STRATEGIC ASSETS AND ORGANIZATIONAL RENT Amit, R., & Schoemaker, P. J. H., SMJ , 1993

1. STRATEGIC ASSETS AND ORGANIZATIONAL RENTAmit, R., & Schoemaker, P. J. H., SMJ, 1993 Youngsoo Kim, BADM 545 Fall 2013

2. 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

3. 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

4. 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)

5. 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

6. SA and SIF: Diagram

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Questions & Answers