Slides prepared by Wenxin GUO Strategic Assets and Organizational Rent Strategic 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?

Decisions about Strategic Assets Outline In place of “Key success Factors” Resources and Capabilities Strategic Assets Strategic Industry Factors Decisions about Strategic Assets Industry analysis The Resource View Behavioral Decision Theory

Introduction Why 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 & Definitions Organization‘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 Definitions Strategic Assets (“SA”) Unit of analysis: firm The 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 market Certain R&C which are subject to market failures become the prime determinants of economic rents at a given time

Key terms and concepts insuran

Key Definitions Organizational 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”).

Desired characteristics of the firm’ s R&C Managers are concerned with the creation of a bundle of tangible as well as intangible R&C, whose economics returns are appropriable by the firm.

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

Decisions about 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.

Decisions about Strategic Assets 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.

Decisions about Strategic Assets 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.

A Multidimensional View 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.)

A Multidimensional View 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 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