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Keywords:

  • retrenchment;
  • Ricardian rent;
  • Schumpeterian rent;
  • resource-based view;
  • capabilities

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.