Building on previous studies of corporate capital allocations, we investigate the effect of the relative size of a business unit with respect to the size of the rest of the corporation on internal investment behavior. Using field data from a large set of firms we find that business unit capital expenditures normalized by assets are higher when a business unit is smaller relative to the rest of its firm, holding other relevant variables (growth, profitability, etc.) constant. We find further support for this relative size effect in a simple allocation experiment. Our analysis extends findings of inefficiencies in capital allocation decisions in a novel direction by suggesting that corporate cross-subsidization is 1) mostly centered around reallocation of capital from large to small business units rather than from high to low performing business units as predicted by the agency-based accounts and 2) due to a simple heuristics that leads managers to naively diversify their allocations in favor of small units. Furthermore, we find no moderating effect of the performance of those small units on the observed cross-subsidization from bigger to smaller units. Managers favor relatively smaller units over larger ones regardless of how those smaller units are performing. Existing agency-based explanations of cross-subsidization in the finance literature cannot readily explain this relative size effect.

outnumbered at Trafalgar by an armada of French and Spanish ships that Napoleon had ordered to disrupt Britain’s commerce and prepare for a cross-channel invasion. The prevailing tactics in 1805 were for the two opposing fleets to stay in line, firing broadsides at each other. But Nelson had a strategic insight into how to deal with being outnumbered. He broke the British fleet into two columns and drove them at the Franco-Spanish fleet, hitting its line perpendicularly. The lead British ships took a great risk, but Nelson judged that the lesstrained Franco-Spanish gunners would not be able to compensate for the heavy swell that day and that the enemy fleet, with its coherence lost, would be no match for the more experienced British captains and gunners in the ensuing melee. He was proved right: the French and Spanish lost 22 ships, two-thirds of their fleet. The British lost none.1

One of Chandler's basic insights was that the new organizational structures adopted after the 1920s reflected a specialization of the roles of business and corporate managers. Business managers coordinated functions and corporate managers allocated resources. This article studies the impact of corporate management on capital allocation decisions by comparing investment behavior in multi- and single-business companies. Using a new taxonomy to control for the quality of each business unit, we analyze a cross-sectional sample of U.S. companies and identify a number of empirical regularities that highlight the allocative decisions of corporate management. In particular, we find that, when dealing with cash-needy businesses, multi-business firms invest more intensively in those that are less profitable. We find no evidence that this subsidy results in a higher success rate in making those businesses profitable over time. We suggest a number of explanations for this empirical pattern.

We consider the game in which b buyers each seek to purchase 1 unit of an indivisible good from s sellers, each of whom has k units to sell. The good is worth 0 to each seller and 1 to each buyer. Using the central limit theorem, and implicitly convergence to tied down Brownian motion, we find a closed form solution for the limiting Shapley value as s and b increase without bound. This asymptotic value depends upon the seller size k, the limiting ratio b/ks of buyers to items for sale, and the limiting ratio \({[ks-b]/\sqrt{b+s}}\) of the excess supply relative to the square root of the number of market participants.

Abstract In explaining the advantages of the principle of hierarchy representing organizations over market exchanges, coordination of specialized efforts and control of opportunistic behaviour are often brought up as methods for governing transactions. Yet these approaches fail to account for many observed internal workings of organizations that may be attributed to impulsiveness, and the consequent mechanisms of impulse control with regard to those moment-by-moment ways by which individuals fail to take action in what they believe to be their own long-term interest. This chapter proposes a model that assumes the existence of such impulsiveness, as well as overall automatic thought and behaviour. This model builds on psychological literature but also on economists' work on time-inconsistent choice, and brings both into the structure of organizational theory. The chapter is a timely reminder of the importance of enriching efficiency views of economic organization with more realistic models of human behaviour.

For many executives strategy evaluation is simply an appraisal of how well a business performs. Has it grown? Is the profit rate normal or better? If the answers to these questions are affirmative, it is argued that the firm's strategy must be sound. Despite its unassailable simplicity, this line of reasoning misses the whole point of strategy—that the critical factors determining the quality of long-term results are often not directly observable or simply measured, and that by the time strategic opportunities or threats do directly affect operating results, it may well be too late for an effective response. Thus, strategy evaluation is an attempt to look beyond the obvious facts regarding the short-term health of a business and appraise instead those more fundamental factors and trends that govern success in the chosen field of endeavor.

Another school of thought holds that advantage is revealed by “super-normal” returns. Again, questions quickly arise. Internal returns are normally measured by some type of market-book ratio. Such ratios include return on capital, return on assets, market-to-book value, and Tobin’s Q. Given such a measure, are supernormal returns “super” relative to the expectations of owners, the economy as a whole, or the rest of the industry?

Problems in the micro-foundations of neoclassical theory, especially in partial equilibrium analysis, are being imported into the resource-based view. This paper critiques neoclassical theory and proffers new concepts more suited to strategy scholars. In particular, we develop the concepts of simple rents, rent sensitivity analysis, and the payments perspective. Copyright (C) 2003 John Wiley Sons, Ltd.

Whereas prices serve to allocate many resources in market economies, there remain vast reservoirs of unpriced resources to be managed. Business management and strategy concerns the creation, evaluation, manipulation, administration, and deployment of unpriced specialized scarce resource combinations. This paper applies the formalism of cooperative game theory to these concerns. In cooperative game theory, rents appear as the negotiated payments for the services of scarce valuable resources. The division of surplus is determined by the relative values created by different use combinations of resources. Within this framework, the strategy, problem is clearly seen as one of discovering or estimating the value of various resource combinations. New wealth can be created by trade in resources as long as there are hitherto unexamined combinations. Copyright (C) 2003 John Wiley Sons, Ltd.

In recent years the concept of competitive advantage has taken center stage in discussions of business strategy. Statements about competitive advantage abound, but a precise definition is elusive. In reviewing the use of the term competitive advantage in the strategy literature, the common theme is value creation. However, there is not much agreement on value to who, and when.

Abstract I consider myself a mainstream researcher in the field of business policy, and the ideas I want to describe in this paper concern the foundations of a theory of business strategy that is rooted in economics. But is such a paper, whatever its merits, really appropriate at a conference entitled ‘Non-traditional Approaches to Policy Research’? Surprisingly, it is. The use of economic theory to model and explicate business strategy, as it is understood within the field of business policy, is distinctly non-traditional.

There is something special about the Honda Motor Company. Like General Motors, IBM, and General Electric, this company has joined the elite club of firms that are used, or have been used, as exemplars of successful business strategy. General Motors' system of decentralized implementation of a centrally directed coherent product policy (1921-1980) was carefully studied by several generations of business-school students. IBM's commitment to a common operating system for all its computing platforms and its apparent ability to control the evolving hardware/software standards for the industry was source material for thousands of lectures on effective competitive strategy (1960-1984). And General Electric (19651980) was the central source for the "strategic management" concepts central to the planning style of the early 1980s-the PIMS-based relationship between market share and return, the use of a two-dimensional grid for allotting cash-flow and growth goals to business units, and the full delegation of strategy-making to relatively low-level "strategic business units."

How do firms behave? Why are firms different? What are the functions of the headquarters unit in a multibusiness firm? What determines success or failure in international competition? In Fundamental Issues in Strategy, twenty-two prominent scholars collectively address these four fundamental questions to examine strategic management's roots and to strengthen the field's theoretical foundations. They take a comprehensive look at the intellectual backbone of the field of strategy, raising important issues that demand further research. The result is a compelling reexamination of strategic management that urges scholars to refocus their efforts now - and sets a research agenda for the coming decade. The editors, Richard P. Rumelt, Dan E. Schendel, and David J. Teece, organized this project specifically to encourage focus on fundamental questions of strategy; call for a significant increase in the sophistication, rigor, and scholarly quality of strategy research; demonstrate a fruitful interaction between strategy researchers and discipline-based scholars; and show the tremendous potential of the intersection of basic disciplines and strategy for gaining new insights and improving management practice and organizational performance. Indeed, by focusing on fundamental questions, the contributors reveal that disciplines like economics, organizational sociology, and political science as well as research on strategic management can - and should - shed new light on this important field. Fundamental Issues in Strategy is the product of a conference jointly sponsored by the Alfred P. Sloan Foundation through its consortium Competitiveness and Cooperation, The John M. OlinFoundation, UCLA Center for International Business Education and Research, and the Strategic Management Society. It frames a complete and original statement about the future of strategic management - and establishes a foundation for future growth and development in the field of strategy.

Perhaps no other article published in the management literature has had the impact of Richard Pascale9s piece on the Honda Effect that was published in the Spring 1984 issue of the California Management Review. This now classic article has stimulated considerable debate over the role and value of corporate strategy in business decision making—which is the subject of this forum. This special collection of essays includes an abridged version of Pascale9s original article [Perspectives on Strategy: The Real Story Behind Honda9s Success], an exchange of correspondence between Henry Mintzberg and Michael Goold, and new essays by Richard Rumelt, Michael Goold, and Richard Pascale, who revisits his own original article as well as this whole debate.