| Abstract: | Two distinct causal mechanisms—resource-picking and capability-building—have been proposed in the strategic management literature about how firms create economic rents. Under the resource-picking mechanism, managers gather information and analysis to outsmart the resource market in picking resources, similar to the way that a mutual fund manager tries to outsmart the stock market in picking stocks. Under the capability-building mechanism, managers design and construct organizational systems to enhance the productivity of whatever resources the firm acquires. These two rent-creation mechanisms are certainly not mutually exclusive, and it is likely that firms generally use both of them. It is therefore important to consider the interaction between these two rent-creation mechanisms: Do they complement each other? Or are they substitutes for each other? In other words, do they enhance each other's value, or detract from each other's value? Answering these questions is a necessary precondition to understanding how firms should allocate their time and effort between these two rent-creation mechanisms. The present paper develops a basic theoretical model to address these questions, and derives testable hypotheses from the model. The model predicts that the two rent-creation mechanisms are complementary in some circumstances but substitutes in others. Copyright © 2001 John Wiley & Sons, Ltd. |
