The Inside Track: On the Important (But Neglected) Role of Customers in the Resource-Based View of Strategy and Firm Growth

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abstract  This paper argues for the important role of customers as a source of competitive advantage and firm growth, an issue which has been largely neglected in the resource-based view of the firm. It conceptualizes Penrose's (1959) notion of
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  The Inside Track:On the Important (ButNeglected) Role ofCustomers in the Resource-Based View ofStrategy and Firm Growth* Ivo Zander and Udo Zander Uppsala University;Stockholm School ofEconomics    This paper argues for the important role ofcustomers as a source of competitive advantage and firm growth,an issue which has been largely neglected inthe resource-based view ofthe firm.It conceptualizes Penrose’s (1959) notion ofan‘inside track’and illustrates how in-depth knowledge about established customerscombines with joint problem-solving activities and the rapid assimilation ofnew andpreviously unexploited skills and resources.It is suggested that the inside trackrepresents a distinct and perhaps underestimated way ofgenerating rents andsecuring long-term growth.This also implies that the sources ofsustainablecompetitive advantage in important respects can be sought in idiosyncratic interfirmrelationships rather than within the firm itself. INTRODUCTION In Edith Penrose’s (1959) classical work on the growth ofthe firm,the author notedalmost in passing the existence ofan ‘inside track’,which allows the firm to senseand exploit a succession ofnew product ideas among its established customers.The topic re-surfaced in a subsequent publication on the growth ofthe HerculesPowder Company,where Penrose concluded that neither supply nor demand canbe singled out as independent factors explaining growth and diversification ofthefirm.While the resource-based view has drawn extensively on Penrose’s work, [1] par-ticularly the notion that the direction and success ofdiversification depends on afew key resources possessed by the firm,it has paid comparatively limited atten-tion to the role and importance ofcustomers in strategy and firm growth.Instead,the resource-based view has evolved into an essentially inward-looking perspec-  Journal ofManagement Studies 42:8 December 20050022-2380 © Blackwell Publishing Ltd 2005.Published by Blackwell Publishing,9600 Garsington Road,Oxford,OX4 2DQ,UK and 350 Main Street,Malden,MA 02148,USA.  Address for reprints  :Ivo Zander,Uppsala University,Box 513,751 20,Uppsala,Sweden(Ivo.Zander@fek.uu.se).  tive.Firms are believed to differ primarily in the possession and deployment of internally controlled skills and resources,which are to be applied across a relatedrange ofproducts or markets.Generally,the resource-based view attributes sec-ondary importance to external factors such as supplier or customer relationships,which tend to be treated as ‘given’once the appropriate skills and resources havebeen developed.This narrow interpretation ofthe sources ofsustainable com-petitive advantage runs the risk ofunderestimating the many ways in which busi-ness firms can generate rents and secure long-term growth.The overall aim and contribution ofthis paper is to affirm and elaborate onthe important role ofcustomers in strategy and firm growth.Based on the notionofPenrose’s (1959) inside track,it conceptualizes four aspects ofusing establishedcustomers to achieve sustainable competitive advantage and long-term growth:(1)inside access to information about emerging customer needs;(2) assimilation andexchange ofcustomers’knowledge through joint problem-solving activities;(3)rapid assimilation ofnew and previously unexploited skills and resources;and (4)protection against imitation through time-compression diseconomies and causalambiguity.The conceptualization draws upon the analysis ofthe historical growthofAlfa Laval,a major producer ofvarious types ofdairy equipment,which alsoserves as a practical illustration ofa company pursuing an inside-track or customer-based strategy.Concurrently,the paper contributes to the discussion that probes the limitationsofthe resource-based view ofthe firm,supporting the evolving notion that thesources ofsustainable competitive advantage in important respects can be foundin shared resources and idiosyncratic relationships in the interfirm domain.It isargued that for strategy and growth purposes firms are not necessarily locked intointernally controlled skills and resources,but may draw upon customers as sourcesofnew ideas and problem-solving capabilities,and flexibility in the assimilation of new skills and resources.Overall,the propositions put forward in the paper suggestthat the study ofsuperior performance within the resource-based view needs toaccount for the multiple ways in which firms can develop sustainable competitiveadvantage and achieve long-term growth.The paper is structured in five main sections.The first section reviews recentdevelopments in the strategy literature,in particular the growth ofthe resource-based perspective and its evolving extensions.It concludes by suggesting the impor-tant but largely neglected role ofcustomers in strategy and firm growth.Thesecond section then conceptualizes the essential aspects ofPenrose’s (1959) insidetrack.The third section,after providing a methodological discussion,illustratesand analyses the emergence and evolution ofthree major product innovations in Alfa Laval – milking machines,plate heat exchangers and dairy systems.Thefourth section uses the case findings to further discuss and explore the viability of inside tracks in strategy and firm growth.The concluding section comments onthe complementarity ofinside tracks and the resource-based view ofthe firm,1520I.Zander and U.Zander © Blackwell Publishing Ltd 2005  identifies some ofthe managerial implications,and emphasizes the need for abroad understanding ofthe sources ofsustainable competitive advantage and firmgrowth. LITERATURE REVIEW The resource-based view srcinated from an interest in the relationship betweenfirm-specific resources and growth and also the effect offirm differences on theability to generate rents and create sustainable competitive advantage (Barney,1986;Rumelt,1984;Wernerfelt,1984).Although there has been considerable diversity in subsequent contributions (for a critical review,see Foss,1998),theresource-based view generally holds that firms can be defined as idiosyncratic col-lections oftangible and intangible skills and resources ( Amit and Schoemaker,1993;Barney,1991;Barney et al.,2001;Conner,1991;Dierickx and Cool,1989; Grant,1991;Mahoney and Pandian,1992;Peteraf,1993;Prahalad and Hamel, 1990;Teece et al.,1997).To the extent that these skills and resources are valu-able,inimitable,non-substitutable and non-tradable in external markets,they areexpected to generate rents and provide the foundation for sustainable competitiveadvantage.Inimitability is linked to a set ofisolating mechanisms,including causalambiguity,intellectual property rights,and customer loyalty,but in particular thetacit nature ofskills or combinations ofresources possessed by the firm (King andZeithaml,2001;Reed and DeFilippi,1990;Rumelt,1984;Winter,1987). The resource-based view also emphasizes the ‘stickiness’,or path-dependency,ofskills and resources. [2] Existing skills and resources are seen as important deter-minants ofboth the direction and success ofentry into new products or indus-tries (Chatterjee and Wernerfelt,1991;Markides and Williamson,1994,1996;Montgomery and Hariharan,1991;Montgomery and Wernerfelt,1988;Ollinger,1994;Penrose,1959;Robins and Wiersema,1995;also,with the exception of‘step function learning’,Helfat and Raubitschek,2000).Overall,diversifying firms areadvised to enter areas which draw upon the same types ofskills and resourcesalready possessed by the firm,which in combination with non-tradability of resources in external markets provide the critical admixture to the large diversi-fied corporation.Other forms ofdiversification,in particular unrelated diversifi-cation or ‘empire building’driven by a mix ofpersonal motives,are seen asmistaken or deemed to be less successful in the long term. [3] The resource-based view contains a wide range ofdefinitions ofthe skills andresources that underlie sustainable competitive advantage and firm growth (otherfrequently employed and related concepts are assets,capabilities and competen-cies).Early work provided broad and sometimes all-encompassing definitions,suchas the services rendered by impregnable ‘bases’or productive resources like tan-gible things and human resources (Penrose,1959),brand names,in-house knowl-Strategy and Firm Growth1521 © Blackwell Publishing Ltd 2005  edge oftechnology,employment ofskilled personnel,trade contacts,machinery,efficient procedures or capital (Wernerfelt,1984),or all assets,capabilities,orga- nizational processes,firm attributes,information,and knowledge controlled by thefirm (Barney,1986).Recent contributions have typically emphasized more narrowand internal aspects (Appendix 1).While some ofthe definitions do not rule outexternal linkages as important sources ofcompetitive advantage,supplier and cus-tomer relationships or ties into the wider institutional environment are typicallyabsent in the discussion ofstrategy,firm growth,and normative conclusions.Priemand Butler (2001,p.31) conclude that:‘...product demand remains external tothe RBV’. [4] Extensions ofthe Resource-Based View  A growing body ofliterature suggests that the resource-based view represents anoverly restrictive perspective on the generation ofrents and long-term growth of the business firm.It has been argued and empirically shown that the sources of competitive advantage may be found in idiosyncratic linkages and shared resourcesin the interfirm domain (Douglas and Ryman,2003;Dyer and Singh,1998;Foss, 1999;Goes and Park,1997;Hart,1995;Lorenzoni and Lipparini,1999;Powell et al.,1996).As idiosyncratic relationships with other firms and the sharing of resources give privileged access to information,opportunities,and problem-solving capabilities,they determine the existence ofinnovative performance and super-normal profits (Gulati et al.,2000;Kogut,2000;McEvily and Zaheer,1999). Recent work on social capital suggests that network embeddedness may be animportant contributor to performance ( Adler and Kwon,2002;Lee et al.,2001;Pennings et al.,1998;Uzzi,1996;Yli-Renko et al.,2001).Uzzi (1996) argues that embedded ties allow for the exchange offine-grained information and jointproblem solving,and that within limits firms organized in networks have betterchances ofsurvival than firms involved in arm’s-length market relationships.In astudy ofnew biotechnology firms,Liebeskind et al.(1996) conclude that the useofboundary-spanning social networks increases both learning and flexibility inways that would not be possible within a self-contained,hierarchical organization.Yli-Renko et al.(2001) propose that social capital embedded in key-customer relationships helps young technology-based firms to acquire knowledge used toproduce a greater number ofnew products and to enhance technological distinctiveness.Likewise,network theory has continually emphasized the importance ofinter-firm relationships and interfirm knowledge exchange in the development ofnewproducts (Axelsson and Easton,1992;Grabher,1993;Håkansson,1989,1993; Johanson and Mattsson,1994;Lundvall,1988),sometimes with an emphasis onthe implications for performance or value creation (Blankenburg Holm et al.,1999;Pennings and Harianto,1992). [5] There has also been a current resurgence1522I.Zander and U.Zander © Blackwell Publishing Ltd 2005  ofinterest in the nature and effects ofregional agglomerations,suggesting thatsustainable competitive advantage derives from geographically confined interac-tion and exchange ofknowledge with customers,suppliers and firms in relatedtechnologies (Enright,1998;Feldman,2000;Malmberg et al.,1996;Porter,1990, 1998).Extensions ofthe resource-based view suggest that the inward-looking per-spective has produced an overly narrow understanding ofhow firms may gener-ate rents and secure long-term growth.Specifically,firms may use access toexternal sources ofinformation and knowledge and draw upon resources whichare not independently ‘owned’or controlled by the individual firm.Yet,the foun-dations and implications ofstrategies based on accessing and using external knowl-edge and resources have not been spelled out in detail,specifically in the contextoffirms exploiting close relationships with existing customers.Paradoxically,theless publicized parts ofPenrose’s (1959,1960) work provide the conceptual start-ing points for counteracting the inward-looking perspective ofthe resource-based view ofthe firm.The specific aspects and implications ofher inside track andwhat may be termed a customer-based view ofstrategy and firm growth will bediscussed below. THE INSIDE TRACK Penrose (1959,p.117) makes particular reference to the usefulness offollowing the inside track,or assimilating knowledge about the kinds ofnew products thatcustomers might need.Although she generally attributes both the direction andsuccess ofdiversification to a few key resources possessed by the firm,a carefulreading ofthe data reveals a more balanced role ofresources and customers infirm growth.Several examples ofthe importance ofcustomers can be found inPenrose’s (1960) study ofthe Hercules Powder Company,a firm that started outin the black-powder and dynamite business and subsequently diversified into arange ofmore or less closely related product areas.Specifically,the discussion sug-gests that the firm’s established customers were instrumental in generating ideasto enter new product areas,and that accommodation oftheir various needsresulted in the assimilation and formation ofpreviously unexploited skills andresources.For example,Hercules’contacts with military customers for explosives,whichrepresented the firm’s srcinal and most important product line,appear to haveled to the discovery and exploitation ofdemand for naval stores such as turpen-tine and pine oil.Moreover,development ofthe rosin business led to the identifi-cation and exploitation ofother needs among established customers: As a result ofthe close association with the paper industry...Hercules in 1931acquired the Paper Makers Chemical Corporation,a diversified,loosely orga-Strategy and Firm Growth1523 © Blackwell Publishing Ltd 2005
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