Firm resource approach in strategic management

Chapter 1 of this book defined and developed the strategic management question—Why do some firms outperform other firms?—and described the evolution of resource-based theory as one approach to answering this question. Chapter 2 introduced the concept of a strategic factor market to demonstrate that whether a firm gains competitive advantages does not depend just on strategies that create competitive imperfections in prod- uct markets, but on the total cost of implementing these strategies. This total cost is determined by the competitiveness of strategic factor markets. One of the central conclusions of this argument is that firms that exploit resources and capabilities they already control in choosing and implement- ing strategies are more likely to gain competitive advantages than firms that acquire the resources and capabilities they need to implement a strategy in more competitive factor markets.

Of course, this conclusion is hardly unique to resource-based the- ory. Indeed, identifying and exploiting a firm’s strengths while avoid- ing its weaknesses has been one of the central features of one of the oldest organizing frameworks in the field of strategic management— the SWOT framework (Ansoff 1965; Andrews 1971; Hofer and Schendel 1978). This framework, summarized in Figure 3.1, suggests that firms obtain competitive advantages by implementing strategies that exploit their internal strengths, through responding to environmental opportu- nities, while neutralizing external threats and avoiding internal weak- nesses. Most research on sources of competitive advantage has focused either on isolating a firm’s opportunities and threats (Porter 1980, 1985), describing its strengths and weaknesses (Penrose 1959; Stinchcombe 1965;

∗ This chapter draws from Barney (1991a).

Figure 3.1. The relationship between traditional ‘SWOT’ analysis, the resource- based model, and models of industry attractiveness

Hofer and Schendel 1978), or analyzing how these are matched to choose strategies.

While SWOT analysis does draw attention to the important role of understanding a firm’s internal capabilities in choosing strategies, it has at least one important limitation in this regard: there is, in this framework, no logic provided to identify a firm’s strengths or weaknesses. That is, the framework suggests that, for example, firms should choose strategies that exploit their strengths, but no mechanism is described through which these strengths can be identified.

In practice, applications of SWOT analysis often devolve into generating lists of ‘things’ a firm is ‘good’ at, together with lists of ‘things’ a firm is ‘not so good’ at. This can lead to what has sometimes been called ‘decision- making by list length’—whatever strategic option gets the most strengths listed for it is the best strategy. Sometimes, the results of this list making are almost comical. For example, if you ask successful entrepreneurs why they are successful, they will routinely identify three central strengths— they worked hard, they took risks, and they surrounded themselves by good people. Ask failed entrepreneurs what happened, and they will often shrug their shoulders: ‘I don’t know, I worked hard, took risks, and surrounded myself by good people.’ You ask CEOs what their firm’s core strengths are; they almost always identify their top management team. When asked to evaluate their competition’s top management teams, CEOs instantly acknowledge, ‘They are really good, too.’

Perhaps the most extreme example of listing as strategic analysis was shared at a meeting of the Strategic Management Society.1 A consultant described an unnamed company whose CEO decided that the firm would only keep any of its diversified operations if those operations ‘contributed to the core competence of the corporation’. Division managers were given several months to develop ways that their business units helped define the ‘strengths’ of the corporation. The average division identified over 500 ways it contributed to the core competence of this corporation!

One way to help resolve this problem might be to turn to the liter- ature that helps firms identify environmental opportunities and threats. However, this literature—exemplified in Porter’s five forces framework (1980)—has implicitly adopted two simplifying assumptions. First, these environmental tools have assumed that firms within an industry (or firms within a strategic group) are, except for firm size, essentially the same in terms of the strategically relevant resources they control and the strategies they pursue (Scherer 1980; Porter 1981; Rumelt 1984). Second, these mod- els assume that should resource heterogeneity develop in an industry or group (perhaps through new entry), this heterogeneity will be very short lived because the resources that firms use to implement their strategies are highly mobile (i.e. they can be bought and sold in factor markets, see Chapter 2).2

The link between a firm’s internal characteristics and performance obvi- ously cannot build on these same assumptions. These assumptions effec- tively eliminate firm resource heterogeneity and immobility as possible sources of competitive advantage (Penrose 1959; Rumelt 1984; Wernerfelt 1984, 1989). Resource-based theory substitutes two alternate assumptions in analyzing sources of competitive advantage. First, this model assumes that firms within an industry (or group) may be heterogeneous with respect to the strategic resources they control. Second, this model assumes that these resources may not be perfectly mobile across firms, and thus heterogeneity can be long lasting. The resource-based model of the firm examines the implications of these two assumptions for the analysis of sources of sustained competitive advantage.

Of course, not all of a firm’s resources are likely to be economically valuable. Indeed, some of these firm attributes may actually make it more difficult for a firm to conceive and implement valuable strategies (Barney 1986b). Others may have no impact on a firm’s strategizing efforts.

However, those attributes of a firm’s physical, financial, human, and orga- nizational capital that do enable a firm to conceive and implement strate- gies that improve its efficiency and effectiveness are, for purposes of this discussion, valuable firm resources (Wernerfelt 1984). The purpose of this chapter is to specify the conditions under which such firm resources can be a source of sustained competitive advantage for a firm.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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