Part I: Strategy Foundations Flashcards
(30 cards)
Basic assumptions in to principal/agent theory?
- Contractual relationship between principal (employer, owner of resources) and agent (employee, hired by the principal) - Delegation of decision competencies from principal to agent - Information asymmetry: principal cannot directly ensure that the agent is always acting in tis best interests - Analysis of opportunistic behavior - Typical fields: owner vs manager, top vs middle management, superior vs employee
Give some examples of information asymmetry:
- Hidden action: principal unable to control agent actions - Hidden information: principal unable to identify strengths and weaknesses of agent; principal unable to judge the quality of employees work. -Holdup: agent does not deliver contractually agreed performance - Others: monitoring, moral hazard (regulations), self-selection (contract via performance), etc.
Transaction cost: policing and enforcement
The cost of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.
Institutional theory: organizational success and survival
Organizations that incorporate societally legitimated rationalized elements in their formal structures maximize their legitimacy and increase their resources and survival capabilities.
Resource based view: key points behind the theory
1 - Identify the firm’s potential key resources 2 - Evaluate whether these resources fulfill the following criteria: valuable, rare, inimitable, nonsubstitutable (VRIN). 3 - Care for and protect resources that possess these evaluations, because doing so can improve the organizational performance.
What is the objective of the knowledge based view?
The development of a unique organizational knowledge base. The development is time consuming because the knowledge base grows with experience based learning process. It should be difficult to copy by the competitors. Represents a strategic potential to achieve and secure a competitive advantage.
What is property rights theory?
Determining how a resource is used, and who owns that resource - government, collective bodies, or individuals. Property rights can be viewed as an attribute of an economic good: - the right to use the good - the right to earn income from the good - the right to transfer the good to others - the right to enforcement of property rights
What is transaction cost theory?
Transaction cost is a cost incurred in making an economic exchange; the cost of participating in a market. It can be divided into search and information costs, bargaining costs and policing and enforcement costs.
Institutional theory: pro and cons
Pro: - Puts an emphasis on individual environment and the conformity to taken for granted norms and practices rather than focusing basically on market and competition - Challenges institutionalized and taken for granted structural features - Explanation of organizational change - Highlights social cognitive and rhetorical view of organizational behavior - Institutional work (entrepreneurship) Cons: - High emphasize on structure - Role of agency? - Role of strategic intentional dimension of action? - Role of power and power distribution - How can be used in mutlinational corporations, where cultures are intrinsically different?
Property Rights theory: pro and cons
Pro: - Organizations are viewed as complex, designable and contract based institutions (beyond pure economic production) - Different property rights structures lead to different incentive structures and forms of organizational behavior. - The theory considers the costs of dealing with property rights: they must be over-viewed, controlled and enforced. Cons: - Individual utility maximizing is assumed after the fact - In the empirical reality there are many different forms of property rights that can not be captured conceptually. - Theory focuses on allocation efficiency.
Give a brief overview of the VRIN characteristics
Valuable: a resource must enable a firm to employ a value creating strategy. Relevant in this perspective is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value creating strategy. Rare: to be of value, a resource must be rare by definition. The less it exists, the more it values. Inimitable: if a valuable resource is controlled by only one firm it could be a source of a competitive advantage. This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly. Nonsubstitutable: even if a resource is rare, potentially value creating and imperfectly imitable, an equally important aspect is lack of substitutability. In competitors are able to counter the firm’s value creating strategy with a substitute, prices are driven down.
What are the core competencies of the knowledge based view?
There three: - Resources: human independent, eg. exclusive access to raw materials, financial resources, patents - Capabilities: human dependent, eg technical knowhow, conceptual skills - Organizational routines: combinations of resources and capabilities, eg. product development process, inter-organizational value creation processes
What is Principal agent theory?
Concerns the difficulties in motivating one party (the “agent”), to act in the best interests of another (the “principal”) rather than in his or her own interests. The problem potentially arises in almost any context where one party is being paid by another to do something, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs.
What is Institutional Theory?
Explains how the institutional environment influences the organizational behavior. Institutional theory focuses on the deeper and more resilient aspects of social structure. In considers the processes by which structure, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior. Different components of institutional theory explain how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse.
Institutional theory assumptions
Organizations are driven to incorporate the practices that are rationalized by the institutional environment. Many techniques of production, accounting or personnel selection become taken for granted means to accomplish certain ends. Apart from possible efficiency, such institutionalized techniques establish an organizations as appropriate, rational, and modern. They are socially expected. This creates LEGITIMACY. Conforming to collective norms and beliefs versus efficiency. DECLOUPING. Isomorphism: organizations tend with time to converge in terms of institutionalized techniques - one copy other successfully techniques without deep thinking if that technique fits on its own organizational environment.
Resource based view: basic assumptions
A firm’s competitive advantage is a result of its resources and combinations of resources. It requires heterogeneity, competitive advantage, imperfect mobility (implies that a firms resources are not commonly, easily, or readily bought and sold in the market place). A firm’s resources lead to enduring competitive advantages, which, in turn, shall lead to superior economic success.
Three approaches of property rights:
Absolute Property Rights: derived from ownership of assets. Owners decide the use of assets - bear the risk and have claims on benefits. Relative Property Rights: derived from contractual obligations. Property Rights on social capital: rights and obligations from social interactions (embeddedness). The quality of the social network (e.g. associations) reflects economic value of social capital.
What kind of industry explore knowledge as a product?
Management consultancy industry, like McKinsey Knowledge Center and The Boston Consulting Group.
The VRIN characteristics are sufficient to guarantee competitive advantage?
The four characteristics are individually necessary, but not sufficient conditions. The chain is as strong as its weakest link and therefore requires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage.
What is knowledge? What types of knowledge exist?
Knowledge is connected information, i.e., information which was brought into a context. It can be: - Individual - Collective - Organizational - Implicit - Explicit
How can we strategically respond to institutional processes?
In five ways: - Defy: challenge the traditional - Manipulate: lobby - Compromise:negotiate - Acquiesce: obey the rules and norms - Avoid
Possible mechanisms to handle principal/agent problems?
Various mechanisms may be used to align the interests of the agent with those of the principal. In employment, employers (principal) may use piece rates/commissions, profit sharing, efficiency wages, performance measurements (including financial statements), the agent posting a bond, or the threat of termination of employment.
What is and what is the difference between tangible and intangible assets?
In free market economies, people have the right of private property over assets. They can be: - Tangible: real estate, equipment, machinery. - Intangible: patents, royalties. In this case, the owner has the right to use, keep earnings of the use, modify, and license it to others (“dilution of property rights”).
Transaction cost theory: pro and cons
Pro: - Explain when is an internal coordination (production) of a transaction preferable to a market oriented coordination (purchase) - Compares the efficiency of different institutional arrangements - Framework that works on different levels: – Individual (incentive structure) – Organizational (coordination) – Inter-organizational (vertical integration) Cons: - Precise measurement and estimation of transaction costs difficult - Theory does not capture the institutional environment (see institutional theory) - Does not look on power and the status or reputation - Bounded rationality: decision makers do not always choose the most efficient arrangement
