Weihao Li (Originally created by Youngsoo Kim) STRATEGIC ASSETS AND ORGANIZATIONAL RENT Amit, R., & Schoemaker, P. J. H., SMJ, 1993 Weihao Li (Originally created by Youngsoo Kim)

Overview Firm-specific resources and capabilities are crucial to firms’ profit Challenge for managers To identify, develop, protect, and deploy resources and capabilities in a way that provides the firm with a sustainable competitive advantages, an organizational rent. In a setting that is featured by Uncertainty Complexity Intra-organizational conflicts Introducing a multidimensional view Including internal and external elements Static and dynamic aspects Rational and behavioral considerations Hybrid of industry analysis, the resource view and BDT This 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.

Literature Review Vasconcellos and Hambrick (1989) Ghemawat (1991) Empirically corroborate organization’s success depends on the match between its strengths and the Key Success Factors (KSF) in its environment. 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: Integrating industry analysis, RBV, and BDT to explain a firm’s profitability For 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.

Key Definitions & Constructs Resources Stocks of available factors that are owned or controlled by the firm Knowhow to be traded, financial / physical / human assets Capabilities A firm’s capacity to deploy resources using organizational processes to effect a desired end Information-based (e.g. ,brand names) ‘Intermediate goods’ to enhance productivity of its resources 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. Resources Capabilities Strategic Assets Strategic Industry Factors

Key Definitions & Constructs Strategic Assets (SA) Set of difficult to trade and imitate, scarce, appropriable, and specialized R&C that bestow the firm’s competitive advantages Strategic Industry Factors (SIF) Market-level R&C that are subject to market failures and become the prime determinants of economic rents Managers’ problem: Identify SA for Organizational Rents Organizational Rents efers to economic rents that stem from the organization's R&C, and that can be appropriated by the organization Via identifying current and possible sets of SIF and developing the corresponding existing and new SA The environmental change that can not be observed in advance makes the contract difficult to be complete. Resources Capabilities Strategic Assets Strategic Industry Factors

SA and SIF: Diagram There 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.

Resource View of Strategic Assets 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 Difficult to buy, sell, imitate or substitute The Applicability of the firm's bundle of R&C to a particular industry setting Complementarity of strategic assets Firm-specific, durable & scarce

Strategic Assets decisions 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 assess Bounded rationality leads to more biases Complexity To keep SA decisions within cognitive bounds, managers must often and extensively simplify and it leads to additional biases Intra-organizational 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 Under 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

A Multidimensional View Difficulties in SA decisions underscores the need for a multidimensional approach Industry Analysis Focuses on external competitive forces and market structure It is essential in deriving a set of Strategic Industry Factors Resource View Focuses on internal and institutional factors Highlights market imperfections, leading to firm differences Limited transferability of Resources, scarcity, complementarity and appropriability give rise to rent opportunities. 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 Under 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

Conclusions Organizational rent stems from Analyzing Strategic Industry Factors (SIF) and Building strategic Assets (SA) accordingly , which consists of Resources and capabilities of the firm, by boundedly rational managers in the context of uncertainty, complexity, and intraorganizational conflicts. Multidimensional approach to SA decisions Industry Analysis, RBV, BDT Under 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

Discussion Questions How do we empirically test this multi-dimensional/ level model? A general question: To explain a social or an economic phenomenon, what criteria should we consider when selecting theory to utilize (BDT, TCE, PRT, RBV, or RO)? Under 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