Parallel streams of ‘resource-based’ work

As this resource-based theory was developing, scholars in other research traditions were developing theories of competitive advantage that had numerous similarities to resource-based logic but were developed largely independent of the work cited earlier. Two of the most important of these parallel streams were the theory of invisible assets (Itami 1987), and work on competence-based theories of corporate diversification (e.g. Prahalad and Bettis 1986; Prahalad and Hamel 1990).


As described by Itami (1987: 12), invisible assets are information-based resources such as technology, customer trust, brand image, and control of distribution, corporate culture, and management skills. For Itami, physical (visible) assets must be present for business operations to take place but invisible assets are necessary for competitive success. Invisible assets are the real sources of competitive power and adaptability because they are hard and time-consuming to accumulate, can be used in multiple ways simultaneously, and are both input and outputs of business activity. People are both accumulators and producers of invisible assets.

Itami classifies information as being environmental, corporate, and internal. Environmental information flows from the environment to the firm, creating invisible assets related to the environment such as pro- duction skills and customer information. Corporate information, such as corporate reputation, brand image, corporate image, and marketing know-how, flows from the firm to its environment. Internal information, such as corporate culture, morale of workers, and management capability, originates and terminates within the firm. In each category, the amount of information gathered, its nature, as well as the channels through which it is gathered, are all invisible assets.

Invisible assets are accumulated either directly—where a firm takes explicit actions such as choosing a technology for research and development—or indirectly—where assets are accumulated as by-products of daily operations. According to Itami (1987), the accumulation and maintenance of invisible assets indirectly through operations can take more time than direct efforts, but the results of this process are more reliable. For example, word-of-mouth customer appreciation is much more effective than a television advertisement in convincing potential customers to buy a firm’s products. However, this is not to suggest that the direct route has to be completely abandoned, but rather that a balance between these two methods of invisible asset accumulation is necessary.

Given the role of both visible and invisible assets of the firm, firms should choose projects that are within the firm’s area of expertise and appropriate to its skills (Itami 1987: 159). However, firms intending to grow have to create deviations from this ideal fit to accumulate new invis- ible assets. Firms that choose to accumulate new invisible assets need to understand that they usually will not be able to compete in a new business as effectively as they have competed in their original market. However, this temporary loss of effectiveness may be necessary if a firm is to continually develop new invisible assets it can use to grow and prosper.

Of course, Itami’s emphasis on the intangible and invisible aspects of a firm directly parallels resource-based theory. However, rather than simply focusing on how resources can explain a firm’s current performance, Itami examines the impact of these invisible assets on a firm’s diversification efforts. This links Itami’s work very closely with the work on the core competence of the organization.


With respect to competence-based theories of corporate diversification, it has already been suggested that Teece (1980) was among the first scholars to begin to apply resource-based logic to the problem of corporate diver-sification. In an effort that paralleled Teece’s work, Prahalad and his col- leagues (Prahalad and Bettis 1986; Prahalad and Hamel 1990) also began developing an approach to understanding corporate diversification that, while never explicitly labeled as a ‘resource-based approach’ had a great deal in common with resource-based logic as it was developing through the 1990s. Where most previous corporate strategy work had focused on the importance of shared tangible assets across the multiple businesses a diver- sified firm had begun operating in (see, e.g. Rumelt 1974; Montgomery 1979), Prahalad began emphasizing the potential importance of sharing less tangible assets across businesses and the role that this sharing could play in creating value through diversification.

In Prahalad and Bettis (1986: 491), these shared intangible assets were called a firm’s dominant logic. They define a firm’s dominant logic as ‘a mindset or a worldview or conceptualization of the business and the administrative tools to accomplish goals and make decisions in that busi- ness.’ Clearly, dominant logic, as an economic justification for corporate diversification, emphasizes intangible, even cognitive, bases for diversifi- cation. Certainly, one of the advantages of such bases of diversification compared to more tangible bases is that competing corporations would have more difficulty imitating these intangible bases of diversification.

Prahalad and Hamel (1990) extended the concept of dominant logic in a very influential paper that defined the notion of a corporation’s ‘core competence’. Prahalad and Hamel (1990: 82) defined a corporation’s core competence as ‘the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.’ Here again, Prahalad and his coauthors focus on intangible rather than tangible assets as a basis for competitive advantage in choosing and implementing corporate strategy.

While developed independently of resource-based logic, this emphasis on the economic value of the intangible is common to both Prahalad’s work and resource-based theory as it was developing in the 1990s. Indeed, since these early contributions by Prahalad, Bettis, and Hamel, most schol- ars that have either further developed the ideas of a firm’s ‘dominant logic’ (Grant 1988) or core competence or tested the empirical implications of these ideas have approached this work in ways that are consistent with resource-based logic (e.g. Wernerfelt and Montgomery 1988; Robins and Wiersema 1995). Indeed, resource-based theories of corporate diversifica- tion, as is shown in Chapter 11, have been one of the most popular ways to empirically test resource-based logic.

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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