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