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MANAGING FIRM RESOURCES IN DYNAMICENVIRONMENTS TO CREATE VALUE: LOOKING

INSIDE THE BLACK BOX

DAVID G. SIRMONMICHAEL A. HITT

R. DUANE IRELANDTexas A&M University

We address current criticisms of the RBV (oversight of dynamism, environmentalcontingencies, and managers’ role) by linking value creation in dynamic environmen-tal contexts to the management of firm resources. Components of the resource man-agement model include structuring the resource portfolio; bundling resources to buildcapabilities; and leveraging capabilities to provide value to customers, gain a com-petitive advantage, and create wealth for owners. Propositions linking resource man-agement and value creation are offered to shape future research.

Indeed, the heart of business management andstrategy concerns the creation, evaluation, ma-nipulation, administration, and deployment ofunpriced specialized resource combinations(Lippman & Rumelt, 2003: 1085).

The primary pursuit of business is creatingand maintaining value (Conner, 1991). The re-source-based view (RBV) suggests that firms’ re-sources drive value creation via the develop-ment of competitive advantage (Ireland, Hitt, &Sirmon, 2003). Specifically, the RBV suggeststhat possessing valuable and rare resourcesprovides the basis for value creation. This valuemay be sustainable when those resources arealso inimitable and lack substitutes (Barney,1991). However, merely possessing such re-sources does not guarantee the development ofcompetitive advantages or the creation of value(Barney & Arikan, 2001; Priem & Butler, 2001). Torealize value creation, firms must accumulate,combine, and exploit resources (Grant, 1991; Sir-mon & Hitt, 2003). Unfortunately, there is mini-mal theory explaining “how” managers/firmstransform resources to create value (Priem &Butler, 2001). Therefore, the RBV requires furtherelaboration to explain the link between themanagement of resources and the creation ofvalue. To fully understand this linkage, the ef-

fects of a firm’s external environment on man-aging resources need to be examined (Bettis &Hitt, 1995). RBV research is essentially silentabout these effects.

Resource management is the comprehensiveprocess of structuring the firm’s resource portfo-lio, bundling the resources to build capabilities,and leveraging those capabilities with the pur-pose of creating and maintaining value for cus-tomers and owners. Structuring the resourceportfolio involves using processes (i.e., acquir-ing, accumulating, and divesting) to obtain theresources that the firm will use for bundling andleveraging purposes. Bundling refers to the pro-cesses (i.e., stabilizing, enriching, and pioneer-ing) used to integrate resources to form capabil-ities. Leveraging involves the set of processes(i.e., mobilizing, coordinating, and deploying)used to exploit capabilities to take advantage ofspecific markets’ opportunities. Thus, throughan external orientation, the purpose of leverag-ing is to use capabilities to create solutions forcurrent and new customers (Kazanjian, Drazin, &Glynn, 2002).

From the firm’s perspective, value creation be-gins by providing value to customers. When thefirm produces greater utility for customers thancompetitors do, it enjoys a competitive advan-tage. In turn, a competitive advantage contrib-utes to increased owner wealth when the firm’slong-term profit margin is positive (Hoopes,Madsen, & Walker, 2003; Powell, 2001). Thus,value creation occurs when a firm exceeds itscompetitors’ ability to provide solutions to cus-

We gratefully acknowledge the helpful comments pro-vided on earlier versions of this paper by Jeff Covin and JeffHarrison and by colleagues in research seminars presentedat INSEAD, Texas A&M University, and The University ofWestern Ontario.

� Academy of Management Review2007, Vol. 32, No. 1, 273–292.

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tomers’ needs, while maintaining or improvingits profit margins. Value creation is optimizedwhen a firm synchronizes the processes in andbetween each resource management componentsuch that the difference between the firm’s costsand the price paid by consumers is optimized.

Additionally, the processes involved in manag-ing resources are affected by the environmentalcontext in which the firm operates (Lichtenstein &Brush, 2001). Because of high environmental un-certainty and varying degrees of environmentalmunificence, sustaining a competitive advantageover time is unlikely, with the result that a firminstead will seek to develop a series of temporarycompetitive advantages (Morrow, Sirmon, Hitt, &Holcomb, in press). Creating a series of temporaryadvantages allows the firm to create new valuewhile maintaining the value created in previousperiods. Thus, effectively and efficiently manag-ing resources within a firm’s given environmentalcontext ultimately determines the amount of valuethe firm generates and maintains over time (Ire-land & Webb, 2006).

Our work enhances the knowledge about theRBV and contributes to research on its efficacy.Priem and Butler (2001) have argued that previ-ous work on the RBV has not provided informa-tion on how resources are used to create a com-petitive advantage. Additionally, Barney andArikan (2001) have suggested that past researchon the RBV assumes that the actions necessaryto exploit resources are self-evident when theyare not. Thus, we develop a model depicting theprocess of managing resources with the inten-tion of creating value. Another important contri-bution of this work is situating the managementof resources within the environmental context,thereby integrating the RBV, which has beenfocused on internal firm attributes, with theorieson a firm’s competitive environment.

We organize the paper as follows. First, weintegrate the RBV, contingency theory, and or-ganizational learning theory to form the model’stheoretical base. Using this base as a founda-tion, we then develop a theoretical model of theresource management process. Critical environ-mental conditions that affect the resource man-agement process are examined. We then ex-plore each of the resource managementcomponents’ processes to develop propositionsregarding the effects of environmental contin-gencies on the linkage between the processesand potential value creation. We conclude with

implications and recommendations for future re-search.

THEORETICAL BASE

Ricardo (1817) argued that superior productionfactors generate economic rents for their own-ers. His famous farmland example demon-strated that when resources have different pro-duction levels and the more productiveresources are scarce, the owner generates ab-normal profits. This logic provides the founda-tion of the RBV (Makadok, 2001). Additionally,based on the assumptions of heterogeneouslydistributed resources and imperfect resourcemobility, valuable, rare, inimitable, and non-substitutable resources can lead to long-lastingcompetitive advantage (Barney, 1991; Peteraf,1993). Empirical evidence supports this logic(see Barney & Arikan, 2001, for a review).

However, the processes by which firms obtainor develop, combine, and leverage resources tocreate and maintain competitive advantagesare not well understood. For example, Barneyand Arikan state that “resource-based theoryhas a very simple view about how resources areconnected to the strategies the firm pursues”(2001: 174). Castanias and Helfat argue that “theskills of top management combined with otherfirm assets and capabilities jointly have the po-tential to generate rent” (2001: 665). These state-ments suggest that possessing valuable, rare,inimitable, and nonsubstitutable resources is anecessary but insufficient condition for valuecreation. Indeed, value is created only when re-sources are evaluated, manipulated, and de-ployed appropriately within the firm’s environ-mental context (Lippman & Rumelt, 2003).

The importance of the environment for man-aging resources suggests that contingency the-ory logic should be integrated into our under-standing of the RBV. Although research of thistype has been completed, it has been focused, todate, on understanding when a resource is valu-able (Priem & Butler, 2001). Miller and Shamsie(1996), for example, found that property-basedresources are more valuable in stable environ-ments, whereas knowledge-based resources aremore valuable in uncertain environments. Brushand Artz (1999) discovered that the value of ca-pabilities differs based on the services offeredby the firm and the level of information asym-metries in the environment. Aragon-Correa and

274 JanuaryAcademy of Management Review

Sharma (2003) argued that a firm’s competitivecontext affects the value of its resources in de-veloping proactive, natural environment strate-gies. While these results are informative, pursu-ing contingency theory’s focus on the “fit”between environmental contingencies and in-ternal configurations may lead to greater under-standing of how resources can be managed tooptimize value creation, because firms do notoperate in a vacuum (for a review, see Donald-son, 2001).

Organizational learning is the “acquisition ofnew knowledge by actors who are able and will-ing to apply that knowledge in making deci-sions or influencing others in the organization”(Miller, 1996: 486). Organizational learning is es-pecially important for the effectiveness and ef-ficiency of resource management in dynamicenvironmental conditions. Organizationallearning provides firms with a potential capac-ity for “strategic flexibility and the degrees offreedom to adapt and evolve” (Zahra & George,2002: 185). Learning of this type is often termedhigh-level learning or metalearning (Fiol &Lyles, 1985). Metalearning considers previousaction/results relationships (i.e., feedback) criti-cal for creating and maintaining value throughconstant development (Lei, Hitt, & Bettis, 1996).In dynamic environments, learning can be ofgreat importance in helping the firm adapt andmaintain an acceptable fit with its environmentwhile seeking to satisfy customers’ needs (Luo &Peng, 1999). Organizational learning is evenmore critical in less munificent environments,because resource scarcity may prolong the ef-fects of poor resource management choices.Thus, environmental munificence likely willhave an effect on the amount of resourcesneeded, as well as how those resources are ac-quired and leveraged (Keats & Hitt, 1988).

THE RESOURCE MANAGEMENT PROCESS

Resource management is critical to value cre-ation because using resources is at least as im-portant as possessing or owning them (Penrose,1959). Furthermore, a firm’s resource manage-ment process can produce different outcomes fororganizations holding similar resources andfacing similar environmental contingences (Zott,2003). Therefore, heterogeneity in firm outcomesunder similar initial conditions may result from

choices made in the structuring, bundling, andleveraging of resources.

Figure 1 presents the causal flow of the re-source management model. Based on processes,the model incorporates a temporal dimension.However, because the firm must have resourcesto bundle into capabilities and because capa-bilities must exist for leveraging to occur, theresource management process is at least par-tially sequential in nature. Furthermore, themodel incorporates feedback loops allowingcontinuous adaptation for synchronization andfit with the environment. Thus, the managementof resources is dynamic, with change resultingfrom adapting to environmental contingenciesand from exploiting opportunities created bythose contingencies. Additionally, Table 1 ispresented to facilitate identification of and tohelp distinguish the processes noted in the re-source management model.

Environmental Contingencies

Environmental dynamism concerns theamount of uncertainty emanating from the ex-ternal environment (Baum & Wally, 2003). Uncer-tainty is created by instability in the environ-ment that produces deficits in the informationneeded to identify and understand cause-and-effect relationships (Carpenter & Fredrickson,2001; Keats & Hitt, 1988). An information deficitaffects the way firms must manage resources tocreate value. For example, uncertainty in theindustry or in potential competitors’ actions af-fects the type and amount of resources neededin the resource portfolio, the capabilities neces-sary to outperform rivals, and the leveragingstrategies required to gain and maintain a com-petitive advantage. Dynamism is reflected bythe regularity in and amount of change occur-ring in the environment. Thus, changes in indus-try structure, the stability of market demand,and the probability of environmental shocks areimportant elements producing uncertainty inthe environment.

Dynamics of industry structure, boundaries,and recipes. Industry structure affects the de-gree of competitive rivalry and uncertainty. Theextent of entry barriers in an industry affects theamount of competition a firm experiences (Por-ter, 1980, 1985). In turn, the degree of competitionand the amount of rivalry it spawns createchange that enhances the potential for uncer-

2007 275Sirmon, Hitt, & Ireland

tainty. However, industry recipes, which are theorganizational routines necessary to compete ina particular industry (Spender, 1989), can mod-erate the extent to which the degree of competi-tion and the amount of rivalry produce uncer-tainty. Industry recipes provide heuristics ordecision rules that guide managerial actions.

But as industry boundaries blur in the compet-itive landscape, industry recipes become lesswell-defined. Additionally, industry recipes arenot necessarily stable across different institu-tional and cultural environments (Wan & Hos-kisson, 2003), and heightened competition inglobal markets has placed a premium on inno-vation in most industries (Bettis & Hitt, 1995; Kim& Mauborgne, 1997). Innovations often make in-dustry recipes less relevant, especially when

they are radical and/or introduced frequently.Additionally, technological changes (environ-mental shocks) or developments in tangentialindustries may drastically affect the validity ofrecipes in mature industries. Technological de-velopments can also make industry boundariesless clear (e.g., telecommunications industry),increasing the difficulty of identifying competi-tors and determining the value the firm’s prod-ucts create for customers. All of these factorsincrease environmental uncertainty.

(In)stability of market demand. Market de-mand can shape an industry’s competitive dy-namics. While demand is growing, less rivalryamong competitors usually exists, because in-creasing demand affords opportunities for allfirms. However, as markets mature and demand

FIGURE 1A Dynamic Resource Management Model of Value Creation


stabilizes, rivalry often increases. Alternatively,large fluctuations in demand (e.g., owing tochanges in the macroeconomic environment) of-ten increase rivalry and produce uncertainty.

Adner (2002) found that market demand affectsthe introduction of new technologies. For exam-ple, demand affects firms’ willingness (need) todevelop and introduce innovations. When mar-ket demand is high or growing, firms are morewilling to invest in the development of new tech-nology because they perceive greater opportu-nities for receiving returns on them. In turn,these innovations affect consumer expectationsand thereby affect competitors’ behavior as well(Adner, 2002).

Therefore, while reductions or stability in de-mand often increase competitive rivalry, grow-ing market demand can stimulate innovation, soboth increasing and decreasing demand canheighten competition (in different ways) andcontribute to increasing environmental uncer-tainty. To deal with the uncertainty from com-petitive rivalry or fluctuations in demand, moreand diverse resources may be required to de-velop new capabilities that can be leveraged inresponse to changes. Environmental shocks canalso substantially increase uncertainty.

Probability of environmental shocks. Environ-mental shocks (e.g., the destabilization of globalcurrencies and rapid privatization of state-owned enterprises) are unexpected events thatcreate discontinuities in an industry (Tushman& Anderson, 1986). Commonly, competitive ac-tions taken by firms outside a focal industrycreate environmental shocks. For example, afirm external to an industry may introduce anew product that performs the functions of theindustry’s existing dominant product more effi-ciently, thus serving as a substitute for it. Thisaction represents a form of Schumpeterian cre-ative destruction (Schumpeter, 1934). When suchshocks occur, the relevance of an industry’s rec-ipes declines or may even disappear. The intro-duction of a “disruptive technology” can createthis outcome.

The development and introduction of wirelesstechnology into a marketplace (e.g., telecommu-nications) exemplifies what Christensen (1997)termed a disruptive technology. Disruptive tech-nologies create significant uncertainty. For ex-ample, the knowledge sets necessary to buildproducts compatible with wireless technologydiffer significantly from those associated withmore conventional wired technology. Thus,

TABLE 1Resource Management Processes and Distinctions

Components/Subprocesses Description

Structuring Refers to the management of the firm’s resource portfolio

Acquiring The process of purchasing resources from strategic factor marketsAccumulating The process of developing resources internallyDivesting The process of shedding firm-controlled resources

Bundling Refers to the combining of firm resources to construct or alter capabilities

Stabilizing The process of making minor incremental improvements to existing capabilitiesEnriching The process of extending current capabilities; although the degree of enrichment can

vary, it extends beyond keeping skills up to datePioneering The process of creating new capabilities with which to address the firm’s competitive

context

Leveraging Refers to the application of a firm’s capabilities to create value for customers andwealth for owners

Mobilizing The process of identifying the capabilities needed to support capability configurationsnecessary to exploit opportunities in the market

Coordinating The process of integrating identified capabilities into effective yet efficient capabilityconfigurations

Deploying The process of physically using capability configurations to support a chosenleveraging strategy, which includes the resource advantage strategy, marketopportunity strategy, or entrepreneurial strategy


firms must seek new resources to compete innew markets created by the disruptive technol-ogy (new industry; Ireland et al., 2003). In thisnew environment with ambiguous require-ments, firms may need to recombine resourcesto develop new capabilities, and they may needto design and employ different leveraging strat-egies to exploit their new and current capabili-ties.

Environmental munificence. Environmental mu-nificence, “the scarcity or abundance of criticalresources needed by (one or more) firms operatingwithin an environment” (Castrogiovanni, 1991:542), is also an important contingency factor inmanaging resources. For example, dynamic envi-ronments with low munificence are substantiallydifferent from dynamic environments with highmunificence (Rajagopalan, Rasheed, & Datta,1993), and both have different implications for howresources must be managed to create value. Inparticular, environments low in munificenceheighten the importance of managing resourceseffectively, because they may not be readily avail-able to the firm when needed. Thus, managerialskills in selecting and/or developing resources be-come increasingly important to firm success.

In total, because environments vary in theirdegree of uncertainty and munificence and be-cause these conditions affect the potential valueof a firm’s resources and capabilities, value cre-ation based on resource management is at leastpartly contingent on a firm’s external environ-ment. Thus, we integrate contingency theorywith the RBV and organizational learning theoryto explain the resource management processes.We begin the discussion with the structuringcomponent.

Structuring the Resource Portfolio

The resource portfolio is the sum of all firm-controlled resources (i.e., tangible and intangi-ble assets). The resource portfolio establishesthe upper bounds of a firm’s potential valuecreation at a point in time (Makadok, 2003).

Structuring the resource portfolio is the pro-cess by which firms acquire (Barney, 1986; Den-rell, Fang, & Winter, 2003; Makadok, 2001), accu-mulate (Dierickx & Cool, 1989; Thomke &Kuemmerle, 2002), and divest resources. Thesubprocesses of structuring (acquiring, accumu-lating, and divesting) are affected by the envi-ronmental context, which, in turn, determines

their contribution to the firm’s potential valuecreation (Miller & Shamsie, 1996). For example,environmental uncertainty strongly influencesthe efficiency of factor markets (Denrell et al.,2003), the likelihood of radical change in cus-tomer demands, and the likelihood of increas-ingly centralized decision making (Keats & Hitt,1988). Therefore, managers must adjust thestructuring subprocesses according to the de-gree of environmental uncertainty and munifi-cence; doing so affects the firm’s ability to createvalue through the subsequent bundling and le-veraging processes.

Acquiring. Acquiring refers to purchasing re-sources from strategic factor markets (Barney,1986). Commodity-like resources (e.g., equip-ment), intangible resources (e.g., intellectualcapital), and complex sets of tangible and intan-gible resources via mergers and acquisitions(Denrell et al., 2003) are examples of resourcesavailable from strategic factor markets. Theprice paid for the acquired resource(s) greatlyaffects that resource’s contribution to the firm’sability to create value, especially in terms ofowners’ wealth.

Barney (1986) has suggested that the prospectsof acquiring resources to simultaneously con-tribute to competitive advantage and ownerwealth are low, because strategic factor marketsare efficient. Thus, the prices paid for resourcesreflect their expected contribution to a competi-tive advantage. However, Denrell et al. (2003)have argued that strategic factor markets oftenhave incomplete information on new resourcesor old resources to be used in new ways (un-known to the market). As such, these markets donot accurately price new resources or resourcesto be used in unexpected ways. Because of thisuncertainty, there may be more opportunities toacquire resources below their true market valuethan previously thought.

Uncertainty also creates ambiguity regardingthe resources needed to develop and maintain acompetitive advantage. This ambiguity sug-gests that firms need a repertoire of resources,especially intangible resources, because theyare often the most flexible. Simply put, slackresources are needed to alter current capabili-ties or to create new ones in response to envi-ronmental changes (either opportunities orthreats). However, building a repertoire of fullydeveloped and functioning slack resources (e.g.,specific knowledge sets, relationships with


other agents, etc.) is likely to be prohibitivelycostly and risky in highly uncertain environ-ments. Rather than full-scale investment in spe-cific resources, firms may be better served byacquiring resources that “allow preferential ac-cess to future opportunities,” often referred to asreal options (Bowman & Hurry, 1993: 762). Realoptions present the firm with a greater variety offuture opportunities to alter existing capabili-ties or to create new ones while containing thedownside risk and costs of doing so to only theloss of the initial investment in the option. Ac-quiring real options then allows the firm to re-main flexible while limiting the cost of that flex-ibility. Thus, under conditions of uncertainty,acquiring some resources as real options prag-matically increases the firm’s range of viableresponses to environmental change in the formof opportunities and threats (McGrath & Nerker,2004).

Real options may be especially importantwhen environmental shocks occur because theycan provide the flexibility needed to redirect thefirm toward new opportunities. Thus, while realoptions may be less important in a munificentenvironment because of resources available, inless munificent environments they are increas-ingly valuable because they provide the flexi-bility needed to respond to environmental op-portunities and threats. Therefore, we arguethat, in addition to the market’s inability to ac-curately price all alternative uses of resources,highly uncertain markets are ones in which afirm acquires resources as real options (empha-sizing intangible resources). Resources as op-tions provide the flexibility needed for the firmto respond to expected (high competitive rivalry)and/or substantial (introduction of a new tech-nology) environmental change. Thus, acquiringreal options increases the firm’s ability to createvalue under conditions of high environmentaluncertainty. These arguments lead to the follow-ing proposition.

Proposition 1a: Under conditions ofhigh environmental uncertainty, ac-quiring resources that allow preferen-tial access to a greater variety of op-portunities increases a firm’s potentialvalue creation. Resources as real op-tions can be especially valuable inuncertain environments with low mu-nificence.

Accumulating. Accumulating refers to the in-ternal development of resources. Accumulatingis necessary because strategic factor marketsare unlikely to provide a firm with all its re-quired resources, especially when environmen-tal munificence is low.

Internal development of resources enhancestheir isolating mechanisms, such as causal am-biguity (Thomke & Kuemmerle, 2002). While iso-lating mechanisms decrease threats of imita-tion, thus increasing the maintainability of anadvantage based on that resource, greater in-imitability may not be the primary goal of accu-mulating. Under conditions of uncertainty, firmsmay be less able to respond to unexpected op-portunities or significant competitors’ actionswithout appropriate resources. For example, if afirm lacks an adequate number of people withmanagerial skills, it may be unable to respondto a market opportunity to introduce a new prod-uct or service when the demand for it appears.This inability to respond may allow competitorsto exploit the opportunity. Building the manage-rial knowledge and skills of professional em-ployees can create a pool of people who canassume managerial positions when the needarises. Internal development of resources be-comes even more critical in less munificent en-vironments, in that resources cannot be easilyacquired from external factor markets in theseenvironments. Thus, a firm may create real op-tions by developing its resources internally inanticipation of future needs.

Accumulating often requires learning. For ex-ample, to develop a firm’s intellectual capitaland enhance managerial skills, employees mustincrease their tacit knowledge. Assigning non-managers and/or relatively inexperienced man-agers to work on projects along with experi-enced managers can help these employeesdevelop managerial tacit knowledge. Yet, insome cases, the firm may not possess theneeded tacit knowledge. In these instances, thefirm might form strategic alliances with compa-nies with the desired knowledge (Lane & Lubat-kin, 1998). Strategic alliances can be especiallyvaluable for learning new knowledge in envi-ronments of low munificence. Using alliances todevelop tacit technical and managerial knowl-edge is common among firms from emergingmarkets—markets often characterized by lowmunificence (Hitt, Dacin, Levitas, Arregle, &Borza, 2000). Alliances used in this fashion can


be viewed as real options (Kogut, 1991). In otherwords, after alliances are initiated, the partnersmay invest more in the relationship to accumu-late additional resources, such as tacit knowl-edge. Managers are only likely to make theseadditional investments when they believe thatthere is a reasonable probability they will pro-duce desired gains. Accumulating resources viareal options, then, is an efficient means to pre-pare the firm to create new and/or improvedresources.

Firms often need new and/or improved re-sources to respond to changing customer de-mands, especially when major changes occur inthe external environment (e.g., environmentalshocks). However, in environments with low mu-nificence, such resources need to be internallydeveloped (accumulated). Firms failing to con-sistently invest in and create real options areless capable of responding to environmentalchanges than those making such investments.These arguments lead to the following proposi-tion.

Proposition 1b: Under conditions ofhigh environmental uncertainty, ac-cumulating resources that allow pref-erential access to a greater variety ofopportunities increases a firm’s poten-tial value creation. The importance ofinternal resource development in-creases in environments with low mu-nificence.

Divesting. Divesting refers to the shedding offirm-controlled resources. Because firms havefinite resources, it is imperative that they ac-tively evaluate current resources and divestless-valued resources to generate the slack andflexibility needed to acquire or accumulate re-sources of higher value (Sirmon & Hitt, 2003;Uhlenbruck, Meyer, & Hitt, 2003). Thus, resourcesthat are not likely to contribute to developing ormaintaining a competitive advantage or excessresources that cannot be bundled and leveragedprofitably are viable candidates for strategic di-vestment. Layoffs of human capital, divestituresof noncore businesses, sell-offs of specific as-sets, spin-offs of businesses, and outsourcing offunctions are examples of strategic resource di-vestitures.

However, research suggests that because ofsunk-cost biases or organizational inertia, firmsfrequently delay divestment of underperforming

assets (Shimizu & Hitt, 2005). Moreover, selectingthe appropriate resources to divest is challeng-ing. Firms investing in real options are oftenunaware of resources’ future value (Miller & Ari-kan, 2004). Sometimes, in the haste to reducecosts in response to changes in competitive oreconomic conditions, firms often divest valuableresources, thereby harming their ability to buildcapabilities that can be leveraged successfully.For example, firms commonly lay off significantnumbers of employees when the economy entersa recession or competitors capture some of theirmarket share. However, these layoffs can reducethe firm’s intellectual capital and harm its abil-ity to take advantage of opportunities when theeconomy rebounds, or can leave it without thecapabilities needed to regain lost market share(Nixon, Hitt, Lee, & Jeong, 2004).

Divesting only contributes to value creationto the extent that it reduces the firm’s tangible(e.g., maintenance, investments, etc.) or intan-gible (e.g., opportunity costs, managerial at-tention) costs without sacrificing a currentcompetitive advantage or the seeds of futureadvantages. Effective divesting requires athorough understanding of a resource’s cur-rent ability and future potential to contributeto value creation. However, under conditions ofuncertainty, the future potential of resources tocreate value is extremely difficult to evaluate.Therefore, layoffs based on arbitrary metrics,such as seniority, are less likely to increase thefirm’s potential to create value for customers. Incontrast, strategic divesting involves only thehuman capital deemed unable to contribute tovalue creation (Cascio, 2002).

When operating in uncertain environments,top-level managers have a tendency to central-ize decision making to gain more control (Keats& Hitt, 1988). This centralization creates greaterinternal information asymmetries. Top-levelmanagers are less likely to have a full under-standing about the value of the firm’s resources,creating the possibility that they are more likelyto divest resources with future (perhaps evencurrent) value-creating potential. These manag-ers are also likely to experience informationoverload, reducing their ability to make effec-tive decisions about appropriate resource di-vestments. Thus, environmental uncertainty islikely to reduce the effectiveness of resourcedivestiture decisions—that is, more errors willbe made in divesting resources when firms op-


erate in highly uncertain environments. Theseerrors will be magnified in environments of lowmunificence because of the difficulty in replac-ing the resources divested in error. Under con-ditions of high environmental uncertainty andlow munificence, firms should be better able tocreate value for customers with little or no di-vestiture of resources. These arguments lead tothe following proposition.

Proposition 1c: Under conditions ofhigh environmental uncertainty, di-vesting resources can harm a firm’svalue creation potential. Extreme cau-tion should be exercised in divestingresources, especially in uncertain en-vironments with low munificence.

While structuring is important, this processalone is insufficient to create value for custom-ers and owners. Indeed, the resource portfolioprovides the basis for developing capabilities. Acapability is an ability “to perform a coordi-nated set of tasks utilizing organizational re-sources” (Helfat & Peteraf, 2003: 999). Bundlingresources into capabilities is a necessary step inappropriating the potential value embedded inthe firm’s resource portfolio.

Bundling Resources

Bundling is the process by which capabilitiesare formed. Resources within the firm’s resourceportfolio are integrated (i.e., bundled) to createcapabilities, with each capability being aunique combination of resources allowing thefirm to take specific actions (e.g., marketing,R&D, etc.) that are intended to create value forcustomers. Commonly, customers want valuefrom a firm’s good or service in the form of asolution to a problem or satisfaction of a need.

Conceptually, capabilities, or resource bun-dles, range from small combinations of re-sources that are designed to perform less com-plex tasks to the higher-order concept of“patching” or integrating “chunks” of busi-nesses (Brown & Eisenhardt, 1999; Siggelkow,2002). Different types of bundling processes pro-duce specific capabilities. Thus, different bun-dling processes are necessary when the firm isattempting to produce incremental change thanwhen the goal is more substantial change in thefirm’s capabilities (Hamel & Prahalad, 1994). Ad-ditionally, the choice of bundling process is in-

fluenced by the uncertainty inherent in thefirm’s external environment. Higher levels of en-vironmental uncertainty increase the need forcreating new capabilities to function in differentenvironmental contexts. Stabilizing, enriching,and pioneering are the three different bundlingprocesses.

Stabilizing. The stabilizing bundling processis similar to the concept of coasting (Siggelkow,2002). The intent of stabilizing is to make minorincremental improvements in existing capabili-ties, such as requiring employees to attend aspecified number of training hours per year tokeep their knowledge and skills up to date.Oftentimes, firms holding a current competitiveadvantage use stabilizing with the intent tomaintain that advantage. Stabilizing can con-tribute to value creation for firms competing un-der conditions of low environmental uncertaintyand high environmental munificence. However,the enriching bundling process more commonlycreates value.

Enriching. The goal of an enriching bundlingprocess is to extend and elaborate a currentcapability. Although the degree of enrichmentcan vary, it extends beyond keeping skills up todate. Capabilities can be enriched by learningnew skills that extend the repertoire of currentskills or by adding a complementary resourcefrom the resource portfolio to the current bundle.An additional resource may have existed in theresource portfolio for some time, or it may havebeen developed or acquired recently with thepurpose of enriching a particular capability. Forexample, a pharmaceutical firm might use analliance with or an acquisition of a biotechnol-ogy firm to capture knowledge that enhances itsR&D capability.

The enriching process that integrates newlyacquired resources with an existing capabilityis similar to grafting (Puranam, Singh, & Zollo,2003). A pharmaceutical firm that attaches or“grafts” the biotechnology company’s productdevelopment capability onto its distribution ca-pability, thereby creating a new, higher-orderproduct commercialization capability, exempli-fies grafting. Grafting is designed to create syn-ergy among complementary resources so as toenrich capabilities. Greater enrichment is fre-quently necessary to create new value or tomaintain the current value created in highlyuncertain environments because of the inability


to easily predict customers’ needs or competi-tors’ actions.

Firms may gain competitive advantages byenriching current capabilities to provide greatervalue than competitors. However, enriched ca-pabilities are more likely to be imitated becausethey represent capability extensions. Maintain-ing a competitive advantage for a period of timecommonly requires new capabilities. Firms usethe pioneering process to create new capabili-ties.

Pioneering. Ahuja and Lampert (2001) havesuggested that instead of building on existingknowledge, a pioneering process is unique andrequires exploratory learning (March, 1991).Flowing from this learning, pioneering may in-volve the integration of completely new re-sources that were recently acquired from strate-gic factor markets and added to the firm’sresource portfolio. Bundling of this type is usu-ally based on Schumpeterian logic, with the in-tent of creating a new competitive advantage.Creativity and a broad and deep knowledgebase stimulate the creation of new and novelcapabilities. These characteristics enhance thelikelihood a manager will be able to identifyunique, value-enhancing ways of integratingthe functionalities of individual capabilities.

It is possible that managers may need to in-tegrate previously unrelated matrices of infor-mation, a process Smith and Di Gregorio (2002)refer to as bisociation. For example, managersat SmithKline acquired Beckman instruments toobtain access to its capabilities in diagnostictechnology. Because of the lack of obvious syn-ergy, analysts criticized the acquisition. How-ever, SmithKline managers intended to combinetheir drug research capabilities with the diag-nostic technological capabilities to create a newcapability in biomedical research (Hitt, Harri-son, Ireland, & Best, 1998). Thus, while the pio-neering bundling process may include the re-combination of existing resources, it ofteninvolves the integration of new resources withexisting ones to create new capabilities. As aresult, pioneering bundling may require a het-erogeneous team of experienced managers.

The need for new capabilities is more pro-nounced in uncertain environments, suggestingthat in highly uncertain environments, firmsmust continuously use pioneering bundling pro-cesses to gain and certainly to maintain a com-petitive advantage. Moreover, new capabilities

are needed to exploit opportunities becausethey are fleeting in dynamic environments. If afirm has to delay exploiting an opportunity onceidentified until the required capabilities are de-veloped, rivals may exploit it first, or the oppor-tunity may disappear.

Influence of environmental context on bun-dling processes. The types of bundling pro-cesses that can be used to optimize the valuecreated for customers and to develop and main-tain competitive advantages are contingent onthe degree of environmental uncertainty. Underconditions of high environmental uncertainty,firms must engage in continuous enriching andpioneering bundling processes. Operating un-der conditions of substantial uncertainty makesit difficult to predict competitors’ actions or de-velopments outside the industry that might cre-ate technological discontinuities. Furthermore,under these conditions, identifying opportuni-ties is likely to be serendipitous (Denrell et al.,2003). As a result, firms must be prepared toreact to influential changes in the environmentand to exploit unforeseen opportunities whenthey occur.

Firms can only do this with enriched and/ornew capabilities that provide advantages overrivals’ capabilities. Furthermore, in a dynamicand uncertain environment, firms are able tomaintain competitive advantages only with ca-pabilities creating more value for customerscompared to the value created by competitors’capabilities. Pioneering is required to developthese types of capabilities. Using pioneering tobuild new capabilities is more difficult, but alsomore important in environments of lower munif-icence. Environments of low munificence makeit difficult to respond to changes by developingnew capabilities, because additional resourcesmay be unavailable or too costly to acquire.Thus, only development of new capabilities be-fore the need for them arises allows firms torespond effectively and in an acceptable timeperiod to environmental changes in low-munif-icence environments. Higher environmental mu-nificence may make it easier to use these bun-dling processes but does not reduce theirimportance. These arguments lead to the follow-ing propositions.

Proposition 2a: Under conditions ofhigh environmental uncertainty, theenriching bundling process is re-


quired to build capabilities that cre-ate optimum value for customers. Theimportance of this bundling process isheightened in environments of lowmunificence.

Proposition 2b: Under conditions ofhigh environmental uncertainty, thepioneering bundling process is re-quired to build capabilities that cre-ate new sources of value for custom-ers. The importance of this bundlingprocess is heightened in environmentsof low munificence.

While a relatively common approach used byfirms, a stabilizing bundling process is likely tobe effective only in the short term, and onlyunder conditions of low uncertainty, when com-petitors’ actions are predictable and the proba-bility of environmental shocks is low. Stabiliz-ing opens the firm’s capabilities to imitation orto the development of even more effective capa-bilities. Thus, firms using stabilizing under con-ditions of high environmental uncertainty arelikely to lose their competitive advantage, be-cause a rival will develop capabilities that pro-vide more value to customers. In a dynamic en-vironment, stabilizing bundling processes willbe ineffective, especially over time. These argu-ments lead to the following proposition.

Proposition 2c: Under conditions ofhigh environmental uncertainty, thestabilizing bundling process is un-likely to create optimum value for cus-tomers.

Leveraging Capabilities

Leveraging involves processes (i.e., mobiliz-ing, coordinating, and deploying) used to applya firm’s capabilities to create value for custom-ers and wealth for its owners. In general, capa-bilities must be mobilized before they can becoordinated and deployed; thus, mobilizing isthe first process firms use to successfully lever-age their capabilities. Because of this generalrelationship, we discuss mobilizing, coordinat-ing, and deploying sequentially. In practice,however, these leveraging processes can followdifferent paths. For example, while deployingcapability configurations, firms might learn howto integrate a capability configuration with

other configurations more effectively. In addi-tion, while coordinating capabilities to form aconfiguration for deployment, insights could be-come apparent, allowing firms to more effec-tively mobilize their capabilities. Thus, the le-veraging of capabilities involves actions thatcan occur sequentially, simultaneously, or attimes even in reverse directions through feed-back loops.

Effective leveraging is important, in that evenwhen a firm owns or controls resources and haseffectively bundled them to develop capabilitieswith value-creating potential, the firm is un-likely to realize value creation unless it effec-tively leverages/uses those capabilities in themarketplace (Lichtenstein & Brush, 2001). Miller,Eisenstat, and Foote argue that “the deepestcapabilities and most integrated configurations(of capabilities) are of no value unless they ex-tract superior returns. So they have to satisfy theneeds of a large enough audience who will payamply to have that done” (2002: 47). Using cre-ativity and entrepreneurial processes (Barney &Arikan, 2001), as well as learning processes(Dierickx & Cool, 1989; Miller, 2003), a firm de-cides where (i.e., which markets) and how toeffectively leverage its capabilities to create thegreatest amount of value for customers (Brush,Greene, & Hart, 2001). Evidence suggests that thenewness (i.e., new products, new markets, etc.)that characterizes entrepreneurial processes islikely to create value for customers (Hamel &Valikangas, 2003; Venkataraman & Sarasvathy,2001), while learning processes contribute to thefirm’s ability to match its capabilities to custom-ers’ needs and to extend current competitive ad-vantages (Slater & Narver, 1999).

Embedded primarily in the skills and tacitknowledge of a firm’s human capital, leveragingprocesses focus on exploiting market opportuni-ties (Sirmon & Hitt, 2003). In this context, lever-aging processes are applied to the firm’s idio-syncratic capabilities and their configurationsto create value for customers within one or morecompetitive market arenas (Winter, 2003). Thus,leveraging processes are critical in matchingthe firm’s internal capabilities with conditionsin its external environment (Chatzkel, 2002).

Firms choose markets in which their capabil-ities can be effectively leveraged to create thegreatest amount of value for customers (Brush etal., 2001). Building effective, interactive relation-ships with customers is vital to gaining the


knowledge required to match firms’ capabilitieswith customers’ needs, especially latent needs(Slater & Narver, 1999). Kodak, for example, isleveraging long-standing relationships withphysicians to replace X-ray machines with dig-ital imaging equipment. Thus, although cur-rently struggling to create wealth for owners,Kodak is attempting to match its digital imagingcapabilities with the needs of one of its majorcustomer groups (Symonds, 2003).

Leveraging capabilities across markets. Amarket is a set of niches and opportunities fromwhich a firm chooses to best leverage its capa-bilities (Miller et al., 2002). The complexity andheterogeneity of markets create multiple oppor-tunities for firms to leverage their idiosyncraticcapabilities and create value for customers(Miller, 2003).

Effective leveraging of the firm’s capabilitiesin one market context often results in organiza-tional learning that fosters their application inother market settings. In general, these addi-tional applications occur by (1) leveraging thesame capabilities across different products andindustries to serve other customers with similarneeds, (2) using the knowledge gained by serv-ing the customer’s needs to sell other goods orservices to that customer to serve differentneeds, and (3) learning how to apply the firm’smarket segment–oriented expertise developedby leveraging its capabilities to meet the expec-tations of additional customers in that particu-lar market niche (Miller, 2003; Miller et al., 2002).As noted previously, firms use three key pro-cesses (mobilizing, coordinating, and deploying)to leverage their capabilities in different marketarenas. However, the three processes must workin a complementary manner for capabilities tobe leveraged effectively.

Mobilizing. The intent of mobilizing is to iden-tify the capabilities needed and to design thecapability configurations necessary to exploitopportunities in the market and gain a compet-itive advantage (Hamel & Prahalad, 1994). Mobi-lizing entails the design of the leveraging strat-egy. When competing in highly uncertainenvironments, it is more difficult for firms toidentify specific capability configurations thatwill optimize value for customers. The ambigu-ity between the cause (i.e., capabilities) and ef-fect (i.e., value creation) existing in highly un-certain environments increases the difficulty ofidentifying the appropriate capability configu-

rations. While specific leveraging strategies areoften idiosyncratic to a firm’s capabilities andits environmental context, we identify three le-veraging strategies that require certain capabil-ity configurations. The first is the resource ad-vantage strategy.

The intent of the resource advantage strategyis to leverage capability configurations that pro-duce a distinctive competence. A distinctivecompetence provides value to customers that issuperior to the value provided by competitorsand, thus, leads to a competitive advantage.Often, firms with known distinctive competen-cies employ this leveraging strategy. For exam-ple, when Philip Morris acquired Miller BrewingCompany, it mobilized its capability configura-tions in marketing and distribution to gain anadvantage over most competitors in the beermarket. As was the case with Miller BrewingCompany, the focus of the resource advantageleveraging strategy is developing a fit betweenthe firm’s competencies and the market where ithas an advantage over its competitors.

The second leveraging strategy focuses on ex-ploiting market opportunities. The market op-portunity strategy requires careful analysis ofthe external environment to identify those op-portunities for which the firm has capabilitiesthat can be configured to exploit them. Often-times, the market opportunities identified willbe adjacent to the firm’s current markets be-cause of managers’ familiarity with these mar-kets. It is more difficult to discover new oppor-tunities in markets distant from the firm’scurrent markets because of knowledge deficits.Still, because they represent new opportunities,some capabilities may need to be enriched andothers pioneered in order to create the configu-rations of capabilities necessary to exploit op-portunities. For example, to exploit a new oppor-tunity, the firm may leverage its R&D capabilityto create an incremental innovation or develop anew service to package with existing productsto satisfy growing or evolving customer needs.

The third leveraging strategy involves creat-ing entrepreneurial opportunities. The entrepre-neurial strategy involves developing capabilityconfigurations to produce new goods and/or ser-vices that require new markets. Such an oppor-tunity may replace an existing market (e.g., dig-ital technology used in cameras created anumber of new markets, such as in retail cam-eras, security devices, and automotive imaging


equipment). Generally, a configuration of R&D,engineering, and marketing capabilities isneeded to design the new product or service thatsatisfies the customers in a new market.

Through experience, those mobilizing thefirm’s capabilities learn to develop routines thatallow them to effectively and efficiently identifyidiosyncratically appropriate capabilities foreach leveraging strategy (Glynn, Milliken, &Lant, 1992). Mobilizing capabilities requires con-tinuous adjustments throughout the firm, be-cause to optimize value, the appropriate capa-bilities must be available to allow a range ofactions that create value for different customersin different markets (Hamel & Prahalad, 1994).The development of a dominant logic facilitatesthe mobilization of capabilities (Bettis & Pra-halad, 1995). However, a dominant logic can pro-duce a path-dependent learning process thatconstrains the design of future leveraging strat-egies (Lei et al., 1996). Thus, when mobilizingcapabilities, firms must be sensitive to path-dependent learning processes that create rigid-ities in the process.

We conclude that mobilizing capability con-figurations is a necessary step in creating valuefor customers. Understanding the markets andcustomers’ needs guides the design of capabil-ity configurations to compete effectively andsatisfy customers’ needs. Yet mobilizing capa-bility configurations is insufficient to createvalue for customers. The capability configura-tions must then be implemented in appropriateways to create value. Doing so requires the ca-pability configurations to be coordinated anddeployed.

Proposition 3a: Mobilizing capabilityconfigurations is a necessary but in-sufficient leveraging process alone tocreate value for customers.

Coordinating. The intent of coordinating is tointegrate mobilized capabilities in an effectiveyet efficient manner so as to create capabilityconfigurations. It is the first step in implement-ing a leveraging strategy. Possessing knowl-edge about the value of individual capabilities,as well as using effective communication net-works to diffuse that knowledge, facilitates ef-forts to integrate capabilities into comprehen-sive sets of value-creating organizational skills(Hamel & Prahalad, 1994). While important, pos-sessing useful and accurate knowledge about

the firm’s capabilities is an insufficient condi-tion alone for value creation. Proactive coordi-nation involves combinative, experienced-based routines to integrate capabilities in orderto implement the leveraging strategy effectivelyand, thus, to create value for customers (Alvarez& Barney, 2002).

Effective coordination of capabilities resultsin the sharing of explicit and tacit knowledge tointegrate the capabilities into effective configu-rations. Networks internal to the firm based oninternal social capital facilitate the sharing ofknowledge (Hitt & Ireland, 2002). In addition, in-vestments in the firm’s technology infrastructure(facilitating communication flows) are criticalfor coordinating capabilities (Hunter, Beaumont,& Matthew, 2002). Managerial relational skillsinvolve using the technology and personal in-teractions to build internal social capital,thereby increasing the likelihood that capabili-ties will be coordinated effectively (Sirmon &Hitt, 2003). Relational skills evolve over time andthrough the development of trust.

Using the examples noted above, coordinat-ing would involve integrating the marketingand distribution capabilities in Philip Morris, or,if an entrepreneurial leveraging strategy wereselected, it might require integrating R&D, engi-neering, and marketing. Creating cross-func-tional teams and developing routines for re-warding creative ideas and projects that requirethe joint involvement of the three capabilitiescould lead to their integration. A goal of coordi-nating is to integrate capabilities in ways diffi-cult for competitors to observe and duplicate(Chatzkel, 2002). A competitively superior coor-dination process contributes to a firm’s ability tooffer unique and innovative value to customers(Kim & Mauborgne, 1997; Yeoh & Roth, 1999).Highly effective coordinating processes facili-tate the development of more creative and flex-ible capability configurations (Sanchez, 1995).

Deploying. The deploying process involvesphysically using capability configurations tosupport the chosen leveraging strategy. Theability of the firm’s capabilities to create valuefor customers is realized through their success-ful deployment. Therefore, the deployment pro-cess is the second step in implementing the le-veraging strategy. The deployment processenhances the maintainability of a competitiveadvantage only when rivals are unable to ac-quire the idiosyncratic skills necessary to de-


ploy their capabilities in a way that creates su-perior value for customers.

The set of explicit and tacit knowledge onwhich a firm relies to deploy its capabilities isoften complex (Johnson, 2002). To reduce com-plexity, the firm codifies as much knowledge aspossible into organizational routines. But be-cause tacit knowledge is critical to successfuldeployment of integrated capabilities and ishighly personal and deeply rooted in an individ-ual’s action within a specific context, much ofthe knowledge associated with deploying capa-bility configurations cannot be codified (Simo-nin, 1999).

We conclude that coordinating and deployingcapability configurations are vital for the imple-mentation of leveraging strategies. Further-more, managerial tacit knowledge and skillsplay a critical role in the effectiveness of theseleveraging processes. Managers’ skills in coor-dinating and then deploying capability config-urations have a major effect on the value cre-ated for customers by the leveraging strategy.Managers who are able to build and use rela-tional capital to integrate multiple capabilitiesinto a configuration and to use organizationalroutines and their tacit knowledge to deploythese configurations to enact the leveragingstrategy are most likely to create value for cus-tomers.

Proposition 3b: The coordinating anddeploying processes are necessary toimplement a leveraging strategy, andtheir effectiveness in the implementa-tion is at least partly dependent onmanagers’ skills in using these pro-cesses.

The environment and its attendant degree ofuncertainty affect a firm’s choices of leveragingstrategies and their coordination and deploy-ment. Thus, we next explore the moderating ef-fect of environmental context on the relationshipbetween leveraging strategies and their out-comes.

Environmental context’s influence on leverag-ing processes. The causal ambiguity created byhighly uncertain environments increases thedifficulty of understanding the cause-effect rela-tionships between using leveraging strategiesand creating value (Reed & DeFillippi, 1990).Thus, in the context of leveraging, uncertaintyrefers to the inability to predict the effects of

different variables on a firm’s attempts to effec-tively mobilize, coordinate, and deploy its capa-bilities.

When a firm operates in a highly uncertainenvironment based on unknown or rapidlychanging industry recipes, growing or fluctuat-ing market demand, and a high probability ofenvironmental shocks, learning is critical tohelp the firm understand how to leverage itscapabilities to create maximum value for cus-tomers. For example, high levels of uncertaintyforce the firm to leverage its capabilities toachieve a series of temporary and changingcompetitive advantages (Eisenhardt, 1999). Be-cause of the dynamism, managers need to con-tinuously redesign capabilities and integratethem into new configurations (mobilizing andcoordinating) as the firm’s competencies rapidlylose their value because of changes in the mar-ket and in customer needs. Competitive advan-tages are rarely sustainable in highly uncertainenvironments, meaning that a resource advan-tage leveraging strategy should be largely ashort-term strategy. Because of the continuousand sometimes substantial change in a dy-namic environment, the firm’s competence maynot remain distinctive for long, or the advantagemay remain but lose its value because compet-itors develop a new competence that createssuperior value for customers. In both cases, theadvantage is lost. These arguments lead to thefollowing proposition.

Proposition 3c: Under conditions ofhigh environmental uncertainty, theresource advantage leveraging strat-egy is likely to create value for cus-tomers only in the short term.

In a dynamic environment, the market oppor-tunity leveraging strategy is likely to be moreeffective than the resource advantage strategy.Exploiting new market opportunities, even thoseadjacent to a firm’s current markets, can pro-duce longer-term advantages. And if the changeis continuous but not major and discontinuous,the market opportunity leveraging strategy cancontribute to a long-term competitive advan-tage. That is, it can do so if the firm continues toidentify and exploit new adjacent market oppor-tunities. Exploiting new market opportunities of-ten requires rapid deployment of capabilities tobeat competitors to the market and maintaintheir advantage. The regular exploitation of new


market opportunities allows the firm to main-tain a competitive advantage, once achieved.The risk with such a strategy comes with a dis-continuous change in the market prompted by acompetitor’s use of an entrepreneurial leverag-ing strategy that produces discontinuous inno-vation. In this case, a new market is created thatmight supplant the existing market.

When an environmental shock occurs, such asthe introduction of a discontinuous innovationor a major political catastrophe as in the eventsof 9/11, the firm likely must respond with anentrepreneurial leveraging strategy to survive.Better yet, the firm may forestall some of theeffects of such events by engaging in an entre-preneurial leveraging strategy before the envi-ronmental shock. Implementing an entrepre-neurial strategy in this type of environmentrequires that capabilities be mobilized and ef-fectively integrated in capability configurationsthat allow the firm to exploit the new market. Inthis way, the firm should be able to positivelyrespond to the environmental shock more rap-idly. In fact, the entrepreneurial leveragingstrategy might produce a new technology thatcreates discontinuous change for the firm’s com-petitors. These arguments lead to the followingpropositions.

Proposition 3d: Under conditions ofhigh environmental uncertaintybased on continuous change, a marketopportunity leveraging strategy canproduce a series of temporary compet-itive advantages (when implementedeffectively), except in the case of ex-treme environmental uncertainty pro-duced through substantial and discon-tinuous change.

Proposition 3e: Under conditions of ex-treme environmental uncertaintycaused by substantial and discontinu-ous change, an entrepreneurial lever-aging strategy likely will be requiredto create value for customers.

A firm’s ability to make rapid, high-qualitydecisions about how to leverage its capabilitiesstrongly influences the amount of value it cre-ates for customers when competing in highlyuncertain environments (Baum & Wally, 2003).Rapidly shifting environmental contingenciesprovide a premium for firms capable of quickly

identifying and understanding the contingen-cies and then making decisions about how toleverage their capabilities without undue delay.In highly uncertain environments, firms willlikely need to employ all three leveraging strat-egies at appropriate times. The need to use allleveraging strategies highlights the necessityfor firms to be able to effectively mobilize, coor-dinate, and deploy capability configurationsnecessary for the creation of value for customersand wealth for owners.

DISCUSSION AND IMPLICATIONS

Each component of the resource managementprocess is individually important, but, to opti-mize value creation, they must be synchronized.Thus, while managing each component of theprocess is important, the integration and bal-ancing of components to ensure harmony in theprocess is necessary to create value for custom-ers. Therefore, top-level managers should viewtheir firm as a system of resources and capabil-ities, developing leveraging strategies thatmatch their capabilities to the market and envi-ronmental context in order to create value forcustomers and owners. Likewise, they should besensitive to the needs and consider feedback ateach stage in the resource management processso that appropriate adjustments can be made inany of the resource management components toachieve or maintain synchronization.

Creating synchronization requires top-levelmanagers to be simultaneously involved in allstages of the resource management processwhile consistently scanning the external envi-ronment for salient cues about importantchange. Simultaneous involvement in the differ-ent stages of resource management (i.e., struc-turing the resource portfolio, bundling the re-sources to build capabilities, and leveragingconfigurations of those capabilities to createvalue for customers and owners) is necessary,because feedback from the market regardingcustomer needs influences the subprocessesemployed in each component. If a firm has notcreated enough value for customers to gain acompetitive advantage, adjustments are neces-sary. In this case, managers should evaluatecustomer desires and the capabilities necessaryto satisfy them. Managers then need to deter-mine if they can enrich current capabilities tosatisfy the customers, or if they need new re-


sources to pioneer new capabilities to do so. Ifadditional resources are needed, they can bedeveloped internally or acquired from externalfactor markets. The process of feedback and ad-justment is continuous such that successfulfirms are continuously learning and buildingknowledge.

Likewise, managers should consistently scanand monitor their external environment, focus-ing especially on potential changes that couldaffect their firm’s ability to create value for cus-tomers. A firm will likely need to respond both tocompetitors and to the level of uncertainty in theenvironment. When competitors introducechanges in their offerings, which could elimi-nate the firm’s current competitive advantage,swift and significant responses are needed. Sig-nificant responses could be initiated in any ofthe resource management components (e.g., ac-quiring new resources, pioneering a new capa-bility, or deploying a new entrepreneurial lever-aging strategy). Competitor actions contribute toenvironmental dynamism and, thus, uncer-tainty. As described herein, firms have to re-spond to changes in the level of environmentaluncertainty (and, in some cases, the environ-mental munificence) in addition to specific com-petitor actions. For example, if the level of un-certainty increases, the firm may need to investin real options in its resource portfolio to main-tain the flexibility needed to reconfigure andleverage its capabilities so as to provide supe-rior value to customers.

While creating value for customers in the faceof environmental changes, managers must alsobe concerned with owners’ and investors’ de-sires. If a firm is not creating adequate wealthfor its owners, its market capitalization willlikely diminish because of the lack of demandfor the firm’s stock. To create value for owners,the firm must provide quality goods to custom-ers to gain a competitive advantage while man-aging its resources efficiently in order to pro-duce necessary returns for the owners (Powell,2001).

Each component of the resource managementprocess and its subprocesses must be efficient.For example, capabilities need to be “tightened”to ensure that they are efficient without harmingtheir ability to provide quality products and ser-vices to customers. Tightening helps to avoidagency costs by preventing managerial oppor-

tunism in building unnecessary or “bloated” ca-pabilities.

Additionally, Coff (1999) notes that establish-ing a competitive advantage does not guaranteewealth creation for owners. Stakeholders (fac-tors of production) may appropriate or take sub-stantial amounts of the rents created by the ad-vantage. Thus, managers need to balance theneed for efficient investments in resources withthe need to maintain the resources necessary toreact flexibly to unexpected changes in the dy-namic and uncertain external environment.

The model we have presented here has mul-tiple implications for managers. In particular,managers need to be able to acquire, accumu-late (develop), and divest (when necessary) re-sources to have the most effective resource port-folio at any given time (Makadok, 2001).Managers should also have the skills necessaryto bundle resources to create effective capabili-ties. Firms especially need to be able to developnew capabilities, in that discontinuous environ-mental changes can greatly reduce the value oftheir current capabilities. Lei et al. (1996) havesuggested that firms should employ a process ofmetalearning to produce these outcomes. Fi-nally, managers should have a repertoire of le-veraging skills. Such skills include the ability todesign appropriate leveraging strategies (mobi-lize capabilities), to create effective coordina-tion routines, to manage knowledge develop-ment and diffusion, and to be entrepreneurial(identify and exploit opportunities). Managersmust also effectively manage the feedback andlearning processes necessary to continuouslyupdate capabilities and adjust the resourceportfolio and/or the leveraging strategies used.

Priem and Butler (2001) have argued that thefield does not understand the “black box” in-volved in using valuable, rare, inimitable, andnonsubstitutable resources to gain and main-tain a competitive advantage. We have at-tempted to “look inside that black box” and ex-plain how these resources can be managed tocreate superior value for customers that, in turn,helps the firm develop a competitive advantage.Furthermore, our model provides information onhow resources must be managed to ensure thatthe competitive advantage also creates wealthfor the firm’s owners. The explication of the re-source management process represents a clearextension of the RBV of the firm. Additionally,using a contingency theory framework, our re-


source management model integrates effects ofthe external environment. Integration of exter-nal environmental contingencies also extendsthe RBV, which has been criticized for beinginsular and overly focused on internal firm at-tributes. The model integrates a learning theoryperspective to develop a dynamic approach toreplace the static approaches used in most pre-vious research on the RBV.

The resource management process we haveexplained here has significant implications forfuture research. First, the propositions should beexamined empirically. Furthermore, we need tounderstand how to effectively structure thefirm’s resource portfolio, bundle resources intovaluable capabilities, and formulate leveragingstrategies that exploit the firm’s capabilities tocreate value for customers. Some research existson acquiring, developing, and divesting certaintypes of resources (e.g., human capital). Butmore research is needed on acquiring and de-veloping other types of resources, as well as onstructuring the total resource portfolio. Muchmore empirical research is needed on bundlingand leveraging resources. The theoretical modelwe have presented provides a base for a newmajor research stream on the management ofresources.

Helfat and Peteraf argue that “it is difficult tofully explain how firms use resources and capa-bilities to create a competitive advantage” (2003:997). The resource management process we havepresented helps to fill this void. With substan-tial implications for managers and a base forsignificant new research on the RBV, this workprovides an important value-added contributionto our knowledge of managing resources in dy-namic, uncertain environments.

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David G. Sirmon ([email protected]) is an assistant professor of managementat Texas A&M University. He received his Ph.D. from Arizona State University and hasserved on the faculty at Clemson University. Resource management, family business,and strategic entrepreneurship are current research interests.


Michael A. Hitt ([email protected]) is a distinguished professor of managementand holds the Joe B. Foster Chair in Business Leadership and the Dorothy Conn Chairin New Ventures at Texas A&M University. He received his Ph.D. from the Universityof Colorado. His research interests include managing resources in organizations,international strategy, corporate governance, and strategic entrepreneurship.

R. Duane Ireland ([email protected]) holds the Foreman R. and Ruby S. Ben-nett Chair in Business at Texas A&M University. He is a fellow of the Academy ofManagement. Strategic alliances, managing organizational resources, and strategicentrepreneurship are current research interests.


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