Corporate Strategy : An Opportunity Cost Perspective

Two of the founding pillars of corporate strategy research are Penrose’s (1959) development of the critical role of firm resources and their accumulation for the scope of the firm and Chandler’s (1962) examination of the relationship between a firm’s organizational structure and its scope of activities. These conversations have proceeded largely independent from one another. We wish to develop how the construct of opportunity cost can serve as a bridge between these two research streams — a bridge upon which a more integrated, joint consideration of the resource logic of firm scope and the organizational challenges of a diversified firm can be built. As a critical first step in this effort, we distinguish between the standard consideration of next best use of a resource across organizations and a recognition that the next best use of a firm-specific resource which is likely to lie within the firm. Relatedly, in a dynamic environment, the new best use of a firm-specific resource is likely to lie within the firm. We use the analytical apparatus of opportunity cost to revisit and provide new insight on key questions of corporate strategy: the issue of coordination costs within the firm, the exploration/exploitation tradeoff, the issue of organizational design and its relationship to firm scope, and the question of firm boundaries