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

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Five Forces Vs Resource based view – A comparison

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.

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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

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.

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Five Forces Vs Resource based view – A comparison

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)

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Five Forces Vs Resource based view – A comparison

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 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 Porter’s five forces model and the Resource

based view is that they do not have the same unit of analysis. Porter’s 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

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Five Forces Vs Resource based view – A comparison

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 firm’s 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 firm’s ultimate goal is to

achieve sustainable competitive advantage. However, how can competitive advantage

be sustained is a matter of dispute. In Porter’s five forces model a competitive

advantage is sustained when it provides above-average returns in the long run. This 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 firm’s competitive advantage, the firm’s strategy can be called

sustainable.

Further, both resource based view and Porter’s five forces model assume that constant

above normal profits are possible. However, again the two models differ regarding the

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Five Forces Vs Resource based view – A comparison

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, Porter’s 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 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.

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Five Forces Vs Resource based view – A comparison

Finally looking the two models from empirical test perspective, many critics feel that

Porter’s 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, 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

Conclusion

The Porter’s 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 Porter’s 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

resource-based view helps it to evaluate its ability to exploit strengths and respond to

identified weaknesses. In fact, according to Werner felt (1984), Porter’s framework and

the resource-based approach 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

resources and miss opportunities to establish sustainable competitive advantage.

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Five Forces Vs Resource based view – A comparison

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