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:

[ILLUSTRATION OMITTED]

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:

[ILLUSTRATION OMITTED]

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.

New managers from related industries may provide the firm with growth potential. Penrose (1959: 75) states that, "It is the heterogeneity and not the homogeneity of the productive services available from its resources that gives each firm each unique character."The changing knowledge of management creates unique, productive opportunities for each firm (Chandler, 1977, 1990; Teece, 1980). Management teams that are heterogeneous yield entrepreneurial services in the form of expansion and diversification (Kor and Mahoney, 2000). Following Chandler (1962), new firm managers are uniquely positioned to create significant organizational breakthrough. In resource-based theory, new managers are both the brake (Penrose effect) and the accelerator for the growth process (Starbuck 1965). New managers create unique opportunities for growth (Chandler, 1992). New managers create new learning opportunities. New learning, such as innovation, are the stocks and flows of a firm's capabilities that generate new ideas (Kogut and Zander, 1992). These new capabilities are often platforms into new markets (Mahoney, 1995). Utilizing new capabilities to enter new markets is more oriented toward unrelated acquisitions. Firms generally enter an unrelated market through acquisition rather than by way of internal development (Chang and Singh, 1999). Following Ansoff (1957), a firm will focus on unrelated acquisitions as its last sequencing move. Thus, firms would be expected to engage in unrelated diversification as their fourth growth response.

The argumentation of resource-based theory above leads to the following sequencing pattern:

[ILLUSTRATION OMITTED]

The challenge in testing the resource-based view of the firm is identifying and measuring the most critical resources of the firm (Hitt, Bierman, Shimizu, and Kochlar, 2001). To do so, it is helpful to focus on a single industry (Dess, Ireland, and Hitt, 1990). The industry selected for this study was the LTL trucking industry. The industry was selected for several reasons.

The LTL segment of the industry is the largest single industry segment in terms of total revenue (Corsi, Grimm and Fietler, 1992). This segment is quite homogeneous in its operating structure and market environment, but is different from the operating structure faced by other segments of the trucking industry (Corsi, Grimm and Smith, 1990). Within the segment, the majority of the carriers utilize a hub-and-spoke operating system that is distinct form the rail, pipeline, and to a certain extent, the TL (truckload) segment (Rakowski, 1988; Silverman, Nickerson and Freeman, 1997).

METHODOLOGY

This section discusses the sample, measurement, data sources, and method of analysis.

Sample

The study begins in 1980 since the Motor Carrier Act of 1980 deregulated interstate transportation. This study ends in 1993 because the Motor Carrier Act of 1994 eliminated restrictions on intrastate transportation. The Interstate Commerce Commission (ICC) identifies the firms in the LTL trucking industry during the period (1980-1993) in their trucking publication--The Commercial Carrier Journal. This journal tracks numerous indices on LTL trucking firms annually. From this source, 166 enterprises in the LTL trucking industry were identified, of which 59 were publicly traded companies. These 59 publicly traded companies accounted for approximately 70 percent of the growth in revenues, employees, and assets during the study time period. Furthermore, none of the privately held companies at the time of deregulation in 1980 existed in the industry in 1993. Thus, these publicly traded companies constitute the current paper's sample.

Measurement and Data Sources

Following Seth and Easterwood (1993), source documents to identify acquisitions in the time period of our study (1980-1993) were (1) The Wall Street Journal Index, (2) Mergers and Acquisitions, list of completed transactions and, (3) Mergerstate Review. To identify firms that went bankrupt during the study time period, the West Bankruptcy Report was used. For firms that made no acquisitions, annual reports were utilized to determine if a firm entered any new SIC's by comparing a firm's SIC's for each year of the study. Following Chatterjee and Singh (1999) and Yip (1982), if firms did not engage in acquisitions during the year, the firm was classified as engaging in internal development if there was no change in the firm's SIC's from the previous year. For firms which changed SIC's from the previous year without acquisitions, their classification was identified as direct investment. Researchers have used material from annual reports to identify changes in corporate strategies and to assess casual reasoning within firms (Bowman, 1978; Bettman and Weitz, 1983). As pointed out by Miller and Friesen (1980: 272), "The only way to perform longitudinal research on many organizations is through detailed, published reports containing continuous history." Snow and Hambrick (1980) believe that strategy may be assessed by three different methods: self-typing, objective indicators, or external experts.

Industry experts were interviewed to assess developments within this industry during the time window of the study. For longitudinal research, in depth interviews with experts are critical to understand not only what happened, but also why and how (Pettigrew, 1990). Snow and Hamhrick (1980) believe that industry experts are well equipped to evaluate change in a firm's strategy. Snow and Hambrick (1980) argue that experts, "Have a comparative view that allows them to differentiate between strategic change and adjustment for a given organization" (p.535). Four of the industry experts agreed to develop patterns for the 59 firms based according to their acquisition, internal development, and direct investment decisions during the study period. Zahra and Pearee (1990) believe that industry experts are an important source of information about a firm's strategy. Industry experts "develop a thorough familiarity with organizational moves over a period of time and, in position to assist in classifying firms into strategic types" (Zahra and Pearce, 1990; 764). The appendix contains a listing of the industry experts consulted.

Method of Analysis

This study follows Miller and Friesen's (1984) study by developing patterns for each firm. Each firms' pattern consisted of the acquisition, direct investment, or internal development decisions that firms make during the duration of the study.

A Delphi study was conducted with the industry experts. The Delphi technique is useful as a means of qualitative data gathering (Delbecq, Van de Ven and Gustafson, 1975). These types of studies are particularly useful because they are a means for aggregating the judgments of a number of experts who cannot come together physically (Delbecq, Van de Ven and Gustafson, 1975). All of the experts had access to the sources identified in the measurement and data sources section. Participants were initially asked to develop patterns for each of the firms in the industry. Next, the aggregated information was sent back to the participants who were encouraged to revise their decisions or to object to the decisions of others. After several rounds of challenges and responses, a consensus was achieved.

Control variables. Initial firm size needs to be controlled for. Following Bettis (1981) and Chatterjee and Wernerfelt (1991), size is controlled for by the following measure:

Size = 1/LOG (total assets)

Other control variables, such as Tobin's q for initial firm profitability, are not utilized because this is a regulated industry in which the regulatory agency controls entry, exit, market share, price, and firm profitability. (Mahon and Murray, 1981; Smith and Grimm, 1987; Hambrick and Finkelstein, 1987; Vietor, 1989; Reger, Duhaime, and Stimpert, 1992).

The groupings of the industry experts resulted in five distinct patterns. Thirty-one firms made no acquisitions and grew instead by internal development. Only five firms that grew by internal development survived in the deregulated environment. Five firms chose not to engage in acquisitions but grew into other markets via direct investment. None of these firms survived in the deregulated environment.

The industry experts identified three distinct acquisition patterns. The first acquisition pattern consisted of firms that engaged in single business acquisitions: these firms grew by acquiring other LTL trucking firms. Of the 12 firms that engaged in this acquisition process, only 3 survived in the deregulated period. A second group of firms (5) engaged in single business acquisitions followed by a period of unrelated acquisitions. None of the firms that followed this pattern survived in the deregulated environment.

Five firms engaged in more complex sequencing. Initially, these firms acquired other LTL trucking firms; their next sequence of acquisitions consisted of related acquisitions; this period of acquisitions was followed by a period of internal development; finally, these firms engaged in unrelated acquisitions. All five of these firms survived in the deregulated environment. All five of these firms were major players in the industry at the end of the period.

A firm's initial size in 1980 may have had an impact upon its failure or survival during the deregulated period. However, Rakowski (1994) found that initial size in the LTL trucking industry was not a significant differentiating factor between successful and not so successful firms after deregulation. Further, Rakowski (1994) notes that "the fallen carriers of the pre-deregulation era have been replaced by a new breed of small, aggressive firms who started out in specialized regional markets." The result of this study (z statistic = .35) with respect to firm size is consistent with the Rakowski study that initial firm size is not a statistically significant factor between firms that survived and those that failed. Interviews with the industry experts identified how and why the five firms were able to achieve significant firm growth while most of the other firms in the industry failed.

The nature of the trucking industry changed radically as a result of the Motor Carrier Act of 1980 which deregulated interstate transportation. During the regulated period, carriers were permitted to operate only within specified geographic boundaries. After deregulation, constraints on operating authority were eliminated and carriers began to acquire other LTL trucking firms to increase scale of operations and establish a national operating network. The result of these same business acquisitions allowed carriers to establish national hub-and-spoke operating networks.

As this national network evolved, carriers realized that they could obtain economies of scope by utilizing the hub-and-spoke operating not only for the transportation of LTL trucking shipments, but also for the transportation of air freight, ocean, and rail shipments. Carriers began to emerge from trucking carriers into transportation firms by engaging in these related types of diversification decisions.

After these related diversification decisions were completed, firms began to change internally. Structurally, the carriers created separate business units for these related transportation services. New resources created as a result of the acquisitions permitted opportunities to increase scope of resource utilization. Planes began to carry LTL shipments where excess capacity existed; the same was true for rail, truck, and ocean resources. However, developing a totally integrated transportation network took a considerable amount of time. After this integration process was completed, these transportation carriers engaged in unrelated diversification in technology based ventures to provide their customer base value added services. The model below illustrates the evolution of the trucking industry over time.

CONCLUSION

This study has demonstrated that a specific sequencing of acquisition and internal development decisions is necessary to achieve transformations to provide for firm growth in a deregulated industry. These transformations allowed firms in the trucking industry to develop new resource positions for resource deepening and path breaking change. As Penrose 1959: 25) notes, "Exactly the same resource when used for different purposes or in different ways and in combination with different types or amounts of other resources provides a different service or set of services." This response-dependency agreement is very relevant to the U.S. LTL trucking industry. Firms initially expanded their scale of LTL trucking operations as a result of deregulation. After the operational infrastructure (e.g. national hub and spoke operating network) was in place, firms began to acquire other forms of transportation services through acquisition, such as air freight and small package, to increase scope of operations and emerge from trucking companies into total transportation carriers. This transition from trucking companies to total transportation carriers led to a period of internal development as firms fully developed their transportation infrastructures. Finally, firms made acquisitions to meet the technology-based needs of their customer base. The results of this study extend the findings of Karim and Mitchell (2000), in that acquisitions could be utilized for both resource deepening and path breaking change. This advantage is especially relevant when the resource configurations are combined into tightly woven, synergistic activities (Eisenhardt and Martin, 2000; Collis and Montgomery, 1995) such as the hub and spoke operating network.

APPENDIX Industry Experts Michael Jackson President, American Trucking Association

(ATA) John Terry LTL Trucking Acquisition Consultant Clyde Woodle Executive Director, ATA Trucking Research

Institute Jim Harkins President, Regular Common Carrier

Conference Board Bob Delaney Board of Directors, TNT Janice Dulzynski Former Head of ATA Research Division and

Current Head of Transportation Library

Northwestern University Bob Voltman Executive Director, National Industrial

Transportation League Glen Sella President, American Institute for Shippers

Association John Throckmorton Vice President, Mercer Consulting John Larkin Senior Analyst, Alex Brown & Company Joe Bryan Principal, Reebie & Associates RESULTS TABLE 1 PATTERNS DERIVED BY THE INDUSTRY EXPERTS Disposition International Direct Acquisition of Firms Development Invest- Patterns

ment

Single Unrelated Multi-

Business Stage Failures 26 6 9 5 0 Survivors 5 0 3 0 5 Total 31 6 12 5 5

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