resource based view of the firm [lockett, morgenstern and thompson, international journal of...

International Journal of Management Reviews (2009)doi: 10.1111/j.1468-2370.2008.00252.x

International Journal of Management Reviews Volume 11 Issue 1 pp. 9–28 9

© 2009 The AuthorsJournal compilation © 2009 Blackwell Publishing Ltd and British Academy of Management. Published by Blackwell Publishing Ltd,9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

Blackwell Publishing LtdOxford, UKIJMRInternational Journal of Management Reviews1460-85451468-2370© Blackwell Publishing Ltd 2008XXX ORIGINAL ARTICLEThe resource-based view of the firmXX

The development of the resource-based view of the firm: A critical appraisalAndy Lockett,1 Steve Thompson and Uta Morgenstern

Over the last 20 years, the resource-based view (RBV) has reached a pre-eminent positionamong theories in the field of strategy, but debate continues as to its precise nature. Thispaper contributes to the debate by critically reviewing the development of the RBV to date.The critical appraisal examines the development of the RBV in terms of theory, method,empirical evidence and practical insights. It is contended that the permeable and eclecticnature of the RBV stems from its being a theory about what firms are and how theyfunction, and that its popularity is due to an absence of limiting behavioural assumptions.Finally, the authors provide their own subjective views on where they think RBV scholarsshould focus their efforts in the future.

Introduction

In this paper we examine the body of theoret-ical and empirical work that encompasses theresource-based view of the firm (henceforththe RBV). Over the last 20 years, the RBVhas risen to a pre-eminent position in strategyresearch. Although the relative weight attri-buted to different scholars’ contributions maybe subject to debate, it is clear that, over time,a series of papers have laid the intellectualfoundations for a body of thought relating tothe relationship between the opportunity setfacing the firm, the strategic behaviour to beimplemented by managers and the outcome in

terms of competitive advantage or performance(e.g. Barney 1986, 1991; Collis 1994; Dierickxand Cool 1989; Peteraf 1993; Rumelt 1984;Wernerfelt 1984).

The RBV views the firm as a historicallydetermined collection of assets or resourceswhich are tied ‘semi-permanently’ to the firm(Wernerfelt 1984). Some users of the RBVdistinguish resources which are fully appro-priable by the firm, such as physical capital orbrand names, from less tangible assets, suchas organizational routines and capabilities(Teece et al. 1997). Similarly, distinctions maybe drawn between static and dynamic resources.The former are those that, once in place, may

The resource-based view of the firm

10 © 2009 The AuthorsJournal compilation © 2009 Blackwell Publishing Ltd and British Academy of Management

be considered to represent a stock of assets tobe used as appropriate over a finite life (e.g.Barney 1986, 1991; Peteraf 1993; Rumelt1984). Dynamic resources may reside incapabilities, such as an organization’s capacityfor learning, which generate additionalopportunities over time (e.g. Collis 1994;Teece et al. 1997). Here, we follow Combsand Ketchen (1999) in noting that the crucialrequirements of the RBV are that the relevantresources, whatever their nature (i.e. resources,capabilities or dynamic capabilities), arespecific to the firm and not capable of easyimitation by rivals (Barney 1991). Therefore,such resources constitute the source ofRicardian rents that comprise a firm’s com-petitive advantage and, to the extent that theirreplication by others is problematic, imply asustainable advantage over the longer term.Because each firm’s resource bundle is unique,being the consequence of its past managerialdecisions and subsequent experience, it followsthat so is each firm’s opportunity set.

As empirical evidence relating to the decom-position of firm performance (e.g. McGahanand Porter 1997) typically finds that firm-specificeffects are at least as important as industrycharacteristics, the RBV offers an obviousframework for analysing inter-firm variationsin performance. As such, it acts as a naturalcomplement to the external, market-basedapproach to competitive advantage that isgrounded in industrial organization economics(IO) and synthesized in, for example, the workof Porter (1980).

The prominence of the RBV as a core theoryin the area of management suggests thatthe time is right to reflect on its development.Given that a number of reviews on the RBVhave already been published, which haveeither been focused towards descriptive ac-counts of the development of the RBV (e.g.Ambrosini 2007; Barney 1995; Barney 2001b;Barney and Arikan 2001; Barney et al. 2001)or have provided a summary of empiricalapproaches and evidence on the RBV (e.g.Armstrong and Shimizu 2007; Newbert 2007),we focus our attention on providing a critical

reflection on the state of health of the RBVresearch. Our intention is not to provide anexhaustive interpretation of all papers thathave been written about the RBV; rather, wereflect on how the core elements of the theoryand its application have developed over time,to explain how we have arrived at the positionwe have today. In doing so, we examine fiveinterrelated facets of the RBV: (i) theory, (ii)method, (iii) empirical evidence, (iv) practicalinsights and (v) the RBV looking forward.The paper unfolds by examining each of thefacets in turn.

The Resource-based View: Theory

In this section we examine the theoreticaldevelopment of the RBV. The central tenets ofthe RBV are path dependence and firm heter-ogeneity (Lockett 2005; Lockett and Thompson2001). The RBV is a theory about the natureof firms, as opposed to theories such as trans-action cost economics which seeks to explainwhy firms exist (see Coase 1937). As such,the RBV requires minimal limiting assump-tions about the nature of strategic behaviour.In effect, the RBV is a statement about howfirms actually operate. The minimalistic natureof the RBV’s assumptions (i.e. its two centraltenets) makes formalization difficult. Ultimately,the RBV’s message that firms’ performancediffers because of different resource endow-ments is probably incapable of falsification.However, theoretical insights have been developedfrom these central tenets. Below, we providean overview of the main theoretical insights,employing the game of poker (where relevant)as an illustration.

Resources and Performance: Sustainable Competitive Advantage

The sustainable competitive advantage (SCA)approach to the RBV is exemplified by thework of Barney (1986, 1991), Peteraf (1993)and Rumelt (1984). Employing the resourceas the unit of analysis the theory seeks toexplain the extent to which a firm may be able

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© 2009 The Authors 11Journal compilation © 2009 Blackwell Publishing Ltd and British Academy of Management

to sustain a position of competitive advantage.Sustainable competitive advantage is basedon the ownership of firm-specific resource(s)that, following Barney (1991), has the follow-ing attributes: (1) it must be valuable; (2) itmust be rare; (3) it must be inimitable; (4) itmust be non-substitutable. These conditionsare what Barney (1991) terms VRIN – valuable,rare, inimitable and non-substitutable. Valu-able resources can be used to exploit opportu-nities and/or neutralize threats in a firm’senvironment. Rare resources are those that arelimited in supply and not equally distributedacross a firm’s current and potential competi-tion. Inimitability refers to the extent to whichresources are difficult to replicate by otherfirms, which may be due to factors such associal complexity (Dierickx and Cool 1989),causal ambiguity and specific historicalcircumstances (Barney 1991). Non-substitutabilityof resources implies that one resource cannotbe simply replaced (or substituted) by anotherone.

Other authors writing on this issue havehighlighted the importance of limits to com-petition – both ex ante and ex post – inresource markets as a necessary condition forSCA (see Peteraf 1993), and the importance ofisolating mechanisms as a necessary conditionfor SCA (see Rumelt 1984).

The RBV is in essence a theory of rentsbased upon resource market imperfections(Amit and Schoemaker 1993). At one level itmay be considered both tautological and eventrivial. Consider a firm earning

Πj = PjQj – Σpijrij

Where Πj, the profit of the firm on product j,is defined as the difference between the revenuereceived (price of product j [Pj] multiplied bythe quantity of product j [Qj]) and the sum ofthe resource inputs consumed in producingproduct j [rij] multiplied by their actual orshadow prices [pij].

If we assume for simplicity that there iseither no product differentiation or, equivalently,that differentiation is completely determined

by the resource inputs, non-zero Πj (i.e. acompetitive advantage) in the face of com-petitive rivalry in the market for j indicatesthat our firm has access to at least one resourceinput on more favourable terms than its rivals.If it is also the case that Πj > 0 persists in thelonger term (i.e. that a competitive advantageis sustainable), this resource advantage mustalso persist over time. Viewed in this light, anySCA is simply a rent conferred by one or moreimperfections in the resource market that pre-vents at least one input being available on equalterms to all actual or would-be competitors.

Thus, the RBV at its most basic offers aninterpretation of the existence of profits inequilibrium based on firm heterogeneity.If that were all it offered, it would be essentiallytrivial. It would amount to a statement thatfirms differ in performance because they dif-fer in attributes. True but hardly informative!It is scarcely surprising that critics of the RBV(e.g. Priem and Butler 2001a,b) have accusedits proponents of tautological reasoning byattributing the generation of competitiveadvantage to possession of those resourceswhose own value reflects these scarcity rents.However, contributors to the RBV literaturehave sought to generate testable hypotheses con-cerning those characteristics of such inputsthat are likely to render them strategic resourcesin the sense of being a source of sustainablerents. Barney’s (1991) VRIN framework,outlined above, sets out the broad conditionsnecessary for a resource’s comparative scarcityto elevate it to strategic significance. Peterafand Barney (2003), among others, begin withthe assumption of resource heterogeneity andthen consider which (if any) of a given collec-tion of resources satisfy the VRIN conditionsoutlined above. They point out that resourcesdiffer in their impact on the firm’s ability togenerate cost or differentiation advantages, andhence performance. Moreover, if the cost of aresource reflects the full potential rents it maygenerate, it cannot, by definition, be a sourceof a competitive advantage.

A resource market imperfection may beexogenous, in the sense that it results from the



firm’s possession of some superior physical,organizational or intangible resource that hasbeen accumulated as a result of the firm’sunique historical evolution. Alternatively, itmay be endogenous, in the sense that it resultsfrom a conscious strategic decision by thefirm’s managers. Such a decision might applyto the acquisition of a resource to facilitatethe firm’s own production and/or to secure itsadvantage over a rival. For example, a depart-ment store corporation’s decision to becomethe ‘anchor’ for a new shopping mall complexis both a move to secure a resource (marketaccess) for the firm and a means of pre-emptinga rival. This parallels the distinction betweenstructure and conduct in the SCP paradigm inindustrial economics. Here market structurehas been traditionally treated as exogenouslydetermined by the underlying industry charac-teristics. Firm conduct, on the other hand, isthe endogenous outcome of managerial decision-taking, albeit within bounds set by structuralcharacteristics. Thus, collusion, for example,which is usually considered to be facilitated byhigh concentration, is imperfectly predictablewithout further modelling.

In acknowledging that resources are tied‘semi-permanently’ to the firm, in the phraseof Wernerfelt (1984), the RBV recognizes that,in the short run, the resource set confrontingparticular managers is largely exogenouslydetermined. However, it also concedes a rolefor the manager in perceiving opportunities,matching these to the available resources and,within limits, augmenting the latter with suchadditional resources as are necessary to imple-ment its strategy. Thus, the role of a manager inthe RBV is akin to that of a card player. Theplayer is provided with a dealt hand of cards,with the value of each card being broadlydetermined ex ante by the rules of the game.Success depends upon the relative skill withwhich that hand, augmented by any cardssubsequently acquired, is played in competitionagainst rivals. However, whereas each handof cards starts out with a completely newdeal, managers are typically engaged in anevolving game in which over time the

resource base, and hence the opportunity set,can be shifted.

Resources and the Role of Managers

Viewing the RBV as we have outlined aboveenables us to gain a better understanding ofhow managers may be able to exploit marketimperfections, in both resource and productmarkets, to advance firm performance. Notmerely does it cede a substantial role tomanagers, but it also links the internal andexternal environments in which they operate.In this way, it also distinguishes the academicstudy of strategic management from that ofindustrial organization economics. The latterhas made considerable progress in analysingthe firm’s optimal response to its externalenvironment, including the behaviour of itsrivals, but it tends to retain its traditionalcharacterization of the firm’s internal workingsas a ‘black box’ beyond scrutiny. Moreover,managers are largely treated as optimizingalgorithms. Under the RBV, managerialresponsibilities include the need to repositionthe firm as opportunities change and itsresource set evolves. By contrast, industrialorganization economics sees the managers’ roleas responsive. Thus, managers in the RBVare both adaptive and proactive, i.e. they are‘enactors’ (Lado and Wilson 1994), whiletheir counterparts in industrial organizationeconomics have a role analogous to that ofmanagers in a regulated utility, whose decisionslargely concern marginal adjustments to outputand input levels.

It is the sources of market imperfections,allied to the roles managers play, whichmakes the RBV an interesting theory. Managers,through the decisions they make, change thenature of competition in markets. The deci-sions that managers take are inextricablylinked to their perceptions about the internalcharacteristics of their own firms and also ofthe external environment in which they com-pete (Penrose 1959). Managerial perceptionsbecome important in relation to three centralelements of the RBV: resource functionality,

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resource recombination and resource creation,which we discuss next.

Resource Functionality

The issue of resource functionality has a longtradition in the RBV literature. Penrose(1959) proposed that the size of a firm’s pro-ductive opportunity set imposes a limit on itsgrowth. She defined the productive opportunityset of the firm as ‘all of the productivepossibilities that its “entrepreneurs” see andcan take advantage of ’ (Penrose 1959, 31, ouritalics). That is, the effective set of productiveopportunity is determined by both managerialperceptions and the resources at their disposal.Penrose further suggested that the search fornovel uses of existing resources may expandthe firm’s opportunity set. Where a firm’sresources are incompletely used and there isalways some slack, there is a potential oppor-tunity for firm growth. In order for any excesscapacity of existing resources to be exploited,the resources may need to be combined withother available resources in order to generateproductive services; we return to this issuebelow. Penrose also highlights that firmsattempt to discover more about the potentialuses of their existing resource via research andother types of proactive searches. She representsthis by arguing that managers frequentlyreflect: ‘there ought to be some way in whichI can use that’ (Penrose 1959, 77). Penrose, ineffect, raises the issue about what the func-tionality of a resource is.

The issue of what resources actually do wasrevisited by Wernerfelt (1984), who employedthe concept of duality to discuss the relation-ship between resources and the products andservices that result from their usage. Accord-ing to Wernerfelt, firms can be defined eitherin terms of products/services or in terms ofresources. The two are the different sides of thesame coin.

It is not the resource type per se thatmatters, it is the functionality of the resourceand how the resource is employed (Penrose1959; Peteraf and Bergen 2003; Wernerfelt

1984). Resources may have a number ofdifferent functions, which may enable themto be employed across a number of differentmarkets over time. An important role formanagers is to determine the most profitableusage for the resources at their disposal.Consequently, resource usage is influenced bythe subjective perceptions of managers. Further-more, resource usage shapes the competitivelandscape. It is the managers of firms whoemploy their resources in similar ways to theircompetitors that determine the boundaries ofindustry membership. If we take the exampleof the manager (landlord) of a public house,he/she will view their premises as a keyresource for the retailing of their drinks andother consumables. The building, however,could have multiple uses. For example, thebuilding could be used as a pet shop. It is howthe resource is used that determines the industryto which the business belongs.

As outlined above, an important role ofmangers is the search for the most profitableuse of the resources at their disposal. A bundleof resources will have different values accord-ing to their usage across different markets.Revisiting our analogy of the game of poker,this makes the rules of the game much morepermissive and hence the game much morecomplex. If we permit resources to be employedacross a range of different markets, this isakin to a poker player being able to take hishand of cards and play across a number ofdifferent games on different tables. The rulesof the game will vary between tables, and sothe value of the poker players’ cards will varyaccordingly. The role of the poker player isquickly to assess which games he/she wantsto play in, i.e. to assess where their cards canbe deployed most effectively.

The problem facing managers, therefore, ishow to understand the functionality of theresources that are under their control, and alsoto understand those that are under the controlof other firms. This will aid managers in notonly detecting present competitors but alsoin anticipating future competitors. Peterafand Bergen (2003, 1029), however, argue that



managers may be poor at understandingthe range of potential functions from theirresource-bases for a number of reasons. Theseinclude: a lack of time and attention; boundedrationality (e.g. Williamson 1975); cognitivebiases; and framing limitations (Amit andSchoemaker 1993). The limitation of managersto perceive competition from outside theirnarrowly defined industries dates back tothe work of Levitt (1960) and the problemsassociated with managers’ myopia.

Not only must managers understand thefunctionality of their resources, they must alsocomprehend the capacity for usage theirresources permit. Some resources may havemultiple functions, and also a capacity thatenables them to be used in a number of differentways simultaneously. That is, a resource mayhave a high capacity for usage so that its useon one market does not preclude it frombeing used in another market. In the case ofintangible resources, especially in the form ofknowledge, there is no real limit to the extentto which the resource can be shared. Conversely,physical resources may be easily exhausted,as their use on one market precludes it beingused in another.

Resource Recombinations

Penrose (1959) argues that resources are seldomvaluable in isolation. In effect, it is unlikelythat we can attribute the success of a firm(and hence SCA) to one specific resource.Consequently, it may be more fruitful toconsider combinations of resources. By com-bining resources firms may be able to addvalue if they are: complementary (Harrisonet al. 1991), related (Dierickx and Cool 1989)or co-specialized (Lippman and Rumelt 2003)in nature. The concepts of complementarity,relatedness and co-specialization all speak tothe issue as to how resource combinationscan create value. The idea of resource com-binations (and recombinations) is central tothe literature on capabilities. A capability isdefined as the firm’s ability to undertake aproductive activity, which is created through

the simultaneous deployment of resourcesand factors of production (Teece et al. 1997).The literature on dynamic capabilities shouldbe viewed as a complement to the RBV(Ambrosini and Bowman 2009; Wang andAhmed 2007).

In addition to the productive opportunityset of the firm being influenced by resourceusage, Penrose (1959) argues that theopportunity set is also influenced by the wayin which managers are able to combineresources to produce productive services (orcapabilities). At any given point the knownproductive services arising from a given bundleof resources are unlikely to exhaust its fullpotential. There is always the potential for firmexpansion. Based on the discovery of changesin customer preferences and innovation, man-agers choose to engage in the recombinationof existing resources to satisfy this perceiveddemand. Hence, opportunities for expansionare limited to the extent to which the managersof a firm perceive there to be opportunities,are willing to act on them and are able tocapitalize on them with their own resources(Penrose 1959, 84). Thus, the growth of thefirm involves discovering new market opportu-nities and changing and using existingresources to match these opportunities.

Sirmon et al. (2007) offer a more detailedconceptualization of resource recombination,focusing on the nature of resource recombina-tions and their effect on capabilities. In doingso, they draw a distinction between the activitiesof stabilizing, enriching and pioneering.Stabilizing involves making minor incrementalimprovements in existing capabilities throughminor improvements to existing resources.A strategy of stabilizing may be a way ofmaintaining a current position of competitiveadvantage in conditions of low environmentaluncertainty. Enriching involves extending andelaborating current capabilities through activitiessuch as learning or adding a complementaryresource. Pioneering is a more advanced processof resource recombination which entails ‘theintegration of completely new resources thatwere recently acquired ... and added to the

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firm’s resource portfolio’ (Sirmon et al. 2007,282). This process involves creativity andexploratory learning in order to create novelcapabilities.

If managers are able to recombine theirresources in a range of different ways, theymay be able to produce new outputs for thefirm. For example, revisiting our pub landlordabove, we find out that in addition to owninga public house he/she also owns a pet shop. Inorder to attract people into the pet shop, themanager buys a large snake, which he/she canalso sell if required. The snake, however, isonly employed in the pet shop during theopening hours of 9 to 5 Monday to Saturday.As the snake does not have to work hard forits keep, and given that it is under-utilizedoutside the shop opening hours, the managerstarts to think how he/she can make a moreprofitable use of the resource. The managerthen has an idea of combining the snake, withone of the bar maids, and hey presto a resourcerecombination leads to the creation of anexotic dancer to perform during the eveningsand/or on Sundays. The manager of the pub hasdiversified into offering entertainment througha resource recombination.

Invoking our poker analogy again, the issueof resource recombination, like the issue ofusage, makes the rules of the game morepermissive. By recombining a bundle of cards,a person may be able to make a series ofdifferent hands that can be played in differentgames. Furthermore, if we relax the assumptionthat the recombined cards have to be controlledby one player only, we open up the potentialfor players to collaborate in recombiningtheir cards. The potential for collaborationsubstantially increases the number of potentialrecombinations that may be possible.

Resource Creation and Decay

The issue of resource creation was first dealtwith by Penrose (1959) through her attemptsto theorize the growth process in firms. Sheargued that firms develop resources throughtheir productive activities and, over time, firms

will generate an excess capacity in theirresource-bases. It is the excess capacity in aresource base that presents the basis for firmexpansion. The activities of the firm will leadto the development of resources over time.The firm’s resources, therefore, will be directlyrelated to the past activities of the firm, i.e. theresource base of the firm will be path dependent.Although Penrose highlighted that resourcesmay be created through the process ofcompeting in markets, little attention hasbeen focused on the issue of resource creation(Bowman and Collier 2006). A notable excep-tion is the Management Science paper ofDierickx and Cool (1989).

Dierickx and Cool (1989) attempted tosummarize the growth and decay processesaffecting those intangible assets that form thecore of the RBV. Barney (1991) examined theconsequences of firm heterogeneity (for agiven set of resources), whereas Dierickx andCool (1989) examined the causes of firmheterogeneity. The genesis of Dierickx andCool’s (1989) argument is that, given that factormarkets for intangible assets are incomplete,critical resources are accumulated rather thanacquired in ‘strategic factor markets’. Further-more, they argue that the immobility of aresource position is linked to the characteristicsof the asset accumulation process. Theirterminology has been widely followed, andtheir typology of asset accumulation may besummarized briefly thus:

Asset mass efficiency describes Dierickx andCool’s (1989) proposition that the marginalcost of specific asset accumulation falls withthe size of the existing relevant asset base.This is seen most clearly where activities suchas R&D exhibit (at least locally) increasingreturns with obvious benefit to establishedresearch-intensive companies.

Time compression diseconomies relate tothe observed tendency of the costs of assetaccumulation to rise within a given time inter-val. The more a firm tries to reduce the timehorizon associated with asset accumulation,ceteris paribus, the more costly the processwill be. Again, R&D is a good example where



there is a well-established trade-off betweenthe time and cost associated with acceleratingthe rate of problem-solving.

Causal ambiguity, as described by Barney(1991), relates to the difficulty faced by out-siders – and perhaps even insiders – in isolatingthe particular factors responsible for a firm’scompetitive advantage.

Asset interconnectedness implies that thecost of adding an increment of resource A tothe firm’s stock may be related to its existingstock of resource B. Dierickx and Cool’s(1989) own example is of a manufacturer whoseproduct development costs are lowered byfeedback benefits derived from the samefirm’s customer service department.

Asset erosion refers to the shrinkage of thefirm’s stock of intangible assets, as these aredestroyed by exhaustion, obsolescence andrivals’ innovation. It is the intangible assetequivalent of balance sheet depreciation fortangible assets. It both afflicts the firm inisolation and arises through the actions ofits rivals. In effect, the firm is a bundle ofresources whose value is in constant flux.

The work of Dierickx and Cool (1989) hasimportant parallels with Barney’s (1986) badnews message, which was that, if resourcemarkets are perfect, the costs of acquiringresources will be approximately equal to thevalue of those resources once they are usedto implement product market strategies.Consequently, if a firm acquires resources,and continues to use them in the same waythat they were previously employed, SCA willbe difficult achieve in the absence of resourcemarket imperfections. Denrell et al. (2003)provide a more nuanced understanding ofresource acquisition, which is consistent withthe work of Dierickx and Cool (1989), byoutlining two conditions under which SCAmay be possible. First, you may be lucky andacquire the resources below their full marketvalue because of a seller’s ignorance. Second,you may own, or have access to, other idio-syncratic resources that are not availableto other firms and which augment the valueof the resources.

The Resource-based View: Methodological and Practical Difficulties

The RBV has developed as a series of relatedpropositions that seek to explain the relation-ship between a firm’s resource endowmentand its performance and growth. However,it has not generated clear unambiguoushypotheses in the manner of more narrowlyconceived theories of firm behaviour or eventransaction cost economics (TCE), an approachwith which the RBV is frequently compared(e.g. by Newbert 2007). For example, TCEcontends that transaction costs rise with certain(relatively) well-defined market attributes,especially asset specificity, and that verticalintegration dominates outsourcing wheretransaction costs are sufficiently high. Together,these hypotheses have suggested a simplereduced form equation test: namely, thatvertical integration will increase with assetspecificity. Variants of such an equation havebeen estimated by many researchers. By con-trast, the RBV has a number of methodologicaland practical difficulties that limit the generationand testing of direct hypotheses.

First, and perhaps most fundamental, is theissue of tautology. Perhaps unsurprisingly,for an approach that ultimately ascribesdifferences in firm performance to intrinsicdifferences in the firms themselves, the RBVis certainly prone to circular reasoning. Priemand Butler (2001a,b) in an exchange withBarney (2001a), debate this point at length.Priem and Butler (2001a,b) reduce the RBVto the following statement: ‘only valuable andrare resources can be a source of competitiveadvantage’, where rarity and value in turndepend upon the use to which such resourcesmay be put. More generally, they argue thatthe problem of tautology lies in the relationshipbetween the general and the specific in theRBV. Competitive advantage is considered tobe rooted in firm-specific circumstances thatare themselves, at least in part, imperfectlyobservable.

Second, if one assumes (as does Barney2001a) that the RBV may be specified in a

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testable form, any empirical assessment of itspredictions requires the identification andmeasurement of relevant resources. Unfortu-nately, this has often proved problematic,because the resources of central concern areoften those associated with organizationallearning etc. and are commonly unobservable(see Ambrosini and Bowman 2001; Godfreyand Hill 1995; Rouse and Daellenbach 1999).Resources which can easily be identified andmeasured are unlikely to be of great interest toRBV researchers. Such resources, however,are commonly the focus of empirical studieslargely because they can be measured, notbecause they are necessarily important.Consequently, a significant body of empiricalresearch on the RBV has parallels with theproverbial drunk looking under the street lightfor his keys. When asked where he had losthis keys he responded, ‘somewhere over therein the dark, but can’t see a thing over there soI’m looking under the light instead.’ A furtherconsequence of the resource identificationproblem is that researchers have used anextremely varied set of proxies for keycapabilities and resources, making systematiccomparisons across the empirical literaturemore difficult.

Third, firm heterogeneity creates problemsfor researchers who are interested in generat-ing a homogeneous sample of firms for testingspecific RBV hypotheses. Recall that thecentral thrust of the RBV is that any firm’scompetitive advantage is rooted in its uniqueattribute set. If each firm is unique, any sampleof firms is heterogeneous by definition. Thisclearly makes it difficult to derive meaningfulinferences about the causes of competitiveadvantage across the sample. To reducesample heterogeneity, some researchers havefocused on single-industry studies, often usingexogenous changes in the industry environment,e.g. deregulation (see Ingham and Thompson1995), as ‘natural experiments’.

Fourth, identifying and explaining causalrelationships in large firms is problematic.The sheer complexity of large organizationsmakes it very difficult to isolate the performance

effects of specific resources. Birger Wernerfeltrecently argued that, if you take a firm likeWal-Mart, there are probably 10,000 littleideas there that each might be worth $100,000or less in annual profits. Therefore, thecomplexity of the organization means that awhole range of small initiatives may influencethe performance of the firm, but each in avery small way (Lockett et al. 2008). Moreover,Barney’s (1991) argument that causal ambiguitysustains competitive advantage, by restrictingrivals’ ability to isolate and hence replicaterent-generating resources, itself suggestslimited potential for empirical work. If rivals,i.e. competitors within the same strategicgroup, cannot fathom a firm’s key resources itappears unlikely that models using externallymeasurable variables will achieve strongexplanatory power, particularly since these areoften estimated across broad industries toallow viable sample sizes.

Fifth, not merely is agreement on a workingdefinition of ‘competitive advantage’ itselfcontroversial (Foss and Knudsen 2003; Powell2001), but such a concept is directly unobserv-able so that empirical tests normally involveseeking to explain inter-firm differences inperformance (see Peteraf and Barney 2003)with respect to observable differences in thefirms’ identifiable resource endowments.Equating performance and competitiveadvantage in this way strictly tests the jointhypothesis that resources and not other factors(see Ray et al. 2003) generate a competitiveadvantage, and that the firm is effectivelymanaged to harvest this competitive advantage.

Sixth, the logic of the RBV does not predicta universal relationship between firm per-formance and any particular resource. On thecontrary, the value of a resource to the firm willdepend upon the specifics of its use, includingthe deployment of co-specialized assets.Therefore, even at the industry level, there maybe no discernible relationship between firmperformance and the possession of resourceX. For example, within the airline industry,full service carriers and low-costs operate verydifferent business models which presumably



require differing resource bundles such that aperformance–resource model indiscriminatelyestimated across airlines is unlikely to yieldstrong results.

Finally, best practice firm-level empiricalwork now generally uses first-differencedpanel data sets, usually unbalanced to minimizeselection/survivor biases. However, in empiricalwork on the RBV it is the fixed effects,discarded in differencing, that contain mostof the interest. It follows that much empiricalwork in the field still tends to use the (otherwisediscredited) single equation, cross-sectionaldesign. This raises inevitable problems ofcausality. For example, if a study of pharma-ceutical companies reports a positive corre-lation between performance and R&D spend,the researcher cannot, without further tests,rule out the possibility that R&D dependsupon performance rather than the reverse.Furthermore, multicollinearity of explanatoryvariables, often size related, is common incross-sectional firm-level work. This reducesthe efficiency of estimates, leading to whatSwann (2006) terms the noise–signal ratio. Manycross-sectional studies do not address thesedifficulties.

The Resource-based View: Empirical Evidence

Empirical testing of elements of the RBV hasfocused on two main issues. First, scholarshave examined the relationship between firmperformance and the possession of identifiableand imperfectly imitable resources/capabilities/competences. Second, researchers haveexamined whether the prior possession of suchresources shapes the subsequent developmentof the firm in ways the RBV predicts.

Resources and Firm Performance

As suggested above, the overarching propositionof the RBV suggests that a firm’s possessionof specialized resources may permit it toenjoy a competitive advantage over its rivalswhich, given suitable management, is converted

into an observable performance advantage.Furthermore, where this resource bundle isimperfectly imitable the competitive advantageis sustainable in at least the medium term.Testing this relationship presents difficulties,some of which have been outlined in the pre-vious section. Among these are problems in bothspecifying testable hypotheses and measuringdependent and explanatory variables.

In the case of the dependent variable, it isnoted above that difficulties in definingand measuring comparative advantage haveensured that a variety of performance variableshave been used in the literature. These haveincluded both accounting and stock market-based measures. The choice of resource measuresas explanatory variables is necessarily evenwider. This is not simply a reflection of theavailability of data to particular researchers; italso reflects the specific nature of any hypoth-esized link between resources and competitiveadvantage. However, an overall consequenceof the diversity of the available empiricalliterature on the RBV and the range of variablesit uses is that formal meta-analyses are pre-cluded, and even summary statistics are difficultto compute.

The most comprehensive treatment of theRBV performance literature is that of Newbert(2007), who performed a semi-quantitativeanalysis of the studies identified via a formalsearch procedure. Newbert (2007) used a keyword search across the management literatureto identify papers appearing to offer a test ofthe resource–performance linkage. After theapplication of relevance criteria, he was leftwith 55 studies from which he generated thefollowing conclusions: First, only 53% of thepapers he examined offered positive supportfor the link between resources (broadly defined)and performance. This figure, he suggests,is broadly consistent with other theories ofstrategic management such as transactioncost economics (see David and Han 2004).Second, he found evidence that resourcecombinations, and/or capabilities/competences,are more likely to explain performance differ-ences rather than single resources in isolation.

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As with the drunk looking for his keys underthe light, many RBV scholars (includingthe authors) have focused on resources thatcan be easily measured, e.g. simple measuresof human capital.

Given the methodological problems indesigning general tests of the resource–performance relationship, discussed above, therelatively modest empirical support revealed byNewbert’s survey is generally unsurprising.Perhaps more worrying for those of us work-ing in the field is that even this level ofsupport is probably inflated by publicationbias: that is the tendency of journal editors todisproportionately reject insignificant findings.

Resources and Firm Development

As noted above, an important strand of theRBV literature, going back to the pioneeringwork of Penrose (1959), is concerned with theway in which the firm’s current resourcebundle shapes its future development. Thiswork implicitly assumes that in a competitiveenvironment decisions concerning the firm’sactivity set will reflect managers’ attempts touse the resources at their disposal in theinterest of advancing the firm’s performance.This leads to predictions about shifts in theboundaries of the firm conditional upon itscurrent resource set. Among boundary decisionsanalysed in this way are issues concerningdiversification, modes of entry to new marketsand refocusing. The diversity of these issueshas thus far precluded any quantitative surveyof which we are aware. The literature reviewthat follows is based on an updating of that inLockett and Thompson (2001). We departfrom David and Han (2004), Newbert (2007)and Armstrong and Shimizu (2007) in ourapproach to reviewing the empirical literature,which employs a keyword search for RBVpapers, because we feel that such an approachomits empirical studies that may be RBV innature, but do not explicitly mention the RBV.Our survey includes papers that test hypothesescongruent with the RBV, even if they do notexplicitly mention it.2

Product/Service Market Diversification

One of the most explicit and implicit empiri-cal application of the RBV has been in theliterature examining patterns of diversificationvia new market entry. Econometric studies byLemelin (1982), MacDonald (1985), Mont-gomery and Hariharan (1991) and Inghamand Thompson (1995) have shown that diver-sification is not a purely random process,driven by idiosyncratic managerial decisions,but instead follows a pattern consistent withthe exploitation of existing identifiable resources(see Montgomery 1994, for a review). Lemelin(1982) found that diversification tended to occuracross industries using similar resources.MacDonald (1985) and Montgomery andHariharan (1991) used US firm-level datato demonstrate a similar outcome, whereasMontgomery and Wernerfelt (1988) identifiedthat specific resources may only be transferredinto a small number of industries and thatfirms with more specific resources couldgenerate higher rents with less diversification.Ingham and Thompson (1995) used financialservices deregulation in the UK as a ‘naturalexperiment’ to show that diversification intopreviously prohibited, but nonetheless related,financial product markets followed the firms’resource endowments at the time of deregulation.

While the RBV has been explicitly andimplicitly used in analysing firms’ diversify-ing expansions into new product markets, thefirm’s decision to expand its operation by pro-ducing its existing products in new regions ornational markets involves directly analogousreasoning. Here the dominant internalizationparadigm (see Caves 1996, for a survey) usedto explain the internationalization of business,suggests that firms choose to become multi-national when the specific assets they possessare more economically transferred acrossinternational boundaries within the firm ratherthan by using markets. Internalization theory’sfocus is upon the role of comparative levels oftransactions costs in determining the optimalform of expansion, and therefore, it might beconsidered an application of TCE. However,



since the transactions costs usually consideredto drive this decision are those attached tointangible assets and firm-specific attributes,where replication is also problematic, there isan obvious relevance for the RBV. Non-specificresources pose far fewer problems for marketcontracting but, conversely, since activitiesdepending upon them alone can be easilyreplicated, offer little opportunity for sustaininga competitive advantage.

The evidence on foreign direct investment,at industry and firm levels, is generally con-sistent with the internalization perspective(see Caves 1996). It points to concentrationsof multinational activity in R&D-intensiveindustries (where proprietary technology isimportant) and advertising-intensive industries,where marketing and brand name issues areimportant. Of particular relevance to the RBVis the firm-level evidence (e.g. Caves 1996;Grubaugh 1987) that confirms the effect ofproprietary assets and relative R&D andadvertising outlays on the probability of a largefirm having multinational operations.

Inter-industry differences in firm organiza-tion constitute a potential difficulty forfirm-level work in this field. In consequence,single-industry studies generally allow a moredetailed specification of relevant resource vari-ables than would be possible in inter-industrywork. Recent examples include case studies ofthe US TV receiver industry by Klepper andSimons (2000), Internet service providers(ISPs) by Greenstein (2000), and the genericpharmaceutical industry by Scott Morton(1999). Klepper and Simons (2000) show thatprior experience in radio technology was amajor determinant of success among entrantsto the rapidly expanding TV receiver marketfrom the 1950s to the 1970s. Furthermore, theadvantage conferred by radio experience con-tinued to exert a statistically significant effect,even after 1965 when colour TV began todominate the market. Greenstein (2000)demonstrates that, although entrants to theISP sector have come to a completely newindustry, their prior experience, commercialbackground and local market characteristics

determine their subsequent development andspecialization. Thompson (2007) reaches asimilar conclusion with respect to entrants tothe digital camera business, while Mitchell(1991) and Carroll et al. (1996) report com-parable results from the diagnostic imagingand early US car industry, respectively.

Scott Morton (1999) shows that, among theset of generic pharmaceutical producers,prior technological, scientific and marketingexperiences determine which new productmarkets, created by compound discovery orpatent lapse, individual firms choose to enter.Thus, prior expertise with a particular class ofcompounds, delivery mechanism or diseasetreatment market will increase the probabilityof entry. Interestingly, she notes how differentfirm resources, the result of divergentexperiences, assist the industry by preventingthe simultaneous entry of large numbers ofproducers with inevitable widespread losses(Scott Morton 1999, 436). This confirms theclassic argument of Richardson (1972) on theimportance of firm heterogeneity in the orderlydiffusion of innovations.

Mode of Market entry (Product and Geographic)

Firms seeking to extend their profitableactivities typically require assets to com-plement their existing resource bundles andfrequently need to obtain these from existingfirms. Mergers and acquisitions, joint venturesand other collaborative associations have beenanalysed quite extensively as alternative mecha-nisms for the acquisition of complementaryassets for domestic and foreign expansionsalike. In some instances, for example, in obtain-ing access to specific assets in countrieswith poorly developed capital markets or withrestrictions on private and/or foreign ownership,the costs associated with acquisition may beprohibitive. In others, joint venturing with thedesired party may turn out to be simplyunattainable. However, a growing body ofresearch suggests that, where a choice exists,joint venturing tends to be associated with a lack

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of specific expertise (of markets, technology,cultures, etc.) on the part of the firm con-cerned. Singh and Kogut (1989) using foreignentrants to the US, Hennart and Reddy (1997)for Japanese entrants to the US, and Thompson(1999) using domestic and foreign expansionsby diversifying UK utility companies, all reportthat having controlled for size, prior marketexperience encourages expansion by acquisi-tion rather than joint venture. Such a result issupportive of the RBV in that it confirms thatoutsiders with incomplete resources need tosecure specific resources via cooperation withthe insider. The experienced entrant is able topurchase the relevant resources by acquiring asuitable company. Of course, this does not pre-clude joint venturing having other advantages.3

Corporate Refocusing (Market Exit)

The reversal of diversification is refocusing. Itis reasonably well established (see Hayneset al. 2003; Markides 1995, and referencestherein) that, in the USA and UK, there was acontinuing increase in diversification amonglarger firms until the early 1980s. Thereafter,there has been a discernible trend towards cor-porate refocusing, defined here as the disposalof peripheral activities and the renewed con-centration upon core businesses. In the past,this has frequently involved the divestment ofunrelated activities acquired in the conglomeratemerger boom of the 1960s and 1970s (Shleiferand Vishny 1991). This reversal of the trendtowards diversification suggests a number ofinteresting questions for researchers. First,why did so many firms engage in apparentlyunsuccessful diversification, especially unre-lated diversification, in the 1960s and 1970s?Second, what caused this policy to be reversed?And third, why did this reversal occur in the1980s?

Both the RBV and Agency Theory (AT)provide insights into these questions whichare, at least in part, both substitutes and com-plements. From the perspective of the RBV,there are at least two contending explanationsfor widespread over-diversification among

large firms. First, a large number of managers,perhaps acting on incorrect suppositions ofinternal capital market superiority may havesimply got it wrong. In the RBV, as in Austrianeconomics (see below), there appears to be nonecessary presumption that managers alwaysmake correct decisions. Second, it is possiblethat previously optimally organized firmsfound themselves over-diversified becausethe comparative advantage of the M-form haddeclined. This has been alternatively attributedto capital market innovations and a reductionin transaction costs (Hoskisson and Turk 1990)and a decline in scarcity rents to the resourceof general management (Goold and Luchs1993). Since these changes coincided withthe internationalization and deregulation ofcapital markets in the 1980s, the reversal ofcorporate diversification also dates from thistime (Haynes et al. 2003).

By contrast, the AT hypothesis attributesover-diversification to the diversion of freecash flow into preferred (sometimes negativenet present value) investments by managersinsulated from capital market discipline byweak corporate governance arrangements(Jensen 1986). The widespread subsequentreversal of this process is again attributed tocapital market changes, particularly the rise inhostile and debt-financed takeovers in the1980s that tended to pressurize managers intoa return towards value-maximizing behaviour(Jensen 1986, 1993).

A growing volume of empirical studies ofcorporate refocusing provides support forboth strategy and governance hypotheses inexplaining the phenomenon (Johnson 1996).Markides (1992) found that refocusing firmswere highly diversified and suffered frompoor performance relative to their industrycounterparts. He also found that the higher theR&D intensity of the core business, the lowerthe likelihood that the firm would refocus.4

Haynes et al. (2003), using a panel of largeUK firms, include strategic and governancevariables in an analysis of divestment activity.They find that divestment, variously measured,increases with size, diversification and market



share in the firm’s core business, while fallingwith performance. However, they also report asignificant positive coefficient for leverage,in line with Jensen’s (1993) free cash flowreasoning and, tellingly, a large and highlysignificant increase in divestment in the yearfollowing the publication of a bid rumour. Theyfind some support for strategy–governanceinteraction effects. For example, firms with‘strong’ governance regimes, defined in termsof management equity ownership and theexistence of substantial ‘blockholders’, ex-perience a much larger sensitivity to poorperformance. In contrast to Johnson (1996),who finds internal and external antecedents tocorporate refocusing in the US, Haynes et al.(2003) do not find a significant role for seniormanagement changes.

While the RBV does not unambiguouslysupport the superiority of related diversificationover unrelated diversification (see Chatterjeeand Wernerfelt 1991), there is a presumptionin much of the refocusing literature thatdivesting peripheral activities to concentrateupon those more closely related to one anothershould raise performance. This is reinforcedby arguments, dating back at least to Penrose(1959), that suggest the costs of managementrise with size and complexity and, unless theseare offset by comparable benefits, as prom-ised, for example, by the M-form hypothesis,performance may be enhanced by decoupling.These conjectures have been supported by anumber of studies of the effects of divestitureon corporate performance. Montgomery andThomas (1988), John and Ofek (1995) andHoskisson and Johnson (1992) all reported animprovement in ROA following corporateasset sales. Markides (1995) found a large andstatistically significant increase in profitabilityfollowing reductions in diversification, althoughhis results also suggest that the gains werelarger for the earlier cases of refocusing in hissample. Haynes et al. (2002), in a dynamicpanel study of firm profitability, report statis-tically significant positive shocks followingdivestment for up to four years after theevent. This study also explores the effect of

‘complexity’, measured as the interaction ofsize and the level of diversification, andreports that the benefits of divestment aresubstantially greater for ‘complex’ firms. Inbrief, the refocusing literature tends to reinforcethe conclusion from that on corporate diversi-fication, in many respects its opposite, aboutthe importance of relatedness in successfulfirm growth.

Practical Insights from the Resource-based View

As academics working in Business andManagement Schools, we are increasinglyencouraged to make prescriptive statementson the basis of existing management knowledge.The use of case studies in strategy teachingillustrates this dilemma. On the one hand, thesuitably selected case can illustrate neatlythe successful or unsuccessful past attemptof some managers to achieve a winning fitbetween resources and strategy. Such teachingaids both reinforce the analysis we are offer-ing and capture the attention of the class bygrounding the subject in a relevant businesscontext. One the other hand, the subject alsoemphasizes the importance of the unknown inthe specifics of individual cases. Indeed, asnoted above, the inevitable ignorance of theoutsider confronted by causal ambiguity isboth an important device to sustain com-petitive advantage and a partial blindfold toany would-be case analyst. The user of casesmust resist the misplaced certainty of ex postrationalizations. Analyses offering 20:20hindsight do not merely disguise the complexityof the decision-taking they cover but are alsounfalsifiable. Under imperfect information, exante optimal decisions can have unpleasantoutcomes while ex ante mistakes can yieldfortuitous mistakes. As Donald Rumsfeldopined about the problems facing US militaryoperations in Afghanistan:

Reports that say that something hasn’t happenedare always interesting to me, because as we know,there are known knowns; there are things we know

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we know. We also know there are known unknowns;that is to say we know there are some things we donot know. But there are also unknown unknowns –the ones we don’t know we don’t know.

Clearly there are resources – known knowns –whose potential to impact on a firm’s futuregrowth is appreciated. Similarly, there arefactors – known unknowns – whose causaldirection is understood but whose impactcan only be evaluated ex post. Finally, thereare the unknown unknowns, the products ofunfolding market, technological or other events,whose manifestation cannot be anticipatedand incorporated in even the most carefulscenario planning. For example, firm managersmay know that their firm is outperforming itsrivals but are unable to explain why this is thecase, i.e. the causal ambiguity problem. Anexample of known unknowns would be thefuture value of a firm’s resources as marketsevolve. We know the value of the resourceswill change over time but not how. We maynot be on our own in not being able to under-stand the notion of unknown unknowns.

Known knowns are unlikely to enable afirm to outperform its rivals in the medium tolong run unless there are market impedimentsthat prevent competition for the underlyingresources (this is the genesis of Barney’s 1991paper). Known unknowns, however, are muchmore interesting from an RBV perspective.The role of managers is to try and make senseof known unknowns and to manage theambiguity surrounding them. As for unknownunknowns, what can we do about them if wedo not ever know about them, even ex post?

The approach adopted in this paper is totreat the RBV not as a theory of firm behaviourbut, primarily as a theory that offers insightsabout the decision-making behaviour ofmanagers. Below, we have outlined some ofthe main practical insights of the RBV, whichare presented as an illustrative rather thanexhaustive list.

First, managers need to understand whatare the strengths and weaknesses of a firm.Wernerfelt’s motivation for writing his seminal

paper in 1984 was a disagreement with Porter’swork on industry analysis and generic com-petition, which abstracted away from inter-firmdifferences (Lockett et al. 2008). Wernerfelt’sview was that opportunities and threats cannotbe exploited solely through the external posi-tioning of businesses. The firm’s distinctiveinternal characteristics are central to anydiscussion of strategy formulation. Strategyshould encapsulate what the firm is distinctivelygood at, and also seek to address the potentialweaknesses of the firm. A rare example ofauthors who have focused on the problemsassociated with firm weaknesses are West andDeCastro (2001) or Powell’s (2001) considera-tion of competitive disadvantage.

Second, the resource base of the firm ispath dependent, i.e. history matters. Firmresources are developed through competitionin markets, and so the markets in whichthe firm competes today, and the way in whichit competes, will be the most importantdeterminants of that firm’s resource basetomorrow. In effect, any learning by the firmwill be, ceteris paribus, closed in to its existingoperations.

Third, managers need to be able to under-stand the functionality of their resources.Resources are defined by their usage. Forexample, a building may be used for a numberof different purposes, but its current usagemay blinker managers from fully appreciatingthe full range of potential functions thebuilding could be used for. This idea linksback to Levitt’s (1960) marketing concept, inthat customers are not interested in the resourcesof a firm, rather they are interested in howfirm resources may satisfy their wants andneeds. Two firms may be able to satisfy similarwants and needs of a customer but by usingdifferent resources. In the area of informationand communication technology, high degreesof technological change have led to a blurringof market boundaries. Companies from com-puting, telecommunications, software, consumerelectronics are now all competing against oneanother in similar markets but with histori-cally very different backgrounds.



Fourth, the resource base of the firm is con-tinuously subject to the processes of resourcecreation and decay. As markets evolve, theunderlying value of a firm’s resource basechanges over time. Changing technology andconsumer tastes, allied to the competitiveprocess, will tend to erode the value of manyresources over time. In general, the resourcesthat may hold the key for a firm’s position ofcompetitive advantage in one period maymerely become a necessary resource to earnnormal returns. Consequently, firms shouldcontinuously seek to manage their resourcebases, investing in decaying resources andalso seeking to develop new resources.

Fifth, acquiring competitive advantage in aresource market is not possible in the absenceof asymmetric information and/or co-specializedresources with which you are going to aug-ment the new resources (Denrell et al. 2003).Therefore, it is likely that any position ofcompetitive advantage will have to be internallydeveloped (Barney 1986).

The Resource-based View Looking Forward

Where is the RBV going, and where should itbe going? The RBV, owing to its permeableand eclectic nature, has become something ofa broad church (Hoskisson et al. 1999). In thispaper, we have focused on the core essence ofthe RBV, but many sub-fields have developedas areas of study, including the study ofknowledge (as a specialized firm resource),capabilities (created by bringing togetherbundles of resources) and dynamic capabilities(the ability to continuously adapt and re-configure a resource and capability base). Wecannot predict where future developments willtake the RBV. Instead, we conclude by offeringa subjective view on where we think scholarsshould focus their efforts in the future. Wefocus on theory and method as we feel thatempirical evidence and practical insights willfollow logically in time.

First, rather than focusing on the conse-quences of firm heterogeneity, more scholarly

attention needs to be devoted to the theoreticalissue of the causes of firm heterogeneity. AllRBV work begins with the explicit or implicitassumption of firm heterogeneity. EvenDierickx and Cool’s (1989) arguments aboutthe causes of competitive advantage focus onhow differences between firms may becomeamplified over time. If the RBV is to developas a theory, it is important that we understandthe origins of firm heterogeneity. In a recentinterview Birger Wernerfelt has posed thequestion as to whether or not it is possible tostart with a model of homogeneous firms orhomogeneous people, or at least randomlydistributed people, and generate significantheterogeneities between firms (Lockett et al.2008). We feel that, by providing insights intothe origins of firm heterogeneity, we may beable to understand better how managers cangenerate and manage their firm’s distinctivedifferences.

Second, more scholarly attention needs tobe focused on the neglected theoretical issueof resource functionality. Evidence of thisneglect can be identified in the burgeoningliterature on dynamic capabilities (seeAmbrosini and Bowman 2009). Scholars ofdynamic capabilities have focused on the role ofresource creation/decay and resource recom-bination, but have not addressed the issue ofresource functionality. Any discussion thatproducts and resources are two sides of thesame coin, and that resource usage maydetermine how we perceive the functionalityof a resource is largely absent from the RBVliterature. We feel that this is a fundamentalweakness of the RBV literature to date. It isimportant, therefore, that more scholarly effortis invested in trying to understand resourcefunctionality and how this relates to the potentialproduct/service market space a firm maycompete in. There are obvious links that maybe made here to cognitive psychology anddecision framing.

Third, as the RBV is a theory about whatfirms are, and does not require a host oflimiting assumptions, it can be deployed withother theories to explain strategic behaviour.

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This is a huge advantage of the RBV, as com-plex relationships can seldom be understoodthrough a single theoretical lens (Gray andWood 1991). To date the RBV has been linkedto theories of the firm, such as AT and trans-action cost economics. For example, RBVprovides insights into the issue of valuecreation within firms, whereas TCE providesinsights into economic organization (Madhok2002). We urge scholars to embrace thepermeable, eclectic and permissive nature ofthe RBV to generate new insights into firmbehaviour.

Finally, scholars need to reflect on theirmethodological approaches to empiricalresearch on the RBV. We have suggested thatit is those resources that are complex, unob-servable and difficult to measure that arelikely to be of greatest importance. Further-more, the paper has noted that problems ofmulticollinearity and endogeneity plaguehypothesis testing in the area, particularlywith firm-level data. Addressing these problemswill not be easy. It may be that more effortneeds to be devoted to the collection of dataat the business unit level or with samples ofsmaller firms where the resource set is lesscomplex. Also, management researchers mayneed to become more diligent in their searchfor suitable instruments to overcome theendogeneity problem in commonly employedvariables (Lockett et al. 2008). These improve-ments in quantitative investigation will hope-fully be accompanied by insightful case-studywork.

Notes

1 Address for correspondence: Andy Lockett, Profes-sor of Strategy and Entrepreneurship, NottinghamUniversity Business School, Jubilee Campus,Wollaton Road, Nottingham, NG8 1BB, UK.Tel.: +44 (0) 115 9515268; Fax: +44 (0)115 8466667;e-mail: [email protected]

2 Lockett and Thompson (2001) argue that there isa considerable body of empirical evidence in thefield of economics that empirically tests hypothesescongruent to the RBV; i.e. the RBV is present butunrecognized.

3 It can avoid some of the management/digestionproblems associated with the acquisition ofdiversified firms (see Kay 1997). An expandingfirm entering a joint venture can target theresources it requires without having to acquireand subsequently dispose of (see Ravenscraft andScherer 1987) the unwanted remainder. Similarly,the lower level of sunk commitment associated withjoint venturing may reduce risk by comparisonwith a full acquisition (see Balakrishna and Korza1993).

4 A result that suggests that diversification is bene-ficial in capturing the spillover effects of R&D.

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Andy Lockett, Steve Thompson and UtaMorgenstern are from the Business School,Nottingham University, Jubilee Campus,Wollaton Road, Nottingham, NG8 1BB, UK.

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