The question of value

Example of a literature review

It is now widely understood that resources – the tangible and intangible assets controlled by a firm that enable it to create and implement strategies (Barney, 2002) – only have the potential to generate economic value if they are used to do something (Porter, 1991). Of course, the thing that resources and their close conceptual cousin, capabilities (Amit & Schoemaker. 1993) are supposed to do is to enable firms to create and implement strategies.

This simple insight actually suggests a way that researchers can measure the potential of a firm's resources to create value: To measure this potential, measure the value created by the strategies a firm creates and implements using its resources. Put differently, since resources have no value in and of themselves and only create value when they are used to implement strategies, researchers should examine the value these strategies create to infer the potential value of a firm's resources.

Of course, there is substantial literature that describes the ability of different strategies to create economic value. A wide variety of such strategies has been described, including cost leadership, product differentiation, vertical integration, flexibility, tacit collusion, strategic alliances, corporate diversification, mergers and acquisitions, and international strategies, to name just a few (Barney, 2002). Much of this work identifies the conditions under which these strategies will and will not create economic value.

For example, a cost leadership strategy creates value if and only if it enables a firm to reduce its costs below those of competing firms (Porter, 1980). A product differentiation strategy creates value if and only if it enables a firm to charge higher prices for its products than a firm that is not differentiating its products (Porter 1980). A corporate diversification strategy creates value if and only if it exploits an economy of scope that cannot be realized through market contracting (Teece, 1980).

There has been less work that links specific firm resources and capabilities with the ability to create and implement these kinds of firm strategies. This is largely because currently available typologies of firm resources are very broad in scope, e.g., Barney's (2002) distinction between financial, physical, human, and organizational resources. Further work developing this type of typology is likely to facilitate the examination of the link between resources, in general, and the ability to conceive of and implement specific strategies.

However, that there has been limited work that links specific resources to particular strategies does not mean that there has been no work in this area. Indeed, several papers have examined the linkages between particular resources and capabilities and specific strategies. Most of this work is carried out on a limited sample of firms, within a single industry. This helps establish the link between the resources and strategies in question. But, taken as a whole, this work suggests an approach to linking resources to strategy and thereby examining the potential of resources to create economic value by enabling firms to create and implement strategies. Consider a couple of examples of this research.

In 1994, Henderson and Cockburn were interested in understanding why some pharmaceutical firms were more effective in developing new patentable drugs than other pharmaceutical firms. It is well known that patents are a source of economic value in the pharmaceutical industry (Mansfield, Schwartz, & Wagner, 1981) contingent on the demand for particular drugs, firms with large numbers of patented drugs will usually have higher revenues than firms with smaller numbers of patented drugs. The specific resource that Henderson and Cockburn were able to identify that enabled some firms to have more patents than other firms was something they called "architectural competence" – the ability to facilitate cooperation among the different scientific disciplines required to develop and test a new pharmaceutical drug. Firms with high levels of this competence were able to patent more drugs than firms with low levels of this competence. Henderson and Cockburn’s research showed that architectural competence had the potential to generate economic value when it was used to develop new patentable drugs.

More recently, Ray, Barney, and Muhanna (2004) examined the relationship between the ability of two functional areas – the information technology function and the customer-service function – and the level of customer service in a sample of North American insurance companies. Again, it is widely recognized that customer service is an information intensive function in most modern insurance companies, and that the careful use of information technology can enhance the ability of customer-service professionals to meet their customers' needs. Customer satisfaction, in turn, is related to a variety of economically important variables, including customer retention. What Ray et al. (2004) were able to do is to develop a measure of the level of cooperation between the IT and customer-service functions in a sample of insurance firms and demonstrate that this relationship – a socially complex resource – has the potential to create economic value when it is used to develop customer-service-specific IT applications. Besides demonstrating thatis possible to examine the potential of a resource to create economic value by examining the value consequences of the strategies a firm creates and implements by using these resources, these –and related – papers have several other things in common. First, they are examples of what might be called “quantitative case studies”. That is, they examine the relationship between a firm's resources and the value of its strategies in a narrow sample of firms, typically a sample of firms drawn from a single industry. This enabled these authors to clearly identify industry-specific resources and capabilities and to build industry-specific measures of these resources. Then, using traditional quantitative techniques, they examine the relationship, between these measures of firm resources and attributes of a firm correlated with a firm's economic performance.

Of course, it is difficult to generalize this research beyond the specific industry contexts within which it is done. That architectural competence is related to the number of patents in pharmaceutical firms may or may not say anything about the relationship between architectural competence and innovation in other firms in other industries. That the level of cooperation between IT and customer service has an impact on the level of customer service in North American insurance companies may or may not say anything about the relationship between this type of cooperation and customer service in other firms in other industries.

Although these papers have limited generality at the level of the specific resources and strategies studied, their results are quite general from a broader perspective. Each of these papers – and the several others that apply a similar empirical logic (e.g., Combs & Ketchen, 1999) – show that at least some firm resources have the potential to generate economic value if they are used to create and implement certain strategies. Over time, as more of these quantitative case studies are done, our ability to specify the conditions under which resources can be used to create and implement strategies that create economic value will be enhanced.

Second, many of these studies examine the value potential of a firm's resources at a level of analysis below that of the firm. Not surprisingly, the most correct level of analysis at which to examine the relationship between a firm's resources and its strategies is at the level of the resource, not the level of the firm. However, the firm is usually the unit of accrual. We are likely to learn a great deal more about the relationship between resources and strategies if scholars are able to “get inside” the firm, where resources reside, rather than simply correlate aggregate measures of resources with aggregate measures of the value of a firm's strategies (Rouse & Daellenbach, 1999).

This, of course, implies that the best resource-based empirical work will involve collecting primary data from within firms in drawn sample. The norm in much of the currently published work in strategic management seems to be to use publicly available data sets to test the extant theory. Clearly, some very clever scholars have been able to use these data sets to say some interesting things, even about resource-based theory. One example is the Milter and Shamsie (1996) study of resources and performance in the motion picture industry. The creative use of proxies helped this article win the Academy of Management Journal's best paper award for 1996. However, in the long run, going inside a sample of firms and collecting data about resources and strategies directly seems likely to be more important for the development and evolution of resource-based research. Even seemingly unobservable resources may be assessed by going inside firms. For example, Hult and Ketchen (2001) used measures gathered from informants and the latent construct function of structural equation modelling to tap into intangible resources.

Finally, the central independent variables in both of these papers – architectural competence in Henderson and Cockburn (1994) and IT/customer-service cooperation in Ray et al. (2004) – focus on a particular type of organizational resource. This type of resource has been described as socially complex (Barney, 1991) and it has been linked to the sustainability of a firm's competitive advantage. Empirically, examination of these sustainability issues is carried out in the next section of this chapter.

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