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Strategic Factor Markets

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Yeolan Lee at University of Alabama in Huntsville
Yeolan Lee
Jay B. Barney at University of Utah
Jay B. Barney
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Strategic Factor Markets
Yeolan Lee
1
and Jay B. Barney
2
1
Ohio State University, Columbus, OH, USA
2
Fisher College of Business, Columbus, OH,
USA
Definition Strategic factor markets are markets
in which firms obtain resources necessary for the
implementation of their product market strategies.
Introduction
Strategic factor markets are markets in which
firms obtain the resources to implement their
product market strategies. Barney’s(1986) paper
sheds light on the importance of the strategic
factor market for the creation of a competitive
advantage. If all firms acquire resources at com-
petitive prices in strategic factor markets, it would
be difficult for any of them to generate abnormal
profits above average. Therefore, the cost of
acquiring resources in strategic factor markets
needs to be an important consideration in any
discussion about creating a competitive advan-
tage. The prices of resources in strategic factor
markets are determined by firms’perception of the
potential value of the resources. If the values of
resources are equally perceived by all firms, com-
petitions among firms would increase the cost of
acquiring resources, and therefore the price of
resources would be determined at competitive
prices. However, if only a small number of firms
recognize the true value of resources, the price of
resources would be determined at below compet-
itive prices. Thus, firms acquiring the resources
would be likely to generate a competitive
advantage.
Implications of Strategic Factor Market
Theory
Literature on mergers and acquisitions (M&As)
focuses on mechanisms of how firms obtain eco-
nomic returns through M&As. If an acquiring firm
can accurately anticipate the true economical
value that an acquisition can create, the acquisi-
tion is likely to generate above-normal profits.
This logic is consistent with the strategic factor
market theory. If a firm can recognize the true
value of resources and acquire them at below
competitive prices, its ability to recognize the
true value of resources becomes a source of com-
petitive advantage. Disequilibrium resource
prices in strategic factor markets are the outcome
of firms’asymmetrical information skills. Some
firms have superior information skills to predict
the true value of resources, which enable them to
acquire those resources at below competitive
This entry was originally published on Palgrave Connect
under ISBN 978-1-137-49190-9. The content has not been
changed.
#The Author(s) 2016
M. Augier, D.J. Teece (eds.), The Palgrave Encyclopedia of Strategic Management,
DOI 10.1057/978-1-349-94848-2_519-1
prices and generate high profits from the resources
in product markets. Other firms, which do not
have superior information skills, would pay equi-
librium prices and thus generate a competitive
parity.
Criticisms and Extensions of the Theory
Dierickx and Cool (1989) question the strategic
factor market theory by arguing that some critical
resources must be accumulated within firms over
time. They demonstrate that firms need to build
resources inside their organizations due to certain
resource characteristics, such as time-
compression diseconomies, interconnected asset
stocks, asset mass efficiencies and causal ambigu-
ity. Although their argument highlights the impor-
tance of developing critical resources inside firms,
the implication of the strategic factor market the-
ory cannot be discarded. The strategic factor mar-
ket theory emphasizes the cost-factor
consideration to explain the source of a competi-
tive advantage (Barney 1989). In fact, firms must
consider the cost of developing resources when
they accumulate resources inside the firms.
Strategic Factor Market Theory
and the Resource-Based View
In sum, the strategic factor market theory empha-
sizes the cost factor of acquiring and/or develop-
ing resources for the creation of a competitive
advantage. The strategic factor market theory
becomes the essential basis of the ▶resource-
based view. Other extensions of the strategic fac-
tor market theory include Adegbesan (2009),
Denrell et al. (2003), Makadok and Barney
(2001), and MacDonald and Ryall (2004).
See Also
▶Resource-Based View
▶Sustainable Competitive Advantage
References
Adegbesan, J.A. 2009. On the origins of competitive
advantage: Strategic factor markets and heterogeneous
resource complementarity. Academy of Management
Review Archive 34: 463–475.
Barney, J.B. 1986. Strategic factor markets: Expectations,
luck, and business strategy. Management Science 32:
1231–1241.
Barney, J.B. 1989. Asset stock accumulation and sustained
competitive advantage: A comment. Management Sci-
ence 35: 1511–1513.
Denrell, J., C. Fang, and S.G. Winter. 2003. The economics
of strategic opportunity. Strategic Management Jour-
nal 24: 977–990.
Dierickx, I., and K. Cool. 1989. Asset stock accumulation
and sustainability of competitive advantage. Manage-
ment Science 35: 1504–1511.
MacDonald, G., and M. Ryall. 2004. How do value crea-
tion and competition determine whether a firm appro-
priates value? Management Science 50: 1319–1333.
Makadok, R., and J.B. Barney. 2001. Strategic factor mar-
ket intelligence: An application of information eco-
nomics to strategy formulation and competitor
intelligence. Management Science 47: 1621–1638.
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