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45 Cards in this Set
- Front
- Back
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Economic Foundations Topics |
Industrial Organization Managerial Theories Agency Theory Transaction Cost Economics Resource-Based View Dynamic Capabilities |
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Industrial Organization |
Caves & Porter (1977) Gilbert (1989) Shapiro (1989) Arthur (1989) Demsetz (1973) Stigler (1965) |
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Caves & Porter (1977) |
IO Entry barriers can apply in subgroup structures; entry decisions involve strategies of targeting groups and moving into specific segments over time |
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Gilbert (1989)
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IO Industry structure is not strictly exogenous, but is endogenous as industry incumbents try to influence the behaviors of potential rivals by engaging in strategic entry deterrence behavior (either by forestalling entry or inducing exit) |
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Shapiro (1989)
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IO Overview of recent IO research that includes game theory; emphasizes the dynamics of strategic actions and the role of commitment in strategic settings, not possible to determine an overall theory of oligopoly. |
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Arthur (1989)
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IO Lock-in by historical events. Explores the dynamics of allocation under increasing returns in a context where increasing returns arise naturally: agents choosing between technologies competing for adoption. |
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Demstez (1973)
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IO Industries become concentrated due to enterprise efficiency, not anti-competitive practices. |
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Stigler (1965)
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IO Even if firms want to collude, information costs and enforcement issues make collusion very difficult if not impossible. |
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Porter (1981)
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IO Brought IO to Strategy. There are several reasons why IO economics are not well embraced by strategy researchers despite of its contribution to strategy field. |
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Managerial Theories of the Firm
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Penrose (1955) Marris (1963) Chandler (1985) |
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Penrose (1955)
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Managerial Theories Some diversified growth represents efficient use of underutilized firm resources that cannot be separated out for sale. Expansion itself provides an opportunity to further growth, an opportunity that did not exist before the expansion, due to unused resources available at no extra cost. However, due to lack of managerial services (imagination, insight, creativity, experimenting etc), all potential opportunities known and open to a firm are not exploited together. |
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Marris (1963)
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Managerial Theories The optimal growth level requires the rate of diversification and profit margin but also a growth-maximizing financial policy. However, because a financial policy is under the hands of managers, an optimal growth level and optimal value of fiscal policy are often set from the point of view of managers, not of shareholders. |
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Chandler (1985)
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Managerial Theories Vertical integration is driven by a desire to keep firmsÕ core assets to efficiently employed (assurance of supply) while diversification is the realization of economies of scope |
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Agency Theory
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Jensen & Meckling (1976) Fama (1980) Demsetz (1983) Fama & Jensen (1986) Jensen (1986) |
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Jensen & Meckling (1976)
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Agency Agency emerges as a response to managerial theory |
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Fama (1980)
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Agency Market for professional managers ÔdisciplinesÕ managers to work for performance |
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Demsetz (1983)
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Agency Corporate execs, while not often among the largest shareholders, receive incomes that are highly correlated with stock performance, and it forms a strong link between management and owner interests |
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Fama & Jensen (1986)
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Agency Shows how organizations characterized by separation of ownership and control are so common and survive well despite of the agency problems. They show that such organizations control the agency problems by separating management (initiation and implementation) and control (reification and monitoring) of decisions. The common features of decision control system include mutual monitoring system, board of directors consisting of outsiders, decision hierarchies etc. |
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Jensen (1986)
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Agency Debt reduces the agency costs of free cash flow by reducing the cash flow available for spending at the discretion of managers. Debt creation binds managers to keep their promise to pay the debts with future cash flow, in this sense it is an effective substitute of dividend |
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Transaction Costs Economics
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Coase (1937) Alchain & Demsetz (1972) Klien, Crawford & Alchain (1978) Williamson (1985) Jones & Hill (1988) Teece (1982) Hill (1990) |
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Coase (1937)
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TCE He early on recognized that there are costs to use market transactions. 1) costs of discovering what the relevant prices are 2) negotiating and concluding a separate contract for each 3)difficulties of specifying all in a contract. By forming an organization and allowing some authority (entrepreneur) to direct resources, certain costs are saved. |
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Alchain & Demsetz (1972)
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TCE They emphasize measurement problem in team production. They examined the difficulty of metering output in team production in which union or joint use of inputs yields a larger output than the sum of the products of the separately used inputs. They view a firm as a contractual structure arises as a means of efficiently organizing team production. |
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Klien, Crawford & Alchain (1978)
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TCE Contracts are open to serious risks. In the presence of appropriable quasi-rents, the possibility of post-contractual opportunistic behavior is real. This can be solved through vertical integration or contracts, with vertical integration being more likely. |
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Williamson (1985)
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TCE Unlike Alchain and Demsetz (1972), Williamson highlights the problem of opportunism in the context where executing transaction requires specific investments. According to him, transaction costs refers to negotiating, concluding and enforcement costs associated with transactions taking places in the market place. There are six main factors that produce transaction difficulties. 1) bounded rationality 2)opportunism 3)uncertainty and complexity 4) small number trading relationships 5) asset specificity 6) information impactedness. The joining of the different pairs of the factors generates particular transaction difficulties and they become serious especially when specific investments are required and information asymmetry between two parties is substantial. In theory, it is possible to use the market transaction if a comprehensive contingent claims contract is made; but in practice, it is almost impossible or prohibitively expensive to specify all the conditions, let alone monitoring such complicated contacts. |
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Jones & Hill (1988)
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TCE Transaction costs should be incurred in order to use market transactions and they can be economized if the economic benefits of internalizing the transaction exceeds the bureaucratic costs of organizing transactions using a hierarchy. There are three ways to realize economic benefits from internalization. Economic benefits from vertical integration occurs when concerns about opportunism in small number trading relationships and information asymmetry between two parties is substantial. Vertical integration obviates the transaction cost of writing complex contract among business units under the control of the head office. Also, compared to external market transaction, vertical integration allows the head office to have access to private information of the contracting parties, thus removing the possibility of resource misallocation. Economic benefits from related diversification are generated when inputs are shared or utilized in complete congestion. It is very difficult to realize such synergistic gains through market transactions due to transaction costs. Economic benefits from unrelated diversification have to do with THE MARKET FAILURE IN THE EXTERNAL CAPITAL MARKET as well as information asymmetry. Compared to external market investors who are at the disadvantage of information asymmetry and control disadvantage, the head office has overcome such weaknesses through its relationship with operating units. By acquiring a firm and exposing it to the discipline of efficient internal market competition, the head office, compared to external market investors, is at advantage of allocating resources more efficiently and thus increases performance. |
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Teece (1982)
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TCE Diversification is driven by excessive capacity and its creation, market imperfection, and the peculiarities of organizational knowledge, particularly its fungibility and tacit nature. |
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Hill (1990)
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TCE Even when asset specificity is high, the problems of opportunism may be mitigated by systems of market in which selection favors actors with good reputation concerning trusting and cooperating relationship. However, transaction cost theory ignores a dynamic evolutionary process for such behavioral repertoire, and in this regard, their rationale for vertical integration may be overstated. |
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TCE Critics
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Granovetter (1985) Robins (1987) Perrow (1986) Ghoshal & Williamson (1996) |
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Granovetter (1985)
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Critic There is substantial overlay between economic relations and social relations. Even with complex exchange relationship, a high level of order can be found in the market (across firm boundaries) and a high level of disorder can be found within an organization. Whether this occurs depends on personal relations and network relations between firms, rather than organizational forms. |
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Robins (1987)
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Critic Robin argues the problem of transaction cost theory when it is applied to empirically oriented discipline. Transaction cost theory shares assumption about social causation that is borrowed from neoclassical economics that forms of organization efficient for economic exchange will supplant less efficient organizations. However, due to the problems of its very assumption about perfect competition and strong rationality about human, applying transaction cost theory |
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Perrow (1986)
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Critic Transaction cost theory is based on assumption of self-interest such as opportunism, but humans are highly adaptive, and so the strictly economic and self-interest nature of EXCHANGE relationship becomes modified and overlaid with social and cultural exchanges. |
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Ghoshal & Williamson (1996)
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Critic The assumption of TCE and the debilitating consequences are wrong and dangerous. Assumptions about 1) Human nature: opportunistic (ex-ante: we don't know if the partner will not behave opportunistically ex-post: discovery can be costly) and 2) The requirement for success: efficiency is the only option / other strategic actions are not considered. Consequences: Vicious cycle to control for opportunistic behavior / Normative and practical danger in TCE. |
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Resource-Based View
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Lippman & Rumelt (1982) Wernerfelt (1984) Barney (1986a, 1986b) Conner (1991) Barney (1991) Reed and DeFillippi (1990) |
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Lippman & Rumelt (1982)
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RBV Uncertain imitability. This concept allows us to deal with causal ambiguity that exists when a link between resources controlled by a firm and its sustained competitive advantage is not understood perfectly. |
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Wernerfelt (1984)
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RBV He introduced the idea of analyzing the firm with a resource-product matrix instead of growth-share matrix. Also, diversification is discussed as a dynamic resource management. Acquisition is seen as a purchase of bundles of resources in a highly imperfect market. |
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Barney (1986a, 1986b)
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RBV For a firm's resources to have sustained competitive advantages, they should have following attributes: 1) Valuable: resources should make the firm to exploit opportunities and/or neutralize threats in a competition. 2) Rare (path dependency assures this) among a firmÕs competitors. 3) Inimitable (uncertain imitability Lippman and Rumelt 1992) -valuable and rare resources can be a source of sustained competitive advantage only when they are inimitable by competitors, and this is often true because a firmÕs ability to acquire and exploit such resources depend on a firmÕs unique historical conditions( place in time and space). |
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Conner (1991)
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RBV He argues that RBV provides an alternative rationale for the questions like why a firm exists and what determines a firmÕs scale and scope. He maintains that heterogeneous firms continue to exist because the assets with which firms will come be mated are themselves heterogeneous, making each other a better fit than other firms. The theory views a firm as Òa creator of unique productive valueÓ instead of Òan avoider of negativeÓ. The scale and scope of a firm depends on a degree of to which new projects are specific to a firmÕs current resource base. He also compares the RBV with other five traditional industrial organization economics. As the neoclassical view of the firm, RBV views a firm as an input-combiner but it does not include the assumptions of neoclassical views. Like the Bain-type IO, the RBV agrees that it is possible to make above-normal earnings but the profits come from idiosyncratic, immobile resources of a firm, not from the artificial reduction of industry outputs. As Schumpeter, the RBV recognizes the power of creative destruction (innovation) to shift market structure, but the RBV does not need large-scale industry incumbents for such initiative. Finally, like the Chicago school but unlike the Bain-type IO, the RBV sees such rents coming from luck or acumen of entrepreneurs in acquiring, combining and deploying such resources (conduct), not from the structure of the industry in which firms operate. |
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Barney (1991)
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RBV Building on the assumptions that strategic resources are heterogeneously distributed across firms and that these differences are stable over time, this articles examines the link between firm resources and sustained competitive advantage. Four empirical indicators of the potential of firm resources to generate sustained competitive Ð value, rareness, imitability, and substitutability Ð are discussed. |
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Reed and DeFillippi (1990)
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RBV Argues that causal ambiguity is a function of tacitness, complexity, and specificity of competency |
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Dynamic Capabilities |
Alchain (1950) Schumpeter (1950) Nelson and Winter (1982) Nelson & Winter (2002) Teece et al (1997) |
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Alchain (1950)
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DC Like the biologists, the economist can predict the effects of environmental changes on the survival class of living organisms. |
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Schumpeter (1950)
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DC The essential character of capitalism is its evolutionary process driven by a perennial gale of creative destruction |
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Nelson and Winter (1982)
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DC Evolutionary relies on a cumulative learning-based view of organizational competence in the face of exogenous changes in the economic subsystem. Evolutionary theory explains how particular organizational forms come to exist in specific kinds of environments. The process is not necessarily efficient and path-dependent process can often lead to an outcome other than those implied by historical efficiency. Capabilities are captured in the organizational routines. Routines are the result of trial and error as organizational learn. Routines reflect the knowledge base of organizations. We can predict how organizations will behave in the future according to their routines, and even a high-level of complex problem solving efforts may fall into a quasi-routine pattern. |
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Nelson & Winter (2002)
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DC Building on the assumptions that strategic resources are heterogeneously distributed across firms and that these differences are stable over time, this articles examines the link between firm resources and sustained competitive advantage. Four empirical indicators of the potential of firm resources to generate sustained competitive Ð value, rareness, imitability, and substitutability Ð are discussed. |
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Teece et al (1997)
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DC Dynamic capabilities framework (Efficiency-oriented): Stresses exploiting existing internal and external firm-specific competences to address changing environment. Conclusions: 1) Private wealth creation in regimes of rapid technological change depends in large measure on honing internal technological, organizational, and managerial processes. 2) Identifying new opportunities and organizing effectively and efficiently are more important than strategizing |
