New venture activities and diversification at farms seem to be perceived as inherently beneficial both to farmers and to rural development. However, the benefit of such efforts and the critical resources and capabilities leading to them seem not to be well understood yet. The purpose of this paper is therefore to explore critical resources and capabilities for farm businesses engaged in entrepreneurial activities through on-farm diversification. The theoretical framework builds upon the resource-based view (RBV) and the dynamic capability (DC) perspective which have emerged as significant research streams within entrepreneurship and strategic management literature. A longitudinal study of three Norwegian farms engaged in on-farm diversification was undertaken through farm visits and in-depth interviews. Analyses show that the farm setting, its traditional production, its relative location, buildings and landscape might all be important resources which add value and uniqueness to the final product that is not easily copied by others. However, in order to reconfigure their resource base and perform necessary changes these farm businesses also rely heavily on developing appropriate dynamic capabilities. The farm businesses appear active in learning and integration of external resources and knowledge, but seem to struggle on building appropriate networks and strategic alliances. Implications for policy makers and practitioners are discussed. (Contains 1 figure and 9 tables.)