1 Strategic Assets and Organizational Rent Strategic Assets and Organizational Rent Raphael Amit and Paul J.H Shoemaker Prepared by: Enrique, Lihong, John,

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Strategic Assets and Strategic Assets and Organizational RentOrganizational Rent

Raphael Amit and Paul J.H Shoemaker

Prepared by: Prepared by:

Enrique, Lihong, John, Enrique, Lihong, John, JongkukJongkuk

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IntroductionIntroduction Manger’s challenge is to identify, develop, protect and deploy resources and capabilities in a way to provide the firm with SCA and thereby, a superior economic return to capital

Managerial decision concerning such resources and capabilities are ordinarily made in a setting that is characterized by:

UncertaintyComplexityIntra-organizational conflicts

The theoretical foundation of the paper combines the resource view of the firm, the industry analysis framework and the behavioral decision theory (BDT).

The BDT acknowledge that managers often make substantial choices, be it in personnel selection or in crafting their firm's strategy highlighting cognitive imperfection that have a great impact on the firm’s approach to its external environment.

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Resources: stocks of available factors that are owned or controlled by the firm; they are converted into final products by using other firms assets and bounding mechanisms

Capabilities: firm’s capacity to deploy resources. Information-based tangible or intangible processes that are firm-specific and developed over time

Strategic Assets: set of difficult to trade and imitate, scarce, appropriable and specialized resources and capabilities that grant the firm’s competitive advantage

Strategic Industry Factors (SIF): resources and capabilities which are subject to market failures, and become the prime determinants of economics rents; they are characterized by their predisposition to market failures and subsequent asymmetric distribution over firms

Key Terms and ConceptsKey Terms and Concepts

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Key terms and conceptsKey terms and concepts

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Relationship between SIF and R&CRelationship between SIF and R&C

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Desired characteristics of the firm’ s R&CDesired characteristics of the firm’ s R&C

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A resource view of strategic assetsA resource view of strategic assets

The strategic value of a firm’s R&C is enhanced the more difficult they are to buy, sell, imitate or substitute (i.e., invisible assets such as tacit organizational knowledge)

The focus is not just on the material aspects of the R&C but on their transformational characteristics

The overlap of the firm’s R&C with the set of SIF will determine the available rents

The firm’s SA exhibit complementarity in deployment; the strategic value of each asset’s relative magnitude may increase with an increase in relative magnitude of the other SA

The more firm-specific, durable and scarce SA are, the more valuable to the firm can be their redeployment

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Decision about strategic assetsDecision about strategic assets

In making investment decision about Strategic Assets, managers face the daunting tasks of:

Anticipating possible futuresAssessing competitive interactions within each projected futureOvercoming organizational inertia and internal dispute in order to realign the firm’s bundle of SA

Recent psychological literature suggests that managers will approach this uncertainty, complexity and conflict with considerable bias, illusion and sub-optimality. Even if highly simplified, the associated SA decisions may not be solvable in closed-form equilibrium terms.

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Uncertainty

Pervasive uncertainty and ambiguity make it probable that managers will hold diverse expectations about such key variables

Their judgment and choices are likely to exhibit idiosyncratic aversions to risk and ambiguity

The joint effects of heterogeneous belief and manager-specific decision processes make equilibrium analyses hard to conduct for both managers and researchers

A bounded rationality view nonetheless predicts some overriding biases; managers will over emphasize past SIF and the SA associated therewith

If perceptions about strategy are unduly anchored on past SA, rent opportunities arise for firms that approach the future more flexibly and imaginatively

Decision about strategic assetsDecision about strategic assets

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Decision about strategic assetsDecision about strategic assets

Complexity

To keep SA decisions within cognitive bounds, managers must often and extensively simplify leading to additional bias

Discretionary managerial decision that relate to SA are affected by a wide range of cognitive biases about the handling of uncertainty and complexity. This in turn, creates suboptimality, imperfect limitability, and organizational rents for some firms.

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Decision about strategic assetsDecision about strategic assets

Conflict

Intra-organizational conflict is another serious challenge encountered by management in making SA decisions

Any change in the existing bundle of SA may benefit some employees and hurt others

The key point is that organizations are complex social entities with their own inertia and constraints; the issue is not simply to select the subset of R&C that is the most likely to yield high rents, but to make organizational participants an integral part of such decisions.

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The authors tried to replace the strategy field’s concept of key factors with the notion of SIF and SA as the basis for creating and protecting firm’s competitive advantage

The rent producing capacity of these SA depends, in part on the manager’s unique characteristics as well as on the extent to which they overlap with the industry-determined SIF

Owing the uncertainty, complexity and conflict (both in and outside the firm), different firms will employ different SA, without any one set being provably optimal or easily imitated

A multidimensional view for the crafting of a SA, in relation to market-determined SIF is created (industry analysis, the resource perspective, and behavioral decision theory)

Conclusions

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Conclusions

The role of the intra-organizational conflict and inertia were identified as important barriers to implementing changes to the firm’s bundle of SA

The uniqueness and low mobility of R&C stem from imperfect and hard to predict decisions facing high uncertainty, complexity and intra-firm conflicts

The authors strengthen the resource view by adding behavioral decision making biases and organizational implementation aspects as further impediments to the transferability or imitability of firm’s R&C