Inferior speed capability, yet faster speed: Evidence from entry into liquefied natural gas industry

Lee, Minjae

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https://hdl.handle.net/2142/105904 Copy

Description

Title

Inferior speed capability, yet faster speed: Evidence from entry into liquefied natural gas industry

Author(s)

Lee, Minjae

Issue Date

2019-07-08

Director of Research (if dissertation) or Advisor (if thesis)

Mahoney, Joseph

Doctoral Committee Chair(s)

Mahoney, Joseph

Committee Member(s)

• Lieberman, Marvin
• Somaya, Deepak
• Schijven, Mario

Department of Study

Business Administration

Discipline

Business Administration

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

speed capability, demand shock

Abstract

The strategic management literature emphasizes the firm’s speed in the time-to-build its plant as a source of its competitive advantage. The extant research literature has achieved substantial progress by recognizing the firm’s speed in its time-to-build its plant as a strategic decision involving a cost-benefit tradeoff, and by distinguishing the firm’s faster speed in its time-to-build its plant from its superior speed capability of building its plant faster at the same cost. This distinction leads to the question of how the firm might achieve competitive advantage through its superior speed capability of building its plant faster at the same cost, which shifts the focus away from simply examining how the firm can achieve faster speed in its time-to-build its plant. However, the previous literature has mostly focused on pre-entry speed capability, which is a focal firm’s speed capability for its recent previous plant construction in the related markets prior to its entry into the focal market. I examine instead post-entry speed capability, which is the focal firm’s speed capability for its current plant construction after it enters the focal market. I revisit the same empirical context of extant research, focusing on the post-demand shock market in the Liquefied Natural Gas industry caused by energy market liberalization in 2000. This previous research found that firms with superior pre-entry speed capability are more likely to enter the post-shock market. In my research, I find that firms in the post-shock period have inferior post-entry speed capabilities compared to firms in the pre-shock period. My empirical finding is surprising because firms with superior pre-entry speed capability are more likely to enter the market later. Furthermore, firms in the post-shock period have more opportunities to learn from their own experiences (i.e., experiential learning) or others’ experiences (i.e., vicarious learning). However, my further analysis provides two explanations on why firms in the post-shock period have inferior post-entry speed capabilities relative to firms in the pre-shock period: namely, new entry of lower speed-capable firms in the post-shock period and increasing opportunity costs arising from not applying non-scale-free resources into more new projects in the post-shock period. Empirical results from my further analysis corroborate these explanations. I also find that the industry-wide speed frontier (i.e., the outer boundary of speed) in the post-shock period expands relative to that in the pre-shock period, whereas firms in the post-shock period have inferior post-entry speed capabilities as compared to firms in the pre-shock period. In particular, I find that the industry-wide speed frontier does not follow a U-shaped relationship between time-to-build and cost-build, but fitted value becomes less negative (and even can be positive) when more firms make investments far within the speed frontier. In addition to looking at pre-entry and post-entry speed capabilities, I consider another key issue in the literature: distinguishing the firm’s faster speed in its time-to-build its plant (i.e., the time lag between the firm’s plant construction initiation and its completion) from its superior speed capability of building its plant faster at the same cost. This dissertation contributes to the extant literature both theoretically and empirically by providing boundary conditions, which distinguish the firm’s faster speed in its time-to-build its plant from its superior speed capability of building a plant faster at the same cost. To address the lack of distinction between the firm’s faster speed in its time-to-build its plant and its superior speed capability of building its plant faster at the same cost, I first develop a model and derive a theoretical framework of the firm’s time-to-build, cost-to-build, and marginal cost-to-build its plant when the firm’s speed capability and/or product-market demand change. My theoretical framework shows that a firm with inferior speed capability can have faster speed if product-market demand increases substantially (additionally, it shows that the firm with superior speed capability can have slower speed if product-market demand decreases substantially). Next, I empirically examine firms’ time-to-build their plants and their speed capabilities in the LNG industry by using a demand shock caused by energy market liberalization in 2000. I find that, despite inferior speed capability, firms in the post-shock period have a shorter time-to-build their plants (i.e., faster speed) relative to firms in the pre-shock period. In conclusion, this dissertation makes four major findings, all of which have significant repercussions for the strategic management literature. First, this dissertation finds that a firm’s pre-entry and post-entry speed capabilities can diverge, and particularly that firms with superior pre-entry speed capabilities do not necessarily achieve post-entry speed capabilities. This empirical finding suggests a further avenue for investigation: researchers should examine the antecedents and outcomes of post-entry speed capability to see how they differ from those of pre-entry speed capability. Second, I find that a demand shock in LNG market can lead to a firm’s loss of capability even if the shock is positive in a homogenous product market. This finding suggests that, in examining the development of firm capabilities and the nature of firm competition, rapid change in a homogenous product market should be considered a context as important as a rapidly changing technological environment or heterogeneous demand. Third, I find that industry-wide speed frontier does not follow a U-shaped relationship between time-to-build and cost-build, but heterogeneity in firms’ speed capability can contribute to less negative (and even positive) fitted value of time-to-build and cost-to-build. This empirical finding complements recent research on time compression (dis)economies, which found time compression economies, not diseconomies, and provided two potential explanations to explain time compression economies: (1) heterogeneity in firms’ speed capability or (2) a U-shaped relationship between time-to-build and cost-to-build with the majority of firms not realizing their economies of time compression. My data show a pattern consistent with heterogeneity in firms’ speed capability. This empirical result suggests that time compression diseconomies and their changes can be better understood by focusing on the industry-wide speed frontier (i.e., the outer boundary of speed), while firm-specific speed capability can be better understood by identifying changes in firms’ distances from the speed frontier. Fourth, my dissertation shows that firms with inferior speed capability can have faster speed when product-market demand increases substantially. This finding suggests that practitioners and academic researchers should distinguish the firm’s faster speed in its time-to-build its plant from its superior speed capability of building its plant faster at the same cost. This distinction suggests that researchers should examine the antecedents and outcomes of the firm’s faster speed in its time-to-build its plant from its superior speed capability of building its plant faster at the same cost in tandem. In coming to these conclusions, this dissertation fills research gaps in the extant literature and offers new insights on the relationships among a firm’s post-entry speed capability, speed, and product-market demand. By combining theoretical rigor and practical relevance in this way, I seek to provide a contribution to the strategic management field. I also hope to offer guidance for future research to go beyond the LNG industry to test empirically the warranted generalizability of the findings presented here.

Graduation Semester

2019-08

Type of Resource

text

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Copyright 2019 Minjae Lee

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