A formal framework for the RBV: Resource dynamics as a Markov process

Research Summary This article introduces a formal framework for long-term resource dynamics under uncertainty. Firms' resource positions are identified with states in a stochastic Markov process. Two stylized examples implementing the framework illustrate how it can yield new strategic insights. One such insight is the attractiveness paradox. Shorter-lived resources might seem less attractive for the simple reason that they will yield returns for a shorter time period. However, the model in this article shows that when accounting for the full competitive dynamics such seemingly less attractive resources can sometimes yield a more attractive investment opportunity. The ultimate goal of introducing the Markov framework is to provide new directions for resource-based view research based on formal and simulation models, while retaining the verbal theory's richness and intuitive appeal. Managerial Summary A firm's resources (the assets and capabilities it has access to) vis-a-vis its competitors are the equivalent of the positions of pieces on a chessboard. They represent the "state" of the game, and each player tries to optimize this state in its favor. What sets apart the game of business from the game of chess is uncertainty: while in chess making a move leads to a certain outcome on the board, making an investment usually does not carry such guarantees, especially if it is in an intangible resource such as technology. This article introduces the mathematical tools to study strategic investments in the game of business, inherently incorporating uncertainty and long-term competitive dynamics.