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Developed our understanding of strategy - Essay Example

A key area of concern for businesses is how to obtain a competitive advantage and furthermore retain that advantage for a sustained period of time. Much strategic management research has focused on understanding sources of “sustained competitive advantage” for firms (Porter,1985; Rumelt, 1984). Strategists in recent times have traditionally based their research (Andrews, 1971; Ansoff,1965; Hofer & Schendel 1978) on a “single organizing framework” (Barney 1991) which first surfaced in the 1960s. Figure one. The relationship between traditional “strength-weaknesses-opportunities-threats” analysis, the resource based model, and the model of industry attractiveness.

Strategy from this perspective involves responding to both opportunities and threats, and to internal strengths and weaknesses, as a means of achieving competitive advantage. (De Wit. and Meyer. 2002 p30) Most research on sources of sustained competitive advantage (prior to the Resource-based view (Wernerfelt, 1984)) have followed this “outside-in perspective” (De Wit and Meyer. 2002) to strategy formulization. (Hofer & Schendel, 1978; Penrose, 1958; Porter, 1980, 1985; Stinchcombe 1956)

The most influential work in this area was published by Michael Porter in 1985 in his book Competitive Advantage, which built upon the original concepts he put forward in his previous book Competitive Strategy. The fundamental concepts of his work suggest that for a firm to secure sustained competitive advantage, they must first select a market with attractive characteristics. Next, they should position themselves in the market in accordance to his Five Forces Framework.

Porters influential framework aids strategists in evaluating competitive forces such as; the threat of new entrants, buyers bargaining power, threat of substitutes, suppliers bargaining power and the rivalry between existing competitors; present in a particular industry or sector. The ultimate profit potential is determined by the collective strengths of these forces. (Porter, 1979 pp34-50). These forces can range from ‘intense’ in industries where little ROI is made, to ‘mild’ in industries where there is greater opportunity for superior performance and consequently increased ROI is realised.

Finally, once the competitive forces in the industry have been identified, the strategist is then in the position to evaluate his company’s strengths and weaknesses and formulate a plan of action. According to Porter, such a plan may include: (1) positioning the firm so that it can defend against competition; (2) moving strategically in order to influence the balance of forces, and thus improve the firm’s position; (3) anticipate changes influencing the competitive forces, responding quicker and thereby exploiting changes in the markets new balance of powers before other realise. Porters approach was widely accepted, however it subsequently lead to the alternative ‘inside-out’ perspective of the Resource-based view being developed.

The Resource-based view first appeared in an article entitle “A Resource-Based View of a Firm” be Wernerfelt in 1984. It was further developed by Rumelt (1984), Barney (1986,1991), Dierickx and Cool (1989). However, “Barney provides what is arguably the most detailed and formalized depiction of the business-level resource based perspective”. (Priem, R, L. and Butler, J, E. 2001 pp23) His “organizational framework”-“that organizational resources that are valuable, rare, difficult to imitate and non-substitutable can yield sustained competitive advantage” (Meyer 1991, in Priem and Butler 2001) has lead to many further studies on the RBV.

This essay aims to (1) Detail the fundamental differences between the RBV and previous works such as Porters five forces. (2)Highlight the key areas of debate that have arisen from Barneys work. Primarily those put forward by Butler and Briem. (3)Evaluate how the RBV has developed our understanding of strategy.

THE RESOURCE-BASED VIEW

The Resource-based view ‘inside-out perspective’, is fundamentally different from Porters ‘out-side in’ view of strategy formulization. Therefore, it’s not surprising that the simplifying assumptions used by Porter are contradictory to the key assumption made by Barney. Porter’s five forces method implicitly assumes that (1) all firms within an industry are identical in terms of the strategic relevant resources they control and the strategies they pursue. (Porter, 1981. In Barney, 2001). (2) That if resource heterogeneity were to develop in a industry, it would be very short-lived because the resources a firm used to implement their strategy would be highly mobile, thus it could be obtained by other firms. (Barney, 1986a; Hirshleifer, 1980. In Barney, 1991p 100).

These assumptions made by Porter are not suitable in the case of the RBV framework, as they disregard firm resource heterogeneity and immobility characteristics as sources of competitive advantage.(Penrose, 1958, Rumelt, 1984; Wernerfelt, 1984, 1989. In Barney 1991). Conversely, Barney (1991) uses two very different assumptions in analysing sources of competitive advantage. (1)Firstly, firms can be heterogeneous with respect to resources they control. (2) Secondly, it is assumed that resources may not be perfectly mobile across firms, resources maybe ‘sticky’ (Priem and Butler, 2001), thus heterogeneity can last for a period of time.

In summary, Porter assumes organisations in an industry or group are homogeneous in nature and Barney assumes the opposite, in that all firms are heterogeneous in nature. Porters use of poor simplistic assumptions on the resource-side of the framework and Barney’s similar use of poor simplistic assumption on the environment-side of the framework, has consequently lead to strategies that are very one-sided. Firstly Porters (1979) five forces theory, which simplified analysis with implicit assumption of homogeneous and mobile factor markets, fails to recognise that barriers to entry can only exist when firms in the industry are heterogeneous in terms of strategically relevant resources they control. (McGee and Thomas 1986 In. Barney 1991p105). Thus by using simplistic assumptions on the resource side of the framework, Porter (1991) has weakened the overall framework.

Likewise, Barney uses simplistic assumptions that are on the demand (environment) side of the framework regarding homogeneous and immobile product markets, implying that demand never changes. (McWilliam & Smart ,1995. In Briem and Butler. Pp22-40) This simplifying assumption also weakens barneys framework, as demand does change and influences the value of firms resources. The main difference between Porters five forces model (along with other environment-focused models) and Barney’s resource-based model is essentially straightforward. Porter suggests that the key to obtaining a competitive advantage is through better understanding of the external environment (environment focused).

On the contrary, Barney suggests that competitive advantage is linked to firm’s internal resources. Barney suggests that if a firm’s resources are both ‘rare’ and ‘valuable’ they can produce a competitive advantage for that firm. Moreover, if these resources are also simultaneously not imitable (replicated), not substitutable and not transferable, those resources may generate a competitive advantage that is sustainable.(Barney 1991.In Briem and Butler. 2001). Since the publication of Barneys Resource-based model, many scholars have questioned the apparent link, suggested by Barney, between internal resources and sustained competitive advantage.