Entrepreneurship and Firm Strategy: Integrating Resources, Capabilities, and Judgment through an Austrian Framework

2.1 Mataja and the Judgment-Based Approach

Before we discuss theory integration, we will show how Mataja’s theory relates to contemporary work, especially the judgment-based approach to entrepreneurship (JBA). The idea of the entrepreneur orchestrating production is common in Austrian economics and receives considerable attention in the capital theories of Lachmann (1978) and Kirzner (1966), as well as in recent contributions to the theory of the firm and entrepreneurship by Foss and Klein (2012) and Bylund (2015).^[5] Combining resources takes center stage especially in the judgment-based approach. In this view, entrepreneurs take given facts like past prices and the state of technology, interpret them based on their own idiosyncratic knowledge and experience to create beliefs about the future, and deploy their resources accordingly (Foss and Klein 2012, 2015). Crucially, the future is not predictable: it is truly uncertain (Knight 1964). Uncertainty in this context refers to ‘unknown unknowns,’ that is, situations that cannot be described in terms of known probabilities; alternately, we could say that uncertainty exists when either or both of the sets of options and outcomes are perceived as open (Packard, Clark, and Klein 2017).

While Knightian uncertainty is a cornerstone of the JBA, Mataja’s work provides only an early version of the concept. He explicitly states that entrepreneurs possess only incomplete knowledge of relevant market conditions, e.g. the relative profitability of different lines of business, sales channels and points of purchase (p. 169); efficient production methods, e.g. large scale (p. 161); and changes in preferences and supply and demand (p. 169). This ignorance suggests uncertainty as a general condition under which Mataja’s entrepreneur operates. This view is further supported by his discussion of risk and why it should be excluded from the definition of entrepreneurship—his point is that risk is not entrepreneurial because it is already captured in prices. Mataja illustrates this using the example of champagne bottling also given by von Mangold (1855: 82) and later by Knight (1964: 213), in which a known average percentage of bottles break during production. This percentage is part of ordinary business calculations, and is simply subtracted from the average number of bottles produced during a given period. Truly entrepreneurial decisions therefore lie elsewhere, and Mataja thus employs a version of the distinction between risk and uncertainty, although it is not as clear or sophisticated as Knight’s (1964).^[6] Moreover, he clearly considered that this future value on which the entrepreneur bases production and makes decisions about acquiring resources has to be imagined in the present. All resource values are ‘anticipative judgment[s] about the future state that may be achieved by allocating the goods according to their use value’ (Mataja 1966: 149). Yet entrepreneurs’ imaginations may ultimately be wrong, and their ‘estimates about the average too high or too low’ (p. 165), in which case they have to bear a loss. Judgment, imagination, and beliefs therefore play a role in his theory.

Uncertainty requires entrepreneurs to exercise judgment, a decision mode that is neither fully rational nor completely random. This concept to some extent remains a black box. Despite building their theory upon it, Foss and Klein (2012) left it for other researchers to dive into the details and only suggested that judgments are related to heuristics, creativity, and confidence in the face of uncertainty. More recently they suggested intuition or “gut feeling” (Foss and Klein 2015; Klein 2017). Others argued for empathic accuracy (McMullen 2015) or customer need diagnosis (Godley and Casson 2015) as the basis of judgment. However, these latter explanations focus on appraising customer needs and refrain from implementation issues, i.e. deploying resources. Mataja’s (1966) idea of judgment is more practical. For him ‘every judgment of value of a good is done by taking a certain average of its expected utility’ (p. 164). He goes on to explain that judgments of resource value are formed by considering qualitatively different contributions to the end product this resource may have and taking their average as the expected value. An employee may perform high or low quality work, for example, and therefore a middle ground should be used as an estimate (p. 164). We would add that also different production structures and outcomes should be considered. Judgment then can be understood as a scenario analysis in which both especially promising and unpromising scenarios are taken into account to determine an estimate. It is important to emphasize that these scenarios are not sophisticated guesses, but subjective predictions based on objective and known facts like current prices, the given production structure and state of technology. Building on Mataja we can ground judgment therefore in a quite practical and clear form of analysis that directly relates the appraisal of customers’ needs to the consideration of the production structure required to satisfy them through business cases. Lewin and Cachanosky (2019) also highlight the importance of actual calculation and provide an accounting and finance-based framework for calculating the prospects of different alternatives that supplements Mataja’s approach.

The notion of judgment has some overlap with the concept of dynamic capabilities. Early contributions on dynamic capabilities focused on processes and routines that are directed at transforming an existing resource base (Eisenhardt and Martin 2000; Teece, Pisano, and Shuen 1997; Zollo and Winter 2002). The execution of dynamic capabilities is triggered by entrepreneurs or managers when there is a felt need to adapt. This definition can easily be related to entrepreneurial judgment, as entrepreneurs transform resources when their perception of the future changes. Teece (2007) presented a more comprehensive notion of dynamic capabilities that not only included transformation processes but also the constant search for opportunities that require such processes. This “sensing” necessarily entails the imagination of future states, while the transformation processes or “seizing” require resource deployments. It is not a surprise that recent literature in this stream highlights its proximity to entrepreneurship (Helfat and Peteraf 2014; Teece 2012). However, as we explain below, there are still important differences between entrepreneurial judgment and dynamic capabilities.

In summary, there are four major insights that we draw from Mataja’s theory and use as points of departure for our integrating framework in the following section: the union of entrepreneur and firm, the entrepreneurial function at the center of the production structure, the differentiation between the source (“specific element”) and modifiers (“random elements”) of profit, and the anticipatory nature of entrepreneurial decision making under uncertainty.

3.1 Integrating the Theory of the Firm and Entrepreneurship Theory

Mataja treats entrepreneurship and enterprise as a conceptual union in which one does not exist without the other. Conversely, the modern literatures on entrepreneurship and the theory of the firm developed separately, and work to integrate them more fully remains ongoing (Foss and Klein 2012). This point is made especially by resource and capabilities scholars, who suggest that entrepreneurship can provide useful ways to advance theories of the firm (Barney 2001; Helfat and Peteraf 2014; Lippman and Rumelt 2003b; Teece 2014). However, progress is slow, even though suggestions abound in both the resource-based and capabilities literatures.

Alvarez and Busenitz (2001) argued than entrepreneurship could be integrated into the RBV by dis-aggregating entrepreneurship into various resources (e.g. alertness, insight, knowledge). Similarly, Wernerfelt (1984) included entrepreneurs’ knowledge and skills in the definition of resources. At the same time, entrepreneurship has been introduced in the capabilities literature as a specific kind of cognition (Helfat and Peteraf 2014) or skill (Teece 2012) in which the preconditions for changing capabilities are called “entrepreneurial.” All of these have in common that they invoke traits associated with entrepreneurship ad hoc instead of offering a consistent theory of it. Mataja, on the other hand, treats entrepreneurship and the firm together from the start. Considerable effort in the same vein has been made by Foss and Klein (2005, 2012, who show how the classical theory of the firm (i.e. transaction cost economics, property rights theory, agency theory) can advance entrepreneurship theory, and vice versa. In their view, the firm is an ‘entrepreneur plus the alienable assets she owns and controls’ (Klein 2017: 149). Since judgment is about the deployment of assets it cannot be delegated without selling it. Judgment therefore is not marketable, a view that Mataja shares, and so entrepreneurs use firms to act upon their intuitions (Foss and Klein 2012).

Building on organizational economics, Bylund (2016) proposes a different view, arguing that completing entrepreneurial plans, especially plans for innovation, requires production structures with resource specialization beyond the scope of the market. Because such specialization is incompatible with the market as it stands, entrepreneurs need to provide a vehicle for fitting together this specialized structure with the whole productive structure of the market. This vehicle is the firm. This view of entrepreneur in firms is, like Mataja’s, explicitly grounded in Menger’s theory of the stages of production. In any case, all three of the approaches mentioned above inextricably link entrepreneurship and enterprise and thereby give support to the many calls for their integration (Barney 2001; Baumol 1968; Foss and Klein 2012; Ireland, Covin, and Kuratko 2009; Teece 2014) while offering points of departure for answering them.

3.2 Integrating Organizational Economics, the RBV, and Capabilities

Organizational economics (especially transaction cost economics [TCE]) and capability theory have been at odds with each other in the realm of strategic management. While early contributions to capability theory were proposed as alternative explanations to transaction costs (e.g. Demsetz 1988; Winter 1988), later ones were more complementary, yet still give capabilities explanatory superiority (Argyres et al. 2012). However, there have been recent exceptions (e.g. Nagano 2020). The main issues in this debate revolved around the underlying assumptions of TCE, especially opportunism (e.g. Conner and Prahalad 1996; Freiling, Gersch, and Goeke 2008; Kogut and Zander 1992; Williamson 1993) and its general explanatory power on heterogeneity in profits, the core topic of strategic management (Argyres 2011). Even Oliver Williamson argued along similar lines, first, by dismissing specific strategic concerns altogether by suggesting that strategizing is economizing on transaction costs (Williamson 1991), and second, by asking how capabilities affect governance choices (Williamson 1999). Nevertheless, there is also a literature stream that argues that the distinction and hierarchy between both theories is arbitrary and that in fact TCE is able to answer the open questions of capability theory (Argyres 2011; Argyres et al. 2012; Argyres and Zenger 2012; Langlois and Foss 1999). Argyres et al. (2012) propose two major roles for TCE or organizational economics in general: first, explaining the entrepreneurial process of combining resources and how it is facilitated by governance choices, and second, explaining how organizational design and firm boundaries affect knowledge creation and sharing.

3.3 Resources and Governance

Mataja (1966) discusses several classical topics in organizational economics. For example, he considers governance and incentive alignment when he argues that entrepreneurial profit should be the major part of an entrepreneur’s income, making his livelihood dependent on the success of the enterprise—‘profit should not just be an extra payment of secondary importance’ (p. 140). Specific shareholders are therefore explicitly regarded as entrepreneurs, as has also been suggested by other proponents of ownership-based theories (e.g. Foss and Klein 2012; Knight 1964). Yet at the same time production takes center stage in Mataja’s analysis of entrepreneurship and the firm. Because profit is closely related to choices about what and how to produce, his approach is also similar the resource- and capabilities-based views. One of Mataja’s (1966: 161) ‘random’ elements of profit is the more efficient exploitation of a resource. He attributes this efficiency to skills, knowledge, and experience, as well as processes and routines. Large-scale production is one example. The value of a resource is derived from the value of the final product it produces. However, most resources are capable of producing more than one product. Mataja argues that a resource is valued by the competing judgments of entrepreneurs trying to estimate the average value it is able to create. If an enterprise is able to produce more than this average it can increase output without increasing costs, or decrease costs while keeping output constant. This logic applies to both existing and substitute resources. If a new resource is a better fit with the existing production process and resource structure it may allow a higher level of exploitation of other complementary resources and even of itself. This may justify acquiring a more expensive, e.g. higher quality, resource when production increases disproportionately. Moreover, this average also contains the known probabilities (risks) of production failure. If the optimal average is 10 units and the failure rate is 5%, the resource is valued at 9.5 units. Introducing better processes and routines that decrease production failure lead to higher average production per resource, making production more efficient and also generating a profit. This becomes especially relevant in equilibrium, where profit is zero, but more efficient resource exploitation allows for an advantage that lasts until other enterprises also employ large-scale production or bring down their failure rates.

This reasoning is commonly associated with the concepts of operative, ordinary, or zero-order capabilities (Helfat and Winter 2011; Winter 2003). These are the ability of a firm to utilize resources to produce some kind of output (Amit and Schoemaker 1993; Helfat and Lieberman 2002; Salvato and Rerup 2011), and are composed of interconnected routines (Winter 2003) and based on knowledge and learning (Freiling, Gersch, and Goeke 2008; Zollo and Winter 2002). In this evolutionary perspective, the more efficient exploitation of resources is a capability. However, from the perspective of organizational economics it may be a source of capabilities. As Argyres et al. (2012) argue, capabilities arise either due to co-specialized investments in resources, creating unique complementarity (Teece 1986), or because an entrepreneur discovers underpriced resources by identifying co-specialization among resources that others do not, or cannot effectuate due to a lack of complementary assets. Mataja accommodates both possibilities. While the latter is clearly related to his “specific” element of entrepreneurial profit rooted in judgment about resource deployment, the former speaks to the “random” element of more efficient exploitation that adds knowledge and skills to the development and change of routines. Therefore, Mataja considers both production and exchange as parts of a chain of actions that ultimately leads to satisfying a customer need. Questions of both coordinating production and of transactions (to procure inputs and sell outputs) stand side by side in his explanation of entrepreneurial profit. Production and exchange are thus mostly complementary, as Mataja’s teacher Carl Menger emphasized (Loasby 2002). By discussing both transaction-related themes (e.g. bargaining power) and production-related themes (e.g. superior coordination) as relevant determinants of entrepreneurial profit, Mataja provides an integrated approach to organization and dissolves the somewhat artificial distinction between the transaction and production research streams (Argyres et al. 2012; Langlois and Foss 1999).

3.4 Knowledge and Bargaining Power

One particularly well-suited example of integration is superior knowledge. Mataja (1966) argues that entrepreneurs have an advantageous position in competition with regard to consumers, but also to capitalists and workers (who provide factors of production). He attributes this advantage to superior knowledge of the market as well as to particular entrepreneurial traits such as a ‘high business drive’ (p. 161) and being ‘energetic’ or ‘vigorous’ (p. 160). Entrepreneurs’ advantages allow them to exploit possible price ranges in their favor by reducing resource prices while increasing the prices of final products, thereby increasing profit. The entrepreneur therefore possesses bargaining power fueled by superior knowledge that allows him to economize on transaction costs. These relations are, however, obviously more complex than Mataja’s entrepreneurs simply overpowering all other market participants. Numerous power relations exist in relation to the firm. Modern examples include venture capitalists who exercise power over start-ups in need of finance, employees with specialized skills and knowledge who can dictate contract conditions, and customers who severely affect sales with the help of social media.

Although Mataja attributes this special bargaining power based on superior knowledge and skills to entrepreneurs in general, he immediately notes that maximizing profit by exercising superior knowledge or power becomes more challenging when competitors occupy similarly advantageous positions. Furthermore, he suggests that power is relevant among entrepreneurs as well, because in order to determine the total entrepreneurial profit of all entrepreneurs one would have to consider the power relations between them. This is reminiscent of transaction costs writings concerning incomplete contracts and the hold-up problem (Grossman and Hart 1986; Williamson 1985) or knowledge asymmetries (Jensen and Meckling 1976). At the same time and going beyond Mataja’s argument, superior knowledge on the demand side can also exhibit positive effects by making entrepreneurial beliefs more accurate. Because valuation goes “backwards,” entrepreneurs that produce goods of lower order may be better at anticipating customer valuations and therefore may be more successful in estimating resource values. Similar reasoning can be found in Barney (1986) in his seminal work on strategic factor markets, where he argues that demand-side firms have a knowledge advantage over supply-side firms with regard to resource values, which allows them to acquire resources below their net present value (Foss and Ishikawa 2007: 753). Barney neglects the customer side, however; his reasoning implies that demand-side firms are generally more profitable because of superior estimations of resource value, which is not necessarily the case. Superior knowledge of the entrepreneur therefore acts on both the specific and the random elements of profit. In the former it is related to strategy, while in the latter it is related to economizing.

Another example is the firm’s boundaries. These have been of particular interest in the discussions of organizational economics and capability theory (Argyres and Zenger 2012). While TCE states that boundary decisions depend on the vulnerability of transactions to opportunism (Williamson 1985), capability approaches argue that firms internalize activities for which they possess a superior capability (Demsetz 1988; Kogut and Zander 1992). Argyres and Zenger (2012) synthesize both arguments and argue that firms integrate resources with unique complementarity, i.e. complementary resources that are not possessed by others, because failing to do so creates significant opportunities for hold-ups. For Mataja, every production process for exchange is an enterprise leading to broad firm boundaries, as suggested also in research on networks and strategic partnerships (Holmström and Roberts 1998). However, Mataja does not have in mind fully vertically-integrated firms controlling the whole production process of one good—he also considers suppliers of intermediate goods and the role of entrepreneurs’ bargaining power. Firm boundaries in his theory are highly flexible because they can contain one task or an entire process. He does, however, provide one clear boundary by stating that entrepreneurs pay for production. Since entrepreneur and enterprise go hand in hand, the boundaries of the firm are therefore determined by that part of production paid for by a specific entrepreneur. This moves Mataja’s reasoning closer to the property-rights (Alchian and Demsetz 1972; Hart and Moore 1990) and ownership-focused theories of Knight (1964) and Foss and Klein (2012) rather than those that view entrepreneurs as independent from ownership (e.g. Kirzner 1973). We now apply the integrative framework outlined above to address some open questions in the resource-based and capability literatures.

4.1 Resources and Value

Mataja provides a clear and consistent account of the relation between value and resources. As explained above, in his theory, the general explanation of entrepreneurial profit is the successful deployment of productive resources. A core feature of the RBV is that profit is based on access to idiosyncratic resources (Barney 1991; Peteraf 1993), and profit is also an indirect outcome of capability theory (Helfat and Peteraf 2009; Teece 2007). Barney’s model (1991) does not feature profit predominately—he defines his explanatory goal of Sustained Competitive Advantage (SCA) in terms of unique strategies—yet in Peteraf’s (1993) definition of SCA, profit takes center stage. For her, bundles of resources differ across firms in terms of their efficiency, and this difference gives rise to rents. These rents can be interpreted as economic profits—defined as excess over opportunity costs—which in turn serve as the definition of competitive advantage (Foss and Knudsen 2003). Foss and Knudsen (2003) argue that defining competitive advantage in terms of economic profits has benefits over definitions in terms of unique strategies (Barney 1991). For example, the profit-based meaning provides easy connections to literature on organizational and industrial economics and avoids situations in which a firm is said to have a competitive advantage even if it incurs losses. Peteraf and Barney (2003), however, argue that this definition of SCA is too broad, as it not only captures the contribution of the resources deployed, but also incorporates external influences such as industry structure. This argument tries to decontextualize resource value and SCA by implying that there is an objective resource value independent from some if not all factors outside the resource itself. However, as we will argue, resources have value only because of the subjective imagination of the entrepreneurs employing them (and ultimately, the consumers who purchase the final products). This imagination is partly built on resource features and their connection to other resources, but also on more comprehensive entrepreneurial planning that includes external parameters.

The tautology critique mentioned above states that both the explanans (resources) and the explananadum (SCA) contain the concepts of value and uniqueness, leading to a situation where value is explained by value (Kraaijenbrink, Spender, and Groen 2010; Lockett, Thompson, and Morgenstern 2009; Priem and Butler 2001). According to Priem and Butler (2001), this is mainly due to an ambiguous treatment of value. Fortunately, our framework resolves this ambiguity. Resource value is ultimately determined by consumers and revealed by the prices they pay. Given the price of the final product, the entrepreneur is able to calculate the contribution of the individual resources. Lippman and Rumelt (2003a) correctly argue that co-specialization and dispersed ownership leading to a ‘fundamental transformation’ (Williamson 1985) may make this especially difficult in individual cases. However, even in general this calculation is far from trivial. Because the consumer’s valuation of the final product is also unknown, entrepreneurs can struggle to ascribe a certain value to productive resources. Resource costs are incurred before the product is sold and the entrepreneur provides the important function of financing production. This requires ‘anticipative judgment[s]’ about future states (Mataja 1966: 149). Since resource value is derived from the future use value of the final product, the entrepreneur can only use their imagination to form an estimate, which makes resource values inherently subjective, rather than objectively given (Lachmann 1978). Only when the product is sold does it become apparent whether the entrepreneur was right and will receive a profit, or was wrong and will incur a loss. Even if the same resource is used to produce the same final product, its value remains unknown ex ante and is subject to change. This leads to the paradoxical conclusion that the real value of a resource at a specific time and place can only be known after it is deployed, when an investment is made (Foss and Klein 2012). This explains why Mataja ascribes to the entrepreneur the specific function of responsibility for production.

4.2 Competitive Advantage

There have been some attempts to solve the tautology problem that follow similar directions as the one proposed here. Bowmann and Ambrossini (2000), for example, introduce different types of consumer values (perceived, monetary, exchange). This solution provides a relevant level of detail but leaves the connection to resource value undefined. Closely related are Peteraf and Barney (2003), who outline resource value as the difference between perceived consumer value and the costs of the firm, but retain an objective notion of value and ex post reasoning, without an entrepreneur. Kraaijenbrink, Spender, and Groen (2010) suggest not differentiating value but rather its occurrence in time, e.g. when a resource is acquired and when it generates SCA. While the time aspect is an important step forward, they correctly point out that too restrictive a treatment can leave no room for managerial or entrepreneurial action. In a similar vein, Freiling, Gersch, and Goeke (2008) argue that actions based on specific resources can yield insights (e.g. customer feedback) that lead to a new evaluation of these resources. This hints at the backward imputation we suggest here; however, it also imports common problems of knowledge-based theories such as the endogenous determination of knowledge (Felin and Foss 2005) and infinite regress (Hallberg and Felin 2020; Kraaijenbring et al. 2010). Lippman and Rumelt (2003a) look at the theoretical foundations of the RBV and argue that the ambiguous notion of value and other logical inconsistencies are imported from the neoclassical treatment of economic rents and costs. While they correctly argue that resources are paid based on a subjective notion of costs, they too favor an objective approach in which resource value is attributed to superiority. A special or distinguished resource that is somehow able to reduce the costs of production can also contribute to profit as a “random” element (Mataja 1966: 162). It need not be unique, however, nor does its value need to be obvious to everyone. The “special” aspect is not in itself a source of profit (or SCA) but simply allows for an increase in its magnitude. Yet without the below-mentioned reasons for sustained profit, special resources quickly lose their ability to generate entrepreneurial profit because their cost-reducing qualities become priced. This implies their tradeability. However, resource combinations do not need to be unpriced to generate a profit (Lippman and Rumelt 2003a; Foss and Ishikawa 2007). Profit depends on the correct imagination of the future, a corresponding entrepreneurial plan, and its successful execution. While resources and capabilities play a major role in these, it is derived from entrepreneurial action. A specific, unique, or special resource may be at the core of this process, but an ordinarily priced resource can generate CA too if it is deployed according to a superior plan. This is not about the resource as such but about entrepreneurial perception of it, or to be more precise, of its attributes and services (Foss and Klein 2012; Penrose 1959).

Entrepreneurial profit and CA are therefore manifestations of value creation by successfully satisfying consumer needs. Failure to satisfy customers is manifested in the value destruction signaled by entrepreneurial loss. Profit depends on correctly aligning entrepreneurial foresight to future customer demand, making continuously accurate judgments a necessary precondition of SCA, and clarifying point (3) above. This provides detail to the general assertion by Foss et al. (2008: 88) that, ‘[m]any rent-generating resources and capabilities are developed due to consistent exercise of superior entrepreneurial judgment by managers over time,’ and directly answers the request of Kraaijenbrink, Spender, and Groen (2010: 361) to develop ‘a resource-based explanation of SCA that focuses on the differences in people’s capacities to identify or imagine and judge the potential risks and benefits associated with the ownership of resources.’

Despite this clear single source of SCA, constraints on the adaption of production are also relevant. Competition leads to the convergence of prices for final products and costs of production, ultimately reducing entrepreneurial profit to zero. The economic effect of the entrepreneur is not disruption, as for Schumpeter (1934), but a kind of equilibration, similar to Kirzner (1973). There is an ‘eliminating tendency’ (Mataja 1966, p. 168) in entrepreneurial profits because competition decreases the prices for final products while increasing the prices for productive resources. This never-ending process, as we have noted above, is the economic baseline; however, Mataja provides different reasons why this process may be disturbed or slowed down. For example, demand shocks may not immediately be internalized by the market. Higher demand for the final product increases the prices entrepreneurs receive while the costs of production do not adapt instantaneously. Furthermore, for resources that have several different uses, a small demand surge from one industry or entrepreneur may not immediately affect resource prices at all, providing a further source of profits.

4.3 Resource Criteria and Conditions for SCA

More important however, are Mataja’s reasons why the elimination of profits (equilibration) may be prevented for longer periods of time. Supply and demand as well as consumer preferences are constantly changing, forcing entrepreneurs and their firms to adapt. However, changing the production structure is neither trivial nor free. Transferring capital goods can be difficult and costly, and the same holds true for both specific knowledge that can only be used in specific production steps because it is tacit (Hayek 1945) and co-specialization with other resources (Baetjer and Lewin 2011; Teece 1986). Moreover, entrepreneurs only possess an incomplete picture of market conditions, especially with regard to the relative profitability of different lines of business, sales channels, and points of purchase, which means they face “true” uncertainty as they make decisions about resource deployments (Foss and Klein 2012; Knight 1964; Mataja 1966). Finally, legal barriers such as privileges, patents, and regulatory entry barriers like skill and knowledge requirements can sustain entrepreneurial profit. It is noticeable that Mataja does not emphasize inimitability beyond legal protection. Bylund (2015) argues that inimitability is impossible because every resource used in production needs to be reproduced or maintained at some point. Inimitability cannot therefore be a source of SCA, since a resource that is not reproduced will be consumed over time. Legal protection, however, allows both inimitability and reproduction. Since these are reasons that make adaption to changing environmental conditions difficult, it is generally possible that no entrepreneur is able to adapt, leaving profits at zero or causing losses. However, if one entrepreneur adjusts successfully, others cannot always easily follow, leading to sustained profits. These points describe the immobility of resources, issues of complementary, asymmetric, and bounded knowledge, and barriers to imitation. All are core themes of the RBV and capability theory that are especially apparent in the seminal articles by Barney (1991), Peteraf (1993), and Teece, Pisano, and Shuen (1997). Barney (1991) lists heterogeneity, immobility, value, rareness, inimitability, and nonsubstitutability as characteristics needed for a resource to provide SCA. Peteraf (1993) speaks of heterogeneity, immobility, and ex ante and ex post barriers to competition, while Teece, Pisano, and Shuen (1997) emphasize complementarity and co-specialization. These have generally been proposed as primary conditions for SCA and have sparked discussions about their logical underpinnings, i.e. their necessity and sufficiency for SCA (Foss and Knudsen 2003; Kraaijenbrink, Spender, and Groen 2010). In a review of industrial organization literature, Foss and Knudsen (2003) argue that only heterogeneity of expectations, i.e. uncertainty, and immobility through sunk cost commitments are necessary for SCA. Our framework agrees, and would see most of the factors proposed by RBV scholars as secondary: they relieve the entrepreneur for a period of time from the need to constantly adjust and make correct judgments. They nevertheless depend on at least one initial correct judgment that puts the entrepreneur in an advantageous position. The primary conditions for SCA, as discussed above, are differences in the imagination of future customer preferences and subsequent entrepreneurial action, as well as the fact that adapting existing resource and production structures is costly (sometimes prohibitively so). We summarize some critiques of the RBV and our suggested solutions in Table 1.

5.1 Heterogeneity

Explaining differences in competitive advantage is the core explanatory goal of both the RBV and capability theory. Differences are attributed to heterogeneous endowments of resources and capabilities, making heterogeneity the hallmark of strategic management. However, heterogeneity is rarely explained bung. Jacobides and Winter (2012), for example, state that heterogeneity is an ‘observable fact’ and its origins can be sufficiently explained by the capability creation process. This process, however, is commonly seen as an accumulation of experiences and knowledge that always requires some pre-existing experience, leading to an infinite regress (Felin and Foss 2011; Halberg and Felin 2020).

Mataja’s distinction between ‘specific’ and ‘random’ elements of profit introduces two interrelated sources of heterogeneity. First, the judgment and imagination of entrepreneurs differ, leading to different profits. As noted above, the notion of judgment is still vague. However, there have been several suggestions for how to clarify the concept, including presenting it as creativity, heuristics, and confidence in the face of uncertainty (Foss and Klein 2012), intuition and gut feeling (Foss and Klein 2015; Huang and Pearce 2015; Klein 2017), empathic accuracy (McMullen 2015) or customer need diagnosis (Godley and Casson 2015). Drawing from Mataja, we suggest also scenario planning that not only looks at understanding the customer, but also considers how needs can be met given existing knowledge, production structures, and prices, and how additional required resources fit in. All of these are underlying causes of heterogeneous entrepreneurial judgment.

Second, Mataja (1966: 161) discusses his ‘random’ elements of profit as a way to look deeper into ‘individual differences in entrepreneurial income.’ He argues that bargaining power, knowledge and skills, and efficiency and optimization modify profits in different ways. This provides another layer of heterogeneity and both can create effects independent from each other. Having exhausted the efficiency gains of an existing technology or production process, different imagination about how and where to direct this process leads to different profits. On the other hand, similar judgments lead to different outcomes when the efficiency of processes differs. However, both sources of heterogeneity can also be interdependent. Idiosyncratic knowledge can be a way to better understand the needs of customers and at the same time provide bargaining power to better exploit their willingness to pay.

5.2 Microfoundations

Each source of heterogeneity is related to microfoundations, which is unsurprising, as Mataja’s approach is rooted in “methodological individualism.”^[7] Based on the same reasoning, our framework argues, along with Felin et al. (2012), that there is a wide range of possible sources of heterogeneity that can be found in individuals, structures, and processes. Individuals include the entrepreneur, managers, and employees. Structures refer to existing resource combinations and organizational designs, while processes are concerned with the interactions of the former.

There has been considerable discussion of microfoundations since the first calls for them appeared (Abell et al. 2008; Felin and Foss 2005; Felin, Foss, and Ployhart 2015; Salvato 2003), and which points back to the theory’s early contributions (Eisenhardt and Martin 2000; Teece, Pisano, and Shuen 1997; Zollo and Winter 2002). This led to growing appreciation of lower-level causes in capability theory especially with regard to the entrepreneur as a person and executive management. Entrepreneurs possess a ‘managerial entrepreneurial capability’ (Teece 2012), or a ‘cognitive managerial capability’ (Helfat and Peteraf 2014), or make decisions based on habits (Zollo and Winter 2012) or cognitive frames (Gavetti 2005). These entail skills and experience along with cognition and social capital (Helfat and Martin 2015) or perception and problem-solving, as well as social cognition and communication (Helfat and Peteraf 2014). There is considerable overlap here with the types of judgment we suggested above. As such, this particular stream of the capability literature may provide an opportunity to further enhance the notion of entrepreneurial judgment.

5.3 Capabilities and Organizational Design

Yet capability theory still falls short when it comes to including employees and considering the importance of organizational design. Several empirical studies argue that employees play a crucial role in routine and capability creation and change (e.g. Buchner and Langley 2016; D’Adderio 2014; Dittrich et al. 2016; Salvato 2009). This can occur through mindful ordinary activities (Salvato 2009), active enactment and recreation (D’Adderio 2014), or reflective talk (Buchner and Langley 2016; Dittrich et al. 2016). Salvato and Rerup (2011) therefore call for the theoretical consideration of lower-level employees, and Salvato and Vasollo (2017) for explanations of capability dynamics that include both managers and employees. While some authors have suggested that dynamic capabilities are linked to less hierarchical and entrepreneurial organizational structures (e.g. Teece 2010; Wilden et al. 2013), they have looked at the problem from a more “macro” level. Yet getting into more detail at the micro level provides a significant opportunity for further theory development (Felin, Foss, and Ployhart 2015).

In our framework this is achieved through the concept of derived judgment, which explicitly argues that although ultimate decision rights remain with the owning entrepreneur, other elements of judgment can be delegated to employees, whether alone or in groups (Foss, Foss, and Klein 2008). Hence, while perception and formation of beliefs may be delegated to one, the corresponding deployment of resources may be delegated to another. The situation becomes complex when several individuals at several levels of decision making are involved, requiring more than just cognition. Interactions may be more or less patterned, repetitive, and structured.

Unusual and novel organizational designs that deliberately defy repetition are an important blind spot of the explanatory link between capabilities based on routinization and competitive advantage (Möller and McCaffrey 2021). Such designs use self-organization and full autonomy of employees with only a minimal set of rules (Felin 2015). The high variability of team composition and characteristics of projects severely restrain the development of routines, yet such organizations are still able to create SCA (Möller and McCaffrey 2021). The sources of this SCA are not routine-based capabilities but the delegation of entrepreneurial judgment to employees who are allowed and required to anticipate custumer demands and deploy resources accordingly. The “specific element” of profit can explain this SCA, but capability theory cannot.

5.4 Dynamic Capabilities

However, Felin and Powell (2016) argue that organizational design containing a high degree of delegation, self-organization, and autonomy is especially suited for the creation of dynamic capabilities. As we argued above, there is indeed some overlap between dynamic capabilities and the framework presented here, yet the issue remains that dynamic capabilities are usually conceptualized as having only an indirect effect on profit (e.g. Helfat and Peteraf 2003; Helfat et al. 2007; Wilden et al. 2013), leaving them without use when there are no ordinary capabilities to act upon. In contrast, proposing a direct relationship between the entrepreneurial acts of creating and (re-)configuring resource combinations and profit (“specific element”) helps to avoid the explanatory gap in cases that bypass the assumptions of capability theory. This does not render ordinary capabilities irrelevant, but rather changes them from original sources of profit and CA to modifiers that affect its size and sustainability: what in our framework, following Mataja, is called the “random element.” It follows from this that the causal explanation of capabilities is reversed. Dynamic capabilities that correspond loosely to our notion of the “specific element” create CA while ordinary capabilities, part of our “random element,” modify it. The firm then becomes a vehicle for entrepreneurs to experiment with resource combinations in pursuit of imagined capabilities (Bylund 2016). Furthermore, a core assumption of dynamic capabilities is that they enable a firm to cope with rapidly changing environments, while slow or incremental change is treated as largely stability (Teece, Pisano, and Shuen 1997). The concept of dynamic capabilities is therefore restricted to a specific external context. This a remnant of the origins of the theory, which invoked resources and capabilities to explain positive profits outside a neoclassical equilibrium and then to further accommodate changes in this equilibrium (Kraaijenbrink, Spender, and Groen 2010). In the framework presented here though, change, not stasis, is the theoretical starting point, again reversing the causality of the argument. Resources are an integral part of this understanding of production, entrepreneurship, and the market process. Moreover, our argument resides in a dynamic view of the economy in which change is nothing special; in fact, it is the norm. The framework remains the same regardless of whether environmental change is slow, fast, or non-existent. Furthermore, perceptions of change are inherently subjective to entrepreneurs and not objective or obvious ex ante: while some entrepreneurs may follow every hype and see disruptive change around every corner, others may regard the same situation as far more stable.

5.5 Flexibility versus Strategy

Finally, the theoretical discussion of making the resource- and capability views dynamic is to a large extent concerned with the general flexibility of firms (Peteraf, DiStefano, and Verona 2013; Pisano 2017). This neglects other important strategic aspects though. Mataja argues that one reason profits can be sustained is because adaptation is costly since resources cannot be combined and separated for free. This may be due to transaction costs related to the definition and enforcement of property rights or associated with learning (Foss and Foss 2008). It implies that resource deployments increase the costs of future deployment and reconfiguration. Therefore, a decision to reconfigure the resource base can deliberately reduce future flexibility. This can, for example, be the case when market entry is delayed to gather additional knowledge (O’Brien et al. 2003). In turn, exercising superior judgment can mean not adapting, in order to stay flexible. This suggests an important trade-off that has rarely been considered. Exceptions include Collan et al. (2014) who propose strategic real options as a supplement to dynamic capabilities and Pisano (2017), who argues that the literature on dynamic capabilities is too concerned with making firms adaptable, while neglecting the strategic decisions and trade-offs that are actually involved when resources and capabilities are transformed. Such decisions include making resource commitments that reduce adaptability but secure competitive advantage, choosing between capability specialization and creation, or between the creation of capabilities that have a broad range of uses and those that are highly specific. While some of these ideas have been around since Teece, Pisano, and Shuen (1997) in the concepts of ‘positions’ and ‘paths,’ they are seldom discussed as crucial aspects of dynamic capabilities. This may be due to the heavy reliance on evolutionary thinking and a deterministic concept of path-dependency that leaves little room for active decision making (Felin and Foss 2011). However, the costs associated with changing an existing resource configuration do not necessarily lead down a deterministic path. Costs influence the economic viability of strategic options, but there is no automatic choice between them. Costly reconfigurations should be carefully considered. They can be the right way forward, for example, when inadequate resource combinations that cause rigidities (Leonard-Barton 1992) have to be dissolved or strategic flexibility should be increased. Furthermore, adaption is no guarantee of success. As noted above, judgments can be wrong, causing losses for the entrepreneur. Polaroid, for example, famously failed to survive despite changes to their resource structure because of incorrect anticipations of customer preferences (Tripsas and Gavetti 2000). Our arguments regarding capabilities are summarized in Table 2.