STRATEGIC ASSETS AND ORGANIZATIONAL RENT

Amit, R., & Schoemaker, P. J. H., SMJ, 1993

Youngsoo Kim, BADM 545 Fall 2013

Overview Why is our firm successful?

Firm-specific resources and capabilities

It was answered by… Industrial Organization theory (IO) Key Success Factors analysis

New perspectives Resource Based View of the Firm (RBV) Behavioral Decision Theory (BDT) Link these two with traditional industry analysis

framework

Literature Review Vasconcellos and Hambrick (1989)

Empirically corroborate the effects of Key Success Factors (KSF) on an organization’s success

Limitations: (1) the industry as the unit of analysis, (2) empirical analysis is ex post, (3) well-known KSF is not KSF anymore

Ghemawat (1991) KSF lacks identification, concreteness, generality, necessity Limitations: uncertainty, complexity, conflict should be

considered to account for discretionary managerial decisions

Alternative approaches Combining IO, RBV, and BDT to explain a firm’s profitability

Resources and Capabilities (R&C) Resources

Available factors that are owned or controlled by the firm

Knowhow to be traded (e.g. patents and licenses), financial / physical / human assets (e.g. property, plant, and equipment)

Capabilities A firm’s capacity to deploy resources using

organizational processes to effect a desired end ‘Intermediate goods’ to enhance productivity of its

resources Information-based (e.g. brand names) Functional areas (e.g. brand management in

marketing)

Strategic Assets andStrategic Industry Factors Strategic Assets (SA)

Set of difficult to trade and imitate, scarce, appropriable, and specialized resources and capabilities that present competitive advantages

Strategic Industry Factors (SIF) Market-level resources and capabilities that are subject to

market failures and prime determinants of economic rents Relevant set of SIF changes and cannot be predicted ex

ante

Managers’ problem: Identify SA for Organizational Rents Via identifying current and possible sets of SIF and

developing the corresponding existing and new SA

SA and SIF: Diagram

RBV and Organizational Rents Resourced-Based View

Organizing a set of complementary and specialized resources and capabilities which are scarce, durable, not easily traded, and difficult to imitate may enable the firm to earn economic rents

Desired characteristics of the firm’s SA

Trade-off: specialization and robustness Two kinds of specialization: limited use or unique use Limited use reduces robustness, but unique use

doesn’t Firms develop specialized assets to enhance profits at

the price of reduced flexibility in the face of Schumpeterian shocks

Challenges in SA decisions (1) Uncertainty

Uncertainty and ambiguity make it probable that managers will hold diverse expectations about key market variables

Judgments and choices are likely to exhibit idiosyncratic risk aversions and ambiguity

Strategic assets choices under uncertainty may entail opposing biases whose net effects are hard to analyze

Complexity To keep SA decisions within cognitive bounds,

managers must often and extensively simplify and it leads to additional biases

Challenges in SA decisions (2) Conflict

Any change in the existing bundle of SA may benefit some employees and hurt others

Organizations are complex social entities with their own inertia and constraints

Challenges and economic rents This lack of solvability is a necessary condition for

their strategic importance and positive rent potential

SA Development: Multidimensional View (1) Difficulties in SA decisions underscores the

need for a multidimensional approach

Industry Analysis Focus on external competitive forces and market

structure

Resource View Factor market imperfections, leading to firm

differences Economic rents derive from firms’ unique R&C

SA Development: Multidimensional View (2) Behavioral Decision Theory

Acknowledging bounded rationality under uncertainty and complexity

In psychology, various models and techniques exist to depict how people represent complex problem situations

Conflict and organization inertia in SA decisions Principal-agent theory gives only rational treatment TCE focuses on bounded rationality and complexity Organizational theory has been more descriptive

and process oriented to understand how firms control and coordinate

Contributions and Conclusions SIF and SA as an alternative to KSF Characterization of rent producing SA

Under which SA could produce organizational rents

Three challenges of SA decisions Uncertainty, Complexity, Conflict

Multidimensional approach to SA decisions IO, RBV, BDT

Uniqueness and low mobility of R&C stem from imperfect and hard to predict decisions by boundedly rational managers facing high uncertainty

Questions & Answers