CHAPTER 2 LITERATURE REVIEW
2.2 WHAT IS THE INDUSRY-BASED VIEW?
2.2.6 Other Industry Dimensions
products or services do not affect the quality of their own products much. Since the buyers do not depend heavily on the industry, their main focus would be on price.
In conclusion, the five forces model predicts the average level of firm performance within an industry and elucidates the root causes of competition and profitability.
2.2.6 Other Industry Dimensions
In line with Porter’s popular five forces model, Dess and Beard (1984) inspected different dimensions of organizational task environments under the assumption that resources available in the task environments have a significant effect on the populations and characteristics of organizations, similar to that of resource-dependence theory and population-ecology theory developed by Aldrich and Pfeffer (1976) and others. Using the inter-item and factor analyses on resource transactions of organization, they found that survival rate of organizations can be contributed to at least three dimensions –
munificence, dynamism, and complexity.
Comparable to Aldrich’s codification of environmental capacity, environmental munificence as a dimension refers to the degree to which the environment allows for the growth and persistence of organizations. In this regard, it can be understood why industry sales growth is a crucial determinant of not only an organizations’ future outlook, but also its profitability as demonstrated by Dess and Beard (1981).
Environmental dynamism as a dimension reflects the unpredictability and uncertainty brought about by environmental change. Generally seen as a sign of
instability, environmental change has the potential of generating unwanted consequences to organizations and affects their performances. Furthermore, environmental change also becomes more difficult for organizations to manage as interconnectedness among
organizations increases, by virtue of contingent factors multiplying (Pfeffer and Salancik 1978).
Environmental complexity involves the diverse range of operations that organizations must deal with in their environment, with organizations facing more heterogeneous environment having more complex operations and structures. Complexity
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may rise as organizations diversify their scope of operations or as organizational density increases (Chandler 1962, Starbuck 1976).
Dess and Beard’s Dimensions of Organizational Task Environments provides a compelling evidence on dimensions that affect organization’s performance and internal structure; however, similar to Porter’s five forces model, the research focuses on factors in organization’s external environments. Since these analyses all assume the average level of organization profitability in the industry predicts the bulk of organizational performances, their findings may be misleading when an organization’s industry is not the primary determinant of its overall performance, especially in the late 90s.
Additionally, these analyses are only appropriate when the industry already preexists.
They offer no value to firms facing new and undiscovered industries. It was thus argued that the attractiveness of an industry could not be viewed independently, but must be combined with analysis of organizations’ resources and capabilities. Although Dess and Beard’s (1984) research incorporates the resource-dependence theory, it was mainly concerned with the input and output exchange between organizations and their task environments.
2.3 WHAT IS THE RESOURCE-BASED VIEW?
Whereas the industry-based view focuses on a firm’s external environments to find opportunities and eliminate threats, the resource-based view focuses on a firm’s internal assets to build strengths and reduce weaknesses. In the second edition of Strategic Management and Competitive Advantage, Barney and Hesterly describe the resource-based view as a “model of firm performance that focuses on the resources and capabilities controlled by a firm as sources of competitive advantage” (74).
Resources used to build strength can be either tangible or intangible. Physical assets such as manufacturing plants or financial assets all count as tangible resources. In contrast, team chemistry among employees and brand recognition by consumers count as intangible assets. Moreover, as a subcategory of resources, capabilities such as innovation or technical skills also enable a firm to use its resources efficiently in carrying out it strategies.
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In A Resource-based View of the Firm, Wernerfelt investigated the relationship between resources and profitability and proposed strategies for managing the firm’s resources in the long run. Expanding on Porter’s five competitive forces (1980),
Wernerfelt (1984) further argued that a firm must establish a “resource position barrier”
in addition to an entry barrier in order to secure its position from diversifying entrants.
With this objective in mind, a firm should be able to identify resources that generate high returns. Moreover, by considering resources that are jointly produced with products, he came up with the idea of “resource-product matrix,” which helps a firm choose its most optimal strategies when growing its pool of valuable resources sequentially. For instance, the improvement in production skills supported by increasing domestic contacts may allow a firm to expand into international markets, leading to the development of resources such as international contacts. Figure 2-3 illustrates this pattern.
Figure 2-3. Resource Development
Source: Wernerfelt (1984, p. 177).
Although Wernerfelt’s simple economic tool can help a firm identify valuable resources that may subsequently become competitive advantages, he did not mention whether these competitive advantages are sustainable. By examining the possibility of
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finding sources of sustained competitive advantages under the conditions of resource homogeneity and immobility, which are the underlying assumptions in Porter’s five force model, Barney (1991) verified the impracticality of such assumptions and concluded that research must focus on resource heterogeneity and immobility. Based on these two new assumptions, he further suggested that in order for firm resources to possess the potential of sustained competitive advantages, they must satisfy the requirements of being valuable, rare, inimitable, and non-substitutable.
According to Barney, resources are attributes that help a firm “exploit
opportunities and neutralize threats in a firm’s environment,” and valuable resources are those that improve the efficiency of a firm’s strategy implementation (1991). While valuable resources and can enhance a firm’s competitive position in the form of
generating more revenue streams or minimizing costs, they are unlikely to be sources of competitive advantages when they are possessed by a large number of firms. On the other hand, if the number of firms possessing a particular resource is less than the number of firms required in an industry with perfect competition dynamics, that particular
resource may be considered a competitive advantage (Hirshleifer, 1980). Nonetheless, even when they are not rare, certain valuable resources and capabilities are still essential for a firm to maintain competitive parity and survive.
Even though valuable and rare resources may be of sources of competitive
advantages, they only become sources of sustained competitive advantages when they are imperfectly imitable. The 3 reasons that Barney (1991) deducted for making resources difficult to imitate are (1) unique historical conditions, (2) causal ambiguity, and (3) social complexity.
Due to the unique path each firm takes, a firm may be able to acquire and exploit resources in a particular space-time along its history that makes it costly for other firms to imitate, consequently imperfectly imitable. Likewise, causal ambiguity has the highest probability of causing imperfect imitability when the firm cannot even understand the link between the resources it controls and the competitive advantages they generate, otherwise competing firms can just acquire people with knowledge of such link to
implement imitation. Finally, socially complex resources such as company culture, brand
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identification, and the personal network of a firm’s manager can all be impossible for competing firms to systematically recreate even when causation is obvious.
While a firm has a great chance of creating sustained competitive advantages due to the aforementioned reasons, Barney (1991) suggests that there also must be no
strategic equivalent substitutes for the firm’s valuable and rare resources. When competing firms can use different resources and capabilities to implement the same strategy, a firm’s sustained competitive advantages will cease to be inimitable and rare.
Eventually, it will lose its edge if competing firms are able to do it a lower cost. Barney’s framework is summarized below in Figure 2-4.
Figure 2-4. The Relationship Between Resource Heterogeneity and Immobility, VRIO, and Sustained Competitive Advantage
Source: Barney (1991, p. 112).
After Barney’ resource-based view made its introduction in 1991, it has since made a vast impact in the field of strategic management. In an attempt to assess the development of the RBV in the 10-year time span, Barney, Wright, and Ketchen (2001) briefly summarized papers analyzing the contribution of the RBV specifically on human resource management, economics, entrepreneurship, marketing, and international
business. In addition, to accommodate for new developments in strategic management, they suggested further research of the RBV in areas such as corporate governance,
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organizational behavior, ethics and corporate social responsibility, and information management. While acknowledging potential methodological issues, they conclude that the resource-based view has indeed improved our knowledge about management.
In Managing Firm Resources in Dynamic Environments to Create Value: Looking inside the Black Box, Sirmon, Hitt, and Ireland (2007) argued that the link between resource acquirement and value creation was not necessarily self-evident; in contrast to what most scholars thought. In fact, they contended that sustaining a competitive
advantage over time is unlikely due to environmental uncertainty, which can be the result of environmental shock or the instability of market demand. Therefore, they attempted to develop a list of processes, as displayed in Table 2-1, to help firms figure out “how” to create value from resources under environmental dynamism.
Table 2-1. Resource Management and Distinctions
Source: Sirmon, Hitt, and Ireland (2007, p. 277)
Depending on the uncertainty in the environment, a firm may choose to engage in a particular process to create competitive advantage or parity. Take the pioneering
process for example, a firm may bundle newly acquired resources with its resource portfolio to create new capabilities in the hopes of exploiting opportunities in a dynamic
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environment. Eventually, a firm should be able to leverage and physically deploy its capabilities and resources to optimize customer value creation. By also considering the effects of external environment contingencies, not only did their model serve as an extension to the resource-based view, but it also countered the criticism that the RBV has only paid attention to internal firm attributes.
2.4 WHAT IS THE INSTITUTION-BASED VIEW?
While the industry-based view and resource-based view of strategy have worked well for Western firms in the past, they have since become insufficient as more firms began to operate in emerging and transition economies. The new obstacles encountered by Western firms in these circumstances cannot be solved by the traditional strategies anymore. In an attempt to explain the unknown, many scholars, and notably Professor Mike Peng, tried to look at the problems through a new perspective, the institution-based view. With the aid of the institution-based view, scholars have begun to figure out a new set of strategies to implement alongside the industry-based and resource-based strategies.
Peng frequently used economist Douglas North’s definition of institution as “the humanly devised constraints that shape human interaction” (p. 3). Institutions play a vital role in our everyday life because they give us a sense of what is acceptable and what is not, thus giving our society a structure. A variety of institutions together make up the institutional framework of a society. From a firm’s perspective, institutional framework set the boundary on its strategic decisions. A rational firm wishing to minimize its transaction costs would like to reduce uncertainty in the environments as much as
possible; and since the institutional framework provides exactly such functions, a rational firm would choose to operate within a given institutional framework. For instance, transaction costs may arise due to parties’ misunderstanding of the situation or simply due to their self-interests. By defining the rules of the game, institutional framework allows a firm to avoid the element of surprise and operate smoothly in an unknown environment. On the other hand, this also results in a firm’s strategies being bounded in a given institutional framework.
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By looking at the homogeneity of organizational forms and practices in their paper, The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality and Organizational Fields, DiMaggio and Powell (1983) explained the mechanisms through which 3 types of institutional isomorphic forces: coercive, mimetic, and normative reduce uncertainty between individuals and organizations under particular circumstances. They described isomorphism as “a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions.”
To begin, coercive isomorphism is the byproduct of formal constraints and informal constraints. Formal constraints may be laws and regulations stemming from political influence or the legal environments. In contrast, informal constraints may be cultural expectations, norms, or ethics. Since organizations are required to abide by these
“rules institutionalized and legitimized within the state,” they eventually develop structures and behaviors similar to one another in order to avoid unnecessary conflicts that result in expense (DiMaggio & Powell 1983, p. 150).
In comparison, mimetic process occurs when an organization faces goal
ambiguity or technical uncertainty. The fact that both of these events have the potential to raise expense significantly and that imitation may be the most straightforward yet
inexpensive solution are the reasons that an organization may choose to copy from existing models. Moreover, organizations are inclined to model after other successful organizations in order to establish legitimacy and parity, especially as their
audience/customer base broaden.
Finally, normative pressure stems from the increasing professionalization of workers. Due to the legitimation of professionalism by universities and training
institutions alike, managers and their staffs are increasingly being imbued with the same sets of organizational ethics norms. Along with the mechanism of filtering, personnel within organizations are progressively becoming indistinguishable. Because
organizations are ultimately made up of individuals, they are also influenced by this isomorphic change.
Together, the coercive, mimetic, and normative forces of institutions set the boundaries on an organization’s strategies and lead organizations to develop into similar structures. The different dimensions of institutions not only serve to reduce uncertainty
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for individuals and organizations as they interact with one another, but also guide them with their decision-making.
Although scholars have studied the influence of “environment” extensively since the 1970s, Peng argues that the majority of the research has been geared toward the direction of “task environment,” which focuses on economic variables such as “market demand and technological change” (Lawrence & Lorsch 1969; Dess & Beard 1984).
Unlike DiMaggio and Powell’s paper, institutions have been treated as background, causing scholars to neglect the importance of interaction between institutions, organizations, and strategic choices.
One of the main reasons for such negligence can be contributed to the invisibility of market-supporting institutions in developed economies, where markets usually work smoothly (McMillan 2007). However, the significant difference in institutional
frameworks between developed economies and emerging economies have forced scholars to look beyond industry-specific and firm-specific factors, but also developed an
institutional perspective. By treating institution as an independent variable, an
institutional perspective of business strategy “focuses on the dynamic interaction between institutions and organizations, and considers strategic choices as the outcome of such interaction,” as shown in Figure 2-5 (Peng 2002).
Figure 2-5. Interaction Between Institutions, Organizations, and Strategic Choices
Source: Peng (2002, p. 253).
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Even though the significance of the institutional framework is more apparent in emerging and developing economies, it also has merits in developed economies.
Furthermore, in The Institution-Based View as a Third Leg for a Strategy Tripod, Peng, Sun, Pinkham, and Chen propose two propositions:
“Proposition 1: Managers and firms rationally pursue their interests and make strategic choices within the formal and informal constraints in a given institutional framework.
Proposition 2: While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty, providing guidance, and conferring legitimacy and rewards to managers and firms.”(2009)
Proposition 1 suggests that the rationality behind managers and firms’ strategic choices is a bounded one. For example, in 1990s financial institutional framework, George Soros was allowed to profit $1 billion through currency speculation because the regulations did not forbid him from doing so. Even though Soros “broke the bank of England” and was later on accused by the Prime Minister of Malaysia of causing the 1997 Asian financial crisis through short selling, it can be understood through proposition 1 that the rationality to maximize his firm’s profitability was made within the boundaries of laws and ethics, albeit controversial.
Extending on the research done by Douglas North and W.R. Scott, Proposition 2 suggests that not only do formal and informal institutions need to be examined
collectively, but informal institutions needs to be given more weight in cases where formal institutions are not fully developed. For instance, because De Beers is the largest producer and supplier in the diamond industry, its informal rule in which only a selected list of companies can become sightholders in its central exchange in London holds more weight to diamond companies wishing to purchase raw diamonds. Although the prices these sightholders receive are non-negotiable and De Beers’ practice is bordering monopolistic, De Beers diamonds usually have the best quality and allow the diamond companies have the least amount of uncertainty as well. Thus, in order to survive in the
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diamond industry, the diamond companies cannot really do anything but to follow the rule.
With the institutional-based view in mind, we can now proceed to have a better understanding of influences that affect Taiwan’s for-hire trucking industry. In addition, I will also apply the industry-based view and the resource-based view to investigate topics such as the prevalent business practices among trucking company managers, the unique characteristics of the trucking industry, and both the internal and external problems faced by trucking companies. By examining all three legs of the strategy tripod, we should be able to gain valuable insights regarding the trucking industry’s current and future outlook.
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METHODOLOGY
3.1 CASE STUDY
A specific methodology of qualitative study, case study, is chosen because the issues at hand prompt the author to investigate the underlying forces that affect
organization behavior and performance in Taiwan’s trucking industry primarily hauling steel, something which is inevitably tied to the strategic making process of chief
executive officers. The case study type is an explanatory one, where the author seeks to explain the presumed causal links between factors and performances in the industry that are too obscure for quantitative measures. Since the strategic making process of firm managers is made in the internal and external environments in which trucking companies compete, it is imperative that the author also considers the context within which the phenomenons occurred to present a persuasive explanation. A single holistic case study with embedded units is conducted to enable the author in comparing the different
strategies made by owners within the same environmental context. Considering that data can be analyzed within the subunit separately and across all subunits, the case study should prove to be convincing. In order to ensure the study remains within a reasonable
strategies made by owners within the same environmental context. Considering that data can be analyzed within the subunit separately and across all subunits, the case study should prove to be convincing. In order to ensure the study remains within a reasonable