Porter's Five Forces Vs Resource based View

Five Forces Vs Resource based view – A comparison

PORTER’S FIVE FORCES VS RESOURCE BASED VIEW

A COMPARISON

Mohiuddin Asad MBA(UK), ACCA, CMA, CIA, CFE, FFA, CCSA

Mohiuddin Asad

1 1


Introduction In the the foll follow owin ing g arti articl cle, e, auth author or has has carr carrie ied d out out a comp compar aris ison on and and contrast of Porter Porter’s ’s 5 Forces Forces Model Model of compet competiti itive ve advant advantage age with with “Resou “Resourc rce e based view”. The author has first explained both theories and then highlighte highlighted d the similarit similarities ies and differenc differences es between between them, them, covering covering most important dimensions.

Mohiuddin Asad

2 2


Five forces model and Resource based view In the last two decades, one of the most important debates emerged in the field of strategic management is how firms achieve and sustain competitive advantage. This debate has led to two basic schools which can be classified as positioning school and resource based school. Five Forces model which represents positioning school was developed by Michael E. Porter in 1980. It is a framework which is generally used for the analysis of industry and development of business strategy. It is mainly based on the premise that a corporate strategy should meet the opportunities and threats in the organization’s outer environment. Porter identified five competitive forces that, according to him, shape every industry and every market. These forces determine the intensity of compet competiti ition on and hence hence the profit profitabi abilit lity y and attrac attractiv tivene eness ss of an industry. According to this model, the objective of corporate strategy should be to manage these competitive forces in a way that improves the position of the organization. Porter described these five forces as: 1) Bargaining power of customers 2) Bargaining power of suppliers 3) Intensity of existing competitive rivalry 4) Threat of new entrants and

Mohiuddin Asad

3 3


5) Threat of substitute products.

The second school of thought is known as Resource based view. It suggests that Firms can earn sustainable super normal profits if they have superior resources and these resources should be Valuable, Rare, Inimitable and Non substitutable. (Grant, R.M., 1991) The fundamental principle of the resource based view is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (Werner felt, 1984; Rumelt, 1984 19 84). ). Accord According ing to Fahy Fahy and Smithe Smithee e (1999 (1999)) “RBV “RBV start starts s with with the assumption that the desired outcome of managerial effort within the firm is a sustainable competitive advantage (SCA). Achieving a SCA allows the firm to earn economic rents or above average returns. In tur turn, thi this foc focus use es atte attent ntiion on how how fir firms achi achiev eve e and su sust stai ain n advantages. The resource based view contends that the answer to this ques questi tion on lies lies in the the poss posses essi sion on of cert certai ain n key resou resourc rces es,, that that is, is, reso resour urce ces s

that that have have char charac acte teri rist stic ics s

such su ch as valu value, e, barr barrie iers rs to

duplicatio duplication n and appropriabi appropriability lity.. A sustainable sustainable competiti competitive ve advantage advantage can be obtained if the firm effectively deploys these resources in its produc product-m t-mark arkets ets.. There Therefor fore, e, the RBV RBV emphas emphasize izes s strate strategic gic choice choice,, char chargi ging ng

the fir firm’s m’s

manag anage ement ent

with with the impor portant tant

tasks asks of

identi identifyi fying, ng, devel developi oping ng and deploy deploying ing key resour resources ces to maxim maximize ize returns”. (Fahy and Smithee, 1999) Mohiuddin Asad

4 4


Similarities and Differences Differences Five forces model explains the firm’s strategy in relation to its product and market positioning, i.e. the products it makes and the market it serv serves es.. This This mode modell emph emphas asiz izes es the the exte extern rnal al impac impactt on stra strate tegy gy deve develo lopm pmen entt and su sugg gges ests ts firm firms s to eval evalua uate te thos those e forc forces es in an industry, which give rise to opportunities and threats. Consequently, the dominant strategy deals with choosing an appropriate industry and positioning the firm within that industry according to the five forces. In contra contrast, st, the resou resource rce based based approa approach ch suggest suggests s that that firms firms should should posi positi tion on them themse selv lves es stra strate tegi gica call lly y base based d on thei theirr valu valuabl able, e, rare rare,, inimitable and non substitutable resources and capabilities rather than the the

prod produc ucts ts

and and

ser service vices s

der derived ived

from from

those hose

resou esourrces ces

and and

capabi capabili litie ties. s. In RBV, RBV, resou resource rces s and capabi capabilit lities ies are consid considere ered d as a root, from which the firm derives various products for various markets. Thus, in resource based view, strategy is focused on leveraging resources resources and capabiliti capabilities es across across many markets and products products instead instead of targeting specific products for precise markets. Hence, we can say that RBV is an inward looking or Inside-Outside model whilst five forces is an outward looking or an Outside-Inside model. One of the fundamental differences in Porter’s five forces model and the Resource based view is that they do not have the same unit of

Mohiuddin Asad

5 5


anal analys ysis is.. Port Porter er’s ’s five five forc forces es mode modell cons consid ider ers s indu industr stry y as a unit unit whereas resource based view chooses a firm or an individual resource as a unit of analysis. However, looking at another dimension, both five forces and RBV models are prescriptive in nature and assume that managers are rational. In the Five forces model, manager has the task to take the right decisions and choose appropriate strategy to manage the five competitive forces in such a way that improves the position of the organization, thus earning above average profits. However, in RBV, strategy is not only about the cognitive ability of the managers and their ability to make the correct decisions, but also about their ability to work creatively with the raw material presented by their firm and thei theirr

envi enviro ronm nmen entt

(Qui (Quinn nn,,

1978 19 78;M ;Min intz tzbe berg rg,,

1987 19 87); );

to

resp respon ond d

appropr appropriat iately ely when when their their firm’s firm’s organi organizat zation ional al struct structure ure finds finds good good strategies (Burgelman, 1994); and to create decision structures and procedures procedures that allow a firm to respond respond to its environment environment adaptively adaptively (Bower, 1974; Levinthal, 1974). Thus, in RBV managers have the entire tasks of identifying, developing and deploying key resources to earn and sustain superior profits. Another similarity in both models is that they both agree that firm’s ulti ultima mate te goal goal is to achi achiev eve e su sust stai aina nabl ble e comp compet etit itiv ive e adva advant ntag age. e. However, how can competitive advantage be sustained is a matter of disp disput ute. e. In Port Porter er’s ’s five five forc forces es mode modell a comp compet etit itiv ive e adva advant ntag age e is sustained when it provides above-average returns in the long run. This Mohiuddin Asad

6 6


is contrary to RBV where competitive advantage is sustained when the efforts by competitors to render the competitive advantage redundant, have ceased (Barney, 1991; Rumelt, 1984). When the imitative actions have have come come to an end end with withou outt disr disrup upti ting ng the the firm firm’s ’s comp compet etit itiv ive e advantage, the firm’s strategy can be called sustainable. Furt Furthe her, r, both both reso resour urce ce base based d view view and Port Porter er’s ’s five five forc forces es mode modell assume assume that that consta constant nt above above normal normal profit profits s are possib possible. le. Howeve However, r, again the two models differ regarding the nature of the rents a firm can

ach achieve.

The

RBV

is

an

efficiency-base ased

explana anation

of

performance differences; it is concerned with Ricardian rents resulting from the scarcity of superior resources (Peteraf & Bergen, 2003) and quasi-r quasi-rent ents s or opport opportuni unity ty costs. costs. Accord According ing to Petera Peteraff and Barney Barney (2003), “Superior resources are more efficient in the sense that they enab enable le a firm firm to prod produc uce e more more econ econom omic ical ally ly and and bett better er sati satisf sfy y customer wants” (Peteraf & Barney, 2003) On the contrary, Porter’s five forces approach emphasizes the exercise of market power and mono monopol polyy-ty type pe rent rents s as the the sour source ces s of perf perfor orma manc nce e diff differ eren enti tial als s (Conner, 1991). Some important aspects of similarity are exposed when we compare the indiv individu idual al forces forces of five five forces forces model model with with the prereq prerequis uisite ites s of resources in the resource based view. There we recognize that much of the underlying concepts have great resemblance. For instance, non subs su bsti titu tuta tabi bili lity ty of a reso resour urce ce in RBV RBV is simi simila larr to the the thre threat at of Mohiuddin Asad

7 7


subs substi titu tuti tion on in five five forc forces es and and inim inimit itab abil ilit ity y of reso resour urce ces s in RBV RBV rese resem mble bles

to

threa hreatt

of new new

entran trantts

in

fiv five

for forces. es.

Like Likew wise, ise,

“bargaining power of suppliers refers to input markets” (Porter, 1991). Proponents of both sides dispute on the link between resources and activities. The proponents of five forces claim that resources represent an inherently intermediate position in the chain of causality. That is, resources arise either from performing activities over time, acquiring them them fro from out outside side,, or som some comb combiinat nation ion of the the two. wo. Both oth are are depe depend nde ent on pri prior manag anage erial ial

choi hoices. ces. On the cont contrrary ary,

the

proponents of RBV claim that its valuable, rare and inimitable and non substitutable resources of the firm that lead to the activities, resulting in sustained competitive advantage. Finally looking the two models from empirical test perspective, many critics feel that Porter’s five forces model lacks empirical evidence to supp suppor ortt his his conc conclu lusi sion ons, s, sugg sugges esti ting ng that that it has has not not bee been well well researched. In contrast, RBV is central to much recent empirical work in strategy. strategy. In middle middle of 1990s, 1990s, a four-year four-year longitudinal longitudinal study of 2800 2800 US firm firms s show showed ed that, that, whil whilst st indu indust stry ry cond condit itio ions ns expl explai aine ned d 4% of profit profitabil ability ity variat variation ion,, indivi individual dual firm firm resour resources ces explai explained ned 44 44% % of profitability variation across firms (Data Systems International, 2007). A more recent study in Spain, involving 1642 firms found that industry cond condit itio ions ns expl explai aine ned d 3% and and firm firm reso resour urce ces s expl explai aine ned d 36 36% % of performanc performance e variation variation (Data Systems Systems Internatio International, nal, 2007). 2007). However, However, Mohiuddin Asad

8 8


there are many other researchers who still think that there are no satisfactory empirical tests of the Resource based view also (Arend, 2006). According to Armstrong and Shimizu (2007), “only one study (Schilling & Steensma, 2002) attempts to capture the effects of rarity (uniqueness) of resources and no study expressly attempts to capture the effects of non substitutability”. (Armstrong & Shimizu, 2007).

Mohiuddin Asad

9 9


Conclusion The Porter’s five forces model emphasizes the actions, a firm can take to earn superior superior profits profits

by creatin creating g privil privilege eged d market market or industry industry

positions against competitive forces whereas the Resource based view emphasizes building competitive advantage through capturing superior prof profit its, s,

stem stemmi ming ng

from from

fund fundam amen enta tall

firm firm-l -lev evel el

reso resour urce ces s

and and

capabilities. While both Porter’s five forces model and Resource based view view may appear appear to be differ different ent they they are actual actually ly comple complemen mentar tary y when integrated. The industry structure and position approach helps a firm to understand understand its competiti competitive ve environm environment ent while while the resourceresourcebased based view view helps helps it to evalua evaluate te its ability ability to exploi exploitt streng strengths ths and respon respond d to identi identifie fied d weakne weaknesse sses. s. In fact, fact, accord according ing to Werner Werner felt felt (198 (1984) 4),,

Port Porter er’s ’s

fram framew ewor ork k

and and

the the

reso resour urce ce-b -bas ased ed

appr approa oach ch

constitute the two sides of the same coin. Thus the author suggests that both Porter’s five forces model and Resource based view remain important and the choice should not be to choose one and discard the other but rather the approach should be to integrate them and make use of their complimentarity. Firms cannot ignore the industries within which they operate, but neither can they afford to focus senselessly upon it at the expense of their internal

Mohiuddin Asad

10 10


resources and miss opportunities to establish sustainable competitive advantage.

Bibliography Porter Porter,, M. (198 (1980), 0), Compet Competiti itive ve Strate Strategy: gy: Techni Technique ques s for Analyz Analyzing ing Industries and Competitors, Free Press, New York. Werner felt, B. (1984), a resource-based view of the firm, Strategic Management Journal, Vol. 5, (April-June): pp. 171-180. Rum Rumelt, lt, R. (19 (1984), Tow Towards ards a str strateg ategiic the theory ory of the firm firm,, In Competitive Strategic Management, Ed. Richard B. Lamb, Englewood Cliffs, New Jersey. Fahy, J. and Smithee, A. (1999), “Strategic Marketing and the Resource Based View of the Firm”, Academy of Marketing Science Review, Review, Vol. 10, 1999. Porter Porter,, M. (199 (1991), 1), toward towards s a dynami dynamic c theory theory of strate strategy, gy, Strategic Management Journal, Vol. 12, pp.95-117. Mint berg, H. (1987), Crafting strategy, Harvard Business Review, Review , Vol. 65 (4): pp. 66–75. Quin Quinn n J. (197 (1978) 8),, Stra Strate tegi gic c chang change: e: logi logica call incr increm emen enta tali lism sm,, Sloan Management Review, Review , Vol. 20(1): pp. 7–17.

Mohiuddin Asad

11 11


Burgelman, R. (1994), "Fading memories: a process theory of strategic busi busine ness ss exit exit in dyna dynami mic c envi enviro ronm nmen ents" ts",, Administrative Science Quarterly , Vol. 39(1), pp.24-46. Bower, J. (1970), Managing the Resource Allocation Process: A Study of Corporate Planning and Investment, Harvard Business School, Boston, MA, Levinthal, D. (1997), Adaptation on rugged landscapes, Management Science, Vol. 43: pp. 934–950. Barn Barney ey,,

J.

(19 (1991),

Fir Firm

resour source ces s

and and

sust su stai aine ned d

comp compe etiti titive ve

advantage, Journal advantage, Journal of Management, Vol. 17(1): pp. 99–120. Peter Peteraf, af, M. and Bergen Bergen,, M. (200 (2003), 3), “Scann “Scanning ing dynami dynamic c compet competiti itive ve landscapes: a market-based and resource-based framework”, Strategic Management Journal, Journal, Vol. 24, pp. 1027-1041 Peter Peteraf, af, M. and Barney Barney,, J. (200 (2003), 3), Unrave Unravelin ling g The Resour Resourcece-Bas Based ed Tangle, Managerial and Decision Economics, Special issue, Vol. 24(4), pp. 309-323. Conner, K. (1991) “A Historical Comparison of Resource-Based Theory and Five Schools of Thought within Industrial Organization Economics: Do We Have a New Theory of the Firm?” Journal Firm?” Journal of Management , 1991, Vol. 17(1), pp.121-154. Data System Systems s Intern Internati ationa onal, l, (2007 (2007)) “The “The Resour Resourcece-Bas Based ed View View of Strategy: Application to the Agricultural Industry”, DSI/Asia and Pacific, July 2007. Mohiuddin Asad

12 12


Arms Armstr tron ong, g, C. and and Shim Shimiz izu, u, K. (200 (2007) 7) “Rev “Revie iew w of Ap Appr proa oach ches es to Empirical Research on the Resource-Based View of the Firm”, Journal of Management , December 2007, Vol. 33(6) Arend, R. (2006) “Tests of the resource based view, Do the empirics have any clothes?” Strategic Organization, Organization, November 2006, 2006, Vol. 4(4) Schilling, M. and Steensma, H. (2002), disentangling the theories on firm firm boun bounda dari ries es:: A path path mode modell and and empi empiri rica call test, test, Organ Organiz izat atio ion n Science, Vol. 13(4): pp. 387-40

Porter, M.E. (1991), "Towards a dynamic theory of strategy", Strategic Management Journal, Journal, Vol. 12 Grant Grant,, R.M. R.M.,, (199 (1991) 1),, the the Reso Resour urce ce-B -Base ased d Theo Theory ry of Comp Compet etit itiv ive e Adva Ad vant ntag age: e:

Impl Implic icat atio ions ns

for for

Stra Strate tegy gy

Form Formul ulat atio ion, n,

California

Management Review, Review , Vol. 33(3), pp. 114–135.

Mohiuddin Asad

13 13

Porter's Five Forces Vs Resource based View

Recommend Documents