Chapter 1: The Need for a Micro Perspective in Strategic Management
Microfoundations have been much talked about in strategy over the last decade. Specifically, this has been about individual-level decision-making, and has often been related to behavioural strategy and human capital strategy.
However, economics has always been micro-foundational, as it starts from the choice situations of individuals. The property rights tradition highlights this also. Thus, the notion of property right means effective control, that is, what an individual can do with resources she owns or otherwise has access to in order to maximize her income (financial as well as psychic).
Because of its consistent micro approach and its sophisticated treatment of individual choices and how such choices interact, the property rights approach is uniquely situated to further the microfoundations of the key strategy issues.
We point to and discuss a number of key areas in strategy where ideas on property rights and transaction costs can be helpfulsuch as contracting as a source of a value creation and competitive advantage; the transaction cost frictions that influence strategizing in the context of an industry; and how property rights and transaction help shape trajectories of entrepreneurial activity in established firms.
Chapter 2: The Property Rights Approach
o This chapter covers the key ideas in the property rights approach: The notion of a property right, effective control, capture and protection of property rights, the Coase theorem, contests for value, the notion of the public domain, property rights systems, and how property rights link to contracts, organizations, and institutions.
o We offer a series of examples that serve to illustrate the key points.
o We briefly discuss the relation between the above ideas and the more limited and more recent ideas on property rights and ownership as contractual and residual decision rights associated with Oliver Hart and his colleagues and students.
Chapter 3: Value creation and Appropriation
o In this chapter we explore how the property rights approach can further our understanding of value creation and appropriation and ultimately competitive advantage. We start from strategys dominant perspective, the resource-based view.
o Property rights economics furthers the resourcebased view of strategic management in a number of ways. First, resources are conceptualized as being composed of multiple attributes for which property rights may be held. Second, a resource owner's ability to create, appropriate, and sustain value from resources depends on the property rights that he or she holds and on the transaction costs of exchanging, defining, and protecting them. While transaction costs are a major source of value dissipation, reducing such dissipation may create value.
o Implications for the RBV analysis of sustained competitive advantage are derived.
Chapter 4: Strategizing and Positioning
o This chapter considers the external aspects of strategy, notably issues of positioning and rivalry (e.g., Porters five forces approach).
o Market power (i.e., the ability to raise price above marginal cost) and bargaining power (i.e., how much one can potentially capture of the value from a transaction) are central constructs in competitive strategy. Positioning research focuses on attempts to build, protect, and exercise market and bargaining power.
o However, because such research does not explicitly include transaction costs, it is usually not realized that parties made worse off by the exercise of market and bargaining power may be able to negotiate, bargain, form coalitions, and otherwise contract around the focal firms attempts to appropriate monopoly profits.
o We show that whether such exercise of countervailing power succeeds depends on transaction costs.
o We also argue that taking a contracting and transaction cost perspective lends insight into the interdependency of competitive forces that are often considered as being separable.
Chapter 5: Learning and Entrepreneurship
o We explain the link between entrepreneurial activities, transaction costs and property rights.
o The property rights perspective complements the cognitive perspective on opportunity discovery as it focuses on how expected returns from the discovery of new opportunitis are influenced by assessments of the costs at which property rights to discoveries can be delineated and enforced (and possibly exchanged).
o However, the actual discovery of entreprenurial opportunities is also directly linked to property rights. Here we build on the idea in chapter 3 that resources are bundles of attributes and conceptualize opportunity discovery as the discovery of new valued resource attributes. Individual resources may have a multitude of undiscovered attributes, some of which may be associated with appropriable value. The discovery of these valued attributes depend in part on the knowledge that entrepreneurs have and in part on their learning based on experimental use with resources. In turn the latter is influenced by property rights and transaction costs.
o Thus, a property rights perspective provides a means of understanding the mechanism that allow firms to create and exploit new entrepreneurial opportunities than can give rise to long lasting competitive advantages. It also sheeds light on barriers for firms opportunity discovery as path dependencies in firms knowledge accumulation is influenced by property rights and transaction costs.
Chapter 6: Stakeholder theory
o Stakeholder theory has increasingly become part of strategic management theory, but suffers from lack of clarity with respect to many of its key ideas.
o Central to stakeholder theory are background assumptions about
ownership. Who owns the firm, and what implications does this have for how firms are run, or should be run? Indeed, what do we mean by ownership in the first place? What is the function of ownership?
o We show how property rights ideas can resolve a number of unclear issues in stakeholder theory by pointing to the many ways in which ownership is circumscribed, but also how the allocation of de facto ownership rights depend on which property rights are left in the public domain because the transaction costs of protecting them are prohibitive.
Chapter 7: Conclusions
o Here we pull the overall conclusions together and discuss future research avenues.
o One such avenue is linking the property rights analysis of firm-level outcomes to institutions.
o Another avenue is examining the skill with which agents exercise their property rights to assets. Thus, it is possible to speak of e.g. the competence with which owners of firms exercise their ownership.
