Olivier Chatain

The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships

Horizontal scope---the set of products and services offered---is an important dimension of firm strategy and a potentially significant source of competitive advantage. On one hand, the ability to build close buyer-supplier relationships over multiple transactions can give an advantage to broad firms that offer buyers “one-stop shopping.” On the other hand, the existence of organizational tradeoffs can give an advantage to firms that specialize in a narrower range of products or services. We develop a biform game that incorporates this tension and show how the use of three generic scope strategies---specialist, generalist, and hybrid---depends on organizational tradeoffs, client-specific scope economies, barriers to entry, heterogeneity in buyer task requirements, and the bargaining power of suppliers relative to buyers. We then use the model to study a variety of issues in supply chain management, including the gains to coordinating suppliers, the optimal level of buyer power, and the desirability of subsidizing suppliers. One of our objectives is to show how biform games, which introduce unstructured negotiations into game theory analysis, can be used to develop applied theory relevant to strategy. Generalizing from our stylized model, we identify a class of biform games involving buyers and suppliers that is useful for strategy analysis. Games in this class have the attractive property of each suppliers share of industry total surplus being the product of its added value and its relative bargaining power.

Where Do Client-Specific Scope Economies Come from? A Revealed Preference Analysis

Cross-selling – selling multiple products or services to a buyer – is a common practice in business-to-business markets. In this paper, I exploit the preferences revealed in the relationships between buyers and suppliers to investigate the origin and magnitude of client-specific economies of scope. I use data from the UK corporate legal market to estimate the relative importance of cost, product line expertise and client-specific scope economies in the creation of economic value.I find evidence of a large opportunity cost of terminating a buyer-supplier relationship. Moreover, scope extensions are associated with less value creation at lower levels of scope. The losses tend to be reduced as scope increases. These findings suggest two sources of increasing returns. The first is the existence of a large cost of creating a new relationship. The second is suppliers ability to reduce the costs associated with delivering a new line of product to an existing buyer, above and beyond the cost of creating the relationship.In addition to these findings, this paper contributes to the literature on value-based models of strategy by showing how their underlying logic can be leveraged for empirical research and applications.

Value-Based Strategy with Frictions

We extend the formal literature on the value-based foundations of strategy, an approach which seeks to integrate industry-level and firm-level analyses of superior performance. The value-based approach starts with the set of players in an industry value chain and their value creation possibilities based on heterogeneous resources and capabilities and it then links these elements to the performance (value capture) of individual firms. While the received theory assumes frictionless interactions and perfect rivalry, there is a long tradition in strategy that explores the effect of imperfect competition on firm performance. To incorporate imperfect competition, we add a simple friction parameter into value-based analysis that moderates the degree of rivalry in the market, as well as adding a parameter for barriers to entry. We then analyze a variety of classic issues in competitive strategy. We show that the effects of rivalry and barriers to entry on industry attractiveness cannot be analyzed independently. Firm heterogeneity emerges naturally in our setting and depends on the degree of frictions. We find that firms with a competitive advantage prefer industries with lower levels of frictions than their disadvantaged rivals. Overall, we show that introducing frictions makes value-based strategy even more effective at providing an integrated approach to industry-level and firm-level analyses.

Resource Reconfiguration in Human-Capital-Intensive Firms

Human-capital-intensive firms face a dilemma in reconfiguring their human asset teams as new opportunities arise. Greater team reconfiguration is helpful to spread knowledge and create social capital within the firm, whereas less team reconfiguration has the advantage of efficiency and performance predictability. We examine client-related determinants affecting such reconfiguration in the context of UK merger and acquisition (M&A) law firms and the M&A legal advisory services they provide to corporate clients. Our results provide empirical support for the proposition that client-related factors influence the reconfiguration of human asset teams. We find as a baseline that human assets are less likely to collaborate with each other on a team if they have recently collaborated (i.e., greater reconfiguration). However, we find that reconfiguration is lower when partners have a relationship with the focal client, but higher when the client is more embedded within the firm. Second, client attributes are important for reconfiguration: human asset teams reconfigure less for high-status clients, but reconfigure more for clients who spread their M&A legal work across many different firms. Finally, we find that resource constraint on partners results in greater reconfiguration, whereas resource constraint on the firm is associated with less reconfiguration. Our findings contribute to the research literatures on strategic human capital, professional service firms, and resource reconfiguration.Extant research has highlighted the importance of resource reconfiguration for firm performance and has identified important drivers of the reconfiguration of macro-level resources, e.g. business units, focusing primarily on supply-side factors. Yet less is known about drivers of the reconfiguration of micro-level resources, e.g. human assets, and about the role which demand-side factors play in resource reconfiguration. We address these gaps and investigate how client-related factors influence the reconfiguration of micro-level resources in human-asset-intensive firms. Using fine-grained data on law firms advising on M&A mandates, we find that law firms are less likely to reconfigure their human assets (lawyers) on mandates for high-status clients, but more likely to reconfigure them when a client has a greater proclivity to switch business between multiple suppliers. Law firms also reconfigure their human assets less for incoming client projects when they have provided prior M&A services to the client, but they are more likely to reconfigure them when the client relationship has a broader scope. Finally, we also show that the size of a firms client portfolio lowers reconfiguration. Our paper extends the literature on resource reconfiguration by explicating antecedents of the reconfiguration of micro-level resources and by highlighting the role demand-side factors play in it. We also contribute to the strategic human capital literature by showing how demand-side factors shape human capital deployment. Finally, we also add to the micro-foundations of resource-based theory by studying important micro-foundational processes underlying a firms capacity to reconfigure its resources.

EFFICIENCY AND INFLUENCE IN THE DEPLOYMENT OF HUMAN ASSETS: EVIDENCE FROM M&A LEGAL ADVISORS

We examine how firms deploy their human assets under efficiency considerations, and how individuals seek to influence these deployment decisions for private gain. Our empirical context is the UK M&...

Deploying Individual-Level Resources Under Constraints: Evidence from the UK M&A Legal Advisory Market

In this paper, we develop and test a framework to better understand how firms strategically deploy their individual-level resources to opportunities. We analyze the allocation of individual-level resources (lawyers) to projects (M&A mandates) in the UK corporate M&A legal market. We find evidence that firms adapt their allocation decisions to deal with the constraints on resource deployment associated with resource scarcity and congestion. Specifically, firms appear to adopt five strategies to manage their constrained resources: Load Equalization, Selective Stretching, Assortative Matching, Relationship Building, and Relational Capital Substitution. We also find suggestive evidence of firm level heterogeneity in the firm’s ability to appropriately deploy resources. Overall, this paper refines the understanding of the resource deployment process and of individuals as rent-generating assets.