DIVERSIFICATION AND FOCUS: A BAYESIAN APPLICATION OF THE RESOURCE-BASED VIEW

We propose a new application of the resource-based view (RBV) that is more consistent with Penrose’s (1959) original framework. We use that framework to study the relationship between diversification and refocusing strategies and economic performance. We propose that the RBV may be enhanced by the explicit recognition of Penrose’s two classes of resources, administrative and productive resources. This distinction suggests a focus on the administrative decisions of managers, including the multiple decisions associated with diversification and refocusing strategies, which lead to economic performance. Second, we argue that RBV theory is a theory about extraordinary performers or outliers, not averages. Therefore, the statistical methods used in applying the theory should account for the difference between individual firms, rather than relying on means across firms, which statistically neutralize firm differences. We introduce a novel Bayesian Hierarchical method to examine actions taken by new CEOs and the resulting effects on economic performance over time. The unique feature of this Bayesian method is it allows us to make meaningful probability statements about the diversification and refocusing strategies of individual firms.