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Five Forces Vs Resource based view A comparison



Mohiuddin Asad

Mohiuddin Asad

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Five Forces Vs Resource based view A comparison

In the following article, author has carried out a comparison and contrast of Porters 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.

Mohiuddin Asad

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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 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 organizations 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

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Five Forces Vs Resource based view A comparison 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 firms 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 firms management with the important tasks of

identifying, developing and deploying key resources to maximize returns. (Fahy and Smithee, 1999) Mohiuddin Asad 4 4

Five Forces Vs Resource based view A comparison

Similarities and Differences

Five forces model explains the firms 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 which the firm derives various products for various markets. Thus, in resource based view, strategy is focused on leveraging resources and capabilities across many markets and products 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 Porters five forces model and the Resource based view is that they do not have the same unit of

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Five Forces Vs Resource based view A comparison analysis. Porters five forces model considers industry as a 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 their environment (Quinn, 1978;Mintzberg, 1987); to respond

appropriately when their firms organizational structure finds good strategies (Burgelman, 1994); and to create decision structures and procedures that allow a firm to respond to its environment 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 firms ultimate goal is to achieve sustainable competitive advantage. However, how can competitive advantage be sustained is a matter of dispute. In Porters five forces model a competitive advantage is sustained when it provides above-average returns in the long run. This Mohiuddin Asad 6 6

Five Forces Vs Resource based view A comparison 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 come to an end without disrupting the firms competitive advantage, the firms strategy can be called sustainable. Further, both resource based view and Porters five forces model assume that constant above normal profits are possible. However, again the two models differ regarding the nature of the rents a firm can achieve. The RBV is an efficiency-based explanation of

performance differences; it is concerned with Ricardian rents resulting from the scarcity of superior resources (Peteraf & Bergen, 2003) and quasi-rents or opportunity costs. According to Peteraf and Barney (2003), Superior resources are more efficient in the sense that they enable a firm to produce more economically and better satisfy customer wants (Peteraf & Barney, 2003) On the contrary, Porters five forces approach emphasizes the exercise of market power and monopoly-type rents as the sources of performance differentials (Conner, 1991). Some important aspects of similarity are exposed when we compare the individual forces of five forces model with the prerequisites of resources in the resource based view. There we recognize that much of the underlying concepts have great resemblance. For instance, non substitutability of a resource in RBV is similar to the threat of Mohiuddin Asad 7 7

Five Forces Vs Resource based view A comparison substitution in five forces and inimitability of resources in RBV resembles to threat of new entrants in five forces. Likewise, 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 from outside, or some combination of the two. Both are dependent on prior managerial choices. On the contrary, 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 Porters five forces model lacks empirical evidence to support his conclusions, suggesting that it has not been well researched. In contrast, RBV is central to much recent empirical work in strategy. In middle of 1990s, a four-year longitudinal study of 2800 US firms showed that, whilst industry conditions explained 4% of profitability variation, individual firm resources explained 44% of profitability variation across firms (Data Systems International, 2007). A more recent study in Spain, involving 1642 firms found that industry conditions explained 3% and firm resources explained 36% of performance variation (Data Systems International, 2007). However, Mohiuddin Asad 8 8

Five Forces Vs Resource based view A comparison 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).

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Five Forces Vs Resource based view A comparison

The Porters five forces model emphasizes the actions, a firm can take to earn superior profits by creating privileged market or industry

positions against competitive forces whereas the Resource based view emphasizes building competitive advantage through capturing superior profits, stemming from fundamental firm-level resources and

capabilities. While both Porters five forces model and Resource based view may appear to be different they are actually complementary when integrated. The industry structure and position approach helps a firm to understand its competitive environment while the resourcebased view helps it to evaluate its ability to exploit strengths and respond to identified weaknesses. In fact, according to Werner felt (1984), Porters framework and the resource-based approach

constitute the two sides of the same coin. Thus the author suggests that both Porters 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

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Five Forces Vs Resource based view A comparison resources and miss opportunities to establish sustainable competitive advantage.

Porter, M. (1980), Competitive Strategy: Techniques for Analyzing 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. Rumelt, R. (1984), Towards a strategic theory of the 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, Vol. 10, 1999. Porter, M. (1991), towards a dynamic theory of strategy, Strategic Management Journal, Vol. 12, pp.95-117. Mint berg, H. (1987), Crafting strategy, Harvard Business Review, Vol. 65 (4): pp. 6675. Quinn J. (1978), Strategic change: logical incrementalism, Sloan Management Review, Vol. 20(1): pp. 717.

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Five Forces Vs Resource based view A comparison Burgelman, R. (1994), "Fading memories: a process theory of strategic business exit in dynamic environments", 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. 934950. Barney, J. (1991), Firm resources and sustained competitive

advantage, Journal of Management, Vol. 17(1): pp. 99120. Peteraf, M. and Bergen, M. (2003), Scanning dynamic competitive landscapes: a market-based and resource-based framework, Strategic Management Journal, Vol. 24, pp. 1027-1041 Peteraf, M. and Barney, J. (2003), Unraveling The Resource-Based 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 of Management, 1991, Vol. 17(1), pp.121-154. Data Systems International, (2007) The Resource-Based View of Strategy: Application to the Agricultural Industry, DSI/Asia and Pacific, July 2007. Mohiuddin Asad 12 12

Five Forces Vs Resource based view A comparison Armstrong, C. and Shimizu, K. (2007) Review of Approaches 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, November 2006, Vol. 4(4) Schilling, M. and Steensma, H. (2002), disentangling the theories on firm boundaries: A path model and empirical test, Organization Science, Vol. 13(4): pp. 387-40

Porter, M.E. (1991), "Towards a dynamic theory of strategy", Strategic Management Journal, Vol. 12 Grant, R.M., (1991), the Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation, California

Management Review, Vol. 33(3), pp. 114135.

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