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 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
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.

3. Literature Review Vasconcellos and Hambrick (1989) Ghemawat (1991)
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
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.

4. Resources and Capabilities (R&C)
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)
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 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
The environmental change that can not be observed in advance makes the contract difficult to be complete.

6. 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.

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
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

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
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

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
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

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
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

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
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

13. Questions & Answers
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

14. Slides prepared by Wenxin GUO
Strategic Assets and Organizational Rent Strategic Management Journal, Vol. 14, No. 1. (Jan., 1993), pp By: Raphael Amit & Paul J. H. Schoemaker
Slides prepared by Wenxin GUO

15. 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?

16. 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

17. 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.

18. 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).

19. 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

20. Key terms and concepts
insuran

22. 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”).

23. 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.

24. 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.

25. 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

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.)

31. 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.

32. 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.

33. 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