The Emergence and Limits of the Firm: An Entrepreneurial Approach

0:00I usually don't like to present as like a third person in one session because it's make everybody sleepy or like a previous presenter they make them sleepy and especially in this time after lunch is really worst time I think and I figure out the realize there's one more this advantage that as what Per did he can make my presentation it's not worth to listen So, but at this point he has one more presentation next time, it's the kind of same topic about me so I'll do that again for you, that mine's better than his so you don't need, you guys don't need to go there. Anyway, my topic is, as I said, is about firm, the theory of firm.

0:52Generally the topics in the theory of firm, they are talking about why firm is in the Market or How About the Boundary of Funds? And most of their conclusion is that there exists the fund because their cost of organizing the transaction is better than they do that thing, that transaction in the market. That means if the producers, they have to search where is the resource and what the price is and they make contract and they keep the contract. All these behavior, these actions need a lot of cost, but they internalize all these things inside one economic organization, then they save a lot of money, so that's the reason they exist in the firm.

1:41And the boundary of firm also explained it by the same vein that if internalizing these transactions inside the firm is the same as other company's cost or it's the same as the transaction cost in the market, then there is no reason to the firm is bigger than that point. Then, as everybody knows, entrepreneurship is really the core and very important point of the whole market process. Then, where is the entrepreneur in determining this emergence and the size of firms?

2:31To explain, to say the conclusion first, the company, the firm is existing in the market because was to protect the entrepreneurial opportunity or competitive advantages. What's the basic role or basic goal of entrepreneurs in the profit organization? Their job is, their object is to create or exclusive profits in the market. And how they do that? They combine various resources, then find new opportunity in the market and make profit. But also their other goal is to not just making profit, they have to sustain this profit a long time.

3:20And these topics are researched, studied in resource-based view. Basically their insistence is that development or implementation of competitive strategy provide firm abnormal market profit. And what is competitive strategy or what is competitive advantage? The competitive strategy is the way to utilize various resources. As Barney said, a firm have competitive advantage when they can implementing a value-creating strategy, not simultaneously being implanted by other competitors.

4:14But they did not clearly mention about where the heterogeneity came from. This competitive strategy is very similar to entrepreneurial opportunity. As you know, the entrepreneurs have very unique ability or unique capability because they have some better ability to foresee the futures and they also have a lot of previous information They learn about certain business and they also have some special cognitive ability to discover the opportunities. So with this special ability, they can find various new characteristics from resources And combining these various resources, then they can make good opportunity to make profit.

5:18As I mentioned earlier, the other goal of entrepreneurs are sustaining their competitive advantage. And how to do that? It also studied in the resource-based view, any strategy can be sustainable when they We only exclusively use this strategy. So the strategy or the resources must be, must not able to immutable or substitutable or is not able to move on. But as you can see from these conditions, these conditions is not quite related It's objective characteristics of resources. It's more close to the objective value, objective characteristics of resources. So to make profit, to have sustainable competitive advantage, any resource or any strategy must have competitiveness and sustainableness at the same time. But If the competitiveness came from subjective value, then where's the sustainability came from?

6:45So based on these two different characteristics of resources, I categorize the resources in four different types. Like if objectively, before that, the subjective heterogeneity can be defined the value of resource in production process and objective characteristics, objective heterogeneity is defined as the easier finding substitute to good and based on these two characteristics the resources can fall into any of these four categories like the 100% homogeneous characteristic or Perfectly Heterogeneous Resources or Invaluable or Invaluable Semi-Heterogeneous Resources.

7:31And what's the relationship between these different characteristics and competitive advantages? I don't talk about the homogeneous resources, the subjectively homogeneous resources because it doesn't provide any competitiveness. So I just talk about the heterogeneous, subjectively heterogeneous resources. The first, the perfectly heterogeneous resources. If any entrepreneur, they conceive new strategy that utilize these perfectly heterogeneous resources, then they have durability of their competitive advantage and their strategy have competitiveness at the same time. However, if the strategy use valuable semi-heterogeneous Valuable semi-heterogeneous resources, that means subjectively heterogeneous, but objectively homogeneous resources, then this strategy only provides competitiveness.

8:32There is no durability because there is many other substituted resources, so competitors, they can duplicate or mimic this competitive strategy. Then what's the relationship with the emergency of firm and these characteristics? First, the perfectly heterogeneous resources, only ownership of that resources makes sustainable competitive advantage. So, by ownership means they can start their companies. However, the valuable semi-heterogeneous resources, the ownership is not enough because there are many other substitutable goods.

9:25So they need other protective methods like a property right or patent for copyrights. How many times I have to... Okay, then I didn't make some examples, but the example slides, I'll give you some examples. First one is when it's tangible assets. The first MP3 players are introduced in the market in 1997 in Korea. Maybe the inventor, they find new characteristics from many small portable device like CD player or mini cassette tape players and other things like MP3 file and the program, they're playing their files in the computer and they think, combine these things together, they can make new portable small size machine.

10:28Machines, that is MP3 players, and these things are very heterogeneous and subjectively, but each of these resources objectively is not heterogeneous, there are many other technology that can embed that software into small chips, and there is many other devices can make it, and everybody can mimic that things, that means even though they start their farms, Without any protective things like property rights or patents, they lose their competitiveness very soon. So actually, this company, they didn't register any patent rights, so after a few years, they are bankrupt.

11:15And the other example is Intangible Asset. Think about the consulting company. I think their critical, very important assets of that consulting company is their idea or their networks. Those things are not tangible. But still, subjectively, those things are very heterogeneous. And at the same time, objectively, it's very heterogeneous because there is no other substitute good in the market. So the person who has that kind of resources, he already owns these resources.

12:04Resources, so he, the consulting, the founder of the consulting company is he is already kind of firm because even though he cannot make like a legal form of the firm, he can be a single firm. And before I explain the boundary of firm or size limit of firm, I will explain first why the company has to be expanded. The sustained competitive advantage cannot be permanent because as everybody knows in this room, market is not steady, it keeps changing, many things change in the market like government policy or consumer taste, or there is a new technology, so the strategy itself, the competitiveness itself disappears very soon at some point, then entrepreneurs have to find a new strategy, they have to conceive a new strategy, how to do that, they have to find new attributes, new characteristics, And they have to protect their competitiveness from other competitors. They have to own these resources and that's the reason the company expands more and more.

13:39But while this company size is bigger, they have to pay more cost to deal with these various resources. The manager costs increase at the same time. And what determines this cost? As some companies have more efficiently deal with these resources, what's the difference between firms? As Coase said, the managerial cost of internalizing the resources into the firm vary with entrepreneurial ability. And as everybody knows in this room, the entrepreneurial ability is also heterogeneous, so everybody has a different ability.

14:28So some entrepreneurs, they have more competence, they have more ability to find subjective values from various resources, and they have more ability to combine these things more efficiently than other entrepreneurs. That means they can utilize these resources more efficiently than other companies. So, the determinant of company boundary is entrepreneurial ability. And the firms grow bigger in proportion to the entrepreneurial ability. So, to the conclusion, the company emerging with the demand for the permanent strategic advantages and entrepreneurial ability is a key factor of advantageous strategy.

15:24Then economic organization is required to maintain the strategic advantages. Managers. Then with regard to the size of company, size of firm, the size of firm is determined by the manager's entrepreneurial ability because the cost efficiency is determined by their ability and entrepreneurial ability is heterogeneous. Thank you.