THEORETICAL AND CONCEPTUAL FRAMEWORK OF THE STUDY
3.3 THEORETICAL PERSPECTIVES OF THE STUDY
A theory is the scientific approach to explaining empirical observations about a natural setting or scientific occurrence, to provide better understanding in predicting future behaviour of the
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phenomenon under consideration (Anvuur, 2008; Oyewobi, 2014). The subject of firm growth is a key research area in entrepreneurial studies that has garnered substantial interest from researchers. However, theoretical development in this area has been limited and slow (Davidsson and Wiklund, 2000; Delmar et al.., 2003; Shepherd and Wiklund, 2009). According to Achtenhagen et al. (2010), half of the studies (28 of 56) reviewed on organisational growth have no clear theoretical underpinning, most of them only making reference to prior studies in the same field or to the current phenomenon being investigated. Achtenhagen et al. (2010) concluded that one reason for the lack of a more integrated body of theory on firm growth might be not only the fragmented research findings, but also a lack of theorizing in the first place. Ahlemann et al. (2013) also noted that the project management literature is generally lacking in theoretical development, and suggested that theoretical foundations be drawn from other related disciplines and applied to project management.
McKelvie et al. (2010) argued that certain theories have a better fit with certain modes of growth because they are closely associated with the causal mechanisms underlying that particular mode of growth. A causal mechanism here refers to the aspect of a theory that explains why a specific outcome occurs (Anderson et al., 2006; Davis and Marquis, 2005;
Hedström and Swedberg, 1998). Hence, there should be a logical association between the mode of growth studies and theory used. McKelvie and Wiklund (2010) also suggested a clearer connection between theory employed and the type of growth measure used, because certain theories have a natural fit with specific indicators of growth (that is, sales, employee size, profit).
Davidsson and Wiklund (2000), viewed business growth as a collective term for several rather different empirical phenomena, with different underlying causal mechanisms, requiring separate theoretical explanations. Government intervention through Targeted Procurement strategies and supply chain relationship quality represents the causal mechanisms in this study, which form the explanatory variables predicting firm growth performance and development as outcome variables. Therefore, the study adopts multidisciplinary theoretical perspectives that are largely rooted in industrial organisation economics, which adequately captures the phenomenon being investigated.
3.3.1 Theory of the growth of the firm
Penrose’s (1959) work – The Theory of the Growth of the Firm, developed over 50 years ago, still represents the most comprehensive, adequate, and popular theory on firm growth; and
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many recently published studies in leading journals specifically examining growth have used Penrose’s theory (for example, Garnsey et al., 2006; Macpherson and Holt, 2007; Mishina et al., 2004). In addition to Penrose, Downie (1958) and Marris (1963, 1964) also made major contributions to the theory of the growth of the firm.
Penrose viewed the firm as a pool of productive resources (human and physical) organized within an administrative framework, and sought to identify the causes of growth of the firm, and the factors that lead to limiting its rate of growth. Although she did identify external inducements (for example, changes in demand, technological innovations and other changes in market conditions) and obstacles (competition from rivals, patent or other barriers to entry) for expansion of the firm, the ideas that are quite dominant in her growth theory are internal resources and inducements, such as unused capacities, including managerial services. Over the years, Penrose’s theory has received criticism for neglecting financial and other external constraints on the growth of the firm, which is a departure from the current study; because in practice, firms encounter growth challenges due to lack of finance and other market restraints.
Moreover, corporate realities have shifted since the 1950s. Hence, important extensions and modifications of Penrose’s theory have been suggested (Lockett et al., 2010). Firm growth theorists have also recognised increased formal alliances between firms, and inter-firm networking; an indication of the blurring of firm boundaries, which has prompted the call for a revision of firm growth theories also to incorporate joint ventures and other hybrid modes of growth (McKelvie et al., 2010).
3.3.2 Industrial organisation economics
Industrial organisation (IO) economics builds on the Theory of the Firm, which is a group of economic theories that explain and predict the nature of the firm, including its existence, behaviour, structure, and relationship to the market (Kantarelis, 2007). IO examines the behaviour of firms in industries and recognizes that relationships exist between the market structure, the conduct of firms and their performance. Market structure here refers to the characteristics of the industry which influence the relationship between firms in the industry (Terry and Forde, 1992). The key measures of performance in IO literature refer to profitability, efficiency and progressiveness (London, 2012; Martin, 1993). IO methodology deals with the performance of business enterprises and the effects of market structures on market conduct, and how firms are organized, owned and managed (Bancock et al., 1998). The most important elements of market structure in these models refer to: the nature of the demand; existing
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distribution of power among rival firms; government intervention; and physical structuring of relationships (horizontal and vertical integration) (Litman, 1998).
Since the beginning of the IO field in the seminal work of Adam Smith’s (1776) Wealth of Nations (as cited in Hay and Morris, 1979), two distinct paths have evolved – the “deductive theoretical” (focusing on firm behaviour) and the “inductive empirical” observation (focusing on market competition) (see London, 2012 for discussion). The distinct development in the two paths, to some extent, forms the basis for the two schools of thought (see Figure 3.1) that have since characterized the IO field. These are discussed in subsequent sections of this chapter.
Recently, IO has been linked to wider perspectives and concepts such as supply chains, industrial networks and clusters, inter-organisational relationships and strategic alliances; often towards improving industry competitiveness and innovation. Firm growth also represents one of the main foci of industrial organisation, which has become a focus of attention for empirical and theoretical researcher (Gassie, 2012; Teruel-Carrizosa, 2006).
Figure 3.1: Industrial organisation economics schools of thought
Industrial organisation Organization economics differs from micro-economics in that it is concerned with government policy about business performance (London, 2008), which makes it the most useful theoretical framework for this study. Martin (1993) affirmed that industrial economics is profoundly and fundamentally concerned with policy questions. Indeed, since the new democratic government in South Africa came to power in 1994 and inherited a legacy of inequality, unemployment and poverty, its biggest challenge has been to provide the
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institutional support to business, and to implement appropriate policies to alleviate the effects of these legacies (The Presidency, 1994).
Researchers have examined the influence of a series of factors, such as strategy factors, top management and industry characteristics, on firm growth (Weinzimmer, 2000). Previous studies have also explored the concept of supply chain management from an IO perspective.
For instance, Ellram (1991) used IO to examine an organisation’s ability to manage the supply chain, suggesting types of competitive relationships that firms undertake, from transaction, short term contract, long term contract, joint venture and equity interest, to acquisition. The ability to describe and analyse the structure and interdependence of relationships in the system of supply chains are significant contributions derived from IO literature (London and Kenley, 2001).
Construction-related studies have been criticised for failing to address the firm or project level of supply chains, rather focusing on the market view and the major players in key markets.
London and Kenley (2001) emphasised the need to explore the explicit inter-firm supply chain relationships on projects within the context of the firm and market which fall within the field of industrial organisation economic theory. They further suggested that government policy relating to industry competition should be informed by observing the current state of the supply chain as it is vital to understand the interdependences between firms at firm level in relation to the market level as well as the long-term impact of changes to relational position between firms.
As stated earlier, the primary phenomenon being investigated by this study (that is, the relationship between government intervention in the construction industry through Targeted Procurement and SMC development), has its theoretical underpinnings in the field of industrial organisation economics. IO focuses on two main areas, that is, the structural and behavioural characteristics of the industry, and how these influences the performance of firms in the industry (Bain, 1959; Martin, 1993). Industrial economists hold the view that the relationship between industry structure and the firm’s performance greatly impacts on the firm’s profitability (Bain, 1959; Hay and Morris, 1979). IO is split into two distinct schools of thought, namely: the Chicago School and the Structure-Conduct-Performance (SCP) school.
3.3.3 The Chicago School of Thought
The Chicago School, which takes its philosophical roots from the deductive school of logic, argues for economic rationalism, that is, market forces rather than government intervention
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should dictate the allocation of economic resources and determine the performance of firms within the industry (Stilwell, 1993). This is an approach usually applied to markets in perfect competition, which is not always the case, as some experience market failure or are characterised by severe socio-economic challenges, for example, income inequality in South Africa (Palma, 2005; Rwelamila, 2012; UNDP, 2013). In the context of the construction industry, the practice of awarding construction project contracts through open tendering, and the ensuing competitive bid process for cost leadership (Runeson and Raftery, 1997) assumes a perfect competition market, thus providing the framework upon which other contractual relationships along the construction supply chain are based. London (2008) argued that in such environments, contractual relationships are based upon the “arm’s length” philosophy. In addition to the seminal analyses by Baldwin (1970) and Baldwin and Richardson (1972), relevant previous studies that have assumed perfectly competitive markets include those of Lowinger (1976), Joson (1985), and Kim (1994); while Miyagiwa (1991), Branco (1994), Laffont and Tirole (1993), and Trionfetti (2000) extend their contributions to consider imperfectively competitive markets (as cited in Evenett and Hoekman, 2005).
3.3.4 Structure-conduct-performance (SCP) framework
In contrast to the Chicago School, the SCP framework argues for government intervention, suggesting that the strategic behaviour of some firms in a market (industry) prevents other firms from competing based on merit, therefore governments must implement policies to moderate this (London, 2008). It contends that the structure of the industry is a primary facet and central to the firm’s economic conduct or behaviour and ultimately, performance of the firm (and industry) (Tirole, 1988). In other words, the structure of the industry is a primary aspect of the firm’s environment and a key determinant of firm conduct and performance. Moreover, the structure of industry has a direct influence on the performance of the firm. Therefore, firm performance is significantly influenced by the structure of the industry. Hence, it is necessary for governments in their role as the regulators of the economy, to intervene and alter the industry structure, towards influencing the performance of firms and the industry as a whole.
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Figure 3.2: The structure-conduct-performance framework
Targeted Procurement – a form of government intervention, is aligned to the SCP framework, and evidence suggest that Targeted Procurement has changed the structural characteristics of the construction industry with the contract-winning rate of SMCs and their market share increasing significantly (Letchmiah 2012; London 2008; Manchidi and Harmond 2002).
However, little is known about the actual effects of Targeted Procurement on the growth performance and development of SMCs at the individual firm level.
3.3.5 New industrial economics
Industrial organisation has evolved over the last few decades. Recent attention in industry analysis has explored chains, clusters and complexes; this is a shift from mechanistic conceptions of the nature of industrial organisation as a market consisting of a collection of establishments producing homogeneous outputs (Scott and Storper, 1986), to a more complex interconnected and interdependent set of markets and firms (as cited in London and Kenley, 2001). Perhaps one of the major changes is the paradigm shift from a linear structure-conduct- performance model that assumed simple causal relationships, to the new industrial organisation model that assumes greater interactions between the elements of the model. The new industrial organisation model proposes a complex interactive structure-conduct-performance framework (London, 2008; Martin, 1993) where structure and conduct are both determined, in part, by underlying demand conditions and technology (see Figure 3.3). Structure affects conduct.
Structure and conduct interact to determine performance. Sales efforts – an element of conduct – also feed back and affect demand. Performance, in turn, feeds back on technology and structure. Progressiveness moulds the available technology. Profitability, which determines how attractive it is to enter the market, has a dynamic (intertemporal) effect on market structure.
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Figure 3.3: Interpretive structure-conduct-performance framework (Source: London, 2008:141)
Industrial organisation economics is multidisciplinary because it draws from economics, law, management and sociology and various combinations of these. It has been identified as a field of research that has contributed to the practical organisation, integration, management, and theoretical understanding of the structural and behavioural characteristics of supply chains in a variety of industries, including retail, auto manufacturing, information technology and electronics engineering (London, 2008). However, given that these industries are not project- based industries, implications for a project-oriented industrial organisation economics supply chain procurement model must be considered. Moreover, there is disagreement within the IO field, and there are quite distinct approaches to industrial organisation economics in different countries. Therefore, attempting to borrow the concept as a framework to apply in another field remains problematic (London, 2008). London and Kenley (2001) however, contended that construction supply chain theory can be strengthened by considerations of industrial organisation economics.
London (2008) emphasized the significance of firm–firm procurement relationships in relation to the project-based IO model. She posited that procurement relationships are constantly changing for each project, give an indication of the structural characteristics of the industry, as a whole, as these are the physical links between firms in the supply chains; they indicate the conduct of firms in markets, that is, the behavioural characteristics of firms in supply chains as they interact with the market to determine governance strategies. The procurement relationship is an entity that can provide information that describes structural and behavioural characteristics of the construction industry’s industrial organisation through the supply chain concept. Therefore, firm – firm project procurement relationships are a fundamental component of the project-based industrial organisation economic model of the construction industry. Given the significant role of firm – firm supply chain relationships in the construction industry,
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London (2008) further suggested that performance elements of profitability, efficiency/productivity and innovation are more appropriate criteria of supply chain performance, and also of industry performance.
London (2008) adopted a project-based industrial organisation object-oriented methodology for construction supply chain procurement modelling, to provide a conceptual framework of structure-conduct-supplier-procurement relationships-supply chain-performance (SC-SPRSC- P) rather than a simple structure-conduct-performance framework. This was prompted by the relative lack of theoretical and empirical research within the construction community that considers the fundamental structural, economic and organisational nature of the industry’s supply chains. The SC-SPRSC-P framework focuses on the nature of the construction supply chains and their industrial organisational economic environment (London, 2008; London and Kenley, 2001), merging the supply chain concept with the industrial organisation model as a methodology for understanding the industry’s structural and behavioural characteristics. It is considered an important contribution to both construction supply chain and construction economic theory, and therefore relevant to the current study.
Built on the principles of the SCP framework, London’s SC-SPRSC-P framework is an industrial organisation model specifically for construction supply chains that can be used to answer a wide range of pertinent questions such as: what is the overall nature of the organisational relationships along the supply chain? What are the power relationships between firms and their suppliers along the chain? How do we analyse such fundamental structural and behavioural properties in the supply chain?
3.3.6 Relational governance theory
In addition to government policies playing an essential role in stimulating the growth of historically disadvantaged small contractors in South Africa, other factors also influence the growth of these companies including working closely with the supply chain (cidb, 2012).
Relationship quality is studied in a variety of disciplines, however, there is a lack of conceptual clarity around relationship quality (Fincham and Rogge, 2010). This study also draws on theories in the areas of relational governance (Boulay, 2013; Ferguson et al., 2005; McNeil, 1974; 1980) to examine relational issues on Targeted Procurement projects, since projects are a type of exchange between supply chain members.
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Relational governance theory holds that inter-firm exchanges (or projects) are governed by two key mechanisms – contracts and relational norms (McNeil, 1974), and suggests that relational norms surpass contracts in their ability to minimize opportunistic behaviour (Boulay, 2013), promote value-creation between firms, and enhance performance (Lusch and Brown; 1996;
Noordewier et al., 1990; Williams et al., 2015). Unlike contracts, relational governance is an endogenous mechanism that binds firms together by prescribing acceptable behaviours (Heide and John, 1992) and enhances inter-firm working relationships, by embedding information flows in a matrix of social ties rather than resorting to contracts or their enforcement by legal action (Ferguson et al., 2005).
In addition to the ten relational norms proposed in McNeil’s (1980) analysis, ensuing research has identified role integrity, solidarity, and reciprocity to be the most important norms, which are related to the behaviours of trust, communication, aligned objectives and shared benefits (Blois and Ivens, 2007; Williams et al., 2015). Williams et al. (2015) contend that relationship quality is important for the development of such relational norms and behaviours throughout a project. Moreover, based on network and social exchange theory in marketing channels, relationship quality has emerged as a critical aspect of business to business exchange (Palmatier et al., 2007).