Resource-based theory makes a few central assumptions about the nature of resources and capabilities, their impact on a firm’s performance, and the sustainability of these performance differences. These assumptions help define the kinds of empirical work that is required to test resource-based theory.
1. THE QUESTION OF VALUE
It is now widely understood that resources—the tangible and intangi- ble assets controlled by a firm that enable it to create and implement strategies (Barney 2002)—only have the potential to generate economic value if they are used to do something (Porter 1991). Of course, the thing that resources—and their close conceptual cousin, capabilities (Amit and Schoemaker 1993)—are supposed to do is to enable firms to create and implement strategies.
This simple insight actually suggests a way that researchers can measure the potential of a firm’s resources to create value: To measure this potential, measure the value created by the strategies a firm creates and implements using its resources. Put differently, since resources have no value in and of themselves and only create value when they are used to implement strategies, researchers should examine the value these strategies create to infer the potential value of a firm’s resources.
Of course, there is substantial literature that describes the ability of dif- ferent strategies to create economic value. A wide variety of such strategies have been described, including cost leadership, product differentiation, vertical integration, flexibility, tacit collusion, strategic alliances, corporate diversification, mergers and acquisitions, and international strategies, to name just a few (Barney 2002). Much of this work identifies the con- ditions under which these strategies will and will not create economic value.
For example, a cost leadership strategy creates value if and only if it enables a firm to reduce its costs below those of competing firms (Porter 1980). A product differentiation strategy creates value if and only if it enables a firm to charge higher prices for its products than a firm that is not differentiating its products (Porter 1980). A corporate diversification strategy creates value if and only if it exploits an economy of scope that cannot be realized through market contracting (Teece 1980).
There has been less work that links specific firm resources and capabili- ties with the ability to create and implement these kinds of firm strategies. This is largely because currently available typologies of firm resources are very broad in scope, for example, Barney’s distinction (2002) between financial, physical, human, and organizational resources. Further work developing this type of typology is likely to facilitate the examination of the link between resources, in general, and the ability to conceive of and implement specific strategies.
However, that there has been limited work that links specific resources to particular strategies does not mean that there has been no work in this area. Indeed, several papers have examined the linkages between partic- ular resources and capabilities and specific strategies. Most of this work is carried out on a limited sample of firms within a single industry. This helps establish the link between the resources and strategies in question. But, taken as a whole, this work suggests an approach to linking resources to strategy and thereby examining the potential of resources to create eco- nomic value by enabling firms to create and implement strategies. Consider a couple of examples of this research.
In 1994, Henderson and Cockburn were interested in understanding why some pharmaceutical firms were more effective in developing new patentable drugs than other pharmaceutical firms. It is well known that patents are a source of economic value in the pharmaceutical industry (Mansfield, Schwartz, and Wagner 1981)—contingent on the demand for particular drugs, firms with large numbers of patented drugs will usually have higher revenues than firms with smaller numbers of patented drugs. The specific resource that Henderson and Cockburn were able to iden- tify that enabled some firms to have more patents than other firms was something they called ‘architectural competence’—the ability to facilitate cooperation among the different scientific disciplines required to develop and test a new pharmaceutical drug. Firms with high levels of this compe- tence were able to patent more drugs than firms with low levels of this competence. Henderson and Cockburn’s research showed that architec- tural competence had the potential to generate economic value when it was used to develop new patentable drugs.
More recently, Ray, Barney, and Muhanna (2004) examined the relation- ship between the ability of two functional areas—the IT function and the customer service function—and the level of customer service in a sample of North American insurance companies. Again, it is widely recognized that customer service is an information intensive function in most mod- ern insurance companies, and that the careful use of IT can enhance the ability of customer service professionals to meet their customers’ needs. Customer satisfaction, in turn, is related to a variety of economically important variables, including customer retention. What Ray, Barney, and Muhanna (2004) were able to do is to develop a measure of the level of cooperation between the IT and customer service functions in a sample of insurance firms and demonstrate that this relationship—a socially complex resource—has the potential to create economic value when it is used to develop customer service-specific IT applications.
Besides demonstrating that it is possible to examine the potential of a resource to create economic value by examining the value consequences of the strategies a firm creates and implements by using these resources, these—and related—papers have several other things in common. First, they are examples of what might be called ‘quantitative case studies’. That is, they examined the relationship between a firm’s resources and the value of its strategies in a narrow sample of firms, typically a sample of firms drawn from a single industry. This enabled these authors to clearly identify industry-specific resources and capabilities and to build industry- specific measures of these resources. Then, using traditional quantitative techniques, they examined the relationship between these measures of firm resources and attributes of a firm correlated with a firm’s economic performance.
Of course, it is difficult to generalize this research beyond the specific industry contexts within which it is done. That architectural competence is related to the number of patents in pharmaceutical firms may or may not say anything about the relationship between architectural competence and innovation in other firms in other industries. That the level of coop- eration between IT and customer service has an impact on the level of customer service in North American insurance companies may or may not say anything about the relationship between this type of cooperation and customer service in other firms in other industries.
Although these papers have limited generality at the level of the spe- cific resources and strategies studied, their results are quite general from a broader perspective. Each of these papers—and the several others that apply a similar empirical logic (e.g. Combs and Ketchen 1999)—show that at least some firm resources have the potential to generate economic value if they are used to create and implement certain strategies. Over time, as more of these quantitative case studies are done, our ability to specify the conditions under which resources can be used to create and implement strategies that create economic value will be enhanced.
Second, many of these studies examine the value potential of a firm’s resources at a level of analysis below that of the firm. Not surprisingly, the most correct level of analysis at which to examine the relationship between a firm’s resources and its strategies is at the level of the resource, not the level of the firm. However, the firm is usually the unit of accrual. We are likely to learn a great deal more about the relationship between resources and strategies if scholars are able to ‘get inside’ the firm, where resources reside, rather than simply correlate aggregate measures of resources with aggregate measures of the value of a firm’s strategies.
Finally, the central independent variables in both of these papers— architectural competence in Henderson and Cockburn (1994) and IT–customer service cooperation in Ray, Barney, and Muhanna (2004)— focus on a particular type of organizational resource. This type of resource has been described as socially complex (Barney 1991b), and it has been linked to the sustainability of a firm’s competitive advantage. Empirically examining these sustainability issues is examined in the next section of this chapter.
2. SUSTAINING COMPETITIVE ADVANTAGES
It is now widely understood that resources only have the potential to create economic value, and that that potential is only realized when a firm uses its resources to create and implement strategies. It is perhaps not as widely recognized that the ability of other firms to imitate a particular firm’s strategies does not depend on the attributes of those strategies, per se, but rather on the attributes of the resources and capabilities that enabled that firm to create and implement its strategies in the first place. Put differently, just as resources only have the potential to create value through their impact on a firm’s strategies, so too strategies only have the potential to be costly to imitate because of the nature of the resources that enabled a firm to choose and implement its strategies.
By their nature, strategies are relatively public. That is, when a firm implements its strategies, it is usually not very long before other firms are able to articulate what those strategies are. This is especially the case when a firm’s strategies are logical and coherent.1 What are not always so public are the resources and capabilities that enable a firm to create and implement its strategies.
Resource-based theory suggests that valuable strategies that are created and implemented using resources that are widely held or easy to imitate cannot be a source of sustained competitive advantage (Barney 1991b). In this context, a firm has a sustained competitive advantage when it is one of only a few competing firms that is implementing a particular value- creating strategy and when this competitive situation lasts over extended periods.
Resource-based theory also makes specific predictions about the char- acteristics of resources and capabilities that make some more difficult to imitate than others.2 For example, Lippman and Rumelt (1982) suggest that causally ambiguous resources are more likely to be costly to imitate than resources that are not causally ambiguous. Barney (1986b) suggests that resources and capabilities a firm already controls are more likely to be costly to imitate than resources it acquires from competitive factor markets. Barney (1986b) suggests that socially complex resources and capabilities— the particular resource he examined in this paper was a firm’s culture— are more likely to be costly to imitate than resources that are not socially complex. Dierickx and Cool (1989) suggest that resources characterized by time compression diseconomies, asset stock interconnectedness, and asset mass efficiencies are more likely to be costly to imitate than resources without these attributes. Finally, in a summary, Barney (1991a) suggests that path dependent, causally ambiguous, and socially complex resources are more likely to be costly to imitate than resources without these attributes.
Of course, each of these assertions implies testable hypotheses about the imitability of different types of resources. A study that examined, say, path dependent resources that enabled a few competing firms to create and implement value-creating strategies, but where numerous firms were able to imitate these strategies once they were initially implemented would be very inconsistent with resource-based theory. So too would a study that examined resources that did not possess any of these special attributes but nevertheless enabled a few competing firms to create and implement value- creating strategies, but where numerous firms were unable to imitate these strategies once they were initially implemented. In the first study, path dependence would not be a source of sustained competitive advantage; in the latter case, the lack of path dependence (or social complexity, or causal ambiguity, or some other attribute of resources supposed to prevent their easy imitation) would be a source of sustained competitive advantage. Both results contradict resource-based theory.
Of course, the empirical requirements to test these hypotheses are nontrivial, but several studies have come close to approximating these requirements. For example, by studying the resource-based determinants of patents, Henderson and Cockburn (1994) come close to examining the sustainability of any competitive advantages that architectural competence might create because patents, as a function of patent law, last a defined and relatively long period—twenty years.3
One particularly elegant study that examined the imitability of path- dependent firm resources was published by Barnett, Greve, and Park (1994). In this paper, Barnett, Greve, and Park examined why some com- mercial banks competing in the state of Illinois during a recession were able to outcompete other banks competing in the same market at the same time. Clearly, banks that were not performing well in this setting had a very strong incentive to imitate the strategies of banks that were performing well. However, Barnett, Greve, and Park hypothesized that one reason the strategies of the banks that were doing well were not subject to quick imitation was that these banks possessed resources and capabil- ities that enabled them to choose these valuable strategies, and that these underlying resources and capabilities were costly to imitate due to their path dependent nature.
This study did not directly measure the resources that enabled some banks to outperform other banks. However, it did demonstrate that banks that had survived a financial recession previously, systematically out- performed banks that had not survived a financial recession previously. Barnett, Greve, and Park interpreted this finding to suggest that there was something about the historical experience of banks that had survived a pre- vious recession that equipped them with the resources and capabilities— they use the largely interchangeable term ‘routines’ (Nelson and Winter 1982)—necessary to survive, and even prosper, in a later reces- sion. Of course, this paper would have been even stronger if it could have directly measured these resources and the extent to which they were path dependent in nature. Nevertheless, it is consistent with the general hypoth- esis that path-dependent resources and capabilities are costly to imitate and thus a source of sustained competitive advantage.
Makadok’s study (1999) of economies of scale in the money-market mutual fund industry also supports resource-based assertions. In this case, however, resource-based theory would suggest that since the realization of these economies of scale did not depend on resources or capabilities that are costly to imitate, that strategies that exploit these economies of scale would not be a source of sustained competitive advantage for these firms. If Makadok (1999) had found that economies of scale in this industry had been a source of sustained competitive advantage, this would have been inconsistent with resource-based theory.
Interestingly, these two studies, like the first two studies reviewed in this chapter, are quantitative case studies. That is, they studied a sample of firms drawn from a particular industry, and in the case of Barnett, Greve, and Park (1994), from a particular geographic market. This enabled these scholars to examine the link between specific resources, strategies, and competitive advantage over time.
Unfortunately, neither of these studies measured the attributes of a firm’s resources and capabilities directly. This is, perhaps, due to the dif- ficulty of gaining access to this intraorganizational resource-level infor- mation over an extended period. Obviously, duplicating Ray, Barney, and Muhanna’s survey methodology (2004) over several years would be very challenging and would delay the publication of any subsequent paper until after all the data had been collected. A recent paper by Leiblein and Miller (2003) on transactions cost and resource-based implications for vertical integration decisions comes closer to meeting this ideal stan- dard than much of the previous work on sustainability of competitive advantages.
Another attribute shared by these two studies is that they were con- ducted on data over time. Although it is possible to define sustained competitive advantage with respect to the observed inability of firms to imitate a particular firm’s resources (Barney 1991a), this equilibrium def- inition of sustained competitive advantage will often be highly correlated with competitive advantages that last a long time. This suggests that time series analyses of various kinds will generally be required to investigate the imitability of different types of firm resources, and thus the sustainability of a firm’s competitive advantage. The challenges associated with collect- ing resource-level information within a firm over time have already been discussed.
3. THE QUESTION OF ORGANIZATION
Thus, while much work is left to be done, some research has examined what most consider to be the two central assertions of resource-based theory: (a) that some resources have the potential to enable firms to create and implement valuable strategies, and (b) that such resources can be a source of sustained competitive advantage when they possess attributes that make their imitation costly. However, some versions of resource-based theory also suggest that firms must be organized to take advantage of their resources and strategies if their full economic potential is to be realized (Barney 2002). This emphasis on strategy implementation has received less attention in the resource-based empirical literature.
There are several possible reasons for this relative inattention. First, most strategy scholars are interested in understanding sources of sustained competitive advantage. If a firm’s ability to implement strategies is valu- able (in the sense described earlier), rare, and costly to imitate, then a firm’s strategy implementation capability is a potential source of sustained competitive advantage. In this case, the study of strategy implementation— as a source of sustained competitive advantage—is indistinguishable from other studies of the sources of sustained competitive advantage.
Indeed, some of the studies reviewed thus far could easily be reinter- preted as if they were examining the competitive consequences of a firm’s ability to implement its strategies. Thus, Henderson and Cockburn’s study (1994) could be reinterpreted as a strategy implementation study by sug- gesting that architectural competence is the ability that some firms have to implement their patenting strategies more effectively than other firms. In this sense, because the ability to implement a strategy can be thought of simply as another type of resource or capability, strategy implementation can be thought of as just another possible source of sustained competitive advantage.
This is one reason why research on the ability of firms to develop new capabilities—so-called ‘dynamic capabilities’ (Teece, Pisano, and Shuen 1997)—has captured the interest of so many strategy scholars. Such dynamic capabilities can also be reinterpreted in strategy implementation terms: A dynamic capability is the ability that some firms have to create new capabilities, capabilities whose potential value can only be realized when a firm implements new strategies that build on these new capabilities.
However, another perspective on the question of organization is that organization includes all those dimensions of implementing a firm’s strate- gies that are, in principle, imitable, but are nevertheless important if a firm is to gain competitive advantages. Barney (2002) calls these dimen- sions of strategy implementation ‘complementary resources’, because these implementation skills—things like an organization’s structure, its man- agement controls, and its compensation policies—are not sources of competitive advantage by themselves, but are nevertheless important if a firm realizes the full competitive potential of its resources and strategies.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.