Posts filed under ‘Strategic Management’
Assets versus Activities
| Richard Langlois |
At the risk of injecting some substance into my posts, let me raise an issue in the economics of organization that I have been thinking about recently.
There has been much discussion in the literature about the differences between the transaction-cost and capabilities views of organization, something that Nicolai and I, among many others, have written about. But another division might be between asset theories and activity theories. Asset theories are of course the province of the mainstream economics of organization. In this literature, one typically defines vertical integration as joint ownership of productive assets, and integration typically arises because of hazards from cooperating without joint ownership. Activity theories come from the literatures on product design and modularity. Here the issue is how tasks (or activities) ought to be designed given the structure of the production process. In this literature, the logic of integrality versus modularity provides clues to which activities out to be “outsourced.” Perhaps the best example of this kind of thinking is by Baldwin and Clark. I have also tried to think about the issues in a paper that will be coming out in Organization Studies. In many ways, this approach harkens back to Adam Smith. (more…)
Syllabus Bleg
| Peter Klein |
As part of a curriculum review project I’m collecting syllabi for first- or second-year PhD courses in strategy, organization theory, and the economics of organizations. If you have a syllabus you’re willing to share, please send it to me at pklein@missouri.edu. I will discuss broad themes and patterns with my colleagues but will keep details confidential. Thanks!
New Paper by Tan and Mahoney: Integrating TCE, RBV, and Agency Theory
| Peter Klein |
Are transaction cost economics, the resource-based view of the firm, and agency theory substitutes or complements? Most applied studies in organizational economics use one or another framework to explain the phenomenon in question; relatively few studies incorporate multiple frameworks, and even fewer attempt to distinguish among them empirically.
A new paper by Danchi Tan and Joe Mahoney, “Why a Multinational Firm Chooses Expatriates: Integrating Resource-Based, Agency and Transaction Costs Perspectives” (Journal of Management Studies, May 2006), takes the middle approach, developing a new framework that incorporates key elements of TCE, RBV, and AT to explain multinational firms’ decisions to staff their foreign subsidiaries with expatriates or host country nationals. (more…)
My First Bleg: Transaction Similarity
| Peter Klein |
A “bleg,” for those who don’t know, is a blog post asking readers for help. (We’ve already written plogs, posted bloggerel, and suffered from blogathy and even blogstipation. No problems yet with blogorrhea.)
Anyway, here’s the bleg. Can readers provide some good references from the capabilities or RBV literatures on Coase’s concept of “transaction similarity,” the idea that firms are more likely to integrate transactions similar to transactions that have been integrated in the past, controlling for current levels of asset specificity, uncertainty, frequency, and so on?
Interesting New Paper by JC Spender
| Nicolai Foss |
One of the puzzles of business administration/management is that the fields of entrepreneurship and strategic management have existed, and continue to exist, in such relative separation. Intuitively, one would think of entrepreneurship — the identification and seizure of new opportunities for profit — as constituting the core of the strategic management field. This, however, is not the case. However, there are various indications that strategic management scholars are about to develop interest in entrepreneurship (e.g., work by Kim and Mahoney, Alvarez and Barney).
One specific indication is an excellent and highly recommended recent paper by JC Spender, “The RBV, Methodological Individualism, and Managerial Cognition: Practising Entrepreneurship.” Here is the Abstract:
If we consider Schumpeter’s methodological individualism and entrepreneurship, the ‘managerial cognition’ arguments can contribute new insights to the RBV discourse. I open by examining the links between resource inputs and firm outputs , and argue the types of rents implied by the RBV cannot arise or be sustained if these links are logical and explainable. The only rents then available are Marshallian quasi-rents arising from information asymmetry or the Ricardian rents from initial allocation, i.e., those of Porter’s analysis. Today’s RBV lacks the components necessary to create and manage the value at the core of Barney’s VRIO model. Causal ambiguity or uncertain inimitability might imply sustainable rents but clearly do not explain how the arise, any more than asserting the firm has dynamic capabilities does. To illustrate how value might be created and brought into the analysis, I look at Penrose’s model of managerial learning, primarily as an accessible instance of the epistemological approach proposed by Austrian economists such as Hayek, Kirzner, and Schumpeter. This concept of value creation parallels the sense-making concepts of the managerial cognition literature. I conclude that an alliance of BPS and MOC approaches can complement and so complete the RBV, synthesizing notions of value creation, heterogeneous and immobile resources, and endogenous growth into a dynamic theory of the firm. It balances rational choice and Schumpeterian entrepreneurship. To wrap this argument up, I discuss the theoretical and practical implications of the amended RBV.
Latent Variables and Structural Equations Modeling
| Peter Klein |
Among my PhD students I note an increasing interest in structural equations modeling (SEM), particularly for working with latent variables. One student’s dissertation uses SEM to study the effect of the institutional environment on entrepreneurship, treating entrepreneurship as a latent variable and using measures of new business starts, patent filings, and the like as the corresponding manifest variables. Another student is using SEM to examine free-riding among members of a large cooperative, with various observable behaviors serving as indicators for the latent variable free-riding.
More generally, SEM is becoming a standard tool in management, where abstract concepts like trust, knowledge, capabilities can (potentially) be modeled as latent variables in a system of equations. Indeed, when I visited Nicolai in his office in Copenhagen a couple of weeks ago, the first thing I noticed on his desk was a LISREL manual, prominently displayed on the corner. (He assures me it is not for show.) (more…)
Information versus Knowledge
| Peter Klein |
Here’s a fascinating symposium from the April 2005 issue of EconJournalWatch on the distinction between information and knowledge in economics. The contributors are Brian Loasby, Thomas Mayer, Bruce Caldwell, Israel Kirzner, Leland Yeager, Robert Aumann, Ken Binmore, and Kenneth Arrow. (Via Jeff Tucker)
Crowdsourcing Blog
| Peter Klein |
Crowdsourcing — discussed here and here — is getting big. How do we know? It now has its own blog. (HT: NMM)
Crowdsourcing and Switching Costs
| Peter Klein |
I blogged a while back about crowdsourcing, in which individuals, typically amateurs, complete to supply inputs to large producers or distributors via the web. Crowdsourcing is often likened to distributed computing, an age-old (in computer terms, anyway) method of sharing computationally intensive tasks over many CPUs.
The best-known example of distributed computing is SETI@home, in which individuals donate their spare processing power to the search for extraterrestrial life. There’s a problem, however, as Lee Gomes tells us in today’s Wall Street Journal ($): high switching costs. SETI@home users get points for donating computer time and, like frequent flyers who stick to one airline to rack up miles, many refuse to switch to other, equally worthy distributed computing projects (the search for an Alzheimer’s cure, a difficult problem in theoretical physics, etc.). As a result, says Gomes, SETI@home “is to distributed computing what AARP is to social-security reform.”
Moral of the story: If crowdsourcing projects attract mainly hobbyists, participating for fun or to impress their (virtual) friends, expect lock-in and substantial first-mover advantages. If participants do it for the money, however, the crowdsourcing landscape may be much more competitive.
More on Economics and the Contiguous Disciplines
| Peter Klein |
Monday’s post on the accusation that contemporary economists focus too heavily on “puzzles,” rather than real problems, elicited a number of interesting responses. Tom Schenk alludes to Coase’s suggestion that economists are shying away from their traditional areas of interest because they can’t solve the standard problems. Coase is worth quoting in full:
Economists are extending the range of their studies to include all of the social sciences. . . . What is the reason why this is happening? One completely satisfying explanation . . . would be that economists have by now solved all of the major problems posed by the economic system, and, therefore, rather than become unemployed or be forced to deal with the trivial problems which remain to be solved, have decided to employ their obviously considerable talents in achieving a similar success in the other social sciences. However, it is not possible to examine any area of economics with which I have familiarity without finding major puzzles for which we have no agreed solutions, or, indeed, questions to which we have no answers at all. The reason for this movement of economists into neighbouring fields is certainly not that we have solved the problems of the economic system; it would perhaps be more plausible to argue that economists are looking for fields in which they can have some success.
Steve Sailer, who has gained a reputation as Steve Levitt’s most vocal critic (1, 2), suggests that the problem is not the application of economic analysis to neighboring disciplines per se, but rather economists’ tendency to apply their tools to subjects in which they lack the necessary background knowledge and expertise. “My objection to Levitt’s work is not that he’s wasting his vast analytical powers on trivial subjects, but that his analytical powers have too often been found inadequate for the magnitude of his subjects.” (more…)
Does Creativity Harm Innovation?
| Peter Klein |
The always-interesting Robin Hansen argues in Business Week that creativity may harm, not help, innovation.
[M]uch of the hoopla over creativity is a crock. Why? Because we are already up to our eyeballs in it. Make no mistake: Innovation matters. Nothing is more essential for long-term economic growth. But to get more innovation we may want less, not more, creativity.
The sobering truth is that the dramatic artistic creations or intellectual insights we most admire for their striking "creativity" matter little for economic growth. . . . Instead, the innovations that matter most are the millions of small changes we constantly make to our billions of daily procedures and arrangements. Such changes do not require free-spirited self-expression. Instead, people quite naturally think of changes as they go about their routine business and social lives. . . .
Are Routines Necessary for an Evolutionary Theory of the Firm?
| Nicolai Foss |
The seminal and in many ways founding contribution to the evolutionary theory of the firm, and its numerous relatives in management, such as the knowledge-based , the competence , the capabilities, etc. views, is without much doubt Sidney Winter and Richard Nelson's An Evolutionary Theory of Economic Change from 1982.
The book is very heavily cited in management (e.g., it is among the top 10 cites in Strategic Management Journal), but has made less of an impact in economics (it was originally intended as an economics contribution rather than a contribution to management). The reason can be found in chapters 4 and 5 that develop notions of routines and organizational capabilities, and try to do so from the notion of individual skill. Since Nelson and Winter (1982) organizational routines have become a primitive in the definition of "higher-level" constructs, such as capabilities or "dynamic" capabilities.
In a number of recent papers (beginning with this paper, but mainly with Teppo Felin), I have identified and discussed various problems with the notion of routines. Very briefly, there are still no clean definitions of routines (which evidently makes it somewhat problematic to define capabilities etc. in terms of routines), the routines construct often implies a denial of methodological individualism, the empirical basis for asserting that routines are so strongly prevalent in real world firms that it is meaningful to think of firms in terms of routines is questionable, routines draw attention away from conscious, rational choice, etc. etc.
Time Inconsistency and a Stakeholder Theory of the Firm
| Joe Mahoney |
Recently I have become more persuaded that the incomplete contracting literature potentially offers a theoretical foundation for a stakeholder theory of the firm.
In this light, two industrial organization economists — Dan Kovenock and Stephen Martin — have “inspired” me to learn more about the concept of time inconsistency problems. In a world of incomplete contracting, we often face the potential for time inconsistency problems (Grossman and Hart, 1986) and opportunistic rent extraction. A policy that is optimal ex ante but sub-optimal ex post can be described as “time inconsistent.”
Announcing Guest Blogger Joe Mahoney
| Nicolai Foss |
Peter and I are extremely pleased and proud to announce our new guest blogger, Joseph Mahoney. Joe is a Professor of Strategy at the Dept. of Business Administration, College of Business, University of Illinois at Urbana-Champaign. His first blog entry will appear later today.
Many readers of this blog will know Joe’s work. For those who don’t, suffice it to say that Joe is one of the most prolific and influential scholars in strategic management. While perhaps most often associated with the resource-based view, Joe has also done important work on transaction cost economics (indeed, his knowledge of TCE is encyclopedic) and on entrepreneurship, drawing on Austrian economics. His paper with Ron Sanchez on modularity (SMJ, 1996) and another with J.R. Pandian (SMJ, 1992) are among the most cited and influential SMJ papers. He has recently published a nice volume on Economic Foundations of Strategy with Sage.
Welcome, Joe!
Continuing the Micro-foundations Crusade
| Nicolai Foss |
With Teppo Felin and Peter Abell, I am continuing the crusade for building micro-foundations for management theory that Teppo and I initiated with our editorial essay in Strategic Organization last year ( “Strategic Organization: a Field in Search of Microfoundations"). We have now written the paper, "Building Micro-foundations for the Routines, Capabilities and Performance Links" as a further stride forward in the struggle against macro-mysticism in strategic management and organization theory. Here is the abstract:
Micro-foundations have become an important emerging theme in strategic management. This paper addresses micro-foundations in two related ways. First, we argue that the kind of macro (or “collectivist”) explanation that is utilized in the capabilities view in strategic management –which implies a neglect of micro-foundations –is incomplete. There are no mechanisms that work solely on the macro-level, directly connecting routines through capabilities to firm-level outcomes. While routines and capabilities are useful shorthand for complicated patterns of individual action and interaction, ultimately they are best understood at the micro-level. Second, we provide a formal model that shows precisely why macro explanation is incomplete and which exemplifies how explicit micro-foundations may be built for notions of routines and capabilities and for how these impact firm performance.
Because we may submit to a journal that prohibits uploading of papers while they are under review, reluctantly I must refrain from making the paper downloadable . However, If you would like to get a copy, send me a mail on njf.smg@cbs.dk
Another New Buzzword: Adjacencies
| Peter Klein |
From today's WSJ feature on Time-Warner we learn that "synergies" are out. Now it's all about "adjacencies."
In deal after deal, [Time-Warner] executives promised to create a well-oiled, "vertically integrated" profit machine. Books and magazines and music would feed television and movie and Internet empires, each strengthening the others. But this vision never panned out. . . . Now divisions are encouraged to cooperate only if they can't get a better deal on the open market. The company's units are expected to be "best in class" — corporate-speak for being an industry leader — and those that fall short are threatened with being sold.
A return to the 1960s and "management by the numbers"? (We do know, for instance, that the conglomerates weren't so bad after all — see this, this, and this.)
Who will write the first RBV paper on adjacencies?
Crowdsourcing
| Peter Klein |
Combine increasingly thick markets for key inputs, rapidly declining costs of producing these inputs, and low transaction costs of organizing suppliers, and what do you get? Crowdsourcing, in which individual web users, mostly amateurs, compete to supply cheap inputs. Tim Swanson offers links and commentary at the Mises Blog. (A "wisdom of crowds" reference gives me a chance to plug the extremely interesting book by my college classmate Jim Surowiecki, The Wisdom of Crowds.)
Paradoxes in the RBV?
| Nicolai Foss |
One of the hallmarks of pomo (postmodernist) "discourse" (or "conversation") is the indiscriminate use of the word "paradox." In management, organizational scholars are particularly prone to use the p word. I have sat in countless seminars and witnessed several conference presentations where the presenters declared some paradox to exist, in theory, in practice or in both. I have never been successful in my attempts to argue that upon closer inspection (better analysis) the postulated paradoxes usually vanish.
In terms of management journals, one of the pomo strongholds is unfortunately one of our leading journals, the Academy of Management Review. I am pretty much behind in my reading of AMR. But this morning I opened the January 2006 issue, and performed my usual vain search for articles that cited my works. I quickly found Lado, Boyd, Wright and Kroll's "Paradox and Theorizing Within the Resource-based View."
The authors claim to use "paradox in the logical sense to address epistemological issues surrounding RBV logic, such as unfalsifiability, tautology, and infinite regress" (p.117). They argue that they embed their understanding in a non-traditional view of science (in contrast to those — such as Foss (1996; "Knowledge-based Approaches to the Theory of the Firm," Org Science) — who allegedly holds "… that the presence of paradox within a theory undermines its scientific utility" (Foss 1996 says no such thing)). (more…)
“The Train Wreck That Is Strategy” and Game Theory
| Nicolai Foss |
In a comment on my co-blogger’s post of yesterday, a commentator argues that there is no real alternative to formalism, and then provokingly continues:
If you need any demonstration of the need for formalism in theory-building within the social sciences, take a look at the train wreck that is Strategy. As we are discovering using formal methods, most of what passes for foundational theory in strategy is wrong.
Unfortunately, he doesn’t explain what exactly he means by “foundational theory in strategy” and why it is “wrong.”
I think that formalization is definitely an important goal of social science research and is worth striving for (See Patrick Suppes’ very convincing argument on the “desirability of formalization in science”). Formalization certainly also makes life easier in a number of ways. For example, in my teaching I have found it literally impossible to convey what agency theory is fundamentally about without using game theory.
However, what may be at issue is exactly how important it is and, in connection to this, whether the practice of building formal theory per se should occupy the highest position in the reputational hieararchy of economics. (more…)
Myths and Fallacies in Strategic Management – Part II
| Nicolai Foss |
Why has the notion of firm-level “capabilities” become so incredibly popular in strategic management research during the last 10-15 years?
This is a puzzle because — as Teppo Felin and I have argued in a series of recent papers (most of which can be accessed from www.nicolaifoss.com) — firm-level capabilities is a highly problematic concept. Thus, there are no theories of the emergence or origin of capabilities and the connection between the level of capabilities and the level of individual agents is at best unclear and perhaps more realistically non-existent. Partly because of these difficulties, there simply aren’t any clean definitions of capabilities around. (more…)
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