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Firm Resources

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DOI: 10.1057/978-1-349-94848-2_481-1

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 By: Raphael Amit and Paul J.H. Schoemaker
The Palgrave Encyclopedia of Strategic Management
Mie Augier; David Teece
ISBN: 9781137294678
Palgrave Macmillan
firm resources
Definition
A firm’s resources are available factors or inputs, both
tangible and intangible, that are owned and/or controlled
by the firm. Resources consist, among other things, of
financial or physical assets (e.g., property, plant and
equipment), know-how that can be traded (e.g., patents
and licences) and human capital (e.g., talent, expertise and
experience).
Abstract
The nature and value of a firm’s resources – especially the
firm’s ability to deploy them to enhance their strategic
value – are central to strategic management. Advances in
information and computing technology that blur firm
boundaries reinforce the important role of resource
deployments that span firm and industry boundaries (Zott
and Amit, 2010). In this article we provide an overview of
what constitutes a firm’s resources and identify
characteristics that increase their strategic value. We draw
on theoretical perspectives such as the RESOURCE-BASED VIEW
and the DYNAMIC CAPABILITIES model of the firm, as well as
insights from networking and business model theory,
among others, to discuss current developments and future
directions.
A firm’s resources are available factors or inputs, both
tangible and intangible, that are owned and/or
controlled by the firm. Resources consist, among
other things, of financial or physical assets (e.g.,
property, plant and equipment), know-how that can
be traded (e.g., patents and licences) and human
capital (e.g., talent, expertise and experience). Bond-
ing mechanisms that firms use to convert these
resources into final products or services include
technology, management information systems, incen-
tive systems and routines, trust between management
and labour, organizational culture and norms, and
others. Grant (1991) provides a detailed list of firm
resources; Barney (1991) discusses their strategic
importance. The emphasis on resources gave rise to
an important new perspective in strategic manage-
ment in the 1980s, namely the RESOURCE-BASED VIEW
(RBV) first articulated by Wernerfelt (1984).
Access to resources in factor markets (for labour
capital, technology etc.) can be an important source
of COMPETITIVE ADVANTAGE. Equally important, how-
ever, is a firm’s capacity to deploy resources, usually
in combination with distinct organizational pro-
cesses. This capacity entails information-rich tangible
and intangible processes developed over time through
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10.1057/9781137294678 - The Palgrave Encyclopedia of Strategic Management, Edited by Mie Augier and David Teece
complex interactions among the firm’s resources.
Such processes can be thought of as intermediate
goods generated by the firm to provide enhanced
productivity of its resources, as well as strategic
flexibility and protection for its final product or ser-
vice. Resources naturally give rise to firm-specific
capabilities, which develop organically by carrying
and exchanging information through the firm’s
human capital. Capabilities are often developed in
functional areas (e.g., brand management in mar-
keting; drug development in the R&D department of
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a pharmaceutical company) or by combining physi-
cal, human and technological resources at the cor-
porate level (e.g., M&A capabilities).
Some of the firm’s resources, and especially its
capabilities, may be subject to market failure, that is,
an inability to trade these factors in perfect markets.
Multiple sources of market failure have been sug-
gested: Williamson (1975) points to small numbers,
opportunism and information impactedness; Klein,
Crawford and Alchian (1978) focus on factor spe-
cialization in terms of use or location; Caves (1984)
highlights sunk costs and suggests that a factor’s value
is inversely related to the extent of its specialization
for a particular use or industry setting.
Characteristics affecting the strategic value of a
firm’s resources
In general, the strategic value of a firm’s resources
and capabilities (hereafter called R&C) increases with
an increase in some key characteristics. The more
difficult the firm’s R&C are to buy, sell, imitate or
substitute, the greater their strategic value to the firm.
For example, invisible assets such as tacit organiza-
tional knowledge or trust between management and
labour cannot be traded or easily replicated by
competitors, since they are deeply rooted in the
organization’s history. Such firm-specific and often
tacit assets accumulate slowly over time (see Dierickx
and Cool, 1989). This idiosyncrasy and imperfect
mobility make them difficult to imitate, and their
development time usually cannot be easily com-
pressed. The presence of complementarity – meaning
that the firm’s R&C are of higher value when com-
bined than if deployed individually – further
enhances their strategic value to the firm. Conversely,
the strategic value of the firm’s R&C declines to the
extent that they are substitutes.
1
 By: Raphael Amit and Paul J.H. Schoemaker
The Palgrave Encyclopedia of Strategic Management
firm resources Mie Augier; David Teece
ISBN: 9781137294678
Palgrave Macmillan
The more scarce, firm-specific and durable the entry or mobility barriers, or by building ‘isolating
firm’s R&C are, the more valuable they can be to the mechanisms’ as impediments to imitation (Rumelt,
firm. First, firms with a scarce resource or capability 1984). Such barriers may arise from limited market
can pursue market strategies based on these char- size, superior access to distribution channels, legal
acteristics to develop their competitive advantage, restrictions, economies of scale and scope and more.
since most other firms would find these strategies too Ghemawat (1991) especially emphasizes the role of
costly and time-consuming. Second, firm-specificity commitment and the firm’s superior access to
and the presence of transaction costs suggest that the resources.
value of some R&C will be lower when deployed by
other firms in the same or in alternative uses. Third,
the more durable the R&C, the smaller the invest- Theories

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ment, if any, required to offset their depreciation.
Unlike physical capital, most capabilities are
enhanced with use, since more experience is gained.
These characteristics of the firm’s R&C reflect a
trade-off between the specialization of assets (a
necessary condition for realizing above-normal
profits or economic rents) and the robustness of these
assets across alternative futures. When firms develop
specialized R&C, they usually do so at the cost of
reduced flexibility in the face of Schumpeterian
shocks (Schumpeter, 1934). This trade-off is a core
issue in deciding which R&C to develop and how (see
Schoemaker, 1992). Firms may gain sustainable
advantage when existing and potential competitors
(new entrants) lack either the ability or desire to
imitate the rent-producing R&C. A firm’s managers
can lessen the incentives of competitors to imitate or
develop close substitutes by, for example, erecting
The resource-based view (RBV) is an important
strategy perspective that builds on Penrose (1959). It
was formally articulated by Wernerfelt (1984) as a
complement to the prevailing industrial organization
view of strategy pioneered by Porter (1980). RBV
emphasizes the fact that imperfections in factor
markets, such as frictions in labour and capital
markets that create imperfect mobility of inputs, can
give rise to systematic differences in firm perfor-
mance (Wernerfelt, 1989). Limited transferability of
resources, as well as their scarcity, complementarity
and firm appropriability, are key conditions giving
rise to economic rent opportunities in this view (see
Figure 1). RBV focuses on internal and institutional
factors, emphasizing the slow evolutionary paths by
which firm-specific resources and capabilities typi-
cally develop (Nelson and Winter, 1982). These
capabilities may include executive talent, culture and

Complementarity Scarcity Low tradeability

Rents due to
Overlap with firm’s resources
strategic industry and capabilities Inimitability
factors (strategic assets)

Limited
Durability Appropriability
substitutability

Figure 1 Desired characteristics of the firm’s resources and capabilities. Source: Amit and Schoemaker (1993).

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10.1057/9781137294678 - The Palgrave Encyclopedia of Strategic Management, Edited by Mie Augier and David Teece
 By: Raphael Amit and Paul J.H. Schoemaker
The Palgrave Encyclopedia of Strategic Management
Mie Augier; David Teece firm resources
ISBN: 9781137294678
Palgrave Macmillan
other less tangible dimensions that have received the one hand, and (2) dynamically adjust capabilities
limited attention in standard models of rational to exploit new opportunities quickly? Since capabilities
behaviour. Further, RBV does not place dominant develop organically with limited time compression, it
economic focus on general equilibrium in the econ- takes time to adjust them to fit a revised strategy and
omy and structural determinants. Instead, dis- even longer to develop new capabilities from scratch.
equilibrium and process dynamics loom as primary Some will wonder if the inherent lags in adjusting
(Peteraf, 1993). dynamic capabilities reduce their value as a basis of
Amit and Schoemaker (1993) build on RBV by strategy in fast-changing environments. Nonetheless,
examining conditions underlying sustainable eco- developing an organizational capacity to modify,
nomic rents. They emphasize the fact that uncer- extend and create new capabilities is of crucial stra-
tainty about which future scenarios may prevail tegic importance in a changing environment.

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(Schoemaker, 1991) gives rise to idiosyncratic man-
agerial decisions across firms. This in turn creates
asymmetries as to which R&C firms develop, and
thus can become a source of sustainable economic
rent. Amit and Schoemaker (1993) focus on key
linkages between Porter’s industry analysis frame-
work, the resource-based view of the firm and
behavioural decision biases (Tversky and Kahneman,
1974, 1981), as well as organizational implementation
issues. Owing to uncertainty, complexity and conflict
(both inside and outside the firm), different firms will
employ different R&C, without any one set being
demonstrably optimal or easily imitated. At best,
managers can devise heuristic solutions that navigate
between the numerous biases characteristic of
humans and organizations (Schoemaker, 1990). It is
argued that organizational asymmetry stems from
imperfect and discretionary decisions to develop and
deploy selected resources and capabilities. Such
decisions are made by ‘boundedly rational managers’
(Russo and Schoemaker, 2002) who have to deal with
high uncertainty, complexity and intra-firm conflict.
Teece, Pisano and Shuen (1997) developed an
important DYNAMIC CAPABILITIES view of the firm that
centres on the capacity to create or modify R&C. This
theory emphasizes a subset of capabilities deemed
vital for evolutionary fitness – a perspective influ-
enced by technical fitness (measured as quality per
unit of cost), market demand and competition (see
Helfat et al., 2007). How can firms develop man-
agerial and organizational processes that allow them
to search for opportunities and select the best ones?
According to Teece, Pisano and Shuen, the key is to
build on the R&C the firm already possesses while also
creating new ones needed for future success. This
dynamic view of capabilities raises an interesting
dilemma for resource-based views of strategy. Can
theorists have it both ways? Can firms: (1) exploit
hard-to-develop-and-imitate core competencies on
Current developments
Two important extensions of RBV strategies are
currently emerging, namely: (1) the role of network-
based capabilities that are only partly owned and
controlled by the firm; and (2) the increasingly
important role of BUSINESS MODELS in which a focal
firm leverages its own R&C with those of its partners.
The information revolution continues to offer
firms unprecedented reach, connectivity and low-cost
computing power. This allows companies to explore
entirely new ways of leveraging their R&C and
creating value for shareholders. We can begin to
understand these new ways with insights from net-
work theory (Kleindorfer and Wind, 2009), where the
focus is on the topography and structure of rela-
tionships. But we also need to include notions of
purpose, acceptance, fairness, coherence and viability
(Zott and Amit, 2009) to fully appreciate the power
and challenges of network-based strategies.
A related body of literature which centres on a
firm’s business model has developed since the early
2000s (Zott, Amit and Massa, 2011). The business
model concept refers to how a firm’s activity system is
designed and enabled by a focal firm to meet per-
ceived market needs. An activity system is the set of
interdependent organizational activities within and
around the focal firm but also encompasses activities
conducted by its partners, customers or vendors. As
such, it transcends the focal firm and spans across the
market environment and possibly its industry
boundaries. An activity in a focal firm’s business
model is defined as the engagement of human, phy-
sical and/or capital resources.
The business model defines the structural template
by which the firm deploys its own R&C, as well as
those of its partner firms, to advantage (Amit and
Zott, 2001). Importantly, the firm’s business model

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10.1057/9781137294678 - The Palgrave Encyclopedia of Strategic Management, Edited by Mie Augier and David Teece
 By: Raphael Amit and Paul J.H. Schoemaker
The Palgrave Encyclopedia of Strategic Management
firm resources Mie Augier; David Teece
ISBN: 9781137294678
Palgrave Macmillan
includes the strategic ways in which these various
activities (and related R&C) are linked with those of
external constituents in both factor and product
markets (Zott and Amit, 2010) for mutual gain.
Entrepreneurial managers of focal firms actively
design (i.e., construct, link, sequence) boundary-
spanning exchanges and activities, which then
become core elements of the business model. The
focal firm is far more than a passive participant in its
surrounding networks. It purposefully structures its
destiny through cooperation and co-creation with
other stakeholders as part of a broader network-based
ecosystem (see Prahalad and Ramaswamy, 2004). The
logic of this structure lies at the heart of the firm’s
business model, which can be viewed as an ‘engine’
for orchestrating and deploying network-based
strategies.
Conclusion
The resource-based view of the firm, in which
resources and capabilities play a central role, has been
one of the main theoretical perspectives in strategic
management theory since the mid-1980s. It comple-
ments the industry perspective (Porter, 1980) in
examining and explaining the sources of firms’
competitive advantage. As industry boundaries
evolve and firm boundaries blur – due to continued
technological progress, deregulation and innovation
– firms increasingly use the resources and capabilities
of partners as an integral part of their own activity
systems. Continued theoretical and empirical
research on these complex dynamics offers the pro-
mise of better grounded normative models. These in
turn can spawn the predictive and prescriptive tools
we need to enrich the science and practice of strategic
management.
RAPHAEL AMIT AND PAUL J. H. SCHOEMAKER
See also
BUSINESS MODEL, THE; COMPETITIVE ADVANTAGE; DYNAMIC CAPABILITIES;
RESOURCE-BASED VIEW
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Palgrave Macmillan
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