Presentation on theme: "STRATEGIC ASSETS AND ORGANIZATIONAL RENT Amit, R., & Schoemaker, P. J. H., SMJ, 1993 Youngsoo Kim, BADM 545 Fall 2013."— Presentation transcript:
1 STRATEGIC ASSETS AND ORGANIZATIONAL RENT Amit, R., & Schoemaker, P. J. H., SMJ, 1993 Youngsoo Kim, BADM 545 Fall 2013
2 Overview Why is our firm successful? It was answered by… Firm-specific resources and capabilitiesIt was answered by…Industrial Organization theory (IO)Key Success Factors analysisNew perspectivesResource Based View of the Firm (RBV)Behavioral Decision Theory (BDT)Link these two with traditional industry analysis frameworkThis research paper is, like other papers today, originated from the question “when vertical integration takes place”.The approach to this problem used to be based on simply company size, or focused on manufacturing, which leads to an emphasis on the valuation of physical assets such as raw materials or facilities.However, these two authors try to put a more focus on human assets, that is, people. In addition, they want to empirically demonstrate the effects of transaction costs on vertical integration of the companies.To achieve this, the authors look at a specific problem, whether a manufacturers’ representative or a direct salesperson to sell a product line.
3 Literature Review Vasconcellos and Hambrick (1989) Ghemawat (1991) Empirically corroborate the effects of Key Success Factors (KSF) on an organization’s successLimitations: (1) the industry as the unit of analysis, (2) empirical analysis is ex post, (3) well-known KSF is not KSF anymoreGhemawat (1991)KSF lacks identification, concreteness, generality, necessityLimitations: uncertainty, complexity, conflict should be considered to account for discretionary managerial decisionsAlternative approachesCombining IO, RBV, and BDT to explain a firm’s profitabilityFor some background knowledge on this problem, let me briefly give you background information.As of 1977, in 15 major industry in the U.S., Rep accounts for only 10% of the total volume, so the market mode is less often used than the integrated mode.
4 Resources and Capabilities (R&C) Available factors that are owned or controlled by the firmKnowhow to be traded (e.g. patents and licenses), financial / physical / human assets (e.g. property, plant, and equipment)CapabilitiesA firm’s capacity to deploy resources using organizational processes to effect a desired end‘Intermediate goods’ to enhance productivity of its resourcesInformation-based (e.g. brand names)Functional areas (e.g. brand management in marketing)Fungible: if Alice lends Bob a $10 bill, she does not care if she is repaid with the same $10 bill, two $5 bills, a $5 bill and five $1 bills or a bunch of coins that total $10 because currency is fungible (noting that, in practice, some denominations might incur additional operational or processing costs). However, if Bob borrows Alice's car she will most likely be upset if Bob returns a different vehicle--even a vehicle that is the same make and model--as automobiles are not fungible with respect to ownership.
5 Strategic Assets and Strategic Industry Factors Strategic Assets (SA)Set of difficult to trade and imitate, scarce, appropriable, and specialized resources and capabilities that present competitive advantagesStrategic Industry Factors (SIF)Market-level resources and capabilities that are subject to market failures and prime determinants of economic rentsRelevant set of SIF changes and cannot be predicted ex anteManagers’ problem: Identify SA for Organizational RentsVia identifying current and possible sets of SIF and developing the corresponding existing and new SAThe environmental change that can not be observed in advance makes the contract difficult to be complete.
6 SA and SIF: DiagramThere is a tradeoff between two modes of institutions. A drawback from doing the internal mode is setup and maintenance costs and a disadvantage from doing the market mode is opportunism and inflexibility. Hence, transaction frequency is a key factor which drawback is bigger than the other.
7 RBV and Organizational Rents Resourced-Based ViewOrganizing 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 rentsDesired characteristics of the firm’s SATrade-off: specialization and robustnessTwo kinds of specialization: limited use or unique useLimited use reduces robustness, but unique use doesn’tFirms develop specialized assets to enhance profits at the price of reduced flexibility in the face of Schumpeterian shocks
8 Challenges in SA decisions (1) UncertaintyUncertainty and ambiguity make it probable that managers will hold diverse expectations about key market variablesJudgments and choices are likely to exhibit idiosyncratic risk aversions and ambiguityStrategic assets choices under uncertainty may entail opposing biases whose net effects are hard to analyzeComplexityTo keep SA decisions within cognitive bounds, managers must often and extensively simplify and it leads to additional biasesUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future
9 Challenges in SA decisions (2) ConflictAny change in the existing bundle of SA may benefit some employees and hurt othersOrganizations are complex social entities with their own inertia and constraintsChallenges and economic rentsThis lack of solvability is a necessary condition for their strategic importance and positive rent potentialUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future
10 SA Development: Multidimensional View (1) Difficulties in SA decisions underscores the need for a multidimensional approachIndustry AnalysisFocus on external competitive forces and market structureResource ViewFactor market imperfections, leading to firm differencesEconomic rents derive from firms’ unique R&CUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future
11 SA Development: Multidimensional View (2) Behavioral Decision TheoryAcknowledging bounded rationality under uncertainty and complexityIn psychology, various models and techniques exist to depict how people represent complex problem situationsConflict and organization inertia in SA decisionsPrincipal-agent theory gives only rational treatmentTCE focuses on bounded rationality and complexityOrganizational theory has been more descriptive and process oriented to understand how firms control and coordinateUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future
12 Contributions and Conclusions SIF and SA as an alternative to KSFCharacterization of rent producing SAUnder which SA could produce organizational rentsThree challenges of SA decisionsUncertainty, Complexity, ConflictMultidimensional approach to SA decisionsIO, RBV, BDTUniqueness and low mobility of R&C stem from imperfect and hard to predict decisions by boundedly rational managers facing high uncertaintyUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future
13 Questions & AnswersUnder rational expectations, the SA challenge will largely vanish as managers will hold the same expectations about the set of SIF that will prevail in the future