Strategic Assets and Organizational Rent Raphael Amit; Paul J. H.

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StrategicAssetsandOrganizationalRent
RaphaelAmit;PaulJ.H.Schoemaker
StrategicManagementJournal,Vol.14,No.1.(Jan.,1993),pp.33-46.
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Strategic Management Journal, Vol. 14, 33-46 (1993)
/
STRATEGIC ASSETS AND ORGANIZATIONAL RENT
RAPHAEL AMlT
(_I
Faculty of Commerce and Business Administration, University of British Columbia,
Vancouver, British Columbia, Canada
\ PAUL J.H. SCHOEMAKER

Graduate School of Business, University of Chicago, Chicago, Illinois, U.SA.

We build on an emerging strategy literature that views the firm as a bundle of resources
and capabilities, and examine conditions that contribicte to the realization of sustainable
economic rents. Because of (I) resource-market imperfections and (2) discretionary
managerial decisions about resource derjeloprnent and deployment, Mee expect firms to differ
(in and out of equilibriicm) in the resources and capabilities they control. This asymmetry
in turn can be a source of sustainable economic rent. The paper focuses on the linkages
between the industry analysis framework, the resource-based view of the firm, behavioral
decision biases and organizational implementation issues. It connects the concept of Strategic
Industry Factors at the market level with the notion of Strategic Assets at the firm level.
Organizational rent is shown to stem from imperfect and discretionary decisions to develop
and deploy selected resources and capabilities, made by boitndedly rational managers facing
high uncertainty, complexity, and intrafirnz conflict.
INTRODUCTION dimensions of competition that will prevail in the
future. For managers. the challenge is to identify,
However they phrase them, executives often develop, protect, and deploy resources and
examine such questions as, 'What makes us capabilities in a way that provides the firm with
distinctive or unique?'; 'Why do some and not a sustainable competitive advantage and, thereby,
other customers buy from us?'; 'Why are we a superior return on capital.
profitable?'. Typical answers might refer to the Managerial decisions concerning such resources
firm's 'technical know-how,' 'responsiveness and capabilities are ordinarily made in a setting
to market needs,' 'design and engineering that is characterized by: (1) Uncertainty about
capability,' or 'financial resources.' The com- (a) the economic, industry, regulatory, social,
mon theme among these responses is that and technological environments, (b) competitors'
management deems some firm-specific behavior, and (c) customers' preferences;
resources and capabilities to be crucial in (2) Complexity concerning (a) the interrelated
explaining a firm's performance. causes that shape the firm's environments, (b) the
While empirical models may, ex post, point to competitive interactions ensuing from differing
a limited set of resources and capabilities that perceptions about these environments; and by
explain some of the firm's past performance, ex (3) Intraorganizational conflicts among those who
ante such models offer limited insight into the make managerial decisions and those affected by
them. ~ h e i ec onditions of uncertainty, corn-
plexity9 and conflict are to
Key words: Bounded rationality, heuristics, organ,-
zational rents, resource view. strateg-i c assets, strateg- ic articulate or ~~~odFeolr. example, the exact
industry factors relationships between the firm's bundle of capa-
a0143-20951931010033-14$12.00 Received 18 June 1990
1993 by John Wiley & Sons. Ltd. Revised 18 August 1992
34 R. Amit and P.J. H. Schoemaker
bilities and its performance may be unclear in strengths and the Key Success Factors (KSF)"n
the present, let alone the future.' its environment. Using a range of mature
By explicitly addressing these dimensions of industrial product industries, their empirical
the managerial challenge, our paper attempts to findings showed that organizations which rated
link the 'industry analysis framework' with the highest on industry KSF clearly outperformed
'resource view of the firm' and highlight the their rivals.
human limitations in crafting firm strategy. We Although this analysis provides an important
start by briefly reviewing the existing literature test of a core thesis in strategy, it also raises
on the resource-based view and defining the further questions. First, the Vasconcellos and
terms we use. We proceed by articulating our Hambrick (1989) study considers the industry as
view and contribution to the theory. We end by the primary unit of analysis, whereas managers
examining the theory in the context of multiple operate from a firm perspective. Second, the
dimensions and emphasizing the heuristic nature empirical analysis is ex post, whereas managers
of organizational rent creation. need to make resource deployment decisions ex
ante, which involves uncertainty, complexity
and organizational conflict. Third, it should be
LITERATURE AND DEFINITIONS recognized that if all firms score high on the
presumed KSF, these factors will cease to be
A growing body of empirical literature points KSF. Thus, we need to introduce sustainable
to the importance of firm-specific factors in asymmetry into the analysis, possibly stemming
explaining variations in economic rent2 (Jacobson from mobility barriers, organizational inertia,
1988; Hansen and Wernerfelt, 1989). For exam- heterogeneous expectations, failures in resource
ple, Cool and Schendel (1988) reported significant markets, and so forth.
and systematic performance differences among The use of KSF as a core concept in strategy
firms belonging to the same strategic group within was recently critiqued by Ghemawat (1991a) as
the U.S. pharmaceutical industry. Additionally, lacking: (1) identification (there may be many
Rumelt (1991) found that business units differ success factors, making it hard to decide which
far more within than across industries. Theorists ones to focus on); (2) concreteness (ambiguity
have long recognized the importance of firm about the causal processes that tie the firm's
differences and distinctive competencies success factors to its performance); (3) generality
(Selznick, 1957; Ansoff, 1965; Andrews, 1971; (to be success factors they must be undervalued;
Hofer and Schendel, 1978). Current managerial i.e., the cost benefit ratio associated with their
writings such as Irvin and Michaels (1989), development must be less than one): and
Wernerfelt (1989), Prahalad and Hamel (1990), (4) necessity (the failure of the success factor
Grant (1991), or Stalk, Evans, and Shulman approach to account for dynamic aspects of
(1992) further evidence a continuing interest in strategy). Whereas we agree with Ghemawat
core skills and capabilities as a source of (1991a) about these challenges, it should be
competitive advantage. pointed out that without uncertainty, complexity,
Vasconcellos and Hambrick (1989) recently and conflict, there would be no room for
conducted an empirical, ex post test of the long- discretionary managerial decisions on strategy
standing strategy premise that an organization's crafting. Only differences in initial endowments,
success depends on the match between its or luck, could underlie asymmetric performance
in that case.
Since KSF notions are commonly used by
strategy scholars and managers alike, they need
I Lippman and Rumelt (1982) refer to this as 'causal
ambiguity.' to be related more carefully to strategy theory.
'
Economists commonly distinguish among three types of An emerging theoretical perspective-that of the
rent: Ricardian rents are extraordinary profits earned from
firm as a collection of resources and capabilities
resources that are in fixed or limited supply. Pareto rents
(or quasi rents) refer to the difference between the payments
to a resource in its best and second best use. Lastly, Monopoly
'
rents stem from collusion or government protectton. Klein, There are numerous interpretations in the Marketing and
Crawford and Alchian (1978) examine quasi-rents in the Strategic Management literature concerning the meaning of
context of vertical integration. KSF. See for example Thompson and Strickland (1990).
Strategic Assets 35
required for productlmarket competition-pro- the firm. Resources are converted into final
vides one such underpinning. This Resource View products or services by using a wide range of
of the firm (Coase, 1937; Penrose, 1959: Nelson other firm assets and bonding mechanisms such
and Winter, 1982; Teece, 1982; Rumelt, 1984; as technology, management information systems,
Wernerfelt, 1984; Barney, 1986a, 1986b, 1989, incentive systems, trust between management
1991; Dierickx and Cool, 1989a, 1989b, 1990; and labor, and more. These Resources consist,
Teece, Pisano, and Shuen, 1990; Conner, 1991; inter alia, of knowhow that can be traded (e.g.,
Ghemawat, 1991b; Peteraf, 1991) focuses on patents and licenses), financial or physical assets
factor market imperfections and highlights the (e.g., property, plant and equipment), human
heterogeneity of firms, their varying degrees of capital, etc.'
specialization, and the limited transferability of Capabilities, in contrast, refer to a firm's
corporate resources. The resource perspective capacity to deploy Resources, usually in combi-
complements the industry analysis framework nation, using organizational processes, to effect
(Porter, 1980; Schmalensee, 1985). The latter a desired end. They are information-based,
focuses on product markets; it views the sources tangible or intangible processes that are firm-
of profitability to be the characteristics of the specific and are developed over time through
industry as well as the firm's position within the complex interactions among the firm's Resources.
industry. The resource view holds that the type, They can abstractly be thought of as 'intermediate
magnitude, and nature of a firm's resources and goods' generated by the firm to provide enhanced
capabilities are important determinants of its productivity of its Resources, as well as strategic
profitability. flexibility and protection for its final product or
In developing the theoretical foundations, we service. Unlike Resources, Capabilities are based
shall build on both perspectives: The resource view on developing. carrying, and exchanging infor-
of the firm and the industry analysis framework. mation through the firm's human capital. Itami
In addition, we introduce a third perspective, that (1987) refers to information-based Capabilities as
of Behavioral Decision Theory (BDT). This new 'invisible assets.' He notes that some of the firm's
field explicitly acknowledges that managers often invisible assets are not carried by its employees
make suboptimal choices, be it in personnel but rather depend on the perceptions of the
selection or in crafting their firm's strategy. BDT firm's customer base (as brand names may do).
can shed light on how boundedly rational managers Capabilities are often developed in functional
cope with the kinds of uncertainty and complexity areas (e.g., brand management in marketing) or
referred to above. Unlike the resource view, which by combining physical, human, and technological
focuses on failures in resource markets. the BDT Resources at the corporate level. As a result,
perspective highlights cognitive imperfections that, firms may build such corporate Capabilities as
while internal to the firm (e.g., internal conflict, highly reliable service, repeated process or
cognitive biases of managers, etc4), have a great product innovations, manufacturing flexibility,
impact on the firm's approach to its external responsiveness to market trends, and short
environment. To date, few links have been drawn product development cycles.
between the BDT literature, the industry analysis Some of the firm's Resources, but especially
framework and the resource view of the firm (for its Capabilities, may be subject to market failure:
an exception, see Zajac and Bazerman, 1991). that is, an inability to trade these factors in
Before proceeding to the theory section, where perfect markets. Multiple sources of market
these perspectives are examined and integrated, we failure have been suggested: Williamson (1975)
clanfy below the key terms and concepts we use. points to small numbers, opportunism. and
information impactedness; Klein, Crawford and
Alchian (1978) focus on factor specialization in
Definitions
terms of use or location; Caves (1984) highlights
The firm's Resources will be defined as stocks of sunk costs, and suggests that a factor's value is
available factors that are owned or controlled by inversely related to the extent of its specialization
'
Penrose's (1959) sem~nalw ork also addresses some of these See Grant (1991) for a detailed description of various types
intrafirm issues. of both tangible and intangible resources of the firm.
36 R. Amit and P.J.H. Schoemaker
Table 1. General characteristics of strategic industry factors (SIF)*
a. Stock type Resources and Capabilities that ex post are shown to be key determinants of firm profitability
in an industry;
b. Determined at the market level through complex interactions among industry rivals, new entrants,
customers, regulators, innovators, suppliers, and other stakeholders;
c. Strategic in that they are subject to market failures and may be the basis for competition among rivals;
d. The bundle of SIF changes over time and is not known ex ante;
e. Their development takes time, skill, and capital; they may be specialized to particular uses;
f. Investments in them are largely irreversible (i.e.. entail sunk costs);
g. Their values deteriorate or appreciate, over time, at varying rates of change;
h. Their pace of accumulation may be affected by a range of managerial actions (policy levers) and by the
magnitude of other Resources and Capabilities that are controlled by industry rivals. One cannot easily
speed up their development (e.g.. doubling the investment will not usually halve the time);
i. Their value to any particular firm may depend on its control of other factors-the complementarity
property. For instance, the value of a firm's product design capability may depend upon the effectiveness
of its distribution network;
j. Not all aspects of their development and interactions will be known or controllable.
This table synthesizes notions from Penrose, 1959; Nelson and Winter. 1982; Teece. 1982; Rumelt, 1984; Wernerfelt, 1984:
Barney, 1989, 1991; Dierickx and Cool, 1989a, 1989b. 1990: Teece er. a/.. 1990: Conner. 1991; Ghemawat, 1991b; Peteraf,
1991.
for a particular use or industry ~ettingW.~e thus set of Strategic Industry Factors changes and
define the firm's Strategic Assets as the set of cannot be predicted with certainty ex ante.'
difficult to trade and imitate, scarce, appropriable The challenge facing a firm's managers is to
and specialized Resources and Capabilities that identify, ex ante, a set of Strategic Assets (SA) as
bestow the firm's competitive advantage. grounds for establishing the firm's sustainable
When the industry (or product market) is the competitive advantage, and thereby generate Organ-
unit of analysis, one may observe that, at a given izational Rents. These are economic rents that stem
time, certain Resources and Capabilities which from the organization's Resources and Capabilities,
are subject to market failures, have become the and that can be appropriated by the organization
prime determinants of economic rents. These will (rather than any single factor). This requires
be referred to as Strategic Industry Factors (SIF). managers to identify the present set of Strategic
For instance, Ghemawat (1991b) suggests that Industry Factors (SIF) as well as to assess the
one may classify industries in terms of the possible sets of SIF that may prevail in the future.
'strategic factors that drive competition in them Also, decisions on the further development of
by virtue of dominating the structure of sunk existing and new Strategic Assets-those that are
costs incurred in the course of competition.' most likely to contribute to the creation and
Strategic Industry Factors, in this context, are protection of economic rents--need to be made.
characterized by their proneness to market Not every firm will succeed with its targeted set
failures and subsequent asymmetric distribution of SA, as their applicability and relevance ultimately
over firms. By definition, Strategic Industry hinges on the complex interaction referred to above.
Factors are determined at the market level Examples of possible SA include: Technological
through complex interactions among the firm's capability; fast product development cycles; brand
competitors, customers, regulators, innovators management; control of, or superior access to,
external to the industry, and other stakeholders. distribution channels; a favorable cost structure;
Their main characteristics are articulated in Table buyer-seller relationships; the firm's installed user
1. It is important to recognize that the relevant base; its R&D capability; the firm's service
The roles of factor specialization and sunk costs in a firm's 'While it may not be possible to identify ex ante the relevant
ability to earn economic rents have been examined by Klein set of strategic assets. one can screen out those assets that
er al. (1978), as well as by Baumol. Panzar, and Willig (1982). are not strategic.
Strategic Assets 37
Firm Industry

to market failure e scarce
e overlap with strategic e appropriabk
industry fadm e firm specdic
6 uncertain ex-ante
formthebasis dthe
r determineorganizabnal
Figure 1. Key constructs
organization; its reputation and so forth. The Resources and Capabilities (R&C),whose economic
relationships between industry determined Strategic returns are appropriable by the firm. The basic
Indusny Factors, and firm level Resources, Capabili- idea that underlies this perspective, cited earlier
ties, and Strategic Assets, are depicted in Figure 1.' as the Resource-Based View Of The Firm, is that
marshalling a set of complementary and specialized
Resources and Capabilities which are scarce,
A RESOURCE VIEW OF STRATEGIC durable, not easily traded, and difficult to imitate,
ASSETS may enable the firm to earn economic rents. Thus,
according to the resource perspective, the value of
By focusing on the firm as the relevant unit of a firm's Strategic Assets extends beyond their
analysis. managers are concerned with the creation contribution to the production process. It depends
of a bundle of tangible as well as intangible on a wide range of characteristics (see Figure 2),
and varies with changes in the relevant set of
Strategic Industry Factors, as depicted by Figure 1.
Wote that we abandon from here on the term Key S~rccess The supposition is that, even in equilibrium, firms
Fuctors. because of its many possible interpretations and
may differ in terms of the Resources and Capabilities
Useb.
38 R. Amit and P.J. H. Schoemaker
Figure 2. Desired characteristics of the firm's resources and capabilities
they control, and that such asymmetric firms scarcity, limited transferability of Resources, imper-
may coexist until some exogenous change or fect substitutability, and appropriability. Barney
l0
Schumpeterian shock occurs (Schumpeter, 1934).9 (1986a, 1986b, 1989, 1991), Dierickx and Cool
Economic rents, in this setting, derive from (1989a, 1989b, 1990), and Ghemawat (1991b)
asymmetry in initial resource endowments, resource provide incisive discussions of desired attributes of
such firm Resources. Figure 2 summarizes the
primary determinants of the rent producing capacity
The assumption of heterogeneous firms controlling resources
that are not perfectly mobile (i.e.. that cannot be easily of a firm's Strategic Assets.
bought. sold or imitated) is essential to the existence of such In general, the strategic value of a firm's
an equilibrium. Lippman and Rumelt (1982) and Barney
Resources and Capabilities is enhanced the
(1986a, 1986b) articulate some of the reasons for imperfect
imitability. These include unique histor~calc onditions, causal
ambiguity, and complexity. Ghemawat (1991b) refers to these
"'
conditions as intrinsic inimitability and therefore the firm's Whereas Industrial Organization economics often looks
factor combinations are viewed as intrinsically heterogeneous. outside the firm to explain sustained superior performance
He suggests that less stringent conditions (e.g., imitation by examining. for example, various market structures,
being costly but not infeasible) may be sufficient for alternative regulatory settings. collusive relationships, or
sustainability. Relatedly, Peteraf (1991) equates resource substitute technologies. the source of rents according to the
heterogeneity to differential levels of factor efficiency. resource perspective is internal.
Strategic Assets 39
more difficult they are to buy, sell, imitate or Capabilities declines to the extent that they are
substitute. For example, invisible assets such substitutes.
as tacit organizational knowledge or trust The more firm-specific, durable and scarce
between management and labor cannot be Strategic Assets are, the more valuable to the firm
traded or easily replicated by competitors can be their deployment, for at least three reasons.
since they are deeply rooted in the organiza- First, if few other firms have R&C that are in
tion's history. Such firm-specific and often high demand and are difficult to imitate, fewer
tacit assets accumulate slowly over a period firms will pursue market strategies based thereon,
of time (i.e., they are history-dependent state since others would find these strategies too costly
variables. See Dierickx and Cool 1989a, and time consuming. Second, firm-specificity and
I'
1989b, 1990). The focus here is not just the presence of transaction costs suggest that the
on the material aspects of Resources and value of some Resources and Capabilities will be
Capabilities, but especially on their transform- lower for certain firms. Third, the more durable
ational characteristics. These are often specific they are, the smaller will be the investment required
to a firm andlor to a particular industry at a to offset their depreciation, if any.'"
given point in time. This idiosyncracy makes These characteristics of the firm's assets
them difficult to imitate and their development emphasize the trade-off between the speciali-
time cannot be easily compressed. zation of assets (a necessary condition for
In addition, the applicability of the firm's rent) and the robustness of these assets across
bundle of Resources, and Capabilities to a alternative futures (see Schoemaker, 1992a). The
particular industry setting (i.e., the overlap trade-off between specialization and robustness
with the set of Strategic Industry Factors), is only partial, as specialization can be of two
will determine the available rents. Managers kinds: (1) limited use or (2) unique use. Limited
influence the development and deployment use entails reduced robustness in that the asset
of Strategic Assets by adopting a process is of little value in particular states of nature.
perspective (in contrast to an input-output Uniqueness, in contrast, is defined relative to
model). This perspective recognizes distinct other players (rather than to states of nature)
phases of development, the importance of and need not be restricted in scope or by
feedback, and the need for vision. It also circumstance. Due to competitive pressures, the
entails careful scripting of how Resources, kinds of specialization that can yield positive
information and people are combined and rents tend to entail limited use (and hence, risk).
sequenced over time in order to evolve specific Uniqueness, in contrast, may reflect historical
Capabilities. In this sense, the viewpoint is accident or heterogeneous expectations as the
essentially an institutional one (de Gregori, primary reasons for non-imitation.
1987). Dierickx and Cool (1989a, 1989b) In essence, firms develop specialized assets to
especially highlight the importance of pro- enhance profits at the price of reduced flexibility
cesses for asset accumulation and their impact in the face of Schumpeterian shocks. This trade-
on inimitability of the firm's Resources. off is, in our view, a core issue in deciding
The firm's Strategic Assets may further exhibit which R&C to develop. Sustainable advantage is
complementarity in deployment or application obtained when existing and potential competitors
(Barnard, 1938); that is, the strategic value of
each asset's relative magnitude may increase with
an increase in the relative magnitude of other Dierickx and Cool (1989b. 1990) have introduced the
Strategic Assets (also known as positive externali- notion of complementarity in asset accumulation (or
interconnectedness) which refers to economies of scope in
ties; see Dierickx and Cool, 1990). An example
asset accumulation. This distinction highlights the dynamic
is Teece's (1986) notion of co-specialized assets- nature of asset accumulation. whereas complementarity in
those for which there is a bilateral dependence asset deployment is a static notion.
The strategic value of R&C may not lie merely in the
in application. Under complementarity, the com-
scarcity of natural resources such as land and oil reserves,
bined value of the firm's Resources & Capabilities but also in the ability to deploy concurrently in multiple uses
may be higher than the cost of developing or such invisible firm-specific assets as culture, reputation, and
relationships with suppliers and buyers.
deploying each asset individually. Conversely,
Unlike physical capital, most capabilities are enhanced
the strategic value of the firm's Resources & with use as more experience is gained.
40 R. Arnit and P.J.H. Schoemaker
(new entrants) lack either the ability or desire Uncertainty
to imitate the rent-producing R&C. A firm's
managers can lessen the incentives of competitors Under rational expectations, the SA challenge will
to imitate or develop close substitutes by, for largely vanish as managers will hold the same
example, erecting entry or mobility barriers or expectations about the set of SIF that will prevail
by building 'isolating mechanisms' (Rumelt, in the future. Since they will maximize the expected
1984). Like Ghemawat (1986). we focus here on value of returns, their initial SA endowments are
aspects that relate to the firm's superior access the only source of variance regarding their behavior.
to Resources. (Of course. competitive advantage In reality, however, managers face considerable
may also arise from size and scope, as well as uncertainty and ambiguity, stemming from new
legal or other restrictions on competition.) proprietary technologies, economic and political
Given the competitive and changing context in trends, competitive actions, changes in societal
which managers must decide which R&C to values, and corresponding shifts in consumer
develop as their firm's basis for competition, it is preferences. Pervasive uncertainty and ambiguity
doubtful that decisions about which SA to develop make it probable that managers will hold diverse
and deploy can be optimally deduced from a expectations about such key variables as demand
general normative theory. More likely, continually growth, price levels, costs, and consumer tastes.
changing heuristics will emerge that strive to Further, their judgements and choices are likely
better incorporate the uncertainty, complexity and to exhibit idiosyncratic aversions to risk and
organizational conflicts confronting managers. l4 As ambiguity (Kahneman and Tversky, 1979; Einhorn
such. our view extends that of Porter's (1980) by and Hogarth. 1986). Ih
emphasizing not only the industry environment The joint effects of heterogeneous beliefs and
in determining future profit but especially the manager-specific decision processes (and biases)
importance of managerial discretion and innovation make equilibrium analyses hard to conduct for
in SA decisions. The latter are by no means both managers and researchers. Coupled with
foregone conclusions; the external environment is overconfidence (Lichtenstein, Fischhoff, and Phil-
only one part of the economic rent story. lips, 1982) and a penchant for confirming over
disconfirming evidence (Klayman and Ha, 1987),
Strategic Assets choices under uncertainty may
DECISIONS ABOUT STRATEGIC entail opposing biases whose net effects are hard
ASSETS to assess. For example, ambiguity aversion and
underweighting of medium and high probabilities
In making investment decisions about Strategic will normally lead to risk aversion. However,
Assets, managers face the daunting tasks of this tendency may be countered or mitigated by
(1) anticipating possible futures, (2) assessing overconfidence and ambitious targets, either of
competitive interactions within each projected which can induce strong risk-seeking." Conse-
future, and (3) overcoming organizational inertia quently, the final SA investment decisions are
and internal dispute in order to realign the firm's
bundle of SA. Recent psychological literature
a multiplicity of state and control variables in noncooperative
(Kahneman, Slovic, and Tversky, 1982) suggests multiplayer games. An added complication in our case arises
that managers will approach this uncertainty, from the difficulty of specifying the game in terms of the
number of players. as well as the state. action. and pay-off
complexity, and conflict with considerable bias,
spaces.
illusion, and suboptimality. Even if highly simpli- '' When gambles entail well-defined probabilities, most
fied and abstracted, the associated SA decisions people exhibit risk aversion (except for low probability and
pure loss gambles). If probabilities are ill defined (the case
may not be solvable in closed-form equilibrium
of ambiguity), even greater risk-aversion is encountered due
terms (although, see Camerer, 1991).'" to people's dislike to unknown risk. Most managerial decisions
entail risk as well as ambiguity.
'' The predicted bias is toward risk-seeking for R&C that
''
Economic rent may accrue to firms with superior or more are deemed to be below some chosen reference point and
timely heuristics, thereby capitalizing on variable as well as toward risk-arjersion for those that exceed this aspiration
bounded rationality (see Schoemaker, 1990). level (see Kahneman and Tversky, 1979). Thus. unrealistic
l5 For example, when modeled as a differential game, the goals or ambitious targets will likely result in unduly risky
problem will probably not be tractable. Closed or even open- R&C decisions. For additional biases and indeterminacies in
loop solutions are generally unattainable when confronted with risk-taking see MacCrimmon and Wehrung (1986).
Strategic Assets 41
hard to predict without detailed micro-level In hindsight, chance and skill are often confused
knowledge of managers' reference points, prob- (Fischhoff and Beyth, 1975). Judgments about
lem framing, degrees of overconfidence, non- correlation or relative importance frequently
linear weighting of probabilities, etc. (see Schoe- miss important cues and interactions (Jennings,
maker, 1992b). Amabile, and Ross, 1982; Hammond, 1955;
A bounded rationality view (Simon, 1979) may Hogarth, 1987), especially if not driven by a
nonetheless predict some overriding biases. For causal theory. Imputations about causality, in
example, managers will probably over-emphasize turn, may be overly sensitive to temporal and
past Strategic Industry Factors, and the SA spatial contiguity, covariation, and similarity of
associated therewith. People generally tend to cause and effect (Einhorn and Hogarth, 1986).
repeat what was rewarded before. Consequently, Unless aided by formal analyses, managers may
managers might be too focused on past competi- easily misconstrue the industry's success factors
tors and pay too much attention to recent and persist in erroneous beliefs about their firm's
experience. The latter is known as the recency SA until proven wrong by competitors.
effect which is closely linked to the more general Lindblom (1959) and Quinn (1980), among
notion of the availability heuristic (Tversky and others, have highlighted the incremental way in
Kahneman, 1974). If perceptions about strategy which managers usually deal with complexity.
are unduly anchored on past SA, rent opportuni- Writers on policy formation have, in general,
ties arise for firms that approach the future more emphasized the contextual and labile nature of
flexibly and imaginatively. These may be new organizational decision making (Mintzberg, 1978;
firms or incumbent ones that vigorously challenge Isenberg, 1987, MacCrimmon and Wehrung,
their own beliefs. Past success may especially 1986). An example is Cohen, March, and Olsen's
bias managers toward an illusion of control (1972) garbage can model, in which problems,
(Langer, 1975). Recent emphasis on the strategic solutions, hidden agendas, coalitions and so
importance of continual organizational learning on mesh in complex ways to yield decisions.
(de Geus, 1988; Senge, 1990) underscore the Mintzberg (1978) and Mintzberg and Waters
special challenges posed by uncertainty and (1983) further highlight the role of the firm's
complexity, whether the firm has been successful unconscious past. They view a firm's realized
or not. strategy (e.g., its SA decisions) to be a blend of
rational, or at least intentional choices, and
implicit or tacit forces within organizations (see
Complexity
also Hamel and Prahalad, 1989). The litany of
To keep SA decisions within cognitive bounds, biases mentioned above serves to underscore
managers must often and extensively simplify our main point here: Discretionary managerial
(Russo and Schoemaker, 1989). The kinds of decisions that relate to Strategic Assets are
simplification they engage in may lead to affected by a wide range of cognitive biases about
additional biases. Tversky and Kahneman (1981) the handling of uncertainty and complexity.
offer persuasive examples of how simplified This, in turn, creates suboptimality, imperfect
framing (such as isolating alternatives or express- imitability. and organizational rents for some
ing outcomes relatively) can lead to inconsistent firms.
decisions. Specifically, frames may (1) bound
out important futures, competitors, or new
Conflict
technologies; (2) dictate the reference point
relative to which SA are measured (e.g., Chrysler Intraorganizational conflict is another serious
comparing its quality control capability to GM's challenge encountered by management in making
rather than to Japan's Honda); and, (3) specify SA decisions. Any change in the existing bundle
the yardsticks or metric used to measure SA of SA may benefit some employees and hurt
(e.g., measuring quality in terms of defective others. Not only do complex agency problems
parts per thousand vs. number and type of (Jensen and Meckling, 1976; Fama and Jensen,
consumer complaints). 1983a, 1983b) exist in obtaining the necessary
Managers' attempts to understand present and information and judgments concerning SA selec-
past SIF may be hampered by additional biases. tion, but also issues of cooperation, trust, and