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Rethinking the effectiveness of asset and cost retrenchment: The contingency effects of a firm's rent creation mechanism

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  • Dominic S. K. Lim
  • Nikhil Celly
  • Eric A. Morse
  • W. Glenn Rowe

Abstract

This paper posits that the efficacy of different retrenchment strategies depends upon the firm's core rent creation mechanism. We focus on two distinct mechanisms of rent creation: Ricardian rent creation based on the exploitation of resources and Schumpeterian rent creation based on explorative capabilities. We argue that cost retrenchment may have detrimental effects on firms with a relatively high Schumpeterian rent focus. On the other hand, asset retrenchment may erode the basis for future rent creation for firms with a higher Ricardian rent focus. Our findings based on a sample of large nondiversified Japanese firms highlight the differing degrees of fragility and recoverability of the two rent creation mechanisms in the context of different retrenchment strategies. Copyright © 2012 John Wiley & Sons, Ltd.

Suggested Citation

  • Dominic S. K. Lim & Nikhil Celly & Eric A. Morse & W. Glenn Rowe, 2013. "Rethinking the effectiveness of asset and cost retrenchment: The contingency effects of a firm's rent creation mechanism," Strategic Management Journal, Wiley Blackwell, vol. 34(1), pages 42-61, January.
    • Handle: RePEc:bla:stratm:v:34:y:2013:i:1:p:42-61
    DOI: 10.1002/smj.1996
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