“Dominance by birthright”? Reconfiguration of firm boundaries to acquire new resources and capabilities
| DOI | https://doi.org/10.1108/IMDS-04-2019-0258 |
| Published date | 21 October 2019 |
| Pages | 1888-1907 |
| Date | 21 October 2019 |
| Author | Jin Hooi Chan,David Reiner |
| Subject Matter | Information & knowledge management |
“Dominance by birthright”?
Reconfiguration of firm
boundaries to acquire new
resources and capabilities
Jin Hooi Chan
Faculty of Business, University of Greenwich, London, UK and
Energy Policy Research Group, Judge Business School,
University of Cambridge, Cambridge, UK, and
David Reiner
Judge Business School, University of Cambridge, Cambridge, UK
Abstract
Purpose –The purpose of this paper is to examine pre-entry resources and capabilities (R&Cs) of de alio and
de novo entrants in an emerging industry. Then, the authors investigate how entrants modify their firm
boundaries, after entering a new industry, to acquire the R&Cs deemed critical to be competitive and survive
in the industry.
Design/methodology/approach –The analysis uses the global biofuel industry as a case study. The
authors use multiple sets of data, including primary data collected from semi-structured interviews with
industry stakeholders and experts across major biofuel-producing countries as well as quantitative data from
industry reports.
Findings –Firms typically deploy two successive strategies in order to survive and grow. First, they extend
vertical boundaries to capitalize on their own pre-entry R&Cs. Then they move quickly to acquire new R&Cs,
which are classified as critical in the value chain of the industry. A new taxonomy of pre-entry R&Cs is
proposed to distinguish critical and non-critical forms of R&Cs, and to reflect the ease of acquisition of any
requisite R&Cs, which are context specific. These strategic moves lead to the bi-directional vertical
integration observed in the biofuel industry.
Research limitations/implications –Managers need to be able to assess the opportunities for entry and
subsequent strategies to be competitive by assessing their R&Cs in terms of criticality and ease of acquisition
in their entry decision making.
Originality/value –A new taxonomy of R&Cs of the firm is proposed which has theoretical significance
and practical implications for new entrants.
Keywords Biofuels, Resource-based view, Firm entry and exit, Industry evolution, Pre-entry experience,
Vertical firm structure
Paper type Research paper
1. Introduction
Innovative “green”technologies might remain as niches facing otherwise insurmountable
socio-technical regimes. Entrepreneurial “green”entrants need to compete with the
incumbents in order to survive and grow. The literature on industry lifecycles provides a
good understanding of new entrant behavior, survival and shakeout. Each entrant brings
along and leverages a distinct set of pre-entry resources and capabilities (R&Cs) into its new
operations in the target industry (Teece and Pisano, 1994). Some researchers (Klepper and
Simons, 2000; Kim and Park, 2006) argued that the survival of the entrant is their birthright,
i.e. the survival of new entrant is determined by their pre-entry R&Cs. The persistence of
early entrants, however, remains an understudied field (Gomez et al., 2016). Historical study
of brewing industry in the USA (Walter et al., 2014) also suggested that de alio firms with
stronger pre-entry R&Cs particularly dynamics capabilities survived the increasing
competitive pressure.
Industrial Management & Data
Systems
Vol. 119 No. 9, 2019
pp. 1888-1907
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-04-2019-0258
Received 29 April 2019
Revised 24 July 2019
Accepted 22 August 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1888
IMDS
119,9
The focus on pre-entry R&Cs in firm survival raises two key questions: which pre-entry
R&Cs mattermost in firm survival in thenew industry? And What are thepossible strategies
to stay competitive in regard to their pre-entry R&Cs? In order to answer the first question,
we need to examine the taxonomy of R&Cs. The ownership of R&Cs determines firm
competitiveness and thereby firm survival (Penrose, 1959). Arguably, this view of firm survival
is equally applicable to any new entrant who is exploiting its R&Cs in the new industry
(Klepper, 2002a). Helfat and Lieberman (2002) distinguished between two categories of
entrants’R&Cs –“core”and“complementary”–whichare context-free. We arguethat further
classification is required for a more useful taxonomy of entrant R&Cs. There is a potentially
long list of core R&Cs ranging from the technology required for production to skills in
marketingof the products. Thedecision to enter intoa new industryobviously cannotbe based
on complete accumulation ofevery one of the core R&Cs. Managers need to beable to assess
the opportunity of entry and subsequent strategy for survivalor growth based on incomplete
information. Our study, based on the case of biofuel sector, proposes that core R&Cs need to
be further classified based on whether the R&Cs are criticality and ease of acquisition, which
are context dependent and would be more meaningful for managers making entry decisions.
As for the second question about competitive strategies for pre-entry R&Cs, studies of firm
evolution (e.g. Nelson and Winter, 1982; Jacobides et al., 2009; Helfat, 2015) suggest that a firm’s
prior experience could lubricate or impose constraints on the evolution of the configuration and
governance of the value chain. The embedded historical context of a firm, described as
fundamental forces –alongside other market and institutional forces –shapes industrial
structure (Geels, 2010). Shifting firm boundaries and the rationale for expanding into other
stages of the value chain, thereby changing the vertical structure, are path dependent (Kim and
Park, 2006). In a study of the US biofuel value chain, Qian et al. (2012) found that a firm has a
higher likelihood of internalizing a stage in the value chain where it has pre-entry experience.
This is equally applicable to de alio firms with integrative capability and de novo firms with
related founder’s experience. Nonetheless, the question remains as to whether a firm should
extend to a stage in the value chain where it does not have any pre-entry experience.
In weighting their chance of survival and growth in the biofuel sector, entrants actively
acquire critical R&Cs, thereby expanding the firm’s boundary along the vertical supply chain by
internalizing other activities irrespective of their pre-entry R&Cs. We find not only evidence of
path dependency, but also evidence of the possibility of breaking away from path dependency.
Our study provides support on the changes of firm boundary particularly in seeking new R&Cs,
which are critical for their survival and growth in this new industry. We find evidence in the
evolution of the biofuel sector of a trend toward bi-directional vertical integration. Downstream
firms integrate backward and upstream firms integrate forward in order to actively pursue
R&Cs, contradicting both the path-dependent view and the view that firms will seek to expand
to occupy the more profitable, higher value, segment(s) of any value chain.
In Section 2, we present a literature review on past studies of the R&Cs of new entrants.
We then offer a brief description of the development of the biofuel sector through 2012 in
Section 3. Section 4 expands on the methodology and data used in our research. In Section 5,
we analyze the major entrants and reclassify their pre-entry R&Cs. We then attempt to
explain the phenomenon of bi-directional vertical integration in Section 6, where firms
extend their control up and down along the value chain. In Section 7, we propose an
extension to the R&C taxonomy for entrants and conclude by describing how firms,
building on the advantages found in their pre-entry R&Cs, seek to control critical R&Cs,
which they were deprived of at birth.
2. Entrants and pre-entry experience
Entrants and their pre-entry experience exert a key influence on industry evolution.
A standard theme in the strategy literature is to compare the competitive advantage of an
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Reconfiguration
of firm
boundaries
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