At this point, a careful reader is probably asking: so what? All this discus- sion of the value of gaining access to a capability, the cost of creating a capability, and the cost of acquiring a firm to gain access to a capability is only relevant if the conditions described above actually exist in some industries. If these conditions are very rare, then the issues raised here are managerially irrelevant. However, while ultimately the frequency with which these conditions exist in different industries is an empirical ques- tion, we believe that these conditions are not uncommon, at least in some types of industries. In fact, there is a class of industries where these three conditions, if anything, are probably quite common. These industries are newly created, rapidly evolving, high technology industries. Examples of these industries include biotechnology, microelectronics, certain sectors of computer software, and so forth. Consider how likely it is for these kinds of industries to have the three conditions described in this chapter.
1. CAPABILITY DIFFERENCES ACROSS FIRMS
Because these industries are newly created, it is not unusual for different firms in them to have very different sets of resources and capabilities. The homogenizing effects of industry structure, mergers and acquisitions, and consolidation have not yet occurred in these kinds of industries, assur- ing that important capability differences are likely to exist across firms that operate in them. Firms in these industries often find that they need resources and capabilities that they do not possess if they are to be com- petitively successful. Thus the first of the three conditions described in this chapter seems likely to exist in these kinds of industries.
2. COSTLY TO CREATE RESOURCES AND CAPABILITIES
Resources and capabilities in these industries are also often costly to create. History matters in these industries, and technology trajectories of different firms are highly path dependent. For example, firms that desire to create the capability of large scale manufacturing in the biotechnology industry almost certainly must have first created the capability to successfully man- ufacture in smaller batches (Pisano 1995). Firms that want to create the capability of writing complex software must first create the capability to write software modules within these complex programs, and second, they must create the capability of continuously integrating these modules to create their software products (Blackburn, Hoedemaker, and Van Wassen- hove 1996). There is no known way to short circuit these path-dependent processes.
Firms in these industries also vary in the extent to which they use socially complex resources and capabilities pursue strategic objectives. Research in the pharmaceutical industry, for example, suggests that some firms are very skilled at integrating product development efforts across multiple scientific disciplines, while other firms are less skilled in this way (Henderson and Cockburn 1994). These socially complex differences between firms are costly to overcome in the short to medium term.
Finally, given the high level of uncertainty in these industries, there can be a great deal of causal ambiguity about how to develop resources and capabilities that are critical to success in them. Often, this is due to the underdeveloped scientific knowledge that underpins these industries. For example, in biotechnology manufacturing, even the most capable firms are often unable to successfully complete all their manufacturing efforts, let alone able to explain to other firms how to create this capability (Pisano 1995). This lack of scientific knowledge, together with the thousands of small decisions that make up some of the core processes in these indus- tries, makes causal ambiguity in these industries very high, and the cost of creating at least some strategically important resources and capabilities essentially infinite.
Taken together, these attributes of newly created, rapidly evolving, high technology industries suggest that it will often be costly for firms to create at least some competitively important resources and capabilities on their own, and thus that the second condition described in this chapter may frequently exist in these industries.
3. COSTLY TO ACQUIRE RESOURCES AND CAPABILITIES
The cost of acquiring another firm to gain access to its resources and capabilities can also be very high in these newly created, rapidly evolving, high technology industries. Over and above any legal, ownership, and asset value constraints that might exist, high uncertainty about the future puts a premium on maintaining flexibility in these industries leading firms to avoid using less flexible acquisitions as a way to gain access to a firm’s resources and capabilities (Pisano 1995). Given the rapidly changing tech- nical needs of firms in these kinds of industries, it is not unusual for a very specific capability to only be required by a firm for a limited range of activities or for a very short period for highly specialized purposes. Indeed, research in these industries has shown that the entire time scale of competition is much shorter than in other kinds of industries (Eisenhardt and Brown 1998). Temporariness increases the cost of using acquisitions to gain access to resources and capabilities. It is also not uncommon for resources and capabilities in firms operating in these kinds of industries to be highly diffused across the firm—implying that acquiring these firms may often lead to acquiring bundles of unwanted resources and capabilities along with those resources and capabilities that are desired through an acquisition. Finally, differences in culture, differences in procedures, and other differences among firms in these kinds of industries can make it very difficult to integrate new acquisitions to gain full access to the resources and capabilities in these firms.
Taken together, these attributes of newly created, rapidly evolving, high technology industries suggest that it will often be costly to acquire other firms in order to gain access to their resources and capabilities, and thus that the third condition described in this chapter may frequently exist in these industries.
Newly created, rapidly evolving, high technology industries are not the only industries that have the characteristics described in this chapter. Further, all exchanges in this type of industry will not necessarily have all these characteristics. Considerations of transaction-specific investment and opportunism are not suggested as being irrelevant in this type of industry. Clearly, whatever form of governance that firms in this type of industry choose to gain access to a capability, they will attempt to build in safeguards that have the effect of reducing the threat of opportunism as much as possible. What has been proposed here, however, is that gaining access to valuable resources and capabilities in this type of industry may take issues well beyond transaction-specific investment and opportunism into consideration. All things being equal, firms in this type of industry should adopt less hierarchical forms of governance than what would be predicted by traditional TCE. Moreover, in these types of industries, firm resources, and capabilities will play a very significant role in determining a firm’s governance choices.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.