Wernerfelt-1984-A Resource-Basead View of the firm.pdf

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Strategic Management Journal Vol. 5 , 171-180 1984)

/

Resource-based View o f the Firm

BIRGER WERNERFELT

Graduate School

of

Business Administration The University

of

c

ichigan Ann Arbor Michigan U.S.A.

Summary

The paper explores the usefulness of analysing fi rms fr om the

resource side rather than from the product side. I n anplogy to entry

barriers and growth-share matrices

the concepts of rtsource

posi tion barrier and resource-product matt ices are suggested These

tools

are then used to highlight the new strategic option@s?hich

naturally emerge r om the resource perspective.

I N T R O D U C T I O N

For

the f i rm, resources an d prod ucts a r e two sides of the sam e coin . Most produ cts requi re

the services

of

several resources and most resources can be used in several products. By

specifying the size of the f irms activity in different pro duc t m arke ts, i t is possible to infer

the min imu m necessary resource com mitm ents . Conversely, by specifying a resource profile

for a f irm , i t is possible to f ind the op tima l prod uct-m arke t activit ies.

Bo th perspectives o n the firm a re reflected in the l i terature on strategic mana gem ent. T he

t radi t ional concept of strategy An drew s, 1971) is phrased in terms of the resource posi t ion

strengths and weaknesses) of th e firm, whereas most of ou r forma l economic tools opera te

on the product-market side. While these two perspectives should ul t imately yield the

sam e insights, o ne might expect these insights to com e with differing ease, dep end ing o n the

perspec t ive taken .

T h e p u r p o se of this pap er is to develop so me simple economic to ols for analysing a firms

resource posit ion an d to look at som e strategic op tion s suggested by this analysis. This wil l

ap ply , in part ic ular, t o the relat ionship between profi tabil ity an d resources, as well as ways

to m anag e the f i rms resource posi tion over t ime.

Look ing a t econo mic unit s in te rms of the ir resource endowm ents has

a

long tradit ion in

economics. The analysis is typical ly confined, however, to categories such as labour,

cap i t a l, and p e rhaps l and . T he idea of looking at f i rms as a broader set of resources goes

back to the seminal work of Penrose (1959), bu t , apar t f rom Ru bin 1973) , has rece ived

re la tively li tt le for ma l a t tent ion . The reason, no d oub t . i s the unpleasan t proper ties for

model l ing purposes) of some key examples of resources, such as technological ski l ls. The

ma them atics used by eco nom ists typical ly require tha t resources exhibit decl ining return s

t o sca le , as in the t radi t ional theory of

fac tor dem and . By vi r tue

of

analysing this type of

resource , th e economic theory of factor demand becomes a special case of t he t heory pu t

forward in this paper. By dealing with the financial resources of the f i rm, the product

por t fol io theor ies in

a

sense become another special case of the theory discussed below.

0143-2095/84/020171-10 01.00

Received 14June 1982

984

by J o h n

Wiley

&

Sons,

L t d .

Revised 7 April 1983


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172

Birger Wernerfelt

Also, th e idea tha t m ul t iproduct f irms benefi t f r om non-f inancia l l inkages such as jo int

costs, is a n old bu t largely neglected par t of econo mics. Recently i t has , however, received

renewed a t tent io n, mainly throug h the formal iza t ion of the economies of scope concep t see

e.g. P an za r an d Will ig, 1981).

I t turns out that the resource perspective provides a basis for addressing some key issues

in the for m ula t ion of strategy fo r diversified firms, such as:

a ) O n which of th e f irms curr ent resources s hou ld diversif icat ion

be

based?

b) W hich resources shou ld be developed thro ugh diversif ica tion?

c) In what sequence an d in to what m arkets should diversi fica tion take place?

d) W ha t types of f irms will i t be desirable for this part icula r f irm to acq uire?

Specifically, the fol lowing p rop osit io ns will be argued:

4

1.

Look ing a t f i rms in te rms of their resources leads to different imm edia te insighrs tha n

the trad it iona l pro du ct perspective. In pa rt icula r, diversified firms are seen in a new

On e can iden t ify t ypes

of

resources which can lead to h igh profi ts . In ana logy to en t ry

barr iers, these a re associated with w hat w e wil l cal l resource posi t ion barriers.

S t ra t egy fo r a bigger firm involves striking a balance be tween the exploi ta t ion of

exist ing resources and the development of new ones. In ana logy to t he g rowth-sha re

ma trix, this c an be visualized in w hat we w ill cal l a r e source -p roduc t m a t r ix .

An acquisi t ion can be seen as a purchase of a bundle of resources in a highly

imperfec t m arke t . By basing the purcase o n a ra re resource , on e can ceterisparibus

maximize th is imperfec t ion and ones chances of buying cheap and ge t t ing good

re turns.

light.

4 T

2.

3 .

4

In th e next sec tion the s imple economics

of

different types

of

resources will be examined

an d the result s will be appl ied to the charac ter i st ics of attract iv e, high profit yielding,

resources. T hen th e analysis is confined to a part icular typ e

of

resource and som e st rategies

for ma nag ing a f irms resource posi t ion over t ime will be looked at .

RESOURCES

AND

P R O F I T A B I L I T Y

By a resource is meant anything which could be thought of as a st rength o r weakness of a

given firm. More formally, a f i rms resources at a given t ime could be defined as those

tangible an d intangible) assets which are tied semipermanently t o the firm see Caves,

1980). Examples of resources are: brand names, in-house knowledge

of

technology,

employment of skil led personnel , t rade contacts, machinery, efficient procedures, capital ,

etc . In this sec t ion, we wil l ask th e ques t ion: U nde r what circumstances will a resource lead

to high return s over longer periods of t ime?

For purposes of analysis, Porte rs f ive competi t ive forces Po rter , 1980) will be used,

al tho ugh these were original ly intended as tools for analysis of produc t s on ly .

General

effects

This heading wil l cover the bargaining power of suppl ie rs and buyers as well as the thre a t

posed by sub st i tute resources.


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A Resource-based View of the Firm 173

If the

production of a resource itself or of one of its critical inputs

is controlled by

a

monopolistic group, it will,

ceterisparibus

diminish the returns available to the users of the

resource. A patent holder, for example, appropriates part

of

the profits of his licence

holders. On a smaller scale,

a

good advertising agency will be able to take a share of the

image builders (customers) profit.

An equally bad situation can occur on the output side

if

the

products resulting fr om use

of

the resource can be sold only

n

monopsonistic markets.

If

a

subcontractor develops a

machine which is fully idiosyncratic to one customer, he will stand to gain less than

if

the

machine has more buyers.

Finally, the availability of substitute resources will tend to depress returns t o the holders

of

a

given resource. A recent example is provided by the way electronic and hydraulic skills

have eroded the payoffs to electrical and mechanical skills.

First mo ver advantages-resource positio n barriers

In some cases,

a

holder of

a

resource is

able to maintain a relative position

visca-vis>

ther

holders and third persons as long as these act rationally.

That is, the fact that soheone

already has the resource affects the costs and/or revenues of later acquirers adversely. In

these situations the holder can be said to enjoy the protection of a resource position barrier.

Defined in this way, resource position barriers are thus only partially analogous to entry

barriers, since they also contain the mechanisms which make an advantage over another

resource holder defensible. (Entry barriers in the traditional market context deal only with

the situation between incumbents and potential entrants, not with the situation among the

incumbents.) Just like entry barriers, resource position barriers do, however, indicate a

potential

for

high returns, since one competitor will have an advantage.

Note that this (resource-based) concept in some sense supersedes the traditional (product-

based) entry barrier concept, but in another sense does not:

(a) If

a

firm,has entry barriers towards newcomers in market A, which shares the use of

a resource with market B, then another firm which

is

strong in B might have

a

cost

advantage there and enter A in that way.

(b) If the firm has

a

resource position barrier in resource

a

which is used in market

A,

it

might still survive the collapse of

A if

it could use

a

somewhere else.

On the other hand,

for

a resource position barrier to be valuable, it should translate into an

entry barrier in at least one market.

So, an entry barrier without

a

resource position barrier leaves the firm vulnerable to

diversifying entrants whereas a resource position barrier without an entry barrier leaves the

firm unable to exploit the barrier.

There is thus a nice duality between the two concepts,

corresponding to the duality between products and resources.

Attractive resources

It is possible to identify classes of resources for which resource position barriers can be built

up. By their nature, these barriers are often self-reproducing; that

is a firm which at a given

time, finds itself in some sense ahead of others may use these barriers to cement that lead. It

is the properties of the resources and their mode of acquisition which allow this to be done.

What

a

firm wants is to create a situation where its own resource position directly or

indirectly makes it more digicult for others to catch up.

To analyse a resource for a general


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Birger Wernerfelt

potential for high returns, one has to look at the ways in which

a

firm with

a

strong position

can influence the acquisition costs or the user revenues of

a

firm with a weaker position.

Let us apply this to a few examples.

Machine capacity

It is well known that production processes with decreasing returns to scale cannot yield high

returns

if

they can be bought in open markets. On the other hand, economies of scale in the

use of resources are the prime example of product entry barriers (Spence, 1979). From the

resource perspective, the product entry barrier translates into a resource position barrier,

since it will be irrational for entrants to buy the resource necessary to compete in a market

where excess capacity would lead to cut-throat competition and low returns.

So,

in this case,

the resource position barrier operates through lower expected revenues for prospective

acquirers.

c

Customer loyalty

I >

In this case the nature of the market for the resource generates the resource position barrief.

It is much easier to pioneer a position than to replace someone else who already has it

see

Ries and Trout, 1981). Here, later buyers will have to pay higher prices than earlier buyers.

Related examples are the first mover advantages in government contacts, access to raw

materials, etc.

Production experience

As

is well known, if the leader executes the experience curve strategy correctly, then later

resource producers have to get their experience in an uphill battle with earlier producers who

have lower costs. Ideally, later acquirers should pay more for the experience and expect

lower returns from it (Boston Consulting Group, 1972). On the other hand,

if

experience

leaks from the early movers to later movers, the effect is to reduce the costs of the latter, so

that we might apprqach. he case of an unpatented idea for which no sustainable first mover

advantage exists. This is the case, for example, with many production systems and

procedures.

Technological leads

Here again, two counteracting effects are at work. On the one hand,

a

technological lead

will allow the firm higher returns, and thus enable it to keep better people in

a

more

stimulating setting so that the organization can develop and calibrate more advanced ideas

than followers. The followers, on the other hand, will often find the reinvention of your

ideas easier than you found the original invention.

So

you need to keep growing your

technological capability in order to protect your position. This should, however, be feasible

if

you use your high current returns to feed

R & D.

A good analogy is a high tree in

a

low

forest; since it will get more sun, it

will

grow faster and stay taller.

In general, one should keep in mind that most resources can be used in several products.

As a result, a given resource position barrier

will

often have consequences for several

products, each yielding part of the resulting return. A resource such as managerial skills,

which could be analysed much like technological leads above, is a good example of this.

The general attractiveness of a resource, understood as its capacity to support

a

resource

position barrier, is only

a

necessary, not

a

sufficient, condition for

a

given firm to be

interested in it. If everyone goes for the potentially attractive resources and only a few can


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A Resource-based View of the Firm

175

win in each, firms will lose unless they pick their fights well. So f irms need to f ind those

resources which can s usta in a resource posi t ion barr ie r , b ut in which no o ne current ly has

one , an d where they have a good chance

of

being a mo ng th e few w ho succeed in bui ld ing

one . They have t o loo k a t resources which co mbin e well wi th w hat they a l ready have and in

which they a re l ikely t o face only a few com peti t ive acq uirers.

Mergers

and

acquisitions

Merge rs and acqu i s i t i ons p rov ide an oppor tun i ty to t rade otherwise non-marketable

resources an d t o bu y o r se ll resources in bundles . Th roug h th is vehic le o ne can , for example ,

sell an im age o r buy a com bina t ion of technological capabil i t ies a nd con tacts in a-given set

of ma rkets . A s i s well kno wn , th is is a very imperfec t m arket wi th few buyers an d ta rge ts ,

an d ye t wi th a low degree of t ransparency owing to th e he terogenei ty of bo th buye rs and

targets.

A

key impl ica t ion of the lat ter is that a given target wil l have differmt values for

di fferent buyers , wi th par t icularly big var iance a mo ng those w ho can obta in som e sor t of fit

synergy) between their resources an d those of the ta rge t .

Because o f th e e xtrem e difficult ies of investigating oft en discreetly):

a) wh at resources a given target has

b) which of tho se the firm can effectively ta ke ad van tage of

c) wha t the cost of doing so will be

d) wha t t he f irm cou ld pay fo r them

prospective buyers oft en l imit their search to targets which sat isfy certain simple cri teria . A

resource-based set of acquisi t ion strategies Salter an d W einh old, 1980) is:

i ) re la ted supplem entary ge t mo re of thos e resources you alre ady have)

i i) related c om plem entar y get resources which com bine effect ively with those you

al ready have) .

Other acquisi t ion s t ra tegies a re more product -or iented and tend to focus on the f i rms

ab il it y t o en t e r and do mina te ) a tt r ac tive marke t s .

Le t us he re focus on the purchase of resource bundles, takin g as given th e profi tabil i ty of

using different combinations. In this perspective,

ones chan ce of maximizing m arke t

imper fec t ion a nd pe rhaps ge tt ing

a

cheap buy would be grea test if one t r i ed to bu i ld on

ones m ost unu sual resource or resource posi tion. Doing so should make i t possible

to

get

in to buying si tuat io ns with relat ively l it t le com peti t io n, bu t also with relat ively few targets.

Al though, in theory, i t would be best to be the sole sui table buyer of a lot of identical

ta rge ts , even a b i late ra l mo nopo ly s i tua t ion would be be t te r th an a gam e with severa l

identical buyers an d sel lers. Especial ly since the lat ter s i tuat io n wil l most l ikely lead o ne in to

heavier com pet i t ion in the race to build resource posi t ion barriers af ter the acquisi tions have

taken place.

D Y N A M I C R E S O U RC E M A N A G E M E N T : A N E X A M P L E

In th e previous sect ion, several si tua t ions in which firms could get high returns fro m

individual resources were examined . In genera l, a f i rs t mover adv antage in a n a t t rac t ive

resource should yield high returns in the markets where the resource in quest ion is


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Birger Wernerfelt

Figure

1.

Resource-product

matrix

dominating. This theory will now be applied to a particular type of resource, the experience

type, produced jointly with products. Finally, some ways in which

a

firm can grow its pool

of such resources, will be investigated.

The resource-pro duct matrix

The analysis will be conducted through what could be called

a

resource-product matrix, in

which the checked entries indicate the importance of a resource in a product and vice versa

(see Figure

1).

This matrix, which is a close cousin of the growth-share matrix, could be made more

informative by replacing the checks with one (or two) numbers, indicating the relative

importance of resources in products or (and) vice versa. As will be seen, even the simple

form above is, however, a very powerful tool. Below it will be used to illustrate several

different patterns of resource development.

Sequential entry

The use of

a

single resource in several businesses is the diversification pattern most often

considered in business policy (Andrews, 1971). A typical example is provided by BICs

(BIC, 1974) use

of

their mass marketing skills, which proved critical in pens, lighters and

razors, but insufficient in pantihose. Attempts to base firms on a single strong technology

also fall into this category. Several consulting firms market concepts which exploit this

growth pattern (e.g. the shared experience of the Boston Consulting Group and the

activity analysis of Braxton Associates).

Although the general idea is to expand your position in a single resource, it is not always

optimal to go full force in several markets simultaneously even with experience curve

effects. Quite often, it is better to develop the resource in one market and then to enter other

markets from a position of strength. An example is BIC, which entered the markets for

pens, lighters and razors sequentially. This

sequential entry

strategy (an idea going back to

John Stuart Mill, and his writings on infant industry protection), is also often followed by

firms when they go international, as illustrated in Figure

2,

where the firm develops

production skills before going international.

To demonstrate the feasibility

of

this, we can look at

a

simple mathematical model. (A


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A Resource-based Viewof the Firm

177

D I I

I

Figure 2 . Sequential entry

more elaborate formalization can be found in Bardhan,

1971.) A

firm can operate

in

two

markets,

A

and

B,

which are such that it takes

a

hours to process

I

to produce

a

unit of

product A, whereas it takes

b

and

b

hours of processes

I

and

11

respectively, to produce a

unit of.product B. Assume process

I1

skills to be available in a perfect market, whereas

process

I

skills can be developed via experience curve effects.

So,

skills in process

I

are the

attractive resource. Finally, look at the firm as having a two-period time horizon and

consider the wisdom

of

developing process

I

skills in market A before market B is entered.

I n

the following, all parameters are assumed positive and subscripts A, B,

I 1 1 1, 2 ,

refer

to the markets, processes, and periods so named.

The demand curves are assumed t o be constant over the two periods and linear

so

that the

quantity sold is

a

linear function of the price charged. This can be written

as:

A i s A - P A A ,

i

1,2

Bi

O B - P B B ,

1 , 2

where

0,

and 8, are the volumes sold at zero price and q, and q he decline in volume per

unit price increase.

Variable costs are assumed to be zero and fixed costs,

C,

of selling above zero outputs are

in period 1 composed

of a

constant cost of operating each process.

I n

period

2 ,

process

I

costs are, however, lowered by

q

A and q or each hour the process was used in period 1 .

So

we get:

C A I

Y A I ,

i f A ,

O

c A 2 Y A I - r A l ( a IA 1 + b l B l ) , i f A 2 > 0

CBI

Y B I + Y B I I , ifB, O

C B , = ~ B i - q B d a r A i + b i B i ) + ~ B 1 1 , if B2 > 0

The simple linear version of the experience curve is chosen for analytical convenience and is

in

no

way crucial to the qualitative results below.

If

the firm tries to maximize the total profit over the two periods, the objective

is

to

maximize:

(pA1

Al)+(A2 A2)+(pB1 B l B l ) +(B2 B2 B 2 )


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Birger Wernerfelt

By inserting the above equations, differentiating with respect to

PA, ,

PAz

PSI, e2

and

using the first order conditions, we find that, i f all outputs are positive, the optimal levels

are

AT Pjkl) 3c8.4 AU1(VA1 VB I ) ] ,

where

V B ~= 0

if

B2 0

A T P z , ) = 46,

T ,*l) 3 L e B + 4 B b I ( V A I V BI)]

BT(P,*2) 0,.

By inserting

A; , A:, B ; , B*,),

A: ,

A:, 0 B:)

and

A:, A*,, 0,. 0)

in the maximant, one can find the conditions under which it is optimal to enter market B

only in the second period. These conditions are:

B bI (V A 1 + V BI )+ [ B & 1 - b I ( V A I + V B 1 ) 1 2 4 B

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Wernerfelt-1984-A Resource-Basead View of the firm.pdf