Title: Differences Between Resources and Strategy in Strategic Management: An Experimental Investigation
Authors: Oladunjoye, G. Titi., Onyeaso, Godwin
Subject: Strategic Management
Publish: 2007
Status: full text
Source: International Journal of Management; Sep 2007, Vol. 24 Issue 3, p592-604
Preparation: Scientific Database Management Journal Articles www.SYSTEM.parsiblog.com
Abstract: According to Jay Barney, resources and capabilities are the core of the resource-based view (RB V) of strategic management. However, the difference between resources and capabilities remains controversial among strategic management scholars. This study uses a classroom experiment to test for the difference between resources and capabilities to students. In a nutshell, the results of the experiment suggest that: (a) resources and capabilities are different constructs, (b) inter-group (inter-organizational) differences in capabilities is the major determinant of inter-group (inter-organizational) difference in performance, and (c) active participation of students in classroom experiments is a teaching tool that enhances students" knowledge of key strategic management constructs such as resources and capabilities. These findings suggest that strategic management professors should use classroom experiments as separate or complementary teaching tools to enhance students" knowledge of strategic management concepts.    --Download Article

Introduction: "The Academy"s new Teaching Committee, chaired so ably by Peter Frost, is helping us conceive of new links among management research, management practice, and tbe classroom (Hambrick, 1994:14, boldface mine)"
 The above quote is culled from an Academy of Management Review article on the Academy"s 1993 Presidential Address captioned "What if the Academy Actually Mattered?" delivered by Donald C. Hambrick. In that presidential address, Hambrick eloquently underscored the importance of integrating management research and practice with classroom teaching so that graduating students are equipped with the skills industry manager are demanding from college graduates (Stephen, Parente, & Brown, 2002). To attain this end, strategic management professors are crafting innovative teaching tools in teaching strategic management concepts to students. The present study makes a contribution to strategic management by using an innovative classroom experiment to illustrate the difference between resources and capabilities, a controversial topic in strategic management.
Agreeably, teaching strategic management as a capstone course is a Herculean task (Greiner, Bhambri & Cummings, 2003) exacerbated by the controversial differences between resources and capabilities (Carmeli & Tishler, 2005; Makadok, 2001). Insofar as this controversy (Amit & Shoemaker, 1993; Priem & Butler, 2001) persists, it will continue to be a milestone against theory development in strategic management (Priem & Butler, 2001). Carmeli and Tishler (2005: 300) expressed this concern as follows:
"Resources as a general term is taken to include three main constructs— resources, capabilities, and competencies, which have been variously defined in the strategic management literature, making it difficult to generalize across studies."
Concomitantly, it has also be argued that "How researchers measure resources and capabilities varies extensively" (Hoopes, Madsen & Walker (2003: 890), which is a milestone to academic dialogue and replication of empirical results (Priem & Butler, 2001). Consequently, Schneider and Lieb (2004) compellingly argued that even though the resource-based view (RBV) of strategic management has become one of the dominant perspectives, it is scantly mentioned in the classroom. There is no a prior reason to assume that lack of clarity between resources and capabilities has not contributed to
under-repesentation of the RBV in the classroom, relative to the industrial organization
economics perspective.
The purpose of this paper is to make a contribution to the teaching of strategic
management (business strategy) by using an experiment to illustrate the differences
between resources and capabilities. In doing so, the experiment is used to illustrate the
notion that capabilities are embedded in organizations (Makadok, 2001), and capabilities
are the major determinant of superior organizational competitive advantage (Grant,
1991; Makadok, 2001; Amit & Shoemaker, 1993). Put differently, the experiment
illustrates that capabilities rather than resources drive superior firm performance
(Makadok, 2001; Amit & Shoemaker, 1993; Grant, 1991; Ethirajet et al, 2005) in
line with the conceptual distinction between resources and capabilities proposed by
Makadok (2001). Importantly, because students understand Makadok (2001) analysis
better, the experiment drew conceptual guide from it. Second, some scholars believe
that Makadok"s definition may be apt. For example, Hoopes, Madsen and Walker (2003:
890) argued that the way Makadok (2001) differentiated resources from capabilities was
masterfully crafted. Third, the use of experiments in which students were practically
and actively involved in expressing the difference between resources and capabilities
is consistent with previous research suggesting that students" conceptual understanding
is enhanced by practical component of teaching (Reid & Johnston, 1999). In this sense,
our approach is consistent with recent definitions and stipulations of classroom research
proposed by Loyd, Kern and Thompson (2005). Finally, Makadok"s distinction between
resources and capabilities has been used in empirical studies (Ethiraj et al, 2005:27)
focusing on the sources of firm-level superior competitive advantage. In sum, our
research ive is as follows.
Formally, the ive of this classroom research (experiment) is to use the experiment
involving active participation of students to illustrate the difference between resources
and capabilities—a controversial area of extant strategic management. In this research
design, every thing tangible used in this experiment is regarded as a resources as shown
in Table 1. Conversely, every other thing intangible used in the experiment are labeled
capabilities. Like capabilities, these intangibles are unobservable, they cannot be
touched, they cannot be valued, and they are embedded in groups and in group members working cooperatively to attain a given ive. This distinction is draws from the
literature review tracing the genesis of the concept of resources and capabilities as well
as the divergent views of scholars about them, as discussed below
The genesis of the notion of resources and capabilities can be traced to the landmark
works of Penrose (1959) and Andrew (1971). In her masterfully crafted analyses, Penrose
conceptualized that firms develop in unique history-dependent manners over time. In
this path-dependency, Penrose reasoned that, in their trajectories of development, each
firm develops its own idiosyncratic pool of (heterogeneous) resources so that the limits
of each firm"s growth can be found "inside" the firm in terms of the resources it was
able or unable to amass over time. However, Penrose went on to argue that, even though
resources (or factors) are available to all firms in the industry, the "capability" needed to
deploy these resources for superior returns is not uniformly distributed across firms in the
industry. In other words, Ricardian rent as rent accruing from superior resources requires
"capability" of the firm to deploy resources in ways other firms cannot. Consistent with
this line of reasoning, Andrews (1971) suggested that the "distinctive competence" of
a firm is not what the firm can do but what the firm can do in ways no other firm can
do it, hence the word distinctiveness.
Drawing from these earlier works as their springboard, scholars of the resource-based
view tradition hold divergent views about resources and capabilities, and their views
have distilled into two controversial streams (Ethiraj et al, 2005). According to Ethiraj
and his colleagues (2005), the first stream includes Barney (1991) and Peteraf (1993).
These gurus lump resources and capabilities together so that there is no clear-cut
distinction between resources and capabilities. To them, resources are "all assets,
capabilities, organizational processes, firm attributes, information, knowledge, etc."
(Barney, 1991: 101),
Conversely, the second stream attempts to draw seemingly clear distinctions between
resources and capabilities (Grant, 1991; Amit & Shoemaker 1993). Specifically, Amit
and Shoemaker (1993: 35) stated that:
resources consist... of know-how that can be traded, financial or physical
assets, human capital, etc,,,, [whereas] capabilities... refer to a firm"s capacity
to deploy resources"
Joining this latter stream. Grant (1991) argued that resources can be seen as "inputs"
into the production processes, so that without resources as inputs no production can
take place. Therefore, resources are at the epicenter of the essence for which firms
exist. In this light, Robert Grant argued that, an anatomy of a firm"s resources is
tantamount to an x-ray of what the firm can do. Thus, if one wants to know what a
particular firm exists for, one should take an x-ray of the firm"s resource configuration.
From another angle. Grant argued that defining a firm"s business in terms of what its
resources permit it do rather than the needs it professes to satisfy—offers a lasting
basis for firm strategy (p, 116), Finally, Grant cautioned that, even though resources are
indispensable to the organization"s production capacity, resources cannot be productive by themselves because they require co-operation and co-ordination to be productive.
By these latter requirements, Grant (1991: 118) brought the notion of firm capabilities
into his analysis and clearly stated that "There is a key distinction between resources
and capabilities."
Joining this latter stream to draw specifically from Amit and Shoemaker (1993: 35),
Makadok (2001:389) defined a capability "as a special type of resource—specifically,
an organizationally embedded nontransferable firm-specific resource whose purpose
is to improve the productivity of the other resources possessed by the firm." [italics
in the original]. By and large, the following key strands of Makadok"s definitions are
noteworthy.
First, a resource is tangible and hence observable, and thus it can be valued and traded.
However, this is not always the case because, even though a parcel of land is tangible,
observable, and can be valued and traded, brand image, patent and license are resources
which are not tangible and hence cannot be valued. In this sense, not all resources are
"necessarily tangible." Second, conversely, capabilities are necessarily intangible and
thus unobservable. These characteristics suggest two things about capabilities: (a)
capabilities cannot be valued in monetary terms, and (b) capabilities are embedded in
employees and teams of employees within the organization. By this latter characteristic,
capabilities cannot be transferred outside the organizational boundaries without
transferring the entire organization or its units. Once the notion of non-transferability
of capabilities enter the discussion, the distinctions between resources and capabilities
become clearer because, inasmuch as capabilities cannot be transferred without
transferring the organization or its units, resources can be transferred.
Additionally, non-transferability of capabilities subsumes the notion that capabilities
are intertwined with tacit knowledge, previous works including Makadok (2001) were
silent about the fact that capabilities are enshrined in tacit knowledge. This link between
capabilities and tacit knowledge became glaringly obvious during our experiment when
a student remarked that "There is no way I can steal another student"s soup-making
capabilities because that knowledge is buried in the heads of each student." Importantly,
juxtaposing capabilities and tacit knowledge reveals how capabilities can be a source of
inimitable and sustainable superior competitive advantage to the organization. Finally,
capabilities leverage productivity of other resources within it"s role as the productivityenhancer
(Makadok, 2001) which parallels the intermediate goods notion of capabilities
(Amit & Shoemaker, 1993). In this sense, capabilities are more than catalysts since they
are enablers to other resources.
All in all, in spite of these conceptual and empirical differences about resources and
capabilities, there is a consensus that resources are at the epicenter of organizational
competitive advantage and performance (Barney, 1991; Nelson & Winter, 1982;
Wernerfelt, 1982). Consistent with this notion, Wernerfelt (1984) conceptualized resource
strengths as the analog of entry barriers, and he argued that a firm"s strategy may include
the capability to develop unique products and services within the bounds of its own unique resources. In like manner, Mahoney and Pandian (1992) argued that resources
can be barriers to imitation similar to entry barriers of the industrial organization (I/O)
perspective. That is, a firm"s capability to combine resources in ways that are not easily
imitated or substituted by rivalries, is a source of competitive advantage. Corroborating
these views. Nelson and Winter (1982) conducted their anatomy of resources within
the paraphernalia of their concept of "organizational routines." In this framework,
organizational routines are the regular, predictable patterns of activities performed by
the organization to produce the products or services for which the organization exists.
From this angle, organizational routines are the analogue of human DNA—the core
map of the living being. Analogously, just as a human being"s DNA contains his/her
genetic make-ups, an organization"s routines are analogue of the organization"s DNA.
We now turn to the experiment.

Methodology
This study was conducted in a strategic management (business strategy) class for graduating seniors (two males and eleven females) in a college-university system in the southern part of the United States, To control for gender bias, nine students were randomly selected from eleven females, so that there was no male involvement in the experiment. The experiment had three groups (A, B & C) so that each group had three female students (photographs can be obtained on request). The non-participating two
male and two female students were allowed to observe the experiment. Ages of the participants ranged from 24 to 27 (M=25, SD=1,23), further discussion of participants appears below.
Again, in order to address the above research question, students were randomly assigned into one of three groups: Groups A, B and C, Our model is based on the idea that each of the three groups is a restaurant specializing in soup making such that the three groups constitute the soup-making restaurant industry. Importantly, however, the use of three groups implies that in the real world the restaurant industry is an oligopoly. This is incorrect. We used three groups because the class size could not permit more than three groups. Any way, the three-group model does not dilute the purpose and significance
of the experiment. To ensure that the three groups were the same in terms of resource positions (possessions), the following protocols were used to implement additional statistical controls.
Following Makadok"s definition of resources discussed above, the materials and ingredients for the soup-making experiment were considered to represent resources in the restaurants industry. In this sense, since all firms in an industry face the same resources and resource prices (Ethiraj et al, 2005; Makadok, 2001), the three groups were given the same soup-making materials as resources to refiect this notion. In this way, it follows that resources and their prices were the same for the three groups as the resource-based view argues (Amit & Shoemaker, 1993; Wernerfelt, 1984)... --Download Article