A resource-based perspective on the dynamic strategy-performance relationship: an empirical examination of the focus and differentiation strategies in entrepreneurial firms

Journal of Management, Winter, 1993 by Elaine Mosakowski

Small and newly rounded firms have received increasing attention in strategic management research. Several scholars have formulated stage models of new firm development (e.g., Greiner, 1972; Kazanjian, 1988; Drazin & Kazanjian, 1990; Miller & Friesen, 1984; Van de Ven, Hudson, & Schroeder, 1984). Others have examined the strategies and strategic planning systems of primarily small, and sometime newly rounded, firms (e.g., Robinson & Pearce, 1983, 1984; Bracker & Pearson, 1986; Bracket, Keats, & Pearson, 1988; Miller, 1983; Shan, 1990; Covin & Slevin, 1989). Nonetheless, little research has combined these developmental and strategic streams (Cooper, 1979; Mintzberg & Waters, 1982; Boeker, 1989; Feeser & Willard, 1990).

Understanding how organizational development, firm strategies, and economic performance interact would shed light on how firms establish competitive advantage. To address this, we adopt a resource-based perspective, which focuses on the creation or acquisition of unique, rare, or specialized resources (Penrose, 1959; Rubin, 1973; Lippman & Rumelt, 1982; Wernerfelt, 1984; Barney, 1986a; 1991; Teece, 1980; 1982; 1986a; 1986b; Dierickx & Cool, 1989; Conner, 1991). The resource-based perspective provides an explanation for how a firm's resources--which relate to firm strategies (Hatten & Hatten, 1987; Wernerfelt, 1984; Barney, 1986a)--influence its subsequent performance.

This research shares the extant strategy research's concern with the strategy-performance relationship. We also examine two strategic choices that have been frequently examined in strategic management research--namely, the focus and differentiation strategies. We use a resource-based perspective to study the relationship between the focus and differentiation strategies and firm performance as one approach to delving into the dynamics of this relationship. Unfortunately, these dynamics have often been overlooked (Ginsberg, 1988). Much strategy research implicitly assumes a long-run, equilibrium perspective by ignoring the timing of when costs are incurred and revenues are generated (Tuma & Hannan, 1984). For example, discount rates are seldom used in strategy research, even though averaging variables over 4 or 5 years is a common practice.

In this research, we employ the resource-based perspective to examine the timing of the costs and revenues associated the focus and differentiation strategies. To do so, we study the strategy- performance relationship over a brief, but critical, period in a firm's developmental process--the time after a firm has undergone an initial public offering of stock (IPO). This period is especially illustrative of firm dynamics since strategies often change in response to the influx of capital from the IPO and performance sights may now shift to the shorter term. This combination of characteristics--changing strategic postures and an emphasis on short-run performance--provides a window into the immediate performance outcomes associated with the changes in a firm's unique or specialized resources.

In the next section, we develop a theoretical framework drawn from a resource-based perspective. From this framework, we propose a model of the strategy-performance relationship and describe the research design that was used to estimate this model. Finally, we present and discuss the results of this estimation.

Theory

A resource-based perspective examines the economic returns to resources that a firms either owns, acquires, or develops. For a resource to generate above-normal returns (rents) and be a source of sustainable competitive advantage, Barney (1991) asserts that it must be valuable, rare or unique among a firm's competitors,(1) imperfectly imitable, and that strategically equivalent substitutes are either rare or imperfectly imitable.

Consider a simple example of the evolution of a firm's resources. Entrepreneurial talent, defined here as the ability to identify untapped business opportunities (Kirzner, 1973), may be a resource held by the firm at its rounding that satisfies the conditions Barney set forth as necessary for sustaining competitive advantage. Naturally, the nascent firm may also already hold other resources that meet these conditions, such as particular physical, human, or organizational assets, as well as the firm may acquire or develop additional resources that complement the firm's original cache of resources as it grows. Some resources may become specialized to others--in essence, producing a bundle (or bundles) of co- specialized assets (Teece, 1986a; 1986b; Conner, 1991;Barney, 1991). In the example of a firm possessing the entrepreneurial talent for identifying business opportunities, the firm may need to acquire complementary managerial talent for building an organization that can exploit these opportunities (Hambrick, 1987), which may in turn call for the development of certain individual and organizational resources. As Wernerfelt (1984) has suggested for a multibusiness firm--but which may also apply to a single business context--the essence of a firm's strategic decisions is how to use its existing resources and how to acquire or internally develop additional unique resources.(2)