WEBVTT NOTE The Emergence and Limits of the Firm: An Entrepreneurial Approach 1 00:00:00.000 --> 00:00:30.000 I 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 2 00:00:30.000 --> 00:00:37.320 So, but at this point he has one more presentation next time, it's the kind of same topic about 3 00:00:37.320 --> 00:00:42.880 me so I'll do that again for you, that mine's better than his so you don't need, you guys 4 00:00:42.880 --> 00:00:52.880 don't need to go there. Anyway, my topic is, as I said, is about firm, the theory of firm. 5 00:00:52.880 --> 00:00:58.640 Generally the topics in the theory of firm, they are talking about why firm is in the 6 00:00:58.640 --> 00:01:06.680 Market or How About the Boundary of Funds? And most of their conclusion is that there 7 00:01:06.680 --> 00:01:14.880 exists the fund because their cost of organizing the transaction is better than they do that 8 00:01:14.880 --> 00:01:22.560 thing, that transaction in the market. That means if the producers, they have to search 9 00:01:22.560 --> 00:01:27.520 where is the resource and what the price is and they make contract and they keep the contract. 10 00:01:27.520 --> 00:01:41.520 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. 11 00:01:41.520 --> 00:02:10.820 And 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. 12 00:02:11.520 --> 00:02:23.520 Then, as everybody knows, entrepreneurship is really the core and very important point of the whole market process. 13 00:02:23.520 --> 00:02:31.520 Then, where is the entrepreneur in determining this emergence and the size of firms? 14 00:02:31.520 --> 00:02:39.520 To explain, to say the conclusion first, the company, the firm is existing in the market because 15 00:02:39.520 --> 00:02:46.520 was to protect the entrepreneurial opportunity or competitive advantages. 16 00:02:46.520 --> 00:02:53.040 What's the basic role or basic goal of entrepreneurs in the profit organization? 17 00:02:53.040 --> 00:03:00.040 Their job is, their object is to create or exclusive profits in the market. 18 00:03:00.040 --> 00:03:01.640 And how they do that? 19 00:03:01.640 --> 00:03:10.400 They combine various resources, then find new opportunity in the market and make profit. 20 00:03:10.400 --> 00:03:18.080 But also their other goal is to not just making profit, they have to sustain this profit a 21 00:03:18.080 --> 00:03:20.760 long time. 22 00:03:20.760 --> 00:03:27.600 And these topics are researched, studied in resource-based view. 23 00:03:27.600 --> 00:03:37.200 Basically their insistence is that development or implementation of competitive strategy 24 00:03:37.200 --> 00:03:44.920 provide firm abnormal market profit. 25 00:03:44.920 --> 00:03:48.520 And what is competitive strategy or what is competitive advantage? 26 00:03:48.520 --> 00:03:55.980 The competitive strategy is the way to utilize various resources. 27 00:03:55.980 --> 00:04:06.020 As Barney said, a firm have competitive advantage when they can implementing a value-creating 28 00:04:06.020 --> 00:04:14.340 strategy, not simultaneously being implanted by other competitors. 29 00:04:14.340 --> 00:04:24.100 But they did not clearly mention about where the heterogeneity came from. 30 00:04:24.100 --> 00:04:31.660 This competitive strategy is very similar to entrepreneurial opportunity. As you know, 31 00:04:31.660 --> 00:04:40.420 the entrepreneurs have very unique ability or unique capability because they have some 32 00:04:40.420 --> 00:04:47.860 better ability to foresee the futures and they also have a lot of previous information 33 00:04:47.860 --> 00:04:58.860 They learn about certain business and they also have some special cognitive ability to discover the opportunities. 34 00:04:58.860 --> 00:05:07.860 So with this special ability, they can find various new characteristics from resources 35 00:05:07.860 --> 00:05:18.460 And combining these various resources, then they can make good opportunity to make profit. 36 00:05:18.460 --> 00:05:25.660 As I mentioned earlier, the other goal of entrepreneurs are sustaining their competitive 37 00:05:25.660 --> 00:05:26.660 advantage. 38 00:05:26.660 --> 00:05:29.460 And how to do that? 39 00:05:29.460 --> 00:05:36.020 It also studied in the resource-based view, any strategy can be sustainable when they 40 00:05:36.020 --> 00:05:39.020 We only exclusively use this strategy. 41 00:05:42.020 --> 00:05:46.020 So the strategy or the resources must be, 42 00:05:46.020 --> 00:05:53.020 must not able to immutable or substitutable 43 00:05:53.020 --> 00:05:57.020 or is not able to move on. 44 00:05:57.020 --> 00:06:02.020 But as you can see from these conditions, 45 00:06:02.020 --> 00:06:04.020 these conditions is not quite related 46 00:06:04.020 --> 00:06:12.020 It's objective characteristics of resources. It's more close to the objective value, objective 47 00:06:12.020 --> 00:06:23.780 characteristics of resources. So to make profit, to have sustainable competitive advantage, 48 00:06:23.780 --> 00:06:33.300 any resource or any strategy must have competitiveness and sustainableness at the same time. But 49 00:06:33.300 --> 00:06:36.960 If the competitiveness came from subjective value, 50 00:06:36.960 --> 00:06:41.960 then where's the sustainability came from? 51 00:06:45.500 --> 00:06:48.420 So based on these two different characteristics 52 00:06:48.420 --> 00:06:51.180 of resources, I categorize the resources 53 00:06:51.180 --> 00:06:52.660 in four different types. 54 00:06:54.100 --> 00:06:57.560 Like if objectively, before that, 55 00:06:57.560 --> 00:06:59.620 the subjective heterogeneity can be defined 56 00:06:59.620 --> 00:07:08.720 the value of resource in production process and objective characteristics, objective heterogeneity 57 00:07:08.720 --> 00:07:14.540 is defined as the easier finding substitute to good and based on these two characteristics 58 00:07:14.540 --> 00:07:22.820 the resources can fall into any of these four categories like the 100% homogeneous characteristic 59 00:07:22.820 --> 00:07:31.420 or Perfectly Heterogeneous Resources or Invaluable or Invaluable Semi-Heterogeneous Resources. 60 00:07:31.420 --> 00:07:38.620 And what's the relationship between these different characteristics and competitive advantages? 61 00:07:38.620 --> 00:07:43.340 I don't talk about the homogeneous resources, the subjectively homogeneous resources because 62 00:07:43.340 --> 00:07:47.460 it doesn't provide any competitiveness. 63 00:07:47.460 --> 00:07:51.380 So I just talk about the heterogeneous, subjectively heterogeneous resources. 64 00:07:51.380 --> 00:07:54.940 The first, the perfectly heterogeneous resources. 65 00:07:54.940 --> 00:07:59.940 If any entrepreneur, they conceive new strategy 66 00:07:59.940 --> 00:08:03.140 that utilize these perfectly heterogeneous resources, 67 00:08:03.140 --> 00:08:07.860 then they have durability of their competitive advantage 68 00:08:07.860 --> 00:08:12.860 and their strategy have competitiveness at the same time. 69 00:08:14.460 --> 00:08:19.460 However, if the strategy use valuable semi-heterogeneous 70 00:08:19.460 --> 00:08:32.460 Valuable semi-heterogeneous resources, that means subjectively heterogeneous, but objectively homogeneous resources, then this strategy only provides competitiveness. 71 00:08:32.460 --> 00:08:45.460 There is no durability because there is many other substituted resources, so competitors, they can duplicate or mimic this competitive strategy. 72 00:08:45.460 --> 00:08:53.460 Then what's the relationship with the emergency of firm and these characteristics? 73 00:08:53.460 --> 00:09:07.460 First, the perfectly heterogeneous resources, only ownership of that resources makes sustainable competitive advantage. 74 00:09:07.460 --> 00:09:14.460 So, by ownership means they can start their companies. 75 00:09:14.460 --> 00:09:25.460 However, the valuable semi-heterogeneous resources, the ownership is not enough because there are many other substitutable goods. 76 00:09:25.460 --> 00:09:34.460 So they need other protective methods like a property right or patent for copyrights. 77 00:09:34.460 --> 00:09:40.460 How many times I have to... 78 00:09:40.460 --> 00:09:58.460 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. 79 00:09:58.460 --> 00:10:27.460 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. 80 00:10:28.460 --> 00:10:58.460 Machines, 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, 81 00:10:58.460 --> 00:11:06.460 Without any protective things like property rights or patents, they lose their competitiveness very soon. 82 00:11:06.460 --> 00:11:15.460 So actually, this company, they didn't register any patent rights, so after a few years, they are bankrupt. 83 00:11:15.460 --> 00:11:20.460 And the other example is Intangible Asset. 84 00:11:20.460 --> 00:11:23.460 Think about the consulting company. 85 00:11:23.460 --> 00:11:35.460 I think their critical, very important assets of that consulting company is their idea or their networks. 86 00:11:35.460 --> 00:11:45.460 Those things are not tangible. But still, subjectively, those things are very heterogeneous. 87 00:11:45.460 --> 00:11:54.460 And at the same time, objectively, it's very heterogeneous because there is no other substitute good in the market. 88 00:11:54.460 --> 00:12:04.460 So the person who has that kind of resources, he already owns these resources. 89 00:12:04.460 --> 00:12:13.700 Resources, so he, the consulting, the founder of the consulting company is he is already 90 00:12:13.700 --> 00:12:22.340 kind of firm because even though he cannot make like a legal form of the firm, he can 91 00:12:22.340 --> 00:12:28.180 be a single firm. 92 00:12:28.180 --> 00:12:37.100 And before I explain the boundary of firm or size limit of firm, I will explain first 93 00:12:37.100 --> 00:12:42.620 why the company has to be expanded. 94 00:12:42.620 --> 00:12:49.220 The sustained competitive advantage cannot be permanent because as everybody knows in 95 00:12:49.220 --> 00:12:55.140 this room, market is not steady, it keeps changing, many things change in the market 96 00:12:55.140 --> 00:13:24.140 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, 97 00:13:25.140 --> 00:13:39.140 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. 98 00:13:39.140 --> 00:13:52.140 But 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. 99 00:13:52.140 --> 00:14:07.140 And what determines this cost? As some companies have more efficiently deal with these resources, what's the difference between firms? 100 00:14:07.140 --> 00:14:17.140 As Coase said, the managerial cost of internalizing the resources into the firm vary with entrepreneurial ability. 101 00:14:17.140 --> 00:14:28.140 And as everybody knows in this room, the entrepreneurial ability is also heterogeneous, so everybody has a different ability. 102 00:14:28.140 --> 00:14:40.140 So some entrepreneurs, they have more competence, they have more ability to find subjective values from various resources, 103 00:14:40.140 --> 00:14:46.140 and they have more ability to combine these things more efficiently than other entrepreneurs. 104 00:14:46.140 --> 00:14:54.140 That means they can utilize these resources more efficiently than other companies. 105 00:14:55.140 --> 00:15:03.140 So, the determinant of company boundary is entrepreneurial ability. 106 00:15:03.140 --> 00:15:09.140 And the firms grow bigger in proportion to the entrepreneurial ability. 107 00:15:09.140 --> 00:15:24.140 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. 108 00:15:24.140 --> 00:15:29.140 Then economic organization is required to maintain the strategic advantages. 109 00:15:29.140 --> 00:15:48.140 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.