Academic journal article Journal of Managerial Issues

First-Order Economizing: Organizational Adaptation and the Elimination of Waste in the U.S. Pharmaceutical Industry *

Academic journal article Journal of Managerial Issues

First-Order Economizing: Organizational Adaptation and the Elimination of Waste in the U.S. Pharmaceutical Industry *

Article excerpt

Since the seminal work of Lawrence and Lorsch (1969), it has been acknowledged that one of the key explanatory variables of performance is the relationship between the firm and its environment. The issue is of such import that more than 30 years later journal editors continue to accept manuscripts dealing with organizational responses to environmental pressure and change. For example, among numerous other pieces on environment and performance that have been published in this journal, there has recently appeared research on industry deregulation, firm strategy, and performance (Kim and McIntosh, 1999), the strategies firms adopt in discontinuously changing environments and their impact on firm performance (Arbaugh and Sexton, 1997), and how firms control strategy in "dynamic versus stable environments" (Fiegner, 1997). Our research is of the same genre and sheds light on how firms economize in the face of environmental pressure, and what are the associated performance effects.

Williamson observed that economizing has received inadequate research attention: "first-order economizing-effective adaptation and the elimination of waste--has been neglected" (1994: 364). Although there exists a substantial body of research on adaptation in the form of asset restructuring as "a popular means for organizations to respond to threats and opportunities in their business environment" (Hoskisson et al., 2004: 525), work specifically addressing restructuring as a means of economizing is most conspicuous by its absence. Similarly, there is a dearth of empirical research looking at the benefits of eliminating waste. We therefore raise and address the fundamental questions: how do managers economize in the face of environmental pressure, and what are the performance consequences of different approaches to economizing? The answers not only have implications for practice but are also important for management theory.

We start by arguing that the neoclassical treatment of allocative efficiency adapted to the level of the firm by IO economics, in combination with the non-allocative efficiency arguments found in both IO economics and X-efficiency theory, offer utility toward examining the role of efficiency gains consistent with first-order economizing. We then synthesize these arguments with ideas from resource-based theory to provide a theoretical foundation for a subsequent empirical analysis that explores economizing in the U.S. pharmaceutical industry.

EFFICIENCY AND ECONOMIZING

Although the charters of strategic management and economics are radically different--the former aims to maximize firm profits while the latter seeks to maximize consumer welfare--strategy scholars have assumed that they are not mutually exclusive and have grounded strategy theory in the longer-established economic theory. We continue that tradition by examining the economic perspective on efficiency and then relating it to the strategy of economizing.

An Economics Perspective on Efficiency

The efficiency literature falls principally under two headings: allocative and non-allocative. Allocative efficiency is grounded in classical/neoclassical economics where, compelled by cost and demand alone, firms behave in a rational manner and make efficient decisions on output. Within this "black box" treatment of firms, it is a given that all firms are rational utility maximizers that continuously operate on their production frontier. Consequently, a firm is allocatively efficient when it adopts the optimum combination of inputs. The question of what constitutes optimum is one that is receiving increasing research attention; for example, see Wang et al.'s (2003) examination of resources allocated among security firm branches, Hartman et al.'s (2001) analysis of resources within branch banks, or Maniadakis and Thanossoulis' (2000) work on resource allocation in acute-care hospitals. The reverse scenario of allocative inefficiency from suboptimal allocation of resources and poor budgeting was observed by Lee and Menon (2000) in their study of the use of information technology in hospitals. …

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