The recent financial meltdown was perhaps the biggest economic crisis since the great depression, and a team of economists says that current macroeconomic models used to diagnose and treat the causes of the ongoing recession are woefully inadequate.

Their study, appearing in the November issue of Strategic Organization, argues that macroeconomics is not equipped to offer full solutions to this crisis. Its basic assumption is that factors of production, firms, and industries in the economy are homogeneous and interchangeable. Research in strategic management has consistently shown that the assumption that the economy is made up of homogeneous or interchangeable factors of production is incorrect.

However, Strategic management theory—with its emphasis on heterogeneously distributed and rather immobile and inelastic resources and capabilities—is ready to open the debate to new ideas for the recovery.

The idea that resources, firms, and industries are different from each other, that capital and labor are specialized for particular projects and activities, and that people (human capital), are distinct, is constantly encountered in strategic management theory and practice. That macroeconomic models assume factors of production in an economy are homogeneous is interesting, the authors point out, because this assumption creates problems for macroeconomics in both explaining the current crisis, and in deriving solutions.

The authors focus on the macroeconomic stimulus itself, and—particularly in the US—the financial-sector bailout measures that followed. Treasury Secretary Henry Paulson told Congress in September 2008 that radical steps were needed "to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."

The US government's restructuring plans for the financial and automobile industries, and potentially for other sectors are likely to run into problems due to their basis in macroeconomic principles, the authors warn.

What should governments do during an economic downturn? The authors believe it is critical to avoid policies that generate poor investment in the first place. They argue strongly that basic heterogeneity of individuals, fiirms, industries, and regions cast doubt on the macroeconomic stimulus policies governments currently preach.

The authors discuss how just as strategic management theory has much to offer in understanding the crisis, the crisis has also thrown certain important weaknesses in current strategic management theory into sharp relief. Strategic management theory must extend its focus on heterogeneous capabilities to include the capabilities to handle major, anticipated shocks. Resourceful entrepreneurs and business managers urgently need us to do so, the authors state.

Adapting to external change is an important theme in strategic management research. Performance depends not only on resources and capabilities involved in production and market exchange, but also on the ability of business to influence political decision makers. In this climate, entrepreneurs may need to become skilled political lobbyists, taking advantage, and influencing the direction of the political debate.

Strategic management scholars have much to offer, and they must now engage in meaningful debate on how management theory can help resolve the current crisis, because the future, both immediate and long term, is at stake.

Citation: Rajshree Agarwal, Jay B. Barney, Nicolai J. Foss, Peter G. Klein, 'Heterogeneous resources and the financial crisis: implications of strategic management theory', 2009, Strategic Organization, DOI: 10.1177/1476127009346790