Successfully competing in the deregulated trucking industry: a resource-based perspective.

ABSTRACT

This paper uses the resource-based view of the firm to explain how firms grow in a deregulated environment. The study demonstrates that firms must utilize a specific sequencing of both acquisitions and internal development decisions to grow in a deregulated environment. A theoretical framework is developed which may explain firm growth in other deregulated industries.

Although the resource-based view of the firm began as a dynamic approach emphasizing change over time (Penrose, 1959; Wernerfelt, 1984; Dierickx and Cool, 1989), much of the subsequent literature has been static in concept (Priem and Butler, 2001). Dynamic research--where conditions under which resources are developed or acquired in one period have implications for the strategic advantages of firms in subsequent periods--is particularly important in studying resource-based theory (Barney, 1991; 2001; Priem and Butler, 2001).

This study will begin to fill this gap in resource-based theory by explaining how resources are developed and utilized over time to generate firm growth. While scholars agree that resources are developed in a complex path dependent process (Teece, Pisano, and Shuen, 1997; Barney and Zajac, 1994; Dierickx and Cool, 1989), predicting the resource development path that will result in highest firm growth represents a gap in resource-based theory. This study uses the resource-based view of the firm to explain the sequencing of diversification and internal development decisions that would generate the highest firm growth over time. Examining this temporal component is important because it could produce a deeper understanding in the strategy literature of complex interactions that occur over time between a firm's resources and its environment (Barney, 1991, 2001; Priem and Butler, 2001).

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RESOURCE-BASED GROWTH FRAMEWORK

Ansoff (1957) was one of the first scholars to address sequencing. Ansoff's product/market grid demonstrated that firms would, initially, grow by gaining more market share from its current products in their current markets. Second, firms would develop new markets for their existing products. Third, firms would develop new products that would be of interest to their current markets. Finally, firms would grow by developing new products for new markets. Since Wernerfelt (1984) views products and resources as "two sides of the same coin," resources could be substituted for products in Ansoff's original matrix.

Since diversification decisions represent different alternatives for market development, a diversification classification could be substituted for markets in Ansoff's (1957) matrix. Rumelt (1974), Palepu (1985), and Seth and Easterwood (1993) classified a firm's diversification decisions as single business, related business, and unrelated business. Based upon the substitution of resources and diversification decisions, the following matrix would result:

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Following Yip (1982), Chatterjee (1990), and Chang and Singh (1999) a firm may grow by either diversification, direct entry, or internal development. Direct entry and internal development represent alternative modes of growth to diversification (Yip, 1982; Chang and Singh, 1999). Adding the alternative modes of growth, internal development and direct investment, the final matrix is illustrated below:

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Resource-Based Sequencing

The resource-based view of the firm provides a prediction to explain the direction of diversification based upon the utilization of unused resources. These unused productive resources of the firm are the most selective force in determining direction of expansion (Penrose, 1959). The use of excess capacity gives the firm a mechanism for growth and provides the firm with the opportunity to extract the maximum leverage that its existing resource base can generate (Penrose, 1959; Teece, 1982). The acquisition process is driven to a large extent through the utilization of excess capacity (Caves, 1980; Chandler, 1962). The utilization of this excess capacity may serve as a starting point for diversification decisions. Firms would initially grow via acquisition by utilizing the excess capacity of existing resources to further develop existing markets. Firms would be expected to make acquisitions in the same business as their initial growth response.

Given that firms have accumulated excess resources within current operations, economies of scope may result by using these same resources in other segments or industries (Panzar and Willig, 1981; Seth 1990a, 1990b). Resource sharing can result in a decrease in unit variable costs; this may provide the combined firm a cost advantage in both the acquiring and target's core business. The probability that an entrant's current excess physical and knowledge-based resources can reduce operating costs in a new market is higher the more related the new market is to the entrant's core markets (Teece, 1982). From a resource-based perspective, firms are likely to grow in a related business since the firm possesses skills and resources to be competitively viable (Porter 1987; Chang and Singh, 1999). After capitalizing upon the immediate market opportunity, firms will develop longer term competitive positions by investing in co-specialized and related assets (Teece, 1987). From an acquisition perspective, firms will choose to enter industries that are close to their existing lines of business (Montgomery and Hariharan, 1991). Firms would tend to engage in related acquisitions as their second growth response.

The more closely related two markets are, the fewer the needed complements to the firm's own physical and knowledge-based resources. However, an acquisitive entry in a related market is more likely to involve the purchase of unwanted assets (Chatterjee, 1990). Therefore, internal development may potentially reduce costs significantly in a related market (Chang and Singh, 1999). In order to exploit its excess resources in a related venture, a parent firm should integrate the related business with its existing lines of business. In other words, the firm will make an integrative connection between the new business and its existing business by sharing resources and transferring skills (Porter, 1987). From the evolutionary perspective of Nelson and Winter (1982), the firm encapsulates organizational learning into its new lines of business by way of its routines (Chang and Singh, 1999).

Learning processes often serve to constrain the range of organizational activities (Levinthal and March, 1993). Rapid learning may result in a competency trap whereby increasing skill at the current procedures make experimentation with alternatives progressively less attractive. Along similar lines, Cohen and Levinthal (1989, 1990) argue that the ability of firms to evaluate and utilize outside knowledge--what they term absorptive capacity--is a function of their prior related knowledge. As a result, firms will tend to confine themselves to a limited set of domains and have difficulty responding to developments outside these areas. In addition, senior managers need time to organize their learning and to utilize the knowledge gained from the experiences of others as well as their own (Senge, 1990).

Resource-based theory suggests that there are managerial limits to the rate of firm expansion (Penrose, 1959). Existing managers must train new managers, the so-called Penrose effect (Marris, 1964; Shen, 1970; Slater, 1980). Penrose (1959: 49) states that "managerial resources with experience within the firm are necessary for the efficient absorption of managers from outside the firm. Thus, the availability of inherited managers with such experience limits the amount of expansion that can be planned and undertaken in any period of time." Empirical evidence shows that rapidly growing firms in one period typically regress to the average growth rate in the next time period (Shen, 1970; Ijiri and Simon, 1977). As pointed out by Penrose (1959: 190), "An industrial empire built up by acquisition and merger, and carried out with little regard for administrative organization is not an industrial firm in our sense until a certain minimum of integration has been achieved."

Due to the fact that (i) internal development can reduce costs in a related market, (ii) the related lines of business must be incorporated into the existing business by way of routines, and Off) the incorporation of new managers require considerable managerial time and limits future expansion, firms would be expected to engage in internal development rather than further acquisition as the third growth response.