Doing the right thing and knowing the right thing to do: why the whole is greater than the sum of the parts

Richard Makadok

Strategic Management Journal, 2003, vol. 24, issue 10, 1043-1055

Abstract: This paper models the joint impact of two determinants of profitable resource advantages: the accuracy of managers' expectations about the future value of a resource, and the severity of agency problems that cause managers' interests to diverge from those of shareholders. While the impact of each of these factors on resource‐investment decisions has been considered in isolation, their joint interaction effect has never been examined. The model generates the following set of testable hypotheses: Managers of firms with agency problems will, on average, tend to under‐invest (relative to what shareholders would ideally like them to do) in resources of uncertain value. This under‐investment will be most severe for those resources where managers' information indicates a low expected value (i.e., risky bets), and will actually be reversed (i.e., over‐investment) for those resources where managers' information indicates a high expected value (i.e., safe bets). Two levers can be used to reduce the degree of this under‐investment: reducing the severity of the agency problems, or improving the accuracy of managers' expectations. Based on their interaction effect, these two levers are shown to be complementary in the sense that they work better together at reducing under‐investment than either one does in isolation. Therefore, future research on the genesis of competitive advantage should examine agency and governance issues along with, not apart from, resource‐based issues. Copyright © 2003 John Wiley & Sons, Ltd.

Date: 2003
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