Complementary assets explained

Complementary assets are assets that when owned together increase the value of the combined assets. It is defined as “the total economic value added by combining certain complementary factors in a production system, exceeding the value that would be generated by applying these production factors in isolation.” ^[1] Thus two assets are said to be complements when investment in one asset increases the marginal return on the other. On the contrary, assets are substitutes when investment in one does not affect the marginal return of the other.

The production process is described by the production function

F(x,y) , where x and y are the amounts invested of the two assets, then it is possible to define formally the elasticity of substitution as \sigma _{xy} = (d ln (y/x))/(= d ln (MRT _{12} )) (d ln (y/x))/(d ln (F _{x} /F _{y} )) If \sigma _{xy} is equal to 1, the assets are substitutes; if lower, complements; if higher antagonists.

Strategy

In the field of strategy, the concept is sometimes understood to apply to assets, infrastructure or capabilities needed to support the successful commercialization and marketing of a technological innovation, other than those assets fundamentally associated with that innovation.^[2] The term was first coined by David Teece. Key empirical studies on complementary assets were conducted by Frank T. Rothaermel.^{[3] [4] [5] [6]}

Complementary assets are broken down into three general types:

1. Generic assets: "general purpose" assets which do not need to be tailored to a particular innovation;
2. Specialized assets: unilateral dependence between the innovation and the complementary asset;
3. Cospecialized assets: bilateral dependence between the innovation and the complementary asset.

Complementary assets, among other factors, are important for organizations wishing to commercialize and profit from an innovation. ^[7] Firms will accordingly aim to acquire and sustain complementary assets, in order to strengthen a firm's asset base in particular in the light of innovation.

Examples

New biotechnology firms often lack the complementary assets to commercialize their innovations and thus form collaborative partnerships with large incumbent firms who do possess the necessary complementary assets such as manufacturing capabilities, marketing channels, brand name, etc. (Rothaermel, 2001)^{[8] [9]}

RC Cola was the first firm to commercialize both diet cola and cola in a can. However, rivals Coca-Cola and Pepsi soon imitated this and beat RC Cola out of the market based on their superior marketing capabilities and brand name recognition, i.e. their complementary assets (Teece, 1986) .^[10]

It has also been demonstrated that competencies in process innovation and implementation moderate the extent to which a firm's environmental management competencies create a cost advantage.^[11]

Antagonistic Assets

The opposite of complementary assets are called antagonistic assets. These are defined as a combination of resources that jointly reduce value from the implementation of other resources. In other words, a firm strategy combining antagonistic assets produces an effect smaller than the sum of the individual effects of each resource.^{[12] [13]}

Notes and References

1. Ennen, Edgar, and Ansgar Richter, "The whole is more than the sum of its parts—or is it? A review of the empirical literature on complementarities in organizations," Journal of Management, 36.1 (2010): 207-233.
2. Teece, David J. 1986. Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Research Policy 15 (6): 285-305.
3. Rothaermel, F.T. 2001. Complementary assets, strategic alliances, and the incumbent’s advantage: An empirical study of industry and firm effects in the biopharmaceutical industry. Research Policy, 30 (8): 1235-1251.
4. Rothaermel, F.T. 2001. Incumbent’s advantage through exploiting complementary assets via interfirm cooperation. Strategic Management Journal, 22 (6-7): 687-699.
5. Rothaermel, F.T., Hill, C.W.L. 2005. Technological discontinuities and complementary assets: A longitudinal study of industry and firm performance. Organization Science, 16 (1): 52-70.
6. Web site: Frank Rothaermel .
7. Mary Tripsas, “Unraveling the Process of Creative Destruction: Complementary Assets and Incumbent Survival in the Typesetter Industry,” Strategic Management Journal, 18(Summer): 119–142, 1997
8. Rothaermel, Frank T. 2001. Complementary assets, strategic alliances, and the incumbent's advantage: an empirical study of industry and firm effects in the biopharmaceutical industry. Research Policy 30(8): 1235-1251
9. [Frank T. Rothaermel]
10. Teece, David J. 1986. Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Research Policy 15 (6): 285-305.
11. Petra Christmann, "Effects of “best practices” of environmental management on cost advantage: The role of complementary assets." Academy of Management Journal, Vol. 43(4), pp. 663-680, 2000.
12. Hockerts . K. . 2015 . How hybrid organizations turn antagonistic assets into complementarities . California Management Review . 57 . 3. 83–106 . 10.1525/cmr.2015.57.3.83 . 154538481 .
13. Book: Komatsu . T. . 2016 . Social Innovation Business Models: Coping with Antagonistic Objectives and Assets. Finance and Economy for Society: Integrating Sustainability . 11 . 315–347 . 10.1108/S2043-905920160000011013 . Critical Studies on Corporate Responsibility, Governance and Sustainability . 978-1-78635-510-2 .