4 / J o u r n a lo f G e n e r a l M a n a g e m e n t
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From critical resourcesto corporatestrategy
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Birger Wernerfelt
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Supposea new high growth segmentopensup in your industry.Shouldyou
enter that segment?lvianyother firms are likely to enter as well. Will the
returnsjustify the costs?If too many firmsenter,and commit high levelsof
funding,your return on investmentwill be mediocreat best.This would be a
d i s a p p o i n t i negx p e r i e n c eb,u t i t i s o n e m a n yc o m p a n i ehsa v eh a d i n r a c e sf o r
market shareand technologicaladvantage.Of course,this doesnot mean
that you shouldnot chasesuchopportunities.If you fail to do so, you might
d o e v e nw o r s e .I t d o e s ,h o w e v e r ,i n r p l yt h e f o l l o w i n g :o n a n e v e np l a y i n g
field, against well managed competitors, you cannot expect superior
performance.You need to look for tilted playingfields,areaswhere you
havea competitiveadvantage.
You have
Where do you havean advantage?
the advantagein marketswhereyour resources
are superiorto thoseof the
competition.In sucha gameyou can achievea strongmarket positionat a
lower cost than your competitors.
The first step is to identify your resources.The secondstep involves
decidingwhereto compete,Only then do you worry about how to compete.
This shiftsthe focus of strategicanalysisfrom the industryto the company
i t s e l fI l ] . S t r a t e s vf o r m u l a t i o nc o n s i s tisn t h e i d e n t i f i c a t i o nd,e p l o y m e nat n d
developmentof resources.What principlesgovern this processin well-m a n a g e dc o m p a n i e s ?
Critical Resources
A l i s t o f y o u r c o m p a n y ' sr e s o u r c eus , o u l dq u i c k l yg e t v e r y l o n g :t h i s p l a n t .
t h a t p a t e n t ,s u c h - a n d - s u cah b r a n d n a m e . a g o o d m a n a g e rh e r e , a g o o d
R & D t e a mt h e r e .e t c . O n l v v e r vf e u ' r e s o u r c easr e c r i t i c a il n t h e s e n s et h a t
J J
I l ] S t t t h i s a r g u n r c n t l u n r s i r t t c n t i t l na w r r - 1{ ',1 1 v 6t hl c i n d u s t r l ' l i l c L r ss u g g c s t c dl ' r v P r t r t c r . M . E . .
C o r n l t t t i t i v e S t r u t c g l ' .N c w Y o r k . N Y , F r c e P r e s s . l 9 f i 0 .
1r,4
V o l . l - l N o . 3 S p r i n s 1 9 8 9/ - t
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t h e vc a nd i f f e r e n t i a t veo u f r o m c o m p e t i t i o nT. h e r c s o u r c eh a st o b e u n i q u e .
I f c o m p e t i t o rcsa n b u v o r d e v e l o pi d e n t i c a rl e s o u r c e st .h e y w i l l d o s o u n t i l
t h e f i e l d i s o v e r c r o w d e dB. u t w h a t u n i q u er e s o u r c ecsa n a c o m p a n yo w n ?
N o t v e r ym a n y ,a p a r tf r o m p a t e n t sb, r a n dn a m c s .m i n i n gr i g h t sa n dp i e c e so f
land.But there is hope. You can profit from a resourceeven if you do not
own it! This may happenbv tradingrvithou'nersof a uniqueresourceif these
t r a d i n gp a r t n e r sT. o s e e
o w n e r sh a v ea d i f f i c u l t i m e s w i t c h i n qt o a l t e r n a t i v e
h o w t h i s w o r k s , i t i s h e l p f u lt o l o o k a t a n e x a m p l e .L e t u s s a v t h a t o n e o f
y o u rm a n a g e r sS, m i t h ,i s p a r t i c u l a r l gy o o d .N o r m a l l y ,y o u h a v et o p a y h i m a
salaryfully reflectingthis, sincecompetitorsotherwisewill hire him arva,'-.
couldconceivably
continueuntil Smith'ssalaryis commensurate
Thisprocess
w i t h h i s s k i l l s ,l e a v i n gn o e x t r a p r o f i t s f o r t h e e m p l o y e r[ 2 ] . T h e r e a r c ,
two exceptionsto this:
horuvever,
TeamEffects. Supposethat Smith is good in part becausehe works well
with Jones.Now if thesetwo can agreeto marketthemselves
asa package,
joint
well
may
to
reahze
value.
if
they
be able
their
However, they cannot,
vour companycan pay them their individualvaluesand reap their (larger)
joint value.
SpecificAssets.Alternatively, it may be the case that Smith is more
valuableto you than to other companies.Also in thiscaseyou will be able
t o p a y h i m l e s st h a n w h a t h e d e l i v e r s .
The pointhereis that you canprofit from tradingwith peoplewho havepoor
or costlyalternatives.
Just tradingwith the owner of a uniqueresourcewill
n o t d o i t . B u t i f t h e o w n e ri s t i e d t o y o u , y o u c a ng a r n e rs o m eo f t h e p r o f i t s
from his resources.I will say that you sharesuchresources.
When executivesof large companiesare askedto identify the basisfor
theircompetitiveadvantage,resources
of this type figureprominentlyon the
list:
We havea good managementteam.
Our marketinggroup is great.
We havesupplierswho know what we want.
The developmentpeopleare good at findingapplications
for our patents.
By now, the retailersknow why our product is different.
Our R & D lab is doing very well.
':
This givesus a procedurefor identifyingthe criticalresources
of a company.
.;r
rj
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[ 2 ] A s f a r a s I k n o w , t h i s a r g u m e n t w a s f i r s t a r t i c u l a t e db y P o s n e r , R . A . , ' T h e S o c i a l C o s t o f
Monopoly and Regulation', Journal oJ Political Economy, ti3, pp. 807-27.1975.
6 / J o u r n a lo f G e n e r a l M a n a g e m e n t
It basicallyboils down to three questions.The naturalquestion:
o Among the resourceswe own, which are unique?
as well as the more subtle,but often more importantquestions:
would leadone
o Doesany departmentperformbetterthan their paychecks
to expect?
tied to us?
o Does any supplieror buyer have major resources
To be honest,this acid test is not likely to bring you any positivesurprises.
whichpassthe test.On
lv{ostlikely, you are alreadyawareof thoseresources
the other hand,it may help you weedout a few - like the plantwhichreallyis
not unique,or the superteamwhich is not paid accordingly.
The Capacity of Resources
After you have identifiedthe criticalresourcesyou own or share,classify
them accordingto their capacity.How much do you haveof eachof them?I
havefound that the followingthree-wayschemeworksvery well in practice.
Fixed Assets- Resourceswith Fixed Long-run Capacity
Examplesinclude plant and equipment, mining rights, employeeswith
by suppliersor distributors,and so
specifictraining,firm specificinvestments
on. Theseresourcesare easyto think about but do not generallyposevery
challengingstrategicquestions.There are two reasonsfor this. First, they
are typicallyonly valuablein one or very few industries.The questionof
whereto deploythem is thereforeoftensimple.Second,you do not normally
find yourselfwith excesscapacityof suchresources.So it is not likely that
you have a lot of theseresourcesto play with.
Blueprints - Resourceswith Pracrically Unlimited Capacity
Examplesinclude patents,brand namesand reputations.These resources
often play a considerablerole in strateevformulation. Essentially,for
advantage
reasonsoppositethosegivenabove,theymayconveyconsiderable
over a rangeof markets,and availabilityis not a real concernbecausetheir
c a p a c i t yi s n o t l i m i t e d .T h e r e c e n t r e n dt o w a r d s ' u m b r e l lbar a n d i n g(' u ' ea r e
Beatrice) and 'corporateidentification'(ARA) representsan attempt to
exploitresourcesof this type.
V o l . 1 4N o . . i S p r i n g 1 9 8 9l l
Cultures- Resourceswith LimiteclShort-run,but UnlirnitedLong-run
Capaciry l3l
We are heretalkingaboutteameffects.Let us assumethat we are workingin
a g r o u p w h o s ef u n c t i o n i n gd e p e n d so n i n t e r a c t i o nb e t w e e ns p e c i a l i s tisn
. s i n a n v s u c hg r o u p ,w e w i l l d e v e l o pa s e to f r o u t i n e so v e r
s e v e r aal r e a s A
w
t i m e [ 4 ] . W e i l l l e a r nw h a t o t h e rm e m b e r sc a nd o , r v i l ld o , a n d w a n t t o d o .
- e . g . , ' s o o n ' .A n d
W e w i l l l c a r nw h a t t h c v m e a nw h e n t h e y s a vs o m c t h i n g
we will learnhow to soll'erecurrentconflicts.The point is that no two groups
w i l l d e v e l o pt h e s a m es o c i a sl t r u c t u r eI.n p a r t i c u l a rs, o m eg r o u p sw i l l e n d u p
with more efficientpatternsof interaction.
If your compan,vemployssuch a group it can be a criticalresource.No
s i n g l em e m b e rc a n a c h i e v et h e s a m el e v e lo f p r o d u c t i v i t yi n a s i m i l a rg r o u p
, o r c a n h e s i n g l e - h a n d e del yx p o r tt h e r o u t i n e s O
i n a n o t h e rc o m p a n y n
. n the
- not
otherhand.you can clonethe efficientgroup by socializing
apprentices
t o o m a n ya t a n y g i v e nt i m e , b u t e n o u g ht o m a k ei t i n t e r e s t i n gF.o r e x a m p l e ,
many companieshave a policy of first training managersat headquarters
b e f o r es e n d i n gt h e m t o t h e d i v i s i o n s I. n d e e d ,s o m eJ a p a n e s e
companies,
such as Matsushita,have all new employeestake lessonsin 'corporate
philosophyT
' . h i s t y p e o f r e s o u r c em a y b e a p p l i c a b l ien m a n y m a r k e t so r i n
few industries.Executivesin many widely diversifiedcompanieswill claim
that theyprosperbecauseof 'good management'
and arguethat their gro$,th
reflectsthe expansionin their pool of managers.On the other end of the
spectrum,pharmaceuticalcompaniesnormally stay within a few markets
whcre their R & D skills apply. Or, firms like Proctor& Gamble confine
their diversificationto marketing intensive consumer products. N{ost
generally,the more widely applicablea resourceis, the lessof a competitivc
advantage
it confers.
How to Leverage your Resources
After you know your critical resourcesand the capacityof each, you are
readyfor action.You know the arsenalat your disposal.How do you deploy
ir?
When lookingat this questionin individualcompanies,I have found the
followingthree classifications
helpful: a resourcecan be used:
t3l A
v e r y e x c i t i n ga c c o u n t o f t h e s e r e s o u r c e si s g i v e n i n P e n r o s e ,E . , T h e T h e o r y o f t h e G r o w t h o f
the Firm, Oxford, Basil Blackwell, 1957.
14lNelson, R. and Winter, 5., An Evolutionary Theory of Economic Growth, Cambridge, Mass.,
H a r v a r d U n i v e r s i t y P r e s s , 1 9 8 2 , p r e s e n t a d e t a i l e d d e s c r i p t i o no f t h i s p r o c e s s .
[ J/ J o u r n a lo f G e n e r a l M a n a g e m e n t
r Independently
o In tandemwith existingcriticalresources.
o In situations where complementaryand specificresourcesneed to be
created.
Let us look at eachcasein turn and considerresources
of eachtype. When
doing so, it may be helpful to refer to Figure 1.
Figure ,1. Tvpes of resourcesand common ways to leveragethem
Application
Fixed assets
Blueprints
Cultures
I n d e p e n d e nat p p l i c a t i o n
Sellor rent
P a i r e da p p l i c a t i o n
Sellor rent
Usein-house
Jointventure
U s ei n - h o u s e
Merger
C u s t o m i z e ad p p l i c a t i o n
U s ei n - h o u s e
U s ei n - h o u s e
Usein-house
I ndependent Ap p Iication
This category contains instanceswhere (excesscapacity of) a critical
resourcecan be used aloneor in connectionwith noncriticalresources[5].
Supposefirst that the criticalresourcein questionis afxed asset:a plant,a
pieceof land, or a mining right. In many cases,you can harvestthe profits
just by selling or renting the resourceto somebodyelse. For example,
supposea well-situatedpieceof land can be usedfor an office building.If
that buildingcan sell for two million dollarsin excessof buildingcosts,then
you can realize(approximately)thesetwo million dollarseitherby sellingto
a builderor by buildingand sellinglater.Most often,,it is easierto sellsucha
resourceand leaveits managementto an expert.
There are cases.of course.when this doesnot work. Considera situation
where you have excesscapacityon a particularpieceof machinery.If the
machineis sufficientlyreliableyou may be ableto 'rent', say,the night shift
to someoneelse.However,if the reliabilityof the machineand the qualityof
the output dependon carefuluse and maintenance,
this may be a strained
arrangement.You may prefer usingthe capacityyourself,even if it takes
you into new businessareas.
N o w l e t u s l o o k a t b l u e p r i n t sA
. g a i n .h e r e , y o uc a ns o m e t i m es e l lo r r e n t
t h e m . F o r e x a m p l e ,m a n y p a t e n t sa r e r o u t i n e l -lvi c- e n s e dN
. o r m a l l y ,t h i n g s
are not so eas)/.You may worry about a licenseepirating your patent.
S i m i l a r l y y, o u c a n r e n t o u t a b r a n d n a m e ,( e . 9 . .C o c a - C o l ac l o t h e s )b u t i t
[5]
'fhe
lollowing is roughly consistcntu'ith the pcrspcctivc dcvclopcd in Runrelt. R.P..
'Divcrsification
S t r a t c g va n d P r o l i t a b i l i t y ' ,S t r e t c g i (l l l u n u g u n a t tJt o u r t r u l . 3 . p p 3 - 5 9 - 6 9 ,l 9 t l 2 .
'Economic
a n d T c ec e , D . J . ,
A n u l v s i s a n d S t r a t c q i cM a n a g em en t ' . C u l i l l t r t t i a h l u n u g , c t n e t r t
R c l r a r ' , 2 - 5 .N o . 3 . p p . 8 7 - 1 1 0 . l 9 l t . 1 .
V o l . l 4 N o . 3 S p r i n gl 9 U 9/ 9
putsyou at risk. The renter may usethe namein a way whichreflectspoorly
o n y o u r e n t i r e b u s i n e s sT. o m a k e i t w o r k a b l e ,y o u n e e d t o i m p o s es t r i c t
constraintson the renter. For example,NlcDonald'sfranchisingcontracts
s p e l l o u t m a n y c r i t e r i aw h i c h t h e f r a n c h i s e eh a s t o s a t i s f vi n r u n n i n s i t s
In many casesit is difficultto policethe arrangement
business.
and the onlv
possibilitvis to use the resourcein-houseand to diversifyaround it.
Consider.finally, cultures.Here therc are few ways to rent them out
withoutlosingthem. Your R & D laboratorymay take on contractwork. or
your personneldepartmentmay sell trainingprograms,but it is difficult to
all the costsof sucha contract.On the otherhand,you would not want
assess
your marketingeroup to take on outsidework for fear that valuablefirm
specificroutinescould leak out. Similarlyyou would never let your team
work in other people'slocations.If you reallyhavea good group going,you
do not want othersto clone it.
Paired application
We here look at situationswhere a relevantco-specialized
resourcealready
existsbut it is owned by anothercompany[6]. For example, in L973,when
EMI wantedto leverageits CATSCAN technologyin the US, it lackeda
selling,serviceand trainingorganisationgearedto tjS hospitals.GE and a
few othersuppliersof medicaltechnologyhad suchorganisations.
Wherethe
independentapplicationsinvolveda choicebetweensellingthe capacityor
usingit yourself,we havetwo other options:the firmscan mergeor they can
form a joint venture.
Where your resourceis a fixed asset,it is often easy to sell or rent it:
Therefore,if one of the two co-specialized
assets
is of thisnature,it will most
often be sold to the owner of the other resource.Sincethe resourcesonly
realrzetheir full potentialtogether,this may leadto sometoughnegotiations,
but it shouldstill be workable.
Supposenext that you want to leveragea blueprint If the co-specialized
resourceis easyto buy or rent, you will normallywant to do that. If not, the
situationis tricky. To make it more concrete,let us think of you as havinga
patent and another company as having appropriate production and
marketingskills. If you do not want to sell your patent, a merger is a
possibility.However,this is not likely to be very attractive.Most often, both
companieswill have a host of different activitiesand to merge them all for
[ 6 ] A r c t e v a n t r e f e r e n c e h e r e i s T e e c e , D . J . , ' F i r m B o u n d a r i e s , T e c h n o l o g i c a lI n n o v a t i o n , a n d
Stratcgic Management', in Thomas, G.L., (ed.), The Economics of Strategic Planning,
L e x i n g t o n ,M a s s . ,D . C . H e a t h , 1 9 8 6 .
l 0 / J o u r n a lo f G e n e r a l M a n a g e m e n t
the sake of one project seemsexcessive.
A joint ventureis often the best
solution.
For cultures, the joint venture option may be dangerous.If you are
leveragingthe skillsof an R & D laboratorywhich is workingfar from your
main business,this is fine. But if the resourcein questionis an integralpart
of your company,)ou cannotafford to 'let it out'. So it is often besteitherto
mergethe two companiesor simplygive it up.
Customized Ap p lication
I am here coveringcaseswhere a resourcecannotbe exploitedin the market
place without irreversiblecommitmentof large sums of money tll For
example,supposeyou havea processpatent,but its userequiresa particular
type of plant to be consutructed;a plant which will be significantlyless
valuableif usedfor other processes.
This is a classicproblem.Is it possible
for you to inducea supplier(or a buyer)to make investments
that tie him to
you?
You can alwaysmake the investmentyourself,but it may not be in your
areaof expertise.If not, you need to convincesomebodyelsethat you will
not turn around and take advantageof them once they havesunk X million
dollarsinto the project.This is very difficultand may yet be very valuable.A
famous- and failed - attemptis the relationshipbetweenGeneralMotors
and FisherBody which after many yearsendedwith a takeoverby GM.
The 'normal' situationis that you haveto do thesethingsyourself.There
are, however,two ways to avoid this:
First, you may be able to write a contractguaranteeingappropriate
returnsto the other party. Sincewe are talking about major investments,
sucha contracthas to run over severalyearsand it is necessary
to coverall
sortsof contingencies.
The dangerouscontingencies,
of course,are those
you cannot think of at first. And yet you know that unthought-of
contingencies
will arise.Most often, the viabilityof this option dependson
the extentto which you and your partner can be made to feel comfortable
with the contractand eachother.
Second,the relationshipmay work becauseit is tied in to a seriesof such
relationships.
For example,most suppliersto Marks and Spencer.a British
departmentstore chain, have the vast rnajorityof their capacitv(often 90
per cent) dedicatedto M & S. If thesesuppliers\r'eredropped,they would
faceeconomicdisaster.And vet. becauseN{ & S hasdone business
this wav
[ 7 ] S e c l ' i r o l e . . l . . ' P r o c u r e m e n ti t n d R e n e g o t i u t i o n ' . J o u r n aol . l ' P o l i t i c aEl t ' u r t < t n t \ , , 9 4 . p pl 3. . r - . s 9 .
1 9 8 6 ,f o r a n a l o g o u sa r g u m c n t s .
V o l .1 4N o .3 S p r i n 1
s 9 8/9I I
thev are trusted.In fact, you can feel
for so long, with so many sr-rppliers.
p r e t t ys u r et h a t t h e y w i l l h o n o u rt h a t t r u s t .I f n o t , t h e y w o u l d n o t b e a b l et o
do businessin the future. Similarly'.an interestingrelationshipexists
l an,
b e t w e e nm a j o r m e t a l c a n m a k e r s( e . g . , A m e r i c a nC a n , C o n t i n e n t aC
C r o w n C o r k a n d S e a l ,N a t i o n a lC a n ) a n d l a r g e u s e r s( . . g . , b r e w e r s ,s o f t
drink bottlers).Most often, pairs of plantsare locatedvery closeto each
other. Given the high coits of transportingthe cans, both parties are
jockeyingfor
dependenton continuedtrade. What then preventsexcessive
position?How can they persuadeeachother to do this? One reasonis that
theseoften are multiplantfirms.They want to continuethis in the future.but
perhapswith different partners. Given this, they need to protect their
'fair' businesspartners. Such implicit contractsare very
reputationsas
attractive,but lesscommon in the US than in Europe or Japan.
Summarizing,critical resourcescan be leveraged in several ways,
dependingon the type of resource.Figure t highlightsthe most common
waysto do this, but there are many examplesof very successful
deviations
thumb.
from theserulesof
How to Grow your Pool of Critical Resources
productmarkets,I madethe point that
In the introduction,when discussing
you cannot expect superior performancein a fair race againstequals.
Instead,you need to look for raceswhere you have an advantage.If we
apply this principle to resourcemarkets,we get the following result: you
cannotexpect to make above-average
returns on investmentsin physical
assets
will pay a lot, somewill flop, and, on
or blueprints.Someinvestments
the average,the price of a criticalresourceis just its value.
With resources
of the culturevariety,thingsare a bit different.Once you
have them, lou can 'grow' them at cost way below the cost of imitation.
Again, you do this by carrying staff beyond what is necessaryfor current
operations.Of course,thereis a limit to how fastyou can grow a culture,but
thereis alsoa limit to how fastyou can deployit. The optimalrate of growth
is difficult to characterize.However, rnanagementof the growth of these
resources
is the most importantelementin preparingyour companyfor the
future. They representa classof investmentswhose returns are at least
partiallyshieldedfrom competitivepressure.
1 2/ J o u r n a lo f G e n e r a l M a n a q e m e n t
Guidelinesfor Action
To translatethese principlesinto successfulcorporatestrategy,a company
should first take a hard look at its resources.Which are critical? Among
these, which ones hold the greatest potential? When performing this
analysis,
it is vitally importantthat sharedresources
not be left out. Next, it
becomes time to worry about deployment. Does your businessmix
sufficientlytake advantageof your critical resources?If not, which markets
could you exit without loss of above-normalreturns?And which markets
should you enter? Further, at the level of businessstrategy,are .vou
competingin the right way?Is a particularjoint ventureor mergerin order?
In a make-a-buydecision,are you doing thingsothersmore appropriatelv
couldundertake?Finally,how can you manageyour resourceportfolioover
time? What do you need to acquireor grow? How can you make sure that
new resources,created through environmentalchanges,are identifiedin
time for action?