Increasing Demand and a Tradeoff Between Speed-Cost Efficiencies and Total Profits

Abstract

Recently, the resource-based view has achieved substantial progress in the strategic management literature by recognizing non-scale free property of resources. Building on this non-scale free resource logic, this paper examines how demand conditions within a market impact firms’ strategic decisions to trade off their speed-cost efficiencies for greater total profits. Demand conditions force this trade off by influencing the opportunity costs of deploying non-scale free resources. I use an analytical model to provide two propositions : (1) when product-market demand increases, the total profit from allocating a firm’s non-scale free resources to two projects becomes greater relative to that from fully using its non-scale free resources for one project, and (2) firm speed-cost efficiency is always lower when a firm chooses two inefficient projects over one efficient project. I provide three hypotheses based on these propositions in the context of liquefied natural gas industry in which demand increased rapidly resulting from energy market liberalization in 2000: (1) firms in the post-shock period (i.e., when product demand rapidly increased after 2000) have inferior speed-cost efficiencies as compared to firms in the pre-shock period (i.e., when product demand was steady and low before 2000); (2) post- shock firms lose more speed-cost efficiency as they conduct more projects; and (3) a firm’s decrease in speed-cost efficiency is associated with a firm’s performance increase in the post-shock period, whereas a firm’s increase in speed-cost efficiency is associated with a firm’s performance increase in the pre-shock period. Empirical tests corroborate all hypotheses.