The development of resource-based theory


Perhaps the first resource-based theory publication in the field of strate- gic management identified as such was by Wernerfelt (1984). Ironically, Wernerfelt’s resource-based arguments did not grow directly from any of the four theoretical traditions identified above. Rather, Wernerfelt’s argu- ment is an example of dualistic reasoning common in economics. Such reasoning suggests that it is possible to restate a theory originally developed from one perspective with concepts and ideas developed in a complemen- tary (or dual) perspective. For example, in microeconomics, it is possible to develop economic theories of decision-making using either utility the- ory, revealed preference theory, or state-preference theory; in finance, it is possible to estimate the value of an investment using the Capital Asset Pricing Model or Arbitrage Pricing Theory. Wernerfelt (1984) attempted to develop a theory of competitive advantage based on the resources a firm develops or acquires to implement product market strategy as a comple- ment or dual of Porter’s theory (1980) of competitive advantage based on a firm’s product market position. This is why Wernerfelt (1984) called his ideas the resource-based ‘view’—since he was simply viewing the same competitive problem described by Porter (1980) from the perspective of the resources a firm controls.

This approach to developing a theory of competitive advantage supposes that the portfolio of product market positions that a firm takes is reflected in the portfolio of resources it controls. Competition among product mar- ket positions held by firms can thus also be understood as competition among resource positions held by firms. In principle, for every concept that enables the analysis of the competitiveness of a firm’s product market (e.g. barriers to entry), there should exist a complementary concept that enables the analysis of the level of competition among resources controlled by different firms (e.g. barriers to imitation).

One of Wernerfelt’s primary contributions (1984) was recognizing that competition for resources among firms based on their resource profiles could have important implications for the ability of firms to gain advan- tages in implementing product market strategies. In this way, Wernerfelt anticipated some of the critical elements of resource-based theory as it developed in the 1990s.

In the same year that Wernerfelt (1984) published his paper, Rumelt (1984) published a second resource-based paper in a book of readings coming out of a conference on strategic management. While these papers addressed similar kinds of issues, they did not refer to each other. Where Wernerfelt (1984) focused on establishing the possibility that a theory of firm performance differences could be developed in terms of the resources that a firm controls, Rumelt began describing a strategic theory of the firm, that is, a theory explaining why firms exist that focused on the ability of firms to more efficiently generate economic rents than other forms of economic organization. At its most general level, such a theory would suggest the conditions under which firms, as an example of hierarchical governance (Williamson 1975, 1985), would be a more efficient way to create and appropriate economic rents than other forms of governance, including markets. Rather than firms existing as efficient ways to minimize the threat of opportunism in transactions—as suggested by the transac- tions cost theorists (Williamson 1975)—Rumelt (1984) was exploring the rent generating and appropriating characteristics of firms.

This theme of linking rent generation, transactions cost, and governance emerges much later, in the work of Conner and Prahalad (1996), Grant (1996), Liebeskind (1996), Kogut and Zander (1996), and Spender (1996), in efforts to develop a resource-based theory of the firm.2 It also antici- pates a very important issue that may ultimately serve as a theoretical link between resource-based theories of firm performance and transactions cost theories of governance. In particular, both theories point to the importance of transaction-specific investments as independent variables that explain different dependent variables. For resource-based theorists, transaction- specific or firm-specific investments can be thought of as resources that are among the most likely to have the ability to generate economic rents (Barney 2001a). For transactions cost theorists, transaction-specific invest- ments create problems of opportunism that must be resolved through governance choices. Teece (1980) brings these two ideas together explicitly by arguing that the kinds of relations among businesses that are most likely to be a source of economic profits for firms pursuing a corporate diversification strategy are also the kinds of relations that will be difficult to manage through nonhierarchical forms of governance. Thus, for Teece, resource-based theories and transactions cost theories, together, constitute a theory of corporate diversification.

The strategic theory of the firm that Rumelt (1984) develops has many of the attributes that will later be associated with resource-based theory. For example, Rumelt defines firms as a bundle of productive resources and he suggests that the economic value of these resources will vary, depend- ing on the context within which they are applied. He also suggests that the imitability of these resources depends on the extent to which they are protected by ‘isolating mechanisms’. He even develops a list of these isolating mechanisms and begins to discuss the attributes of resources that can enhance their inimitability.

The third resource-based article published in the field of strategic man- agement is Barney (1986a). Similar to Wernerfelt (1984), Barney (1986a) suggests that it is possible to develop a theory of persistent superior firm performance based on the attributes of the resources a firm controls. How- ever, Barney (1986a) moves beyond Wernerfelt (1984) by arguing that such a theory can have very different implications than theories of competitive advantage based on the product market positions of firms. Thus, Barney (1986a) begins a shift from what might be called the resource-based view toward what is currently called resource-based theory.

Barney (1986a) introduces the concept of strategic factor markets as the market where firms acquire or develop the resources they need to implement their product market strategies.3 He shows that if strategic fac-tor markets are perfectly competitive, the acquisition of resources in those markets will anticipate the performance those resources will create when used to implement product market strategies. This suggests that, if strategic factor markets are perfectly competitive, even if firms are successful in implementing strategies that create imperfectly competitive product mar-kets, those strategies will not be a source of economic rents. Put differently, the fact that strategic factor markets can be perfectly competitive implies that theories of imperfect product market competition are not sufficient for the development of a theory that explains persistent performance dif- ferences between firms. This, of course, contradicts one of the central tenants of Porter’s theory of industry attractiveness—that the ability of firms to enter and operate in attractive product markets is an explanation of persistent superior firm performance. In the extreme, Barney’s argument suggests that if strategic factor markets are always perfectly competitive, it is not possible for firms to earn economic rents.

Of course, strategic factor markets are not always perfectly competitive. Barney (1986a) suggests two ways that such markets can be imperfectly competitive: First, in the face of uncertainty, firms can be lucky and, second, it may be the case that a particular firm has unusual insights about the future value of the resources it is acquiring or developing in a strategic factor market. Barney (1986a) concludes his paper by suggesting that the resources a firm already controls are more likely to be sources of economic rents for firms than resources that it acquires from external sources.

Dierickx and Cool (1989) extended Barney’s argument (1986a) by describing what it is about the resources a firm already controls that may make it possible for that resource to generate economic rents. Following Rumelt’s discussion (1984) of isolating mechanisms, Dierickx and Cool (1989) suggest that resources that are subject to time compression disec- onomies (what others [Arthur 1989] have called path dependence), that are causally ambiguous, that are characterized by interconnected asset stocks, or that are characterized by asset mass efficiencies are less likely to be sub- ject to strategic factor market competition than other kinds of resources. Many of the attributes of a firm’s resources that make them not subject to strategic factor market competition identified by Dierickx and Cool (1989) are later discussed and applied by Barney (1991b).

Together, these four papers—Wernerfelt (1984), Rumelt (1984), Barney (1986a), and Dierickx and Cool (1989)—outline some of the basic prin- ciples of resource-based theory. These papers suggest that it is possible to develop a theory of persistent superior firm performance using a firm’s resources as a unit of analysis. These papers also describe some of the attributes that resources must possess if they are to be a source of sus-tained superior firm performance—Rumelt’s concepts (1984) of value and isolating mechanisms and Barney’s notion (1986a) that resources already controlled by a firm are more likely to be a source of economic rents than other kinds of resources. They also suggest that it is the bundle of unique resources possessed by a firm that may enable a firm to gain and sustain superior performance.

Of course, a great deal of work has followed these initial four papers. For example, Barney (1986b) developed a resource-based explanation of why an organization’s culture can be a source of sustained competitive advantage (to be discussed further in Chapter 4), and Barney (1988) applied the logic developed in Barney (1986a) to mergers and acqui- sitions to show that strategic relatedness, per se, was not sufficient for bidding firms to earn economic rents from acquiring target firms (to be discussed further in Chapter 10). Conner (1991) explored the relationship between resource-based theory and other traditions in microeconomics. Building on Rumelt (1984), she also began to explore some of the theory of the firm implications of resource-based logic. Castanias and Helfat (1991) showed how the creation and appropriation of economic rents aligned the interests of a firm’s managers and equityholders and thus how resource-based logic helped address incentives problems identified in agency theory (see Alchian and Demsetz 1972; Jensen and Meckling 1976). Barney (1991b) published a paper that outlined the basic assumptions of resource-based logic and how those assumptions could be used to develop testable assertions about the relationship between a firm’s resources and its competitive advantages (to be discussed further in Chapter 3).4 Rumelt (1991) published an empirical paper that showed that firm-level effects explained more variance in firm performance than either corporate or industry level effects, a result consistent with resource-based logic and a result that contradicted earlier published work that showed that industry effects were a more important determinant of firm performance than firm effects (Schmalensee 1985; Wernerfelt and Montgomery 1986). Hansen and Wernerfelt (1989) published a paper that demonstrated that the char- acteristics of a firm’s organizational culture had a more significant impact on its performance than the attributes of the industry within which it operated—results that also were consistent with resource-based expecta- tions. Peteraf (1993) published a paper that thoroughly grounded resource- based logic in microeconomics, and Mahoney (1993) published an article that compared and contrasted resource-based logic with other theories of competitive advantage. Grant (1996) published an article that, among other things, began to explore the managerial implications of resource- based logic.

Together, these and many other papers created the foundation of what has become known as resource-based theory. The major assumptions, assertions, and predictions of this body of theory are examined in detail in subsequent chapters of this book.

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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