“The Resource-Based View Within the Conversation of Strategic Management,” Strategic Management Journal 13(5): J.T. Mahoney & J.R. Pandian. (1993). Group 3: Jason Franken Prasanna Karhade Hsiao-Ching Lee Marko Madunic Jennifer Shen

2 “RVB within the Conversation of Strategic Management” Motivation: The RBV  conversation w/n strategic management: Insight on firms’ heterogeneous competencies & capabilities; propositions testable in diversification strategy literature. Fits w/n organizational economics paradigm. Complementary to industrial organization research. * RBV increases discussion b/w these 3 perspectives.Purpose: To coalesce and sustain this conversation.

3 “RVB within the Conversation of Strategic Management” Strategy – continuing search for rents (above normal returns): Ricardian rents – from owning valuable, scarce resources. Monopoly rents – from collusion & competition barriers. Entrepreneurial rents – from risk-taking & entrepreneurial insight in uncertain/complex environment … these rents are inherently self-destructive due to diffusion of knowledge. Quasi-rent – difference b/w 1 st - & 2 nd -best uses firm-specific resources (physical & human capital and dedicated assets).

4 “RVB within the Conversation of Strategic Management” RBV Explains Sources of Rent: Services ofdurable resources that are: Relatively important to customers & simultaneously superior, imperfectly inimitable, & imperfectly substitutable. But rents are not appropriated if resources are non- tradeable or traded in imperfect factor markets. Heterogeneity in terms of information, luck, & capabilities. Distinctive competence & superior org. routines may generate rents from a resource advantage.  SWOT clarified by identifying firm’s strengths & capabilities for strategic advantage.

5 “RVB within the Conversation of Strategic Management” Distinctive Competence = f (resources t ) Rents may result not (just) from better resources, but from a firm’s distinctive competence in effectively employing resources. Heterogeneity in productive services  firm’s unique character. Interaction b/w resources, distinctive competence, & managerial logic drives diversification process. Current resources  managerial perceptions & thus, direction of growth. Also resource profile  direction of diversification. Diversification Strategy: RBV contributes to diversification strategy research in 4 ways: (1) Considers limitations of diversified growth. (2) Considers motivations for diversification. (3) Provides theory for predicting direction of diversification. (4) Provides theory for predicting superior performance (for certain categories of related diversification).

6 Firm growth limited by: Resource constraints (Wernerfelt, 1989) 1) Shortage of labor or physical inputs. 2) Shortage of finance. 3) Lack of suitable investment opportunities 4) lack of sufficient managerial capacity. Penrose effect (Penrose, 1959) Only limited by internal management in the long-run. Competing claims on managerial services: Managerial services devoted to training new managers. Managerial services available for expansion.  Cyclical growth (fast in period t  slower in period t +1).  Highly interdependent resources slow growth. * Management is the accelerator & brake on firm growth! “RVB within the Conversation of Strategic Management”

7 Motives for firm growth: Unused productive services + Changing knowledge of management  unique productive opportunities for each firm. Excess capacity (Chandler, 1962) Due to indivisibilities & cyclical demand  drives diversification. Unused productive services present a jig-saw puzzle for balancing processes (Penrose, 1959). Balance b/w exploiting existing resources & developing new ones  Optimal Growth (Penrose, 1959)! * Dynamic Programming Models (Rubin, 1973) illustrate the last point! Virtuous circle (Penrose, 1959) Growth requires specialization Specialization requires growth & diversification (to utilize unused productive services). Thus, specialization induces diversification. “RVB within the Conversation of Strategic Management”

8 Direction of growth: The direction of a firm’s diversification is due to the nature of its resources & the market opportunities. Resource Profile: determines direction of growth. The productive services of these resources are a selective force in determining the direction of diversification. Firms diversify by transferring idiosyncratic organizational and intangible capital among related activities. * Firm-specific resources & relatedness of activities influence the direction of diversification, but important firm capabilities change over time! Diversification & Performance: Related diversification  higher rents ( than unrelated ) Rents not appropriated by bidding firm if perfect competition. Appropriated if luck, private information, or private synergy. Contestable synergy vs. idiosyncratic bilateral synergy. “RVB within the Conversation of Strategic Management”

9 RBV complements Industrial Org. Δ Environment  Δ resources’ importance. Duality of max. production, given resource constraints, & min. resource costs, given desired production level. Sustainability of rents is function of: Isolating mechanisms – firm level barriers to imitation; analogous to: Entry barriers (industry level). Mobility barriers (strategic group level). Absent govt. intervention, isolating mechanisms exist b.c. Asset specificity & bounded rationality ( uniqueness & causal ambiguity ). Chicago School questions RBV & Harvard School’s view of scale economies, advertising, and R&D as isolating mech.

10 “RVB within the Conversation of Strategic Management” Integration of RBV with … Organizational economics provide insights on the implementation of diversification strategies.  Endogenous theory of heterogeneity: RBV +Organizational economics + Dynamic capabilities  heterogeneity results from: Path dependencies, irreversible commitments, complementary/co- specialized assets, 1 st -mover advantages, disequilibrium process of Schumpeterian competition. RBV +Industrial Organization  heterogeneity results from: Isolating mechanisms & uncertain imitability. Unique managerial services from underlying distribution of abilities. * Time & attention - scarce resources (1-period eq. analyses neglect).

11 “RVB within the Conversation of Strategic Management” Integration of RBV with … Strategic group analysis: Can rare, inimitable resources be a source of sustained strategic group advantages? Industry analysis: Can rare, inimitable resources be a source of sustained strategic group advantages?