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DYNAMIC CAPABILITIES AS ANTECEDENTS OF THE SCOPE OF RELATED DIVERSIFICATION: THE CASE OF SMALL FIRM ACCOUNTANCY PRACTICES ERIK DVINGPAUL N. GOODERHAM

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MUHAMMAD SAQIBMUBASHER ALINASEEM AHMEDSAIMA BATOOLPresented by

FOCUS OF THIS ARTICLE

Diversification through internal development1

Explaining the antecedents of resource development. 2

Use (DCA) to identify core underlying dynamics of diversification. 3

RESEARCH

INTRODUCTION

Scope of the firm in relation to its diversification has remained hot topic in strategy research

But there is still lot of work to be done in regard to the antecedents or the performance implications of diversification (H&H)

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INTRODUCTION

Scope of the firm in relation to its diversification has remained hot topic in strategy research

But there is still lot of work to be done in regard to the antecedents or the performance implications of diversification (H&H)

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INTRODUCTIONHoskisson and Hitt (1990) Firms may increase the scope of their product offerings through internal development in highly related product marketsPrime motives of diversification is deployment of surplus resourcesIntangible resources are potentially more flexible for diversificationDeployment of intangible resources for diversification is subject to managers perceived incentives, i.e strategic choiceCritique: Their theorizing fails to take into account differential capabilities as antecedents of resource deployment for purposes of diversification.

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NEED FOR DYNAMIC CAPABILITIES APPROACHPrimary product offered:standard accountancy servicesEvidence suggests that:those practices that have broadened firm scope of services beyond primary product are enjoying higher profits than others.further indicates: despite apparent greater incentives, there are differences in terms of the scope of advisory services they provide.Given that, intangible resources (accountancy services) are largely common and incentives to deliver advisory services well known across industryvariations in the scope of advisory services provided could not be explained To explain variations in advisory services dynamic capabilities perspective of the firm is a more fruitful approach

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SMALL FIRM ACCOUNTANTS AS BUSINESS ADVISORS

European business dominated by the SMEs.

Contribute 66% of all jobs 65% total business turnover

But SMEs rarely have the resources to allow accounting duties to be conducted in-house

Therefore SMEs often seek external assistance from accountants

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SMALL FIRM ACCOUNTANTS AS BUSINESS ADVISORS

Because of the long-term, regular cooperation small firm accountancy practices have with their clients through the provision of basic accounting services, there is a potential for the development of the trust required to act as business advisors

by purchasing multiple services from the same source, clients are able to economize on information costs,

by offering multiple services firm will achieve synergies (economies of scope) in the production and generate more revenue.

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THE NORWEGIAN CONTEXTDue to legal requirements of producing annual financial accounts majority of SMEs in Norway get services of external authorized accountantsPrerequisite for Authorized of Accountant is 2 year Diploma + 2 year practice3 year Bachelor degree is not compulsory of authorization and free of any regulation regarding the service provision.Diploma Holder technical focus Homogeneous competencies, predictable & standardized environmentBachelor degree Advisory focus Heterogeneous competencies, no standardized and unstableTherefore staff of accountancy firms are highly variable

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A DYNAMIC CAPABILITIES VIEW OF ACCOUNTANCY FIRMS AS BUSINESS ADVISORSRBV emphasis the deployment and protection of unique knowledge rather than resources or competencies to actually change over timeEarly explanations of why firms had differential stocks of resources featured luck and/or superior information recently though, the need to specify the dynamics of the processes underlying resource development and differentiation has resulted in the dynamic capability construct:the firms ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments

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A DYNAMIC CAPABILITIES VIEW OF ACCOUNTANCY FIRMS AS BUSINESS ADVISORSWinter (2003) example:Consider a hypothetical firm in equilibrium, produce and sell the same product, at same scale and to the same customers . The capabilities exercised in that stationary process are the zero-level capabilities, the how we earn a living now capabilities. By contrast, capabilities that would change the product, the production process, the scale, or the customers (markets) served are not at the zero level. New product development, as practiced in many firms, is a prototypical example of a first-order dynamic capability

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A DYNAMIC CAPABILITIES VIEW OF ACCOUNTANCY FIRMS AS BUSINESS ADVISORSGiven standardized competencies for the production and delivery of the standard accountancy services, together with uniform incentives to diversify, Author argue that change in product scope derives from the possession of dynamic capabilities.

Definitions of dynamic capability organizations general capacity for the regeneration of its knowledge base.as consisting of specific strategic and organizational processes that manipulate resources into new competencies and that renew old ones. However, these include not only internal processes, but also collaboration with other organizations as a means of extending each firms competencies The value of dynamic capabilities lies in the resource configurations that they create or enhance, which in turn enable the firm to pursue opportunities in new, unpredictable markets

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A DYNAMIC CAPABILITIES VIEW OF ACCOUNTANCY FIRMS AS BUSINESS ADVISORSDefinitions of dynamic capability the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve and dieDC are systematic and persistent features of an organization, but he takes issue with the notion that they are routines but with known effectsdynamic capabilities must be built with the managers role analogous to an architect since it involve long-term commitments to specialized resources.

Authors view: Dynamic capabilities are best conceived as enduring routines, systems, and processes that are visible, known, and managerially intended as a means to achieving new resource configurations

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A DYNAMIC CAPABILITIES VIEW OF ACCOUNTANCY FIRMS AS BUSINESS ADVISORSDynamic Capabilities Implications (concerns) for accountancy firms: configuration of the practices human capital resourcesAdvisory services will be more complex like ability to respond to a variety of client needs and situations that call for novel responses. delivery of standard accounting practices will be considerably less likely to produce the synergies that generate a wide range of business advisory services.Firm for business advisory services ensure that the practices human capital configuration is not static, but is subject to continuous developmentAccountancy practices lacking in strong alliancing processes for accessing outside knowledge will be more confined to standardized accountancy services than those practices that interact with an array of complementary service providers.

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THE DEVELOPMENT OF DYNAMIC CAPABILITIESstandardized accountancy practices Homogeneous competencies, predictable & standardized environmentadvisory services Heterogeneous competencies, unpredictable

In unpredictable markets the dynamic capabilities by which firms integrate, build, and reconcile internal and external competencies become a critical source of competitive advantage.

development of the dynamic capability to meet the requirements of a changing environment is a challenge involving the ability to exploit both internal and external competencies. These two sources of competencies are not to be regarded as substitutes for one another, but as complementary.

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THE DEVELOPMENT OF DYNAMIC CAPABILITIESInternal competenciesAuthor argue that there are two main internal sources of the dynamic capabilities relevant for delivering business advisory services. these involves the heterogeneity of the accountancy practices competencies assets baseprofessional training of front- line stafflevel or type of their formal education

Hypothesis 1 (H1): The scope of business advisory services delivered by an accountancy practice will be broadened by the heterogeneity of its human capital.

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THE DEVELOPMENT OF DYNAMIC CAPABILITIESInternal competenciesThe second significant internal source of dynamic capabilities for the delivery of a broad scope of business advisory services is located in specific systems that enable the practice to develop and thereby regularly reconfigure its competency base in a firm-specific and therefore inimitable mannerHypothesis 2 (H2): The scope of business advisory services delivered by an accountancy practice will be broadened by its having established specific, identifiable routines and systems aimed at reconfiguring the competency base of the practice.

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THE DEVELOPMENT OF DYNAMIC CAPABILITIESExternal competenciesAlthough many core dynamic capabilities have their focus on the reconfiguration of resources within firms, other dynamic capabilities are related to the development and exploitation of inimitable collaborative interfirm relationships that confer access to resources and capabilities from differentially endowed firmsHypothesis 3 (H3): The scope of business advisory services delivered by an accountancy practice will be broadened by the range of its alliances with external complementary service providers.

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STRATEGIC CHOICEDynamic capabilities must be accompanied with strategic decision makingstrategic positioning: by achieving positioning a small firm accountancy practice, they may able to diversify into business advisory services.Costs of services and capacity of client accordingly implies that the propensity to procure business advisory services varies positively with sizeHypothesis 4 (H4): The scope of business advisory services delivered by an accountancy practice is broadened by the proportion of relatively large client firms served by the practice

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STRATEGIC CHOICEstrategic intent, that is a consistent ambition to set targets that imply a sizable stretch for an organizationIn the context of small firm accountancy practices, strategic intent would imply a well-articulated aspiration to search for new opportunities and new markets through the broadening of the scope of related services Hypothesis 5 (H5): Those accountancy practices that intend to seek out new markets or launch new services will provide a broader scope of business advisory services than other practices.

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DATAData collected through questionnaire from sample of 254 small accountancy firms Independent variablesHeterogeneity of human capitaldegree to which front-line staff are authorized accountantsfront-line staff who have a bachelors degree level of educationQuestionsSpecific and identifiable routines and systems aimed at reconfiguring the competency base of the practice.indicate if their practice had devised a skills development plan45% confirmed that they had implemented such a plan

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DATARange of alliances with external complementary service providers?indicate the degree to which their practices cooperate with external service providers within seven specified industries: lawyers, external auditors, consultancies, software providers, IT-firms, banks, insurance companies and advertising and financial planning consultanciesProportion of relatively large client firms served by the practice?defined large clients as those having more than 20 employees35% of the practices report that they serve clients with more than 20 employeesIntention of seeking out new markets or launching new services?Control variableNumber of staff in practice: larger numbers of front-line staff have more surplus resources and therefore more latitude for specializationDependent variableNumber of services provided: developed a list of 15 business advisory services

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Dependent variableNumber of services provided: developed a list of 15 business advisory services

ResultsAnalysis 1: Larger practices do indeed tend to offer a greater scope of business advisory servicesAnalysis 2:more strategic intention the practice displays in regard to developing products or markets, the more services the firm has actually billed for during the last years (Hypothesis 5)larger the percentage of relatively large clients, the greater the scope of advisory services (Hypothesis 4)Analysis 3: (Hypothesis 1) is supported as heterogeneity does have effect but both employees type have opposite effects on the scope of business advisory services

practices having internal development routines have a greater propensity for offering a greater scope of services (Hypothesis 2)

Findings indicate that the greater the range of strategic alliances, the greater the scope of services offered (Hypothesis 3)

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ResultsFinally, significant control variable, number of staff in practice, indicate that larger practices are able to offer a broader scope of business advisory services.

Although both strategic intent and client portfolio results indicate that the apparent effect of strategic choice is spurious and should in fact be attributed to dynamic capabilities.

Supplementary analysispractices with a relatively large portfolio of services tend to derive a greater proportion of their revenue from advisory services.

such profitability will act as a stimulus for the practice to deliver yet more business advisory services.

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CONCLUSIONIn this article, primary aim was to address this deficiency in understanding of related diversification by specifying key underlying antecedents. It is done so by drawing on insights from the dynamic capabilities approach in the context of small firm accountancy practices. In particular, hypothesized those dynamic capabilities would enable firms to expand their scope of services. Given standardized competencies for the production and delivery of core products, together with uniform incentives to diversify, change in product scope, derives from the possession of dynamic capabilities.

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