Paper Discussion Market Frictions as Building Blocks of an Organizational Economics Approach to Strategic Management Authors Joseph T. Mahoney and Lihong Qian (Mahoney, Joseph T., and Lihong Qian. "Market frictions as building blocks of an organizational economics approach to strategic management." Strategic Management Journal 34.9 (2013): 1019- 1041.) Presented by Ujjal Kumar Mukherjee University of Illinois – Urbana Champaign September 02, 2015
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Paper Discussion Market Frictions as Building Blocks of an Organizational Economics Approach to Strategic Management Authors Joseph T. Mahoney and Lihong.
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Paper Discussion
Market Frictions as Building Blocks of an Organizational Economics Approach to
Strategic Management
Authors
Joseph T. Mahoney and Lihong Qian
(Mahoney, Joseph T., and Lihong Qian. "Market frictions as building blocks of an organizational economics approach to strategic management." Strategic Management
Journal 34.9 (2013): 1019-1041.)
Presented by
Ujjal Kumar Mukherjee
University of Illinois – Urbana Champaign
September 02, 2015
Index
1. Introduction: Research Question
2. Fundamental Idea of the Paper: Market Friction Logic
3. Details of Market Friction Logic
4. Conclusion (Recent Developments)
Objective of Research
To synthesize insights from several organizational economic
approaches such as transaction costs, property rights, resource based
and real options into an integrated market frictions approach as
fundamental building blocks for an organizational economic
approach to strategic management.
Research Questions
Why do firms exist?
Why do some firms outperform others?
Three primary strategic goals as underpinnings to the above questions:
Cost Minimization
Value Creation
Value Capture
Index
1. Introduction: Research Question
2. Fundamental Idea of the Paper: Market Friction Logic
3. Details of Market Friction Logic
4. Conclusion (Recent Developments)
First Fundamental Welfare Theorem of EconomicsAny Walrasian Equilibrium Allocation is Pareto-efficient.
Assumptions:
1. Lots of exchange goods, lots of individuals endowed with some of each good.
10. Poorly or undefined property rights (North, 1990).
Consequences of Market Frictions
Fundamental Idea of Economic Approach to Strategic Management
“Strategic Management seeks remedies for these various economic consequences due to market frictions for the purpose of cost minimization, or ways to leverage these market frictions for the purpose of value creation and value capture”
-
Mahoney and Qian, 2013.
Index
1. Introduction: Research Question
2. Fundamental Idea of the Paper: Market Friction Logic
3. Details of Market Friction Logic
4. Conclusion (Recent Developments)
Organizational Economies Approach to Cost Minimization
Reducing transaction costs is the primary organizational economics approach to the strategic goal
of cost minimization.
Opportunism and Asset Specificity
Poses transactional hazards to other exchange partners
Can cause economic hold-up problems.
Strategic Approach to Cost Minimization
Internalization to mitigate contractual hazard.
Vertical Integration.
Organizational Economies Approach to Value Creation
Resource based approach considers the strategic goal of value creation, more specifically, the potential economic rents derived
from heterogeneous resources and capabilities.
Four cornerstones of competitive advantage:
Superior resources.
Ex-post limits to competition.
Imperfect resource mobility.
Ex-ante limits to competition.
The real options theory provides a theoretical explanation for why firms may make investment decisions that differ from what the (narrowly defined) net present value approach would prescribe.
Market Friction Based Approach to Value Creation
Competitive access to valuable resources: Relevant: A resource is relevant if there is a demand for it (Barney, 1991). Scarce /Rare: Resources are scarce if supply is limited and there are
limitations on expansion of supply (Peteraf, 1993). Uniqueness of resource. Heterogeneity of resources. Complementarity: Relative magnitude of strategic resource may increase
value of other resources.
Strategic Response: Low Transferability: Difficulties in pricing, information asymmetry,
difficulties in partitioning, and isolation mechanisms such as patenting, trademark enforcement.
Inimitability: Path dependence, social complexity, and causal ambiguity. (Barney, 1991)
Non-substitutability: Imperfect substitution between firm resources.
Real Options Based Approach to Value Creation
Advantages:
Low Transferability: Protection against uncertainty.
Flexibility in strategic choice.
Consideration of inter-project and inter-temporal spill-overs.
Evaluating growth options.
A real options is the right but not the obligation to undertake certain business initiative such as deferring, abandoning, expanding, staging, or contracting a capital investment.
Organizational Economies Approach to Value Capture
Resource based approach
Complementarity: Possession of co-specialized resource.
Embeddedness: Cross-sectional and longitudinal interconnectedness of resources.
Property Rights Theory
Well defined residual control rights.
Patent, trade-mark protection and equity share arrangements are some examples.
Appropriation of economic rent is a necessary condition for economic value sustainability
Building on the same fundamental logic, each theory branches out by emphasizing different but overlapping combinations of market frictions to address its canonical problem.
Taking a Stock: Market-frictions logic
Using the market-frictions logic First approach is to start with the research gap
identified within the existing literature
Second approach is to start with the strategic phenomenon of interest
Recent Development in Organizational Economic Approach
Cost creation coupled with value creation.
Intra-firm spillovers and governance inseparability.
Intra-firm spillovers and economies of scale and scope.
Cost minimization coupled with value capture.
Asset specificities and negative inter-firm externalities.
Asset specificity and loss of positive inter-firm spillovers.
Value creation coupled with value capture. Poorly or undefined property rights and capabilities with value creation
potential.
Asset specificity and positive inter-firm spill-overs.