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Strategic Assets and Organizational RentStrategic Management Journal, Vol. 14, No. 1. (Jan., 1993), pp. 33-46.

By: Raphael Amit & Paul J. H. Schoemaker

Slides prepared by Wenxin GUO

Overview

Research question

When a firm is viewed as a bundle of resources and capabilities, what are the conditions that contribute to the realization of sustainable economic rents?

Outline

Resources and Capabilities

Strategic Assets

Strategic Industry Factors

In place of “Key success Factors”

Decisions about Strategic Assets

Industry analysis

The Resource View

Behavioral Decision Theory

IntroductionWhy are some firms profitable?

Possess of firm-specific resources and capabilities (R&C)

The challenge for managers is to identify, develop, protect, and deploy R&C ex ante to provide firm with rents under the problem of Uncertainty, Complexity and Intraorganizational conflicts.

This paper attempts to link the 'industry analysis framework' with the 'resource view of the firm' and highlight the human limitations in crafting firm strategy.

Literature & DefinitionsOrganization‘s success depends on the match between its strengths and the Key Success Factors (KSF) in its environment. (Vasconcellos and Hambrick ,1989)

Critics: lack of 1) identification of KSF; 2) concreteness of causal factors; 3) generality; 4) necessity (Ghemawat, 1991a)

Thus, an emerging theoretical perspective is needed built on resource view, industry analysis framework & Behavioral Decision Theory (BDT).

Key DefinitionsStrategic Assets (“SA”)

Unit of analysis: firmThe set of difficult to trade and imitate, scarce, appropriable and specialized R&C that bestow the firm's competitive advantage.eg: Technological capability; fast product development cycles; brand management, etc.

Strategic Industry Factors (“SIF”)Unit of analysis: industry/product marketCertain R&C which are subject to market failures become the prime determinants of economic rents at a given time

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Key terms and conceptsKey terms and concepts

Key DefinitionsOrganizational Rents

Refers to economic rents that stem from the organization's R&C, and that can be appropriated by the organization.

It requires managers to ex ante:• Identify and assess the present set of Strategic Industry factors

(“SIF”).• Decide further development of existing and new Strategic

Assets (“SA”).

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Desired characteristics of the firm’ s R&C

Resource View of Strategic Assets

Resource-Based View Of The Firm

Marshalling a set of complementary and specialized R&C which are scarce, durable, not easily traded, and difficult to imitate, enables the firm to earn economic rents.

Resource View of Strategic Assets

Factors determining the magnitude of rents

Difficult to buy, sell, imitate or substitute “+” value of Strategic assets

the applicability of the firm's bundle of R&C to a particular industry setting will determine the available rents.

Value of complementary strategic assets:• may be higher than the cost of developing each asset

individually• may decline to the extent that they are substitutes

firm-specific, durable & scarce “+” value of Strategic assets


Uncertainty “Bounded Rationality”

Under rational expectations, firms’ initial SA endowments are the only source of variance regarding their behavior

In reality, managers face considerable uncertainty & ambiguity due to changing environment, which lead to heterogeneous beliefs and manager-specific decision processes

Opposing bias: risk aversion, overconfidence, ambitious targets, etc.

Past success may especially bias managers toward an illusion of control (Langer, 1975), which may lead to improper SIF & SA.


Complexity

To keep SA decisions within cognitive bounds, managers must often and extensively simplify (Russo and Schoemaker, 1989). The kinds of simplification may lead to additional biases.

Discretionary managerial decisions that relate to SA creates suboptimality, imperfect imitability. and organizational rents for some firms.


Conflict

Intraorganizational conflict is another serious challenge encountered by management in making SA decisions.

Problems: agency problem, issues of cooperation, trust and competentce

The key point is that organizations are complex social entities with their own inertia and constraints.

A Multidimensional View

Industry Analysis

It excels in assessing the profit potential of various industry participants by focusing on the external competitive forces and barriers that prevail in different product/market segments.

It is essential in deriving a set of Strategic Industry Factors.


The Resource-Based View

It highlights imperfections in factor markets, resulting in systematic firm differences. Limited transferability of Resources, scarcity, complementarity and appropriability in turn give rise to rent opportunities.

The focus is more internal and institutional, recognizing the often slow and evolutionary path by which firm specific Capabilities develop (Nelson & Winter, 1982.)


Behavioral Decision Theory (BDT)

It complements the resource perspective in explicitly acknowledging bounded rationality and in particular, the crucial roles of problem framing and heuristic decision-making.

In this view, strategy aims at overcoming bias and blind spots. (Zajac & Bazerman, 1991)

The BDT perspective is especially important in light of the pervasive uncertainty and complexity surrounding SA decisions.

Conclusions

Organizational rent stems from imperfect and discretionary decisions to develop and deploy selected resources and capabilities, made by boundedly rational managers facing high uncertainty, complexity, and intrafirm conflict.

Strength and Limitation

Strength:This paper strengthen the resource view by adding behavioral decision making biases and organizational implementation aspects as further impediments to the transferability or imitability of a firm's Resources and Capabilities.

Limitation:Limited prescriptive advice on how to target, develop and deploy firm-specific Strategic Assets

Slides prepared by Wenxin GUO

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