and administrative skills will have a harder time predicting the effects of their environments because they find it more difficult to comprehend or influence their markets. These organizations will be more reluctant to embrace product variations as it is safer to stick with a narrower line whose components and market appeal are better understood (Lancaster, 1990).

Effect uncertainty also may be reduced by resources that endow fn'ms with significant influence over buyers and competitors. Such influence may be afforded in part by control over key supply, marketing or distribution channels, which guar- antee a firm exclusive access to resources or customers and, thus, impede rivals' initiatives. Market control may, for example, diminish the chances that product variations will meet with unpredictable or negative reactions from the market. It is easier to gain acceptance for product variations when these can all benefit from the same powerful marketing channels, especially if those channels exclude the prod-



ucts of competitors. Such control produces marketing economies and guarantees that variations will appear very prominent ly before potential consumers (Lancaster, 1990; Kekre & Srinivasan, 1990).

H2: Organizational effect uncertainty stemming from an absence of skills or resources will relate negatively to product variety.

Product Variety and Decision Response Uncertainty

Decision response uncertainty pertains to the ignorance and risks that managers perceive in making specific decisions. Milliken (1987: 137) defines response uncertainty as "a lack of knowledge about response options and/or an inability to predict the likely consequences of a response choice" (also Taylor, 1984). It reflects both the difficulty managers have in predicting the outcomes of their decisions and also the values of those outcomes--e.g., the costs of making a wrong choice (Conrath, 1967). The more costly a potential mistake, the greater the perceived risk, and the higher the level of response uncertainty (Conrath, 1967; Garner, 1962). Thus, decision response uncertainty depends on the ignorance and risks perceived by the decision maker, factors that are affected both by qualities of the decision maker and of the specific decision (Taylor, 1984).

As is true of effect uncertainty, the greater the level of response uncertainty, the less diverse the product line is apt to be. In cases of relative ignorance , especially when a great deal of money or a longstanding personal reputation must be risked to introduce a product variation, managers will be reluctant to do so. But when response uncertainty is low because managers' knowledge of outcomes is great and the costs or career risks of making a variation are minimal, managers are more likely to have the courage to proceed (Conrath, 1967; Downey, Hellriegel, & Slocum, 1975, Milliken, 1987).

One important indicator of the uncertainty managers perceive in making product variation decisions is cost. The more it costs to introduce a new product variety, the more uncertain the chances of recouping the sizeable investment. This uncertainty is compounded by the greater complexity of most higher cost variations. High costs also increase the risks of hurting a manager's career if some product variations fail. These risks will discourage managers from straying into expensive variations, and may cause them to stick to safer, more familiar product lines.

The uncertainty managers perceive in making product variation decisions may also be a function of their own situation, their job tenure, for example (Hambrick & Fukutomi, 1991). Managers who have been at their jobs a long time may have a more biased and limited awareness of new and alternative ways of doing things (Miller, 1991). Thus, they are more apt to be uncomfortable with embracing product variations that lie beyond their spheres of expertise. Such discomfort is compounded because these managers know that their established reputation is at stake in introducing a new variation. There is, for them, potentially, much to lose from such decisions and little to gain (Miller &Chen, 1996). For example, if the variation they introduce fails, it may ruin a longstanding record; and if it succeeds, its benefits to an already established record will be modest.



More recently appointed managers, by contrast, may perceive fewer job risks in moving towards greater variety. They may be more comfortable with emerging market trends (Hambrick, Geletkanycz, & Fredrickson, 1993; Miller, 1991), and have more reputation to gain (and less to lose) by adopting new variations (Hambrick & Fukutomi, 1991).

H3: Decision response uncertainty stemming from the perceived risks of a given decision will relate negatively to product variety.

Method

Sample and History

Our sample consisted of the seven major Hollywood film studios from the years 1936 to 1965. These studios included MGM, Twentieth Century-Fox, Warner Brothers, Paramount, United Artists, Universal, and Columbia. Although United had few production facilities, it helped finance and distribute movies by independent producers, some of whom had part ownership in the company. The only other potential major, RKO, was deleted from the sample because it terminated operations in 1956, a full nine years before the end of our study. Prior to that, RKO had gone through frequent reorganizations and changes in form and management (Lasky, 1989).

Before 1936, there had been growing consolidation in the film industry (Bord- well, Staiger, & Thompson, 1985: 403). But the last significant merger took place between Fox and Twentieth Century in 1935. Around the same time, Paramount reemerged from bankruptcy as a new organization. Thus, by 1936 the industry had matured into the oligopoly that became known as the studio system. And for the next dozen years or so, demand for films remained strong, both as reflected by stable patterns of attendance--80 to 90 million admissions per week throughout the entire period--and by gradually increasing box office revenues (Steinberg, 1980).

All of the studios of the day developed their own stables of talent by signing a wide variety of stars to exclusive long-term contracts. Four of our major studios also owned or leased theaters in significant locations across the country. Collec- tively, the majors controlled less than 3,000 theaters out of 18,000 nationwide. But these included the preponderance of first-run cinemas in big cities that drew 75 percent of the national box office (Balio, 1985: 255). Because many studios controlled their stars and were guaranteed distribution for their films via their theaters, they were able to plan well in advance a steady stream of film offerings (Gomery, 1991; Whitney, 1982). A high level of stable demand brought a very reasonable chance of success; and control over theaters made sure all of a studio's films would have a sufficient audience.

The period from the early 1950s to the mid 1960s brought about significant transformations in the industry that greatly enhanced the level of environmental uncertainty (Balio, 1985; Mast, 1992). Between 1948 and 1950, television sets had only entered 25 percent of homes; but this penetration had doubled to 50 percent by 1952, and had reached 70 percent by 1954. As a result, cinema attendance



declined significantly from 1949 to 1953 and then stabilized at only about 40 to 50 million admissions per week. Firms began groping to find new ways to attract movie-goers and soon started to differentiate their films from television programs by making more lavish productions (Mast, 1992: 275; Smart, 1982: 295). They experimented with new techniques involving color film, wide screens, and stereo- phonic sound. Thus, the technical and creative skills of studios became ever more important as growing entertainment alternatives made movie-goers more discrim- inating. Also, audiences became more fickle in their tastes (Bohn, Stromgren, & Johnson, 1978; Gomery, 1991). Box-office failures became common as falling demand made studios compete fiercely for increasingly unpredictable audiences.

To contribute further to this climate of uncertainty, the studios began to lose control over their distribution outlets and their stars. Although the major studios were first targeted by antitrust proceedings in the late 1930s, the first truly effective steps to reduce their power were only taken in the late 1940s. These culmi- nated in a ruling by the Justice Department in 1948 that ultimately forced the majors to sell off their theaters by the late 1950s.

We terminated our period of analysis in 1965, as after that conglomerates began to buy up many of the studios. This, in large part, was because so many studios had fallen in value and some were approaching bankruptcy. Also, by the late 1960s the studio system was replaced by one dominated by independent producers and directors (Bohn, Stromgren, & Johnson, 1978).

Variables

Product Line Variety. Product line variety (/simplicity) can be measured quite easily in the film industry. It is reflected by the range of film genres under- taken by a studio in any given year. For the major studios, each genre represented a different product in terms of structural components such as plot, character, setting, thematics and style (Buscombe, 1977: 27-31; Schwartz, 1981: 15-18; Solomon, 1976: 2-4). The genres allowed studios to quickly and poignantly communicate the essential features of each of their films. Thus, each genre represented a distinct product variation as its films possessed many common elements and appealed to the same segment of the audience.

Some studios had simple product lines: that is, they concentrated on only a few genres or produced only a narrow range of genres. Other studios produced films in a wide range of genres, and did not place too much emphasis on any one. Different genres may require different writers, actors, directors, and filming techniques, but, as in the case of variations in other manufactured products, most use similar production technologies.

We categorized for this study 7,124 films. These comprised all feature length releases by the seven leading studios. The genre for each film was provided by the authoritative The Motion Picture Guide (Nash & Ross, 1985). In cases where a film was classified into more than one genre, the leading categorization was used. For example, a film classified as a musical/comedy was categorized as a musical. The Nash and Ross (1985) classifications corresponded very closely to those of Hanson and Gevinson (1993) in their American Film Catalogue.



The extensive literature on film genres identifies as many as 15 classical genres of film; these include action/adventure, comedy, crime/gangster, drama, fantasy, historical/biographical, horror, musical, mystery/detective, romance, romantic comedy, science-fiction, thriller/espionage, war, and western (Armour, 1980; Gomery, 1991; Grant, 1977, 1986; Schwartz, 1981). Some authors do not distinguish romantic comedy from romance, and others combine fantasy with horror and science-fiction, resulting in as few as 12 categories (Dolan, 1983; Michael, 1969). To establish the robustness of our findings, we ran our analyses using product variation measures encompassing both 12 and 15 genres. Results were almost identical, but we display those for 15 genres.

A studio's product variety/simplicity can be measured by the distribution of films across the genres it produces each year. Therefore, all of our indexes of product line variation are based on the number of films in each of thej (= 1 .... 15) genres for each of the i (= 1 .... 7) studios in year t (= 1936 ..... 1965): x i j t.

We employed three distinct but related indexes of product'variety: RANGE, VARIANCE, and DOMINANCE (Miller &Chen, 1996). The simplest and most unambiguous index is RANGE: it merely counts the number of genres of films that each studio produces each year.

The variance and dominance indexes measure the concentration of a studio on a particular genre or genres. These indexes are inverse indicators of product line variety (i.e., direct indicators of simplicity). The VARIANCE index reflects the numerical emphasis on the most frequently produced genres. Variance is computed by the standard deviation Si, t of the number of films in each genre calculated across all genres; and is calculated for each studio for each year. This figure is divided by the number of films produced by a studio in a given year to control for differences in the output of large versus small studios. Variance is high, for example, when a few genres dominate all others. The index increases as discrepan- cies grow between the number of films in a given studio' s most and least common genres for a given year.

V = (Sg, ,/Ng, ,)

The DOMINANCE index gauges the extent to which a studio's largest genre for one year dominates its film output in that year. It is calculated as the number of films in a studio' s largest genre Di, t expressed as a fraction of its total number of f i lmS, Ni, r

We wished to ascertain that our product variety measures did not in any way reflect the size of a studio. This was confLrmed by correlational analyses which showed that none of our indexes correlated significantly with studio revenues (correlations ranged between -0.04 and -0.05). Moreover, when we included total revenues in the models on Table 4, these never accounted for significant additional variance or materially altered the other findings.

E n v i r o n m e n t a l S ta te Uncertainty . We employed two indicators of environmental state uncertainty, each measured on an annual basis. The first reflects product demand uncertainty and is gauged by the level of demand that firms in the industry enjoyed for their films: a high level of demand provided market opportu-



nities for many genres, whereas poor demand caused uncertainty about which genres would succeed--in part because of growing audience selectiveness, and in part because of the competitive jockeying this engendered. The second indicator of state uncertainty reflects competitive rivalry within the industry and is assessed by the total magnitude of changes in market share for all studios. Since this is a study of a single industry, it was necessary that we examine a sufficiently long period of history to encompass considerable change in environmental uncertainty. The thirty year interval we studied in the film industry exhibited exactly such change.

Until 1949, the major studios enjoyed a fairly strong and stable level of demand for their films. This ensured these companies an ample audience for their films, whatever the genre. But beginning in 1950, the advent of television ushered in a period of declining demand. This induced intense competitiveness among studios who fought each other for a shrinking and more exacting audience. The lower the level of demand, the more pressure it put on all studios to hold on to their audience by altering their products, technologies and marketing campaigns (Miller & Shamsie, 1996). These changes elevated the level of uncertainty in the industry. Industry demand level was assessed by the percentage of annual household recreational spending devoted to movie attendance. This information was obtained from the U.S. Department of Commerce, Social and Economic Statistics Administration (Steinberg, 1980).

Our second indicator of environmental state uncertainty assesses the level of rivalry among competitors within the industry. It reflects the degree to which rivals are able to take market share away from each other by aggressive competition. Shifts in the market positions of major competitors both indicate and create uncertainty about the best ways to compete. Our index of industry instability was first developed by Hymer and Pashigian (1962) and later modified by Caves and Porter (1978). The index measures industry instability for each year: it simply sums the absolute values of the annual changes in market share of the seven major studios. During the period of this study, the market shares of these studios collectively averaged 87.5 percent of industry sales. Data on domestic film revenues for each studio were obtained from annual reports. These figures were divided by total box-office receipts for the year to derive the annual market shares. Information on box-office receipts was obtained from the U.S. Department of Commerce, Social and Economics Statistics Administration.

Organizational Effect Uncertainty. We argued that organizational effect uncertainty would be an inverse function of creative, technical and administrative skills, and of market control. A strong repertoire of skills gives f'trms the ability to better understand and adapt to their environments, thereby reducing effect uncertainty. Similarly, resources that provide an element of market control can minimize the impact of uncertainty. Such skills and resources may, thus, serve as reverse indicators of effect uncertainty.

Perhaps the most important tools studios possessed to reduce effect uncertainty were the creative and technical skills that they had been able to build up. Each studio tried to develop unique abilities in various areas of film production that it could use to differentiate its films from those produced by its competitors (Mast, 1992:230-231). These diverse skills included expertise in script develop-



ment, set design, direction, camera work, sound, and editing. MGM, the largest studio, had developed a work force of six thousand skilled employees distributed among twenty-seven departments (Balio, 1985: 264).

Studio skills are in part reflected by the number of Academy Awards won each year. These awards were voted on by expert peers in the industry who were in a good position to appraise a wide variety of skills, both at their own studios and among the competitors. The majority of such skills were in creative and technical categories such as screenplay, cinematography, editing, costumes, set design, and sound. Although these awards were given to individuals of exceptional ability, they also reflected a studio's success in recruiting, developing, and supporting talent. We gathered data on the percentage of Academy Awards that were won annually by each studio. The primary source for this data was a complete listing of Academy Awards published by Michael (1968).

Theaters controlled by each studio represented an important resource that enhanced market power and reduced effect uncertainty. Well-situated theaters that were owned or leased long-term by the studios afforded control over valuable distribution outlets. And theaters owned by the studios were almost all situated in prime locations. Collectively, the studios owned over 70 percent of the theaters located in cities of over 100,000 people (Whitney, 1982: 166). In fact, theaters controlled by the studios averaged annual revenues that were fifteen times those of the independents (Balio, 1985: 255).

More importantly, a network of theaters reduced effect uncertainty because it provided studios with an extensive and compliant showcase for their own films (Conant, 1960). A studio's theaters also ensured its films distribution in all of the prominent markets, while competitors had to settle for theaters in less desirable locations (Black & Boal, 1994). In short, a network of theaters reduced uncertainty for a studio by providing it with reliable and effective outlets for all its films.

We obtained information on the number of domestic theaters owned or under long-term lease for each studio for each year from figures provided in annual reports and in Moody's Industrial Manuals.

Decision Response Uncertainty. Decision response uncertainty stems from the perceived risk faced by individual managers in deciding to introduce product variations. We argued that such uncertainty increases with the costs of creating product variety and with the job tenure of the managers responsible for these decisions. Both these factors increase the risks managers attach to their product decisions.

The higher the production costs per film, the greater the perceived risk of going into different kinds of products. The literature on the film industry well documents the increased risk that studio executives perceived whenever their costs of new film projects began to rise (Conant, 1960: 124; Mast, 1992: 287). When the average production budget per film becomes very high so that much is bet on each new project, film executives are more likely to want to limit risks by concentrating mostly on those genres that they know best. We obtained average production budgets per film from the data on film costs and producers' fees contained in the annual financial reports of the studios.


108 D. MILLER AND J. SHAMS1E

Table 1. Operationalization of the Three Types of Uncertainty

Indicators Measures

ENVIRONMENTAL STATE UNCERTAINTY

Source: Challenge and volatility in the industry

Robustness of demand % of annual household recreational spending devoted to movie attendance.

Competitive Volatility Absolute value of annual changes in market share for all studios

ORGANIZATIONAL EFFECT UNCERTAINTY

Source: Lack of skills and resources needed by a firm to understand or cope with the effects of its

environment

Creative, functional and technical skills Academy Awards won

Control over distribution Ownership or leasing of theaters

DECISION RESPONSE UNCERTAINTY

Source: Risks and costs perceived by managers in making a decision

Development and production costs Average production cost per film

Risk to established reputation Tenure of production head

Decision response uncertainty is also expected to. increase with the tenure of the production-head. This individual had the greatest influence over the types of films made and decided upon the slate of films for each year based on the availabil- ity of producers, directors and stars (Staiger, 1985). With time, the various heads began to tie particular producers, directors and stars to specific types of films. Thus, the variety of film genres would only expand if a head were willing to take a chance with new talent or with employing existing talent in new types of films.

We argued that long-tenured product managers come to favor their tried and true genres and perceive greater uncertainty in branching out from these. Many kinds of line extensions take them beyond their areas of comfort or expertise. Long-tenured production heads also tend to be less familiar with emergent trends in their markets, and face more risks to their reputations in introducing product variations.

The tenure of the heads of production for each studio was measured in number of years since their appointment to that position. This information was obtained from several accounts of the histories of the major studios (Finler, 1988; Gomery, 1986; Shiach, 1995; Steinberg, 1980).

Analyses The data consisted of 30 years of observations across seven studios. One year

was lost due to the lagged awards variable. Given the longitudinal nature of our study, it was necessary to transform our data to avoid any problems of autocorrelation and heteroscedasticity. To do this, we used pooled time-series cross-



sectional analyses (Kmenta, 1986: 616-625). This procedure first adjusts the data for autocorrelation using the Prais-Winsten (1954) iterative transformation. To establish the adequacy of a first-order autocorrelation adjustment, we inspected the correlograms for the analyses. These declined rapidly at higher lags, confirming both the stationarity of the time series process and the adequacy of a first-order correction. Separate autocorrelation adjustments were done for each firm.

A second transformation of the data was then employed to correct for heteroscedasticity. We divided the dependent and independent variables by the firm-specific error variances obtained from the regressions on the autocorrelation-corrected data. The twice-transformed data could then be pooled and analyzed using ordinary least squares (see also Judge, Hill, Griffiths, Lutkepohl, & Lee, 1988: Section 11.5; Sayrs, 1989). Plots of residuals were inspected to confirm the absence of patterns due to heteroscedasticity or autocorrelation (Sayrs, 1989).

We wished to establish the convergence of our findings for our three different variety indexes. Thus, we conducted a principal components analysis of our three variety indexes to derive a composite factor. We then ran the models of Table 4 on the factor. We found that the first principal component accounted for 77 percent of the variance, and the range, variance and dominance indexes correlated, respectively, at -.75, .97 and .89 with the component. Tables 4 and 5 show strong convergence of the results for the three indexes and the composite factor.

Exploratory Analyses. We wanted to ascertain that our three types of uncertainty were sufficiently independent statistically to warrant their distinct inclusion in our models. The correlations given in Table 3 satisfied us that this was indeed the case as only 2 of the 12 possible inter-category relationships among our 6 uncertainty variables were significant (one negatively). Moreover, when we ran a varimax rotated principal components analysis, each of the variables loaded at above .81 on distinct components.

To make our analyses comprehensive, we examined the interaction effects among our three uncertainty categories in predicting product line variation/ simplicity. To avoid including an unwieldy number (12) of multicollinear interaction terms in our models, we standardized and then averaged the variables in each of the uncertainty categories to obtain a single average score for each category. This averaging also ensured a more complete characterization of each category. We then computed three interaction terms: environmental state x organizational effect uncertainty (EO), organizational effect x decision response uncertainty (OD), and environmental state x decision response uncertainty (ED). The components of the interaction terms were standardized before multi- plication to further reduce multicollinearity. The results of the interaction analysis are given in Table 5.

Finally, to establish the robustness and generality of our findings across the period, we dropped the last five years of data from our analyses. These were clearly the most different years of the study as the studio system had fallen apart and the number of theaters and stars controlled by the studios had declined dramat- ically. The results mirrored those of Table 4 almost without exception; the only very minor difference was an increase in the significance of the relationship between number of theaters and the variance index of product variety.


l l 0 D. MILLER AND J. SHAMSIE

Table 2. Descriptive Statistics

Mean SD

Product Variety Range (out of 15 genres) Variance index Dominance index

Environmental State Uncertainty Customer % spending on movies Market share instability

Organizational Effect Uncertainty Theaters owned or leased Academy Awards won

Decision Response Uncertainty Production costs per film ($000) Tenure of Production Head (yrs)

9.53 1.65 .09 .01 .27 .06

13.01 7.06 106.00 60.73

112 187 12.8 13.7

1841 1168 8.9 7.8

Findings

Tables 2 and 3 contain descriptive statistics, while Table 4 presents the autoregressive-heteroscedastic models that test HI to It3. Overall, there was a good deal of support for our hypotheses.

The consumer spending variable assessing environmental state uncertainty showed a very significant association with all three of our measures of product variety. There is little doubt that declining demand and the product line changes and competition it engendered were associated with a greater variety and broader distribution of film genres. It may be that, whereas healthy levels of demand allowed studios to continue with their normal ways of doing business, shrinking demand induced a more concerted effort to keep customers by experimenting with a broader set of offerings. Indeed, historians have observed that some Hollywood studios experimented with a wider range of films during the 1950s (Gomery, 1991: 322; Mast, 1992: 295-303). Declining demand, it seemed, was forcing executives to search harder for attractive genres. Thus, HI was supported.

Table 3. Pearson Correlations

1. 2. 3. 4. 5. 6. 7. 8. 9.

1. Range 1.0 2. Variance - .62 1.0 3. Dominance -.41 .88 1.0 4. % Spending - .08 .23 .11 1.0 5. Share instability .13 - .14 - .10 - .12 1.0 6. Theaters - .06 .04 - .04 .48 - . 12 7. Academy Awards .12 - .09 - .09 .01 - .18 8. Costs per film -.21 - .05 .01 - .72 - .20 9. Tenure of Head - .07 - .02 - .07 .04 .05

1.0 .13 1.0

- .20 .12 1.0 .02 -.01 -.11 1.0

Note." All coefficients greater than .20 are significant at or beyond the 0.05 level.

JOURNAL OF MANAGEMENT, VOL. 25, NO. l, 1999

STRATEGIC RESPONSES

Table 4. Product Variations as a Function of Three Kinds of Uncertainty Autoregressive-Heteroscedastic Models

111

Product Variety Indexes

Composite Variance Dominance Factor

Range (-) (-) (-)

Environmental State Uncertainty:

Consumer % spending on movies (-) .55*** .44*** .35*** .47*** Mkt share instability .04 . l0 .09 .08

Organizational Effect Uncertainty:

N o f theaters (-) - . 0 6 - . 15+ - . 19* - . 15+ Academy Awards (-) - . 1 6 " * - . 1 3 " - . 1 3 " - . 1 5 "

Decis ion Response Uncertainty:

Cost per Film - . 6 5 * * * - . 2 3 * - . 19" - . 3 6 * * * Tenure o f head - . 16* - . 03 - . 0 9 - . 0 2

Buse R-squared .18 .10 .10 .11 F statistic 7 .25*** 3.50** 3.70** 3.81"*

No~s: +, *, ** and * ** indicate significance levels at or beyond the 0.06, 0.05, 0.01 and 0.001 levels, respectively. (-) denotes that the variable is an inverse indicator of either uncertainty or product variation, and that we reversed the scale to correspond with our hypotheses and facilitate interpretation.

We were surprised, however, that our second indicator of environmental state uncertainty, market share volatility, was not associated with product variety. This may be because market share changes were not sufficiently revealing indicators of the intensity of competition among our major studios. In the film industry, market shares typically fluctuate considerably from year to year simply because different studios may be responsible for one or two major box-office triumphs.

Organizational effect uncertainty, at least as manifested by a dearth of creative and production skills--i.e., a paucity of Academy Awards---did indeed relate negatively and significantly to all three indexes of product diversity. Number of theaters, which represented a studio's control over distribution, also bore significant relationships with two of our three indexes of product diversity. In short, It2 received good support. Studios that did not possess much creative talent and did not own theaters produced a narrower variety of films. It is not surprising, then, that the smaller studios such as Columbia and Universal were the ones that focussed more narrowly on low budget westerns, comedies and horror films (Bohn, Stromgren, & Johnson, 1978: 212-215; Gomery, 1991: 178-180).

Finally, as predicted by 1-13, decision response uncertainty as reflected by the risks inherent in costly film production related negatively and significantly to all three of our indexes of product variety. But the tenure of the head of production related only to the range index of variety. This suggests that some veteran production heads restricted themselves to fewer genres, but did not concentrate on any of the genres that they did produce.

The interaction analyses yielded largely non-significant results. The single exception was the negative interaction effect between environmental and organiza-



Table 5. Product Variations as a Function of Three Kinds of Uncertainty and Uncertainty Interactions Autoregressive-Heteroscedastic Models

Product Variety Indexes

Composite Variance Dominance Factor

Range (-) (-) (-)

Environmental State Uncertainty: Consumer % spending on movies (-) .53*** .47*** .36*** .51"** Mkt share instability .03 .11 .09 .06

Organizational Effect Uncertainty: N of theaters (-) - .08 -.21 * - .23* - . 19* Academy Awards (-) - .16"* - .11" - .12" - .13"

Decision Response Uncertainty: Cost per Film - .66*** - .27* - .20* - .43*** Tenure of head - . 16" - .00 - .09 - .02

Interactions Among Kinds of Uncertainty: Envir * Org'n - .12" - .15" - .07 - .13" Org'n * Decision .06 .10 .01 .04 Envir * Decision .15" .01 - .02 .09

Buse R-squared .20 .12 .11 .13 F statistic 5.39"* 3.01 * 2.60* 3.11 *

Notes: +, *, ** and * * * indicate significance levels at or beyond the 0.06, 0.05, 0.01 and 0.001 levels, respectively. (-) denotes that the variable is an inverse indicator of either uncertainty or product variation, and that we reversed the scale to correspond with our hypotheses and facilitate interpretation.

tional uncertainty for three of the four models of Table 5. It appears that under a high level of organizational uncertainty, environmental uncertainty is less apt to increase product line variety. This is reasonable. Studios facing uncertainty due to a lack of creative and production skills, or of marketing resources, will have a harder time successfully increasing product variety, especially when industry uncertainty demands an abundance of such talents.

Discussion

In examining the relationship between organizations and their environments, uncertainty and perceived uncertainty have been among the most intensively explored variables. But so far, uncertainty has been seen as an external property, or as a way in which managers perceive their external environments (Downey, Hell- riegel, & Slocum, 1975; Duncan, 1972; Khandwalla, 1977). In fact, however, managers' perceptions of uncertainty may not only be a function of the properties of their external environments, but also of the difficulty predicting the effects of the environment on a particular organization, and the risks inherent in an individual decision situation (Garner, 1962; Milliken, 1987). In our study, strategic responses were a function of uncertainty operating at three levels: the environment, the organization, and the individual decision. Distinguishing among these levels could be useful for studying the varied consequences for organizations that



different types of uncertainty might have. These kinds of distinctions, for example, helped Allison (1971) to understand the Cuban missile crisis, for which he analyzed factors operating at the state, organizational, and individual levels.

Clearly, uncertainty in the external environment can influence how a company shapes its strategy. But perhaps just as important is the knowledge, capacities, and resources a fLrm has to reduce that uncertainty, as well as the inherent uncertainty of a given decision to a specific decision maker. Indeed, we found that the Holly- wood studios demonstrated very different responses to each of these different kinds of uncertainty. Uncertainty at the environmental level appeared to induce greater product variety, which allowed studios to hedge their bets on emerging market trends. But organizational effect and decision response uncertainty induced managers to eschew variety, in order perhaps not to tax resources and to reduce personal and corporate risks. Until scholars distinguish among different kinds of uncertainty, they may fall victim to incomplete arguments and noncumulative research results. Our research on the Hollywood studios revealed the three types of uncertainty to be quite distinct in their sources and consequences. This distinctness can be illustrated by the example of an established and reputable manager facing a costly decision to introduce a new film genre. Because there is so much to lose, the decision maker may experience a good deal of decision response uncertainty. But if his organization has superb creative and production skills and a powerful distribution apparatus, that same manager might experience relatively little organizational effect uncertainty. And if the environment is stable oT predictable, he or she may sense little state uncertainty.

Given such contrasts, what might the combination of these three forces imply for product variety? Our empirical findings of relative independence among the three kinds of uncertainty suggest that the effects of the forces are mostly additive. The exception, as we noted above, is the potential interplay between organizational effect and environmental state uncertainty. We found that where organizational effect uncertainty was high--that is, where studios did not have the skills or resources to support much product line variety, firms were less likely to increase variety in the face of state uncertainty that could place the greatest demands on such resources.

But more research is needed on such interactions. Specifically, we believe it would be useful to look into the interactions among the three kinds of uncertainty by performing multi-industry studies. One might, for example, investigate whether industries with great state uncertainty also produce greater organizational effect and decision response uncertainty. It may be that in the turbulent semi-conductor or software industries----domains with great state uncertainty--managers have little confidence in their ability to predict the impact of the complex and rapidly changing environment on their firm or its decisions. By contrast, in industries of little state uncertainty--forest products or steel manufacture, for example---it may be easier to foresee how customers and rivals will respond to the actions of the finn. Such questions could not be tested in this single industry study, but their exploration may provide a more complete understanding of the construct of uncertainty and the interplay among its components.



As we argued at the outset, product variety is an important indicator of the strategic simplicity of an organization (Miller, 1993; Miller & Chen, 1996). Thus, it may be that the three kinds of uncertainty that we have discussed will have important associations with other aspects of strategic simplicity. For example, just as environmental state uncertainty spurs product variety, it may also induce firms to pursue more product innovation, broader market scope, and more comprehensive and multifaceted strategies (Miller & Chen, 1996). Each of these responses can help ensure that products will remain relevant in an unpredictably changing environment. Moreover, just as organizational effect and decision response uncertainty were associated with lower product variety, so might they limit product innovation, market scope, and strategic comprehensiveness and multifacetedness. For example, effect uncertainties that derive from a lack of critical knowledge or skills can reduce an organization's ability to develop new products, address wider markets, or devise more complex strategies. So too can the uncertainties perceived by individual managers making particular decisions. Innovation, for example, is less likely where personal ignorance, costs, or career risks are high.

To conclude, this study represents a significant shift in the analysis of uncertainty. But it is only a first step that must be replicated in other industries and with different operationalizations of each of our levels of uncertainty. It would also be useful to examine the effects of these levels of uncertainty on other aspects of strategy and simplicity.

Acknowledgment: The authors would like to thank Ming-Jer Chen and Frances Milliken for their helpful comments, and the Social Sciences and Humanities Research Council of Canada for Grant 804-93-0014.

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Documents

Strategic responses to three kinds of uncertainty: Product line simplicity at the Hollywood film studios