June 17 - Resource Relatedness, Redeployability, and Firm Value

Resource Relatedness, Redeployability, and Firm Value - Arkadiy Sakhartov

In-class exercise

Consider a firm that enters the model having been previously focused on industry i: the firm operated a unit of resources in industry i. In the remaining three periods of the resources’ useful life, that unit can be used in two industries, i and j. In the first period, the use of all resources in industry i would generate certain net cash flow Ci=10; whereas the use of all resources in industry j would generate certain net cash flow Cj=10. In the second and the third periods, the net cash flow for a unit of resources is uncertain in industry j: it follows the binomial process specified in the Excel spreadsheet; whereas the net cash flow for the unit of resources deployed in industry i is certain and grows with the risk-free interest rate r=0.1, also as shown in the linked Excel spreadsheet. (https://www.dropbox.com/s/lju09fn709trfpw/Numerical%20illustration%20of%20redeployment%20%28assignment%29.xlsx?dl=0)

In each of the three periods, the firm can use redeployability of its resources: it can withdraw the whole unit or a half of a unit of resources from one industry and redeploy them to another industry. If the firm uses only a half of resources in an industry, the cash flow generated in that industry is also halved. Resource redeployment is costly with total costs determined by: (a) the dissimilarity (unrelatedness) of resource requirements between i and j that is operationalized as S=1, and (b) the amount of redeployed resources. In particular, if all (or a half of) resources are redeployed to i or to j, the firm pays the redeployment cost equal S (or 0.5S).

Compute: (a) the expected discounted net present value VR of the firm when redeployability is present; (b) the expected discounted net present value V of the firm when redeployability is absent; and (c) the expected discounted net present value of resource redeployability R.

Background Materials: Readings

Sakhartov AV, Folta TB. 2014. Resource relatedness, redeployability, and firm value. Strategic Management Journal 35(12): 1781‒1797.

Sakhartov AV, Folta TB. 2015. Getting beyond relatedness as a driver of corporate value. Strategic Management Journal 36(13): 1939‒1959.

Background Materials: Videos

Resource RedeploymentRESOURCE REDEPLOYMENT refers to the withdrawal of various resources (equipment, people, cash) from the source and their reallocation to the destination. Just like in the military where redeployment was first defined as the transfer of a unit, a person, or supplies from one theater of war to another⸺ resource redeployment in business involves the origin and the destination. Thus, resources can be redeployed from one business to another business within a multi-business firm. A multinational corporation can withdraw resources from its subsidiary in one country and redeploy them to a subsidiary in another country. Resources can also be redeployed between different firms⸺from a target to an acquirer in an M&A deal, or vice versa… Recently, such abundant examples of resource redeployment, have started to attract research interest. This channel is developed by Arkadiy Sakhartov, a faculty from the University of Illinois, to share some nascent research on RESOURCE REDEPLOYMENT.

Background Materials: Slides

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