Resource-Based and Property Rights Perspectives on Value Creation : The Case of Oil Field Unitization

Why is property rights theory important for strategic management? Strategic management focuses on why certain business firms persistently outperform others. Property rights theory addresses this key question by analyzing market frictions. Resource-based theory, a mainstream theoretical perspective in the discipline of strategic management, implicitly assumes that resources are secure due to the inherent attributes of the resources as well as being effectively protected by third-party enforcement and self-enforcing agreements. Extant property rights theory enables us to relax these assumptions to take into account processes where there are struggles in establishing property rights that will enhance the realized economic value of resources. Determination of value creation, which is emphasized in resource-based theory, is informed by a careful examination of property rights. A case study of oil field unitization (where a single firm is designated as the unit operator to develop the oil reservoir as a whole) is analyzed to illustrate these theoretical points. In particular, widespread failure to achieve oil field unitization in the United States despite large potential aggregate economic gains shows how asymmetric information and distributional conflicts over rental shares can limit adoption of property rights that would enable the "internalization of externalities" and thereby enhance realized value creation. This business case highlights that a full resource-based analysis of value creation that focuses on realized value, and not merely potential value, must incorporate the role of property rights to internalize externalities and to solve game-theoretic prisoners' dilemma problems of common-pool resources. The case of (the lack of) oil field unitization in the United States illustrates how difficult it can be to get the institutional details of the property rights correct for realized value creation. In an economic world of positive transaction costs, there are frictions in the development of property rights that can drive a persistent wedge between potential value and realized value. In terms of theory development, property rights theory enables us to analyze distributional conflicts and is a complementary and necessary component to resource-based analysis of (realized) value creation