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Porter's Five Forces Vs Resource based View

Porter's Five Forces Vs Resource based View

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Published by Mohi Asad



PORTER’S FIVE FORCES
VS
RESOURCE BASED VIEW

A COMPARISON



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









Introduction
In the following article, author has carried out a comparison and contrast of
Porter’s 5 Forces Model of competitive advantage with “Resource based view”. The author has first explained both theories and then highlighted the similarities and differences between them, covering most important dimensions.


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 competition and hence the profitability and attractiveness 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
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). According to Fahy and Smithee (1999) “RBV starts 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 turn, this focuses attention on how firms achieve and sustain advantages. The resource based view contends that the answer to this question lies in the possession of certain key resources, that is, resources that have characteristics such as value, barriers to duplication and appropriability. A sustainable competitive advantage can be obtained if the firm effectively deploys these resources in its product-markets. Therefore, the RBV emphasizes strategic choice, charging the firm’s management with the important tasks of identifying, developing and deploying key resources to maximize returns”. (Fahy and Smithee, 1999)

Similarities and 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 serves. This model emphasizes the external impact on strategy development and suggests firms to evaluate those forces 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 contrast, the resource based approach suggests that firms should position themselves strategically based on their valuable, rare, inimitable and non substitutable resources and capabilities rather than the products and services derived from those resources and capabilities. In RBV, resources and capabilities are considered as a root, from whi



PORTER’S FIVE FORCES
VS
RESOURCE BASED VIEW

A COMPARISON



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









Introduction
In the following article, author has carried out a comparison and contrast of
Porter’s 5 Forces Model of competitive advantage with “Resource based view”. The author has first explained both theories and then highlighted the similarities and differences between them, covering most important dimensions.


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 competition and hence the profitability and attractiveness 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
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). According to Fahy and Smithee (1999) “RBV starts 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 turn, this focuses attention on how firms achieve and sustain advantages. The resource based view contends that the answer to this question lies in the possession of certain key resources, that is, resources that have characteristics such as value, barriers to duplication and appropriability. A sustainable competitive advantage can be obtained if the firm effectively deploys these resources in its product-markets. Therefore, the RBV emphasizes strategic choice, charging the firm’s management with the important tasks of identifying, developing and deploying key resources to maximize returns”. (Fahy and Smithee, 1999)

Similarities and 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 serves. This model emphasizes the external impact on strategy development and suggests firms to evaluate those forces 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 contrast, the resource based approach suggests that firms should position themselves strategically based on their valuable, rare, inimitable and non substitutable resources and capabilities rather than the products and services derived from those resources and capabilities. In RBV, resources and capabilities are considered as a root, from whi

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Categories:Types, Research
Published by: Mohi Asad on Oct 17, 2011
Copyright:Attribution Non-commercial

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03/12/2014

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Five Forces Vs Resource based view – A comparison
PORTER’S FIVE FORCESVSRESOURCE BASED VIEW
 
A COMPARISON
Mohiuddin Asad
MBA(UK), ACCA, CMA, CIA, CFE, FFA, CCSA
Mohiuddin Asad
1
1
 
Five Forces Vs Resource based view – A comparison
 Introduction
In the following article, author has carried out a comparison andcontrast of Porter’s 5 Forces Model of competitive advantage with “Resourcebased view”. The author has first explained both theories and thenhighlighted the similarities and differences between them, coveringmost important dimensions.
Mohiuddin Asad
2
2
 
Five Forces Vs Resource based view – A comparison
Five forces model and Resource based view 
In the last two decades, one of the most important debates emerged inthe field of strategic management is how firms achieve and sustaincompetitive advantage. This debate has led to two basic schools whichcan be classified as positioning school and resource based school. FiveForces model which represents positioning school was developed byMichael E. Porter in 1980. It is a framework which is generally used forthe analysis of industry and development of business strategy. It ismainly based on the premise that a corporate strategy should meetthe opportunities and threats in the organization’s outer environment.Porter identified five competitive forces that, according to him, shapeevery industry and every market. These forces determine the intensityof competition and hence the profitability and attractiveness of anindustry. According to this model, the objective of corporate strategyshould be to manage these competitive forces in a way that improvesthe position of the organization. Porter described these five forces as:1) Bargaining power of customers2) Bargaining power of suppliers3) Intensity of existing competitive rivalry4) Threat of new entrants and
Mohiuddin Asad
3
3

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