Time compression (dis)economies: An empirical analysis

Abstract

Research Summary: To investigate time compression diseconomies (TCD), this study estimated time–cost elasticities using 459 oil and gas global investment projects (1997–2010). Results show that the average cost of accelerating investments is negative: a firm could cut $6.3 million in costs of a single project by accumulating asset stocks 1 month faster. About 88% of the projects exhibit negative time–cost elasticities with over 39% of unrealized economies of time compression. Only 12% of the projects are subject to TCD. These time inefficiencies or frictions do not negate the existence of TCD, but suggest they are less prevalent than assumed in the literature. Management experience, R&D investment, firm size, economic development, and political stability are shown to be associated with greater time compression efficiency. Managerial Summary: How fast should firms invest? The conventional view is that acceleration increases market revenues but also inflates costs. However, there is no recent empirical evidence of this tradeoff. Our article systematically investigates the costs of compressing time in investment projects. Results show that most firms in the oil and gas industry are significantly time inefficient in their operations. Specifically, by accelerating investments, firms would also substantially decrease costs. We estimate the magnitude of these time inefficiencies for specific oil and gas industries and firms and study which strategies might mitigate this problem. This fine‐grained analysis should help firms assess their financial incentives to accelerate projects and prove informative to stock market analysts’ valuations of firm investment timing.

The origins of time compression diseconomies

“…Thus far, there has been surprisingly little empirical work on TCD, and existing studies have reached mixed conclusions. Hawk, Pacheco‐de‐Almeida, and Yeung (2013) have shown that the cost of building petrochemical plants increases as time is compressed, though firms may ultimately benefit from speeding up (Hawk & Pacheco‐de‐Almeida, 2018). Knott, Bryce, and Posen (2003) have demonstrated that TCD has a very limited effect on catch‐up ability in the pharmaceutical industry, whereas Vermeulen and Barkema (2002) and Jiang, Beamish, and Makino (2014) have illustrated that speed negatively influences success in international expansion.…”

“…Knott, Bryce, and Posen (2003) have demonstrated that TCD has a very limited effect on catch‐up ability in the pharmaceutical industry, whereas Vermeulen and Barkema (2002) and Jiang, Beamish, and Makino (2014) have illustrated that speed negatively influences success in international expansion. In a recent review of the work on TCD, Hawk and Pacheco‐de‐Almeida (2018) conclude, “In sum, TCD have been a longstanding theoretical principle with important implications for multiple strands of literature in management science; yet, we have only sparse and outdated empirical evidence of their existence” (p. 2491). Thus, further empirical work on TCD is warranted.…”

The Impact of Firm Speed Capabilities on the Decision to Partner or Go It Alone

“…In addition, slower firms also risk being preempted by faster competitors, resulting in potentially higher costs from late entry due to having a later pick on desirable sites, or later access to key suppliers or customers (Lieberman & Montgomery, 1988. A recent study found a substantial amount of time inefficiency across firms (Hawk & Pacheco-de-Almeida, 2018), suggesting that many firms face these potentially higher costs from being a slower firm.…”

Do Synergies Pop up Magically in Digital Transformation-Based Retail M&A? Valuing Synergies with Real Options Application

“…The M&A synergy issue touches on many key research streams in the strategy literature. For instance, it includes the ideas of the resource-based view of the firm and VRIO framework [6], the framework of recombinant innovation [7], the speed of strategic decisions [8], the real options perspective [9], and cultural factors in strategic management [10]. These research streams rely on heterogeneous sets of assumptions and have diverse theoretical origins.…”