Summary: Coff, R.W. (1999): When Competitive Advantage Doesn’t Lead to Performance

Coff’s main idea is that performance of a firm, as shown by most performance measures, is not the same as rent generated. This is due to the fact that these performance measures only capture a small portion of rent generated, and doesn’t say anything about the rent that stakeholders other than shareholders – notably employees and management – can appropriate.

The author’s approach is an extension of the resource-based view of the firm that explains this relationship between competitive advantage and firm performance, and how bargaining power influences the appropriation of rent by different stakeholders.

Coff basically criticizes the traditional resource-based view for assuming a tight link between rent generation and firm performance and for the overly simplistic definition of a firm. Rather, performance is the outcome of two steps: rent generation and rent appropriation. To introduce a “better” definition, he sees the firm as a nexus of contracts. Therefore, rent is created when all stakeholders receive sufficient compensation to hold them in place and some stakeholders get more that would be required to hold them in place.

Whereas most performance measures focus on the residual interest that is appropriated by shareholders, Coff argues that this is a too narrow view. Other stakeholders can appropriate significant portions of the rent generated, thereby reducing firm profit. Their ability to appropriate rents depends on their bargaining power, which is influenced by four determinants: (1) capability of unified action, (2) access to key information, (3) replacement costs to the firm if a stakeholder exits, and (4) cost of exiting to the stakeholder.

Coff describes bargaining power in two configurations. In a small team of individual people, capability of unified action can be neglected. Employees’ bargaining power is significant, as professionals usually have access to key information and replacing them is very costly for the firm. Exit costs, on the other...