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The Resource-Based View Within The Conversation of Strategic Management

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The Resource-Based View Within the Conversation of Strategic Management
Author(s): Joseph T. Mahoney and J. Rajendran Pandian
Source: Strategic Management Journal, Vol. 13, No. 5 (Jun., 1992), pp. 363-380
Published by: John Wiley & Sons
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 Strategic Management Journal, Vol. 13, 363-380 (1992)

THE RESOURCE-BASEDVIEWWITHINTHE
CONVERSATIONOF STRATEGICMANAGEMENT
JOSEPH T. MAHONEYand J. RAJENDRANPANDIAN
College of Commerce and Business Administration, University of Illinois, Champaign,
Illinois, U.S.A.

The resource-based approach is an emerging framework that has stimulated discussion

between scholars from three research perspectives. First, the resource-based theory
incorporates traditional strategy insights concerning a firm's distinctive competencies and
heterogeneous capabilities. The resource-based approach also provides value-added theoretical
propositions that are testable within the diversification strategy literature. Second, the
resource-based view fits comfortably within the organizational economics paradigm. Third,
the resource-based view is complementary to industrial organization research. The resource-
based view provides a framework for increasing dialogue between scholars from these
important research areas within the conversation of strategic management. Resource-based
studies that give simultaneous attention to each of these research programs are suggested.

McCloskey (1985) persuasively argues that 'good over, the resource-based theory is concerned with
science is good conversation.' The resource-based the rate, direction and performance implications
view is good management science, properly of diversification strategy which are areas of
speaking, because it stimulates good conversation considerable focus in the strategy field
within the strategic management field. The (Ramanujam and Varadarajan, 1989).
resource-based approach (Penrose, 1959; Werner- Second, the resource-based approach fits
felt, 1984) is attracting the attention of a growingcomfortably within the conversation of organi-
number of researchers precisely because the zational economics (Barney and Ouchi, 1986).
framework encourages a dialogue between schol- In fact, the resource-based view may arguably
ars from a variety of perspectives. The purpose be considered a fifth branch of the organizational
of this paper is to coalesce and sustain this economics tree of knowledge along with positive
conversation. agency theory (Eisenhardt, 1989), property rights
In particular, three major research programs (Alchian 1984; Coase, 1960), transaction cost
are currently intertwined in the resource-based economics (Williamson, 1985), and evolutionary
framework. First, the resource-based view incor- economics (Nelson and Winter, 1982).
porates concepts from mainstream strategy Third, the resource-based approach is com-
research. Distinctive competencies (Andrews, plementary to industrial organization analysis
1971; Ansoff, 1965; Selznick, 1957) of heteroge- (Caves, 1982; Porter 1980). In particular, we
neous firms, for example, are a fundamental emphasize that the resource-based view contains
component of the resource-based view. More- elements of both the Harvard (Bain, 1968;
Mason, 1957) and Chicago (Demsetz, 1982;
Stigler, 1968) schools of industrial organization
Key words: Resources,rents, diversification,growth, thought. Indeed, Conner (1991) persuasively
organizationaleconomics argues that the resource-based approach both

00
0143-2095/92/050363-18$09. Received 10 April 1991
(C 1992 by John Wiley & Sons, Ltd. Revised 27 January 1992
364 J. T. Mahoney and J. R. Pandian

reflectsa strong industrialorganizationapproach yielding Ricardian rents include ownership of

and is at the same time unique. valuable land, locational advantages, patents and
The resource-basedview not only stimulates copyrights. Second, monopoly rents may be
conversationwithinmainstreamstrategyresearch, achieved by government protection or by collusive
organizationaleconomics and industrialorgani- arrangements when barriers to potential competi-
zation researchbut it also provides a framework tors are high (Bain, 1968). Third, entrepreneurial
for increased discussion between these research (Schumpeterian) rent may be achieved by risk-
perspectives.In this paper we develop our thesistaking and entrepreneurial insight in an uncer-
that the resource-based approach presents an tain/complex environment (Cooper, Gimeno-
opportunity for dialogue and debate between Gascon, and Woo, 1991; Rumelt, 1987; Schum-
scholars from different research perspectives. peter, 1934). Entrepreneurial rents are inherently
Future resource-based studies that give simul- self-destructive due to diffusion of knowledge
taneous attention to these three research pro- (Schoemaker, 1990; Schumpeter, 1950).
grams are suggested. Finally, the firm may be able to appropriate
rents when resources are firm-specific. The
difference between the first-best and second-best
RESOURCE-BASED THEORY WITHIN use value of a resource-the so-called quasi-
THE CONVERSATION OF STRATEGY rent 2 (Klein, Crawford and Alchian, 1978)-is
precisely the amount that a firm may appropriate
Types of rent
to achieve above-normal returns. Quasi-rents are
Strategy can be viewed as a 'continuingsearch appropriable from idiosyncratic physical capital,
for rent' (Bowman, 1974:47), where rent is human capital and dedicated assets (Williamson,
defined as returnin excess of a resourceowner's 1979).
opportunity costs (Tollison, 1982). A resource
may be conveniently classified under a few
Sources of rent
headings-for example, land and equipment,
labor (including workers' capabilities and The existence and maintenance of rents depend
knowledge), and capital(organizational,tangible upon a lack of competition in either acquiring
and intangible)-but the subdivisionof resources or developing complementary resources. Rents
may proceed as far as is useful for the problem derived from services of durable resources that
at hand (Penrose, 1959: 74).1 are relatively important to customers and are
The generationof above-normalratesof return simultaneously superior, imperfectly imitable,
(i.e. rents) is the focus of analysisfor competitive and imperfectly substitutable, will not be appro-
advantage(Porter, 1985). In contrastto efficient priated if they are nontradeable or traded in
market theorists, most resource-basedtheorists imperfect factor-markets (Barney, 1991; Dierickx
insist that short-term(if not long-term)economic and Cool, 1989; Peteraf, 1990).
rents are possible (Schoemaker, 1990). Several The resource-based view incorporates the
types of rents may be usefully distinguished. insights of the early seminal contributions to
First, rentsmay be achievedby owninga valuable strategic management in order to explain how
resourcethat is scarce(Ricardo, 1817). Resources firms generate rents. The traditional concept of
strategy (Andrews, 1971; Ansoff, 1965) considers
i The importanceof assessing a firm's resourceprofile has the resource position of the firm. A firm selects
clearly been a traditional focus within strategic management its strategy to generate rents based upon their
(e.g. Ackoff, 1970, chap. 4; Hofer and Schendel, resource capabilities. Organizations with the
1978: 144-153). Hofer and Schendel (1978: 145) suggest that
a resource profile combines the following resources and strategic capability to focus and coordinate human
capabilities: (1) Financial resources (e.g. cash flow, debt
capacity, new equity availability); (2) Physical resources (e.g.
2
plant & equipment, inventories); (3) Human resources (e.g. Quasi-rent as used by Klein, Crawford and Alchian (K-C-
scientists, production supervisors, sales personnel); (4) A) (1978) is referred to as a Pareto (Marshallian) rent by
Organizational resources (e.g. quality control systems, corpor- Rumelt (1987). Note that in the economics literature a quasi-
ate culture, relationships); (5) Technological capabilities (e.g. fixed scarce resource that yields rents is sometimes referred
high quality production, low cost plants). Grant (1991) to as a 'quasi-rent' where the meaning is 'quasi-Ricardian
suggests a sixth type of resource, intangible resources (e.g. rent.' In this paper quasi-rent is used in the K-C-A sense of
reputation, brand recognition, goodwill). Pareto (Marshallian) rents.
 Resource-based Theory of the Firm 365

effort and the ability to evaluate effectively the make better use of human capital by correctly
resource position of the firm in terms of assigning workers to where they have higher
strengths and weaknesses have a strong basis for productivity in the organization (Tomer, 1987),
competitive advantage (Andrews, 1971). Rent and the firm may make better allocations of
theory allows us to clarify the SWOT framework financial capital toward high yield uses (Bower,
by identifying exactly what can be real 'strengths' 1970; Williamson, 1975).
and firm capabilities for strategic advantage. A rich connection among the firm's resources,
Differences among firms in terms of information, distinctive competencies and the mental models
luck, and/or capabilities enable the firm to or 'dominant logic' (Prahalad and Bettis, 1986)
generate rents.3 of the managerial team drives the diversification
The firm's unique capabilities in terms of process (Ginsberg, 1990; Grant, 1988). Penrose
technical know-how and managerial ability are argues that unused productive services of
important sources of heterogeneity that may resources 'shape the scope and direction of the
result in sustained competitive advantage. In search for knowledge' (1959: 77). The services
particular, distinctive competence and superior and rents that resources will yield depend upon
organizational routines in one or more of the the dominant logic of the top management team,
firm's value-chain functions may enable the firm but the development of the dominant logic of
to generate rents from a resource advantage (Hitt the top managerial team is partly shaped by the
and Ireland, 1985). resources with which they deal. This notion that
the firm's current resources influence managerial
perceptions and hence the direction of growth
Distinctive competence is a function of the
is a cognitive proposition that reinforces the
resources which a firm possesses at any point in
economic rationale that a firm's resource profile
time
will influence the direction of diversification
Penrose argues that: 'It is the heterogeneity. . . of (Wernerfelt, 1984).
the productive services available or potentially
available from its resources that gives each firm
Diversification strategy and resources
its unique character' (1959: 75). For example,
top management in a diversified enterprise can The resource-based view contributes to the large
be a significant and distinctive resource if it stream of research on diversification strategy
uniquely contributes to the sustained profitability (Ramanujam and Varadarajan, 1989) in four
of the enterprise (Castanias and Helfat, 1991). areas: First, the resource-based approach con-
A firm may achieve rents not because it has siders the limitations of diversified growth (via
better resources, but rather the firm's distinctive internal development and mergers and
competence involves making better use of its acquisitions). Second, the resource-based view
resources (Penrose, 1959: 54).4 The firm may considers important motivations for diversifi-
cation. Third, the resource-based approach pro-
3 In the agency literature, asymmetric information typically vides a theoretical perspective for predicting the
refers to articulable knowledge that has not been revealed direction of diversification. Fourth, the resource-
by an agent and/or principal. Organizational capabilities,
however, may involve a closely interrelated mix of routines, based view provides a theoretical rationale
tacit knowledge and organizational memory (Nelson and for predicting superior performance for certain
Winter, 1982; Polanyi, 1962; Walsh and Ungson, 1991). categories of related diversification.
Thus, differences in capabilities may go far beyond the issue
of nondisclosure of relevant information. A firm may 'know
more than it can tell' due to causal ambiguity. The upshot
is that differences in firm capabilities do not reduce to Limits to growth
(articulable) information asymmetries.
4 Penrose's (1959) argument that a firm may achieve Penrose (1959) provides a seminal contribution
competitive advantage by making better use of its resources in the resource-based tradition. Fundamentally,
has been formally modeled in terms of 'dynamic adjustment it is the resources of the firm which limit the
costs' (Prescott and Visscher, 1980). The firm slowly discovers
which tasks suit employees best. The trade-off is between choice of markets it may enter, and the levels
rapid firm growth in which case job assignment errors are of profits it may expect (Wernerfelt, 1989). Key
large, and slower growth of the firm, in which information resource constraints include: (1) shortage of labor
about employee's skills have been further processed by
managers resulting in improved job assignments. or physical inputs, (2) shortage of finance, (3)
lack of suitable investment opportunities, and (4)
366 J. T. Mahoney and J. R. Pandian

lack of sufficient managerial capacity. Penrose large extent drives the diversification process
(1959) considersthe growthof the firmas limited (Caves, 1980; Chandler, 1962).5 The resource of
only in the long-runby its internal management unused human expertise, in particular, may drive
resources. diversification (Farjoun, 1991).
The total managerial services that a firm The firm's capability6 lies upstream from the
requiresat a point in time are partlyconstrained end-product-it resides in skills, capacities, and
by the necessityto run the firmat its currentsize, a dynamic resource fit which may find a variety
and is partly requiredto carry out expansionary of end uses (Caves, 1984; Teece, 1982; Ulrich
ventures with respect to new products and and Lake, 1990). Excess physical capacity leads
expansiongenerally(Gort, 1962;Hay and Morris, to related diversification if the capacity is end-
1979; Marris, 1964). New managerial recruits product specific (Chatterjee and Wernerfelt,
increase the growth potential of the firm. 1988).
However, the trainingof new managersand their At all times there exist within every firm,
integration into the work-force occupy some of pools of unused productive services, and these,
the time and effort of existing managers, and together with the changing knowledge of manage-
thus reduce the managerialservices availablefor ment, create unique productive opportunities for
expansion. In Penrose'stheory 'management(is) each firm (Chandler, 1977, 1990; Teece, 1980).
both the acceleratorand the brakefor the growth Penrose argues that there is a 'virtuous circle'
process' (Starbuck, 1965: 490). (1959: 73) in which the process of growth
This managerialconstrainton the growth rate necessitates specialization but specialization
of the firm,the so-called 'Penroseeffect' (Marris, necessitates growth and diversification to fully
1963), suggests that fast-growing firms in one utilize unused productive services. Thus, speciali-
period tend to experience slower growth in the zation induces diversification.
next period (Penrose, 1959: 49). Hence, the Rubin (1973) formally models firms' diversifi-
Penrose effect suggests a negative correlation cation decisions according to Penrose's theory.
between growth rates in successive periods Rubin's (1973) dynamic programing model illus-
(Slater, 1980b). Case studies (Edwards and trates Penrose's thesis that there is an optimal
Townsend, 1961; Penrose, 1960; Richardson, growth rate for the firm. An optimal growth of
1964), formal models (Slater, 1980a; Uzawa, the firm involves a balance between exploitation
1969), and econometrictests (Shen, 1970)provide of existing resources and development of new
support for the Penrose effect. A corollary to resources (Penrose, 1959; Rubin, 1973; Werner-
the Penroseeffect is thata higherinterdependence felt, 1984).
among resources will lower the firm's growth
rate (Robinson, 1932).
The direction of growth

A resource-basedmotivationfor growth In addition to providing insights on the rate of

the growth of the firm, the resource-based
In addition to analyzingthe limits of the rate of approach provides value-added theoretical expla-
a firm's growth, Penrose (1955, 1959) also
examines the motives for expansion. It is rare Indeed Chandler thought highly of Penrose (1959); see
for all units to be operating at the same speed Chandler (1962: 453, footnote 1).
6 Penrose (1959: 25) makes a crucial distinction between
and capacity, and this phenomenon creates an
resource and capabilities (services of resources): 'resources
internal inducement for firm growth. Penrose consist of a bundle of potential services and can, for the
(1985: 13) presents a resourceapproacharguing most part, be defined independently of their use, while
that firms are administrativeorganizationsand services cannot be so defined, the very word 'service' implying
a function, an activity.' In more modern terms, Penrose
collections of physical, human and intangible (1959) is suggesting that resources are stocks and capabilities
assets. Unused productiveservices from existing (services) are flows. Dynamic capabilities are created over
resourcespresent a 'jig-sawpuzzle' for balancing time and may depend on the history of the use of resources
in an extremely complex (path dependent) process. Path-
processes (Penrose, 1959:70). Excess capacity dependent capabilities provide the building blocks for the
due to indivisibilities,and cyclical demand, to a firm's strategic architecture of strategic complexity.
 Resource-based Theory of the Firm 367

nations for the direction of a firm's diversification. the hypothesis that the direction of diversification
The direction of a firm's diversification is due to occurs at random. They find that a firm's
the nature of its available resources and the competencies and intangible assets in advertising
market opportunities in the environment. and R&D explain the direction of diversification
Several econometric studies support the strategy. The productive services of these
resource-based theory that an enterprise's firm- resources are a selective force in determining the
specific resources serve as the driving force for direction of diversification (Penrose, 1959: 87)
its diversification strategy. Lemelin (1982) finds and the pattern of reconfigurations, in general
that industries assigned to categories of producer (Singh and Chang, 1991).7
goods, consumer convenience goods and con- These empirical studies suggest that firm-
sumer nonconvenience goods are more likely to specific resources and relatedness of activities are
diversify into other industries assigned to the important variables in the diversification process.
same category. Lemelin (1982) argues that this Companies grow in the directions set by their
pattern is consistent with the resource-based capabilities and these capabilities slowly expand
hypothesis that firms attempt to transfer intan- and change (Penrose, 1959; Richardson, 1972).
gible capital among related activities.
MacDonald (1985) finds that firms are more
Diversification and performance
likely to enter industries that are related to their
primary activities. R&D intensive firms channel It is not our intention to review the vast literature
their diversification toward R&D intensive indus- on diversification and performance. Our objective
tries. R&D expenditure is a reasonably effective here is simply to state the resource-based
proxy for capturing an enterprise's endowment logic for the possible association between firm
of unique knowledge possessed by individuals diversification and performance.
and teams within the organization (Caves, 1982). The resource-based discussion of the
Thus, the diversification pattern that MacDonald diversification-performance linkage is embed-
(1985) finds may reflect the transfer of shareable ded within the more general question of whether
idiosyncratic organizational and intangible capital any strategy that the firm utilizes makes a
among related activities (Prescott and Visscher, difference. There still is an important debate
1980; Williamson, 1985). concerning the significance of firm effects as
Similarly, Stewart, Harris and Carleton (1984) opposed to industry attractiveness effects on
find a very strong positive relationship between performance. While Schmalensee (1985) does not
the advertising intensity of the acquiring firm's find support for the existence of firm effects,
primary industry and the advertising intensity of several other studies find significant firm effects
the acquired firm's primary industry. Advertising (Cubbin and Geroski, 1987; Duhaime and Stim-
expenditure is a reasonably effective proxy for pert, 1991; Hansen and Wernerfelt, 1989; Jacob-
capturing a firm's intangible assets (such as brand son, 1988; Mueller, 1977, 1986; Rumelt, 1987,
name and reputation). 1991; Scott and Pascoe, 1986; Vasconcellos and
Montgomery and Hariharan (1991) supply Hambrick, 1989; Wernerfelt and Montgomery,
further support for the resource-based view that 1988). A focus on specific resources rather than
the resource profile of the diversifying firm is strategy types in the merger and acquisition
critical in predicting the resource characteristics research may better explain firm performance
of the destination industry. While previous (Harrison, Hitt, Hoskisson and Ireland, 1991).
empirical research, discussed above, assigned The preponderance of empirical evidence
firms to their primary industry and studied suggests that firms' strategies may influence their
the relationship between these primary (origin) rent stream. The next question is: What is the
industries and destination industries, Montgom-
ery and Hariharan (1991) provide a significant
contribution by using the FIC Line-of-Business
(LB) data to consider the resource profile of 7While the resource-based view has developed a viable
approach for explaining and predicting growth and diversifi-
diversifying firms. Montgomery and Hariharan cation, a 'resource-based theory of divestment' is clearly
(1991) find strong empirical evidence to reject lacking.
368 J. T. Mahoney and J. R. Pandian

nature of these firm effects? Two important higher rents to the acquiring firm relative to
empiricalstudies (Montgomeryand Wernerfelt, unrelated diversification because of the greater
1988;Wernerfeltand Montgomery,1988)suggest likelihood of synergy (efficiency or market power)
that the resource-based theory of the firm (Chatterjee, 1990a). Put simply, unrelated diversi-
providesa theoreticalunderpinningfor explaining fication is unlikely to enhance technological
andpredictingsignificantfirmeffects. A resource- complementarities (i.e. economies of scope)
based theory of diversificationsuggests that firm or increase market power relative to related
effects might exist in the form of focus effects. diversification.
These authors investigate the proposition that It is important, however, to distinguish between
widely diversified(less-focused)firmsare unable two types of synergy, which we call contestable
to transfer their competencies to a host of synergy and idiosyncratic bilateral synergy. Con-
differentmarkets. They argue that the resource- testable synergy involves a combination of
based theory of diversification is helpful in resources that create value but are competitively
explaining the absolute performanceof related available. Contestable synergy corresponds to
diversifiersrelativeto unrelateddiversifiers.They Barney's (1986c) perfectly competitive factor
make two points to support this argument:(1) markets. Idiosyncratic bilateral synergy is defined
wider diversificationsuggeststhe presenceof less as the enhanced value that is idiosyncratic to the
firm-specificresources that normallyyield lower combined resources of the acquiring and target
rents; (2) a given resource will lose more value firm. Only in the case of idiosyncratic bilateral
when transferredto marketsthat are less similar synergy is the achievement of rents theoretically
to that in which it originated. possible through synergy. Our argument is that
Using the concentric index of diversification financial synergy to be achieved with unrelated
(Caves, Porter and Spence, 1980) as a proxy for diversification is more likely to be contestable
relatedness, Wernerfeltand Montgomery(1988) synergy while related diversification offers greater
find that narrowlydiversifiedfirmsreceive higher potential for idiosyncratic bilateral synergy.
rents (using Tobin's q as a proxy) than widely How much value does the bidding firm receive
diversified firms. This result supports the from this idiosyncratic bilateral synergy? Here,
resource-basedhypothesisthat expansionby firms we have a classical example of bilateral monopoly.
into activities in which they have comparative As Scherer notes: 'The theory of bilateral
advantagesis most likely to yield rents (Penrose, monopoly is indeterminate with a vengeance'
1959). (1980: 299). Depending on the bargaining power
Chatterjeeand Wernerfelt(1991) note that the of the bidding and target firm, the bidder may
vast majority (but by no means all) of the receive anywhere from nothing to the full value
empirical studies to date indicate performance of the idiosyncratic bilateral synergy. Firms, of
advantagesfor related diversificationover unre- course, will try to make commitments to influence
lated diversification(Bettis, 1981; Lubatkinand their relative bargaining power. For example,
Rogers, 1989; Montgomery, 1985; Montgomery antitakeover amendments may be implemented
and Wernerfelt, 1988; Palepu, 1985; Rumelt, by managers of the target firms in the target
1974, 1982; Singh and Montgomery,1987; Vara- shareholders' interest in order to increase the
darajanand Ramanujam,1987). However, even target firm's bargaining leverage to receive a
grantingthe resource-basedpremise that related greater share of idiosyncratic bilateral synergy
diversificationyields higher rents, the bidding (Grossman and Hart, 1980).
firm will be unable to appropriatethese rents in In the case where the synergy is not idiosyn-
a perfectly competitive market for mergers and cratic, the bidding process will enable the target
acquisitions(Barney, 1988). On the other hand, firm to appropriate the entire value-created
the bidding firm will achieve rents if the bidding (Barney, 1988). There must exist some type of
firm has private information, luck, or private 'market imperfection' in order for the diversified
synergy which is not easily imitable or substitu- firm to achieve rents via acquisition or internal
table (Barney 1986c). development. Market imperfection is an area of
It is unlikely that privateinformationand luck considerable focus within the organizational
varysystematicallybetween unrelatedand related economic paradigm and is critical for developing
diversification.Related diversificationresults in a resource-based theory of the firm.
 Resource-based Theory of the Firm 369

RESOURCE-BASED THEORY WITHIN This static equilibrium approach consequently

THE CONVERSATION OF does not address the competitive process which
ORGANIZATIONAL ECONOMICS is of central concern in strategy (Teece and
Winter, 1984). The view of corporate behavior
The organizational economics paradigm (Barney is most closely associated with Schumpeter's
and Ouchi, 1986) includes evolutionary economics vision of competition as a process of 'creative
(Barney 1986b; Nelson and Winter, 1982; Schum- destruction' rather than as a static equilibrium
peter, 1950), transaction cost economics (Coase, condition (Barney, 1986b; Lippman and Rumelt,
1937; Ouchi, 1980; Williamson, 1975); property 1982; Nelson and Winter, 1982; Phillips, 1971).
rights theory (Alchian, 1984; Jones, 1983) and The resource-based approach may be framed
positive agency theory (Eisenhardt, 1989; Jensen in a dynamic context. Schumpeterian competition
and Meckling, 1976). Theorists from these involves carrying out 'new combinations' includ-
perspectives share the resource-based theorists ing new methods of production as well as
dissatisfaction with the neoclassical theory of the organizational innovation (Iwai, 1984). This
firm. Schumpeterian competition may be translated
Barney and Ouchi (1986) note that positive into the resource-based framework by considering
microeconomics has been dominated by a the firm's 'new combinations of resources'
research program that emphasizes supply and (Penrose, 1959: 85) as a means of achieving
demand, equilibria, optimization analyses and the goal of sustained competitive advantage
industry structure. The task of strategic manage- (Ghemawat, 1986). Penrose (1959), following
ment is to contribute insight concerning the Schumpeter (1950), views the competitive process
structure-strategy-performance paradigm (Bain, as dynamic involving uncertainty, struggle and
1968; Porter, 1981; Scherer, 1980) and to get disequilibrium. Firms accumulate knowledge as
'inside the black box' by analyzing the 'strategic a strategic asset (Winter, 1987) through R&D
firm'8 (Rumelt, 1984). While industrial organi- and learning, some of it incidental to the
zation analysis attempts to characterize the production process. Indeed, Rumelt combines
behavior of a 'representative firm', the resource- the Schumpeterian perspective with the resource-
based approach focuses on the key success factors based view by suggesting that strategy formulation
of individual firm behavior to achieve firm- concerns: 'the constant search for ways in which
specific advantages by a portfolio of differential the firm's unique resources can be redeployed in
core skills and routines, coherence across skills, changing circumstances' (1984: 569).
and unique proprietary know-how (Aharoni and The resource-based view on distinctive com-
Sticht, 1990; Dosi, Teece and Winter, 1990; petencies may also be analyzed in an evolutionary
Prahalad and Hamel, 1990). context. The firm's distinctive competencies may
The fundamental paradox of the neoclassical be defined by the set of substantive rules and
theory of the firm is that the firm need not exist. routines used by top management. Managers'
The neoclassical theory assumes away transaction past decisions and decision rules are the basic
costs (Williamson, 1975); limits on rationality genetics which firms' possess. Sustainable advan-
(Simon, 1976); technological uncertainty
(Schumpeter, 1950); consumer or producer learn-
ing (Lieberman and Montgomery, 1988) and interdependence of consumer's utilities, no interdependence
in production, and perfect information. Organizational
prices as signals of quality (Spence, 1974). The economics in general, and the resource-based approach in
removal of these 'frictions' leads to the conclusion particular, departs from this stylized world. Economies of
that prices are no longer sufficient statistics scale and asset specificity (sunk costs) violate the price-taking
assumption; positive transaction costs result in less than
(Koopmans, 1957).9 complete markets; externalities violate the assumptions of
zero interdependence in consumption and production; and
asymmetric information (entrepreneurship and first-mover
8 The strategic firm is 'characterized by a bundle of linked advantages) violates the assumption of perfect information.
and idiosyncratic resources and resource conversion activities' To put it economically, one of the assumptions of the
(Rumelt, 1984: 561). In this paper, the firm's potential 'Theorem' must be violated for a firm to generate (and
resource conversion activities are designated firm capabilities. sustain) positive rents. In fact, one of the assumptions must
9 The so-called First Fundamental Welfare Theorem of be violated for the firm to exist. A detailed analysis of the
economics articulates a perfectly competitive equilibrium implications of these real-world imperfections for strategy
(i.e. zero rents) of price-taking, complete markets, no research can be found in Yao (1988).
370 J. T. Mahoney and J. R. Pandian

tage is thus a history (path) dependent process (Baumol, Panzar and Willig, 1982); property
(Arthur, 1988;Barney, 1991;Nelson and Winter, rights are ill-defined (Alchian, 1984); externalities
1982). are present (Dahlman, 1979); imperfect
The resource-based approach is also closely (asymmetric) information exists (Eisenhardt,
alignedwith other theories composingthe organ- 1989, Yao, 1988); and transaction costs are
izationaleconomicsparadigm(Barneyand Ouchi, positive (Williamson, 1991a). The result of
1986). The resource-based view is linked to these market imperfections is that recognition,
agency theory because the resource deployment disclosure, team organization, monitoring and
of the firm is influencedby (minimizing)agency dissipation costs are incurred in contractual
costs (Castaniasand Helfat, 1991). The resource- exchange (Caves, 1982; Teece, 1982).
based view is linked to property rights since While market failure explains the existence of
delineated property rights make resources valu- the firm (Coase, 1937), the resource-based view
able and as resources become more valuable, posits heterogeneous firms as the outcome of
property rights become more precise (Libecap, certain types of market failure. Transaction cost
1989). Finally,the resource-basedtheoryis linked analysis (Teece, 1984; Williamson, 1975) suggests
to transaction cost theory because resource that idiosyncratic capital is an important source
combinationsare influenced by transactioncost of market failure and heterogeneity. Unique
economizing(Teece, 1982; Williamson, 1991b). assets may take the form of human capital
In the translation of the transaction cost (Becker, 1964), physical capital (Klein, Crawford
approach into the resource-based approach, and Alchian, 1978), legal capital (Alchian,
a firm is considered both an administrative 1984; Barzel, 1989), organizational capital and
organizationand a pool of productiveresources experience (Huff, 1982; Prahalad and Bettis,
(Penrose, 1959). In planningexpansion, the firm 1986; Spender, 1989), and intangible capital
considers the active juxtaposition of its own (Caves, 1982).
'inherited' endowment of resources and those The diversification literature, discussed above,
that it must obtain from the market in order to emphasizes the role of intangible assets in
carryout its programof activities(Barney, 1991; explaining heterogeneity. Successful firms in most
Caves, 1980).'? These resource endowments industries possess one or more types of intangible
factors are assumed to be semipermanentlytied assets-technological know-how, patented pro-
('sticky') to the firm due to recontracting costs cess or design, know-how shared among
and market imperfections (Teece, 1990; Yao, employees, and marketing assets. Intangible
1988). Firm-specific resources may result in assets are often subject to market (transaction
sustainable performance differences (Hill and cost) failure. Even if the firm can market
Jones, 1989, Oster, 1990; Robins, 1992; William- its intangible assets effectively, it could not
son, 1985). The analysis of these resources disentangle them from the skills and knowledge
extends quite naturally to international business of the managerial team (Nelson and Winter,
competition and cooperation (Collis, 1991; Tall- 1982). In summary, idiosyncratic physical,
man, 1991). human, and intangible resources supply the
The resource-based framework views diversifi- genetics of firm heterogeneity.
cation as a response to indivisibilities and market Not only are there substantive areas of overlap
failure (Teece, 1982). The transaction cost, between organizational economics and the
property rights, and positive agency theory resource-based view of the firm but there are
literatures provide the theoretical underpinnings methodological similarities as well. Fundamen-
for the resource-based approach by analyzing the tally, the organizational economics paradigm of
nature of market failure. Market failure occurs evolutionary economics, transaction cost theory,
when: there exists private synergy and sunk cost positive agency theory and property rights theory
attempt to explain the origin, function, evolution,
and sustainability of our 'institutions of capitalism'
"0 Richardson (1990: 231) notes that: 'we cannot hope (Williamson, 1985). The resource-based view is
to. . . answer our question about the division of labor expressly concerned with a specific institution,
between firm and market unless the elements of organization,
knowledge, experience, and skills are brought back to the namely, the rent-generating heterogeneous firm
foreground of our vision.' and its origin, function, evolution, and sus-
 Resource-based Theory of the Firm 371

tainability (Barney, 1991; Lippman and Rumelt, enables the researcher to specify the minimum
1982; Rumelt, 1984). Debates concerning the necessary resource commitments. Conversely, by
validity of the organizational economics metho- specifying a resource profile, for the enterprise,
dology (Barney and Ouchi, 1986) need to be an optimal product-mix profile can be developed.
seriously analyzed by resource-based scholars. Indeed, the product market and resource market
While the resource-based view is intertwined are 'two sides of the same coin' (Wernerfelt,
with the organizational economics literature, a 1984: 171).
case can be made that the resource-based The resource-based view correctly suggests that
view is also complementary to the industrial focusing on firm effects is important in developing
organization structure-conduct-performance and combining resources to achieve competitive
paradigm. Valuable resources are often imper- advantage, but this does not imply that industry
fectly imitable and imperfectly substitutable product analysis merely yields normal returns.
enabling the heterogeneous firm to generate and On the contrary, analysis of the environment is
sustain rents. The sustainability of rents is a still critical since environmental change 'may
function of 'barriers to imitation,' which have change the significance of resources to the firm'
been a major focus of the industrial organization (Penrose, 1959: 79).
paradigm considered below. The essential theoretical concept for explaining
the sustainability of rents in the resource-based
framework is 'isolating mechanisms' (Rumelt,
RESOURCE-BASED THEORY WITHIN 1984). The notion of isolating mechanism (at the
THE CONVERSATION OF INDUSTRIAL firm level of analysis) is an analogue of entry
ORGANIZATION barriers (at the industry level) and mobility
barriers at the strategic group level (Caves and
The resource-based view is complementary to the Porter, 1977; McGee and Thomas, 1986). 1 In
analytic (Hill, 1988; Karnani, 1984; Schmalensee, this sense, the resource-based view utilizes
1978) and empirical literature (Dess and Davis, a central concept of the structure-strategy-
1984; Grinyer, McKiernan and Yasai-Ardekani, performance paradigm, albeit at a different level
1988) based on the Bain-Porter framework (Bain, of analysis. These isolating mechanisms (barriers
1968; Porter, 1985). Peteraf (1990) provides a to imitation) explain (ex post) a stable stream of
contribution to the resource-based literature by rents and provide a rationale for intraindustry
systematically contrasting the classical 'Harvard- differences among firms.
school' Porter framework (1980), and the Examples of isolating mechanisms (both
resource-based view of the firm. Peteraf (1990) efficiency and market power) are derived from
also contrasts the revisionist 'Chicago-school' the resource-based theory, mainstream strategy
(Stigler, 1968) industrial organization view to the research, organizational economics and the indus-
resource-based view. The emphasis in this section trial organization literature (Table 1). It is no
is on the common ground shared between these exaggeration to claim that the concept of isolating
'two systems of belief' (Demsetz, 1974) in mechanisms (Rumelt, 1984) is an insightful
industrial organization and the resource-based and unifying concept. The crucial aspect for
approach. competitive advantage involves the productive
While the industrial organization literature services of rent-generating resources and resource
focuses externally on the industry and product combinations which cannot be easily imitated or
markets (Phillips and Stevenson, 1974; Tirole, substituted.
1988) and the resource-based view focuses inter- Although the list of isolating mechanisms is
nally on the firm and its resources, there is impressive, what is the generalizable insight? A
nonetheless a duality between the economist's careful examination of the list of isolating
constrained maximization problem of maximizing
production given resource constraints and the I A major
distinction, however, is that entry (mobility)
constrained minimization problem of minimizing barriers are a private collective asset of an industry's (strategic
resource costs given a desired production level. groups's) incumbents, and investments to augment these
assets are subject to free-riding and underprovision. Isolating
Wernerfelt (1984) reminds us of this fundamental mechanisms involve firm-level investments in resources and
principle: specifying the enterprise's product mix capabilities.
372 J. T. Mahoney and J. R. Pandian

Table 1. Isolating mechanisms

Resource-based view/strategy literature

Mechanism Reference

Resource position barriers Wernerfelt, 1984

Unique or rare resources which are not perfectly mobile Barney, 1991
Unique managerial talent that is inimitable Penrose, 1959
Resources with limited strategic substitutability by equivalent assets Dierickx and Cool, 1989
Valuable, nontradeable or imperfectly tradeable resources Barney, 1991
Dierickx and Cool, 1989
Distinctive competencies and core competencies that are difficult to Andrews, 1971
replicate Dosi, Teece, and Winter, 1990
Unique combinations of business experience Huff, 1982; Prahalad and Bettis,
1986; Spender, 1989
Corporate culture that is valuable, rare and imperfectly imitable due Barney, 1986a
to social complexity, tacit dimensions and path dependency Fiol, 1991
Culture that is the result of human action but not of human design Arrow, 1974; Camerer and
Vepsalainen, 1988; Hayek, 1978
Invisible assets that by their nature are difficult to imitate Itami, 1987
Valuable heuristics and processes that are not easily imitated Schoemaker, 1990
Time compression diseconomies Dierickx and Cool, 1989
Response lags Lippman and Rumelt, 1982

Organizational economics literature

Mechanism Reference

Schumpeter's resource combinations Schumpeter, 1934

Management skills and team embodied capabilities Nelson and Winter, 1982
Organizational innovation that is characterized by a slow diffusion Armour and Teece, 1978
process Mahajan, Sharma and Bettis, 1988
Unique historical conditions in which firm-specific skills and resource Arthur, 1989
combinations result in path dependencies and heterogeneity over time Barney, 1991
De Gregori, 1987
Uncertain imitability due to bounded rationality and causal ambiguity Lippman and Rumelt, 1982
Enacted complexity Schoemaker, 1990
Idiosyncratic assets Williamson, 1979
The rich connections between ambiguity and uniqueness Demsetz, 1973
Reed and DeFillippi, 1990
Co-specialized assets Teece, 1986, 1987
(high interconnectedness) Dierickx and Cool, 1989
Organizational capital Tomer, 1987
Reputation and image Klein and Leffler, 1981
Kreps and Wilson, 1982; Kreps,
1990
Consumer trust Itami, 1987
Private or asymmetric information and knowledge as strategic Barney, 1986c
resources Eisenhardt, 1989; Holmstrom, 1979
Winter, 1988
Resource commitments Caves, 1984; Ghemawat, 1991
First-mover advantages in acquiring information and other valuable Lieberman and Montgomery, 1988
resources that inhibit imitation
Firm-specific knowledge of buyers, sellers and worker's capabilities Prescott and Visscher, 1980
Imperfect factor markets Barney, 1986c
Wernerfelt and Montgomery, 1986
Ill-defined property rights that result in imperfect mobility of Alchian and Demsetz, 1972
resources
Patents, trademarks, and copyrights Alchian, 1984

Continuedon next page

 Resource-based Theory of the Firm 373
Table 1. Continued

Industrial organization literature

Mechanism Reference

Investments that entail high exit barriers and high switching costs Porter, 1980
High sunk cost investments Baumol, Panzar and Willig, 1982
Learning and experience curve advantages that are kept proprietary Lieberman, 1987
Spence, 1981
Legal restrictions on entry Stigler, 1968
Economies of scale combined with imperfect capital markets Bain, 1968

mechanisms suggest that absent government of isolating mechanisms, as noted above. In

intervention, isolating mechanisms exist because short, we argue here that the resource-based
of asset specificity and bounded rationality approach appears to be generating new intellec-
(Williamson, 1979). Or, put differently, isolating tual combinations of thought (Conner, 1991).
mechanisms are the result of the rich connections Suggestions for sustaining the conversation are
between uniqueness and causal ambiguity considered below.
(Lippman and Rumelt, 1982). A reasonably
comprehensive review of the strategy, organi-
zational economics and industrial organization DISCUSSION AND CONCLUSIONS
literature on 'barriers to imitation' reveals the
powerful generalizable insights of these two A fully developed theory of the expansion of the
seminal articles.'2 firm is a formidable challenge for strategic
The resource-based view is closer to the management research. The theory would involve
'Harvard School' Mason-Bain-Porter framework production theory (Hayes and Wheelwright,
in believing in the effectiveness of these isolating 1984), investment theory (Hirshleifer, 1970),
mechanisms. The 'Chicago School' view questions portfolio theory (Sharpe, 1970), organizational
whether economies of scale, advertising and economics (Barney and Ouchi, 1986; Williamson,
R&D expenditure can ever be a barrier to entry 1985), the theory of oligopoly (Friedman, 1983),
or isolating mechanism (Demsetz, 1974, 1982; the theory of international finance (Sodersten,
Kitch, 1983; Stigler, 1968). Many industrial 1980), and so forth. While not claiming to be a
economists take an eclectic view between the two comprehensive theory of expansion, the resource-
camps (Mancke, 1974; Phillips, 1976; Williamson, based approach provides an illuminating gen-
1985). eralizable theory of the growth of the firm.
Peteraf (1990) argues that the resource-based As we reflect back on the full set of articles
view is closer to the 'Chicago school' in emphasiz- published on, or related to, the resource-based
ing efficiency rents rather than monopoly rents. view of the firm, a few value-added areas for
However, this distinction should not be taken research are suggested.
too far. As Demsetz notes, there is no reason
to suppose that competitive behavior never yields
Integrating the diversification literature with the
monopoly rents (1973: 3). The resource-based
organizational economics literature
view is closer to the 'Harvard-School' in terms
of positing sustainable rents. This difference is To be a fruitful comprehensive theory of diversi-
due to the divergent premises of the 'Harvard- fication, the resource-based view must also aid
School' and 'Chicago-School' on the effectiveness management practice on the choice of governance
structure (i.e. mergers and acquisitions, internal
12 Itami's (1987) notion that invisible (intangible) assets are development, and intermediate modes such as
often the only source of competitive edge that can be joint ventures). The choice of organizational
sustained over time suggests that invisible assets are the most form is of primary concern in organizational
likely candidates for resources that are unique and causally
ambiguous. economics (Williamson, 1985). Integration of the
emerging resource-based view with organizational
374 J. T. Mahoney and J. R. Pandian

economics may provide value-added insights on outcome of an underlying distribution of entre-

the implementation of diversification strategy preneurial abilities. The resource-based literature
(Chatterjee,1990b;Lamontand Anderson, 1985; is a framework within which an integrated
Simmonds, 1990; Yip, 1982).13 Hybrids and analytical model may be constructed.
networks involve the coordination of resources An advantage of the disequilibrium approach
across firm boundaries (Borys and Jemison, is that time may be viewed as the fourth dimension
1989). Can these hybrids and resources be of resources (along with land, labor, and capital,
matched in a discriminatingway? broadly defined). Time and attention are scarce
resources (Becker, 1965; Simon, 1976) and
are sources of competitive advantage that are
The developmentof an endogenoustheory of
neglected in single-period equilibrium analysis.
heterogenleity
The approach of organizational economics
A fundamentalpremise that distinguishesindus- (Barney and Ouchi, 1986) of real heterogeneous
trial organizationfrom strategic managementis firms, competing in real (calendar) time appears
the strategy field's assumptionof heterogeneous more relevant (and no less rigorous) than
firms. It seems legitimate to require that the orthodox equilibrium models. 14 Nevertheless,
strategy field provide a base for its theoretical contributions to the field may be achieved on
foundations.A majoradvancementin the strategy both fronts. Amit and Schoemaker (1990), for
field is the development of models where firm example, analyze the sustainability of heteroge-
heterogeneity is an endogenous creation of neous firms both in, and outside of, equilibrium.
economic actors.
One approach is to integrate the resource-
Integration of the resource-based view with
based view with the organizationaleconomics
strategic group analysis
and dynamiccapabilitiesapproach(Teece, Pisano
and Shuen, 1990), in which heterogeneity is While a morality play of the virtuous resource-
explained as an outcome of a disequilibrium based theorists doing battle against the misguided
process of Schumpeterian competition (Iwai, strategic group theorists and industrial organi-
1984), path dependencies (Arthur, 1989), first- zation analysts may provide a crusading faith for
mover advantages,irreversiblecommitmentsand the young and naive, a more balanced view, in
complementary or co-specialized (Ghemawat, our estimation, is needed. Intellectual isolating
1991; Grant, 1990; Teece, 1987; Williamsonand mechanisms which artificially reduce the trading
Winter, 1991). of ideas are not best for the strategy field as a
A second approach utilizes the equilibrium whole.
models (Shapiro,1989)of industrialorganization Albeit at different units of analysis, strategic
to explain the nature of the heterogeneousfirm. group research is by no means inconsistent with
Lippman and Rumelt (1982), for example, a resource-based view. In fact, as McGee and
generate an equilibriumin which firmheterogen- Thomas have noted: 'strategic group analysis has
eity is an endogenous outcome due to isolating interesting parallels with the theory of growth of
mechanisms and uncertain imitability. Their the firm as first articulated by Downie, Penrose
model provides a persuasive argumentthat firm and Marris more than 20 years ago' (1986: 157).
heterogeneity may be sustained in equilibrium Can rare, inimitable resources be a source of
withoutinvokingad hoc entry barriers.A second sustained strategic group advantages?
type of model stresses 'the heterogeneity (of
managerialservices), their uniquenessfor every
individualfirm' (Penrose, 1959: 199). Oi (1983)
models the heterogeneousfirmas the equilibrium

' Caves (1982: 4) notes that intangible resources 'are subject

14
to a daunting list of infirmities for being put to efficient use Penrose (1959) denied the concept of long-run equilibrium
by conventional markets.' Thus, intangible resources are analysis in the resource approach. Penrose (1959) suggests
posited as being positively related to the internal development that firms are operating in a never-ending state of flux with
mode of diversification. 'lumpy' resources and excess capacity.
 Resource-based Theory of the Firm 375
Integration of the resource-based view wvith Academy of Management Review,' 11, 1986a,
industry analysis pp. 656-665.
Barney, J. B. 'Types of competition and the theory
Competitive advantage is a function of industry of strategy: Toward an integrative framework',
analysis, organizational governance and firm Academy of Management Review, 11, 1986b,
effects (in the form of resource advantages and pp. 791-800.
strategies). The resource-based model has the Barney, J. B. 'Strategic factor markets: Expectations,
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32, 1986c, pp. 1231-1241.
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Montgomery and Wernerfelt (1988) give simul- hypothesis', Strategic Management Journal, 9
taneous attention to the resource-based view, (Summer), 1988, pp. 71-78.
organizational economics and the industrial Barney, J. B. 'Asset stocks and sustained competitive
advantage: A comment', Management Science, 35,
organization paradigm (see also, Wernerfelt 1989, pp. 1511-1513.
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attention to these research streams is precisely advantage', Journal of Management, 17, 1991,
the approach that warrants future research. pp. 99-120.
Barney, J. B. and W. Ouchi. (eds.) Organizational
Economics: Toward a New Paradigm for Studying
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