Strategy Soup
Resource based view & Porter’s View of the world
Most startups are launched with ambitious plans for growth. However, many promising ones also go off the rail. Often they have trouble scaling, or delivering the right value proposition to the specific target segment. Forbes reported that 90% of the startups fail. Why do you think there’s this persistent gap between business goals & performance?
Resource Based View
The resource-based view means that firms possess resources, which help them achieve competitive advantage, that lead to superior long-term performance. Resources that are valuable and rare can lead to the creation of competitive advantage. It emphasizes that the company should position themselves strategically based on their — valuable, rare, inimitable and non substitutable resources and capabilities instead of the products and services obtained from those resources and capabilities.
Porter’s View : According to Porter, price is not the only factor influencing strategy. He introduced five forces that build up to an industry’s competitive advantage which strategically shape every industry and every market. As per this model, the objective of corporate strategy should be to manage these competitive forces in a way that improves the position of the organization. These five forces are :
- Threats of new entry
Every company should consider how easy it is for others to enter their specific Industry and market and might threaten the company’s position. It is essential to consider the following factors — (1) How much does it cost & how long does it take to enter a specific market (2) What are the barriers to entry ? (3) What does it take for a company to make it more scalable? (4) Are the technologies protected? (5) How strict is the market regulation? — — By answering these questions, it will be clear for the company with how much ease or effort the competitors can enter the market.
2. Threat of substitution
This helps a company determine the probability of your customers that can replace the company’s product or service with a substitute that can solve the same need. For this, the company needs to do a competitive research analysis and study — differentiators between product/service and the alternatives available, Types of substitute available in the market, How much money and effort does it take switching to the alternative product, What products or services can you offer that might substitute a market leader?
3. Bargaining power of suppliers
This is to analyze how easily suppliers could increase their prices that could affect the company’s bottom line. Consider the following — How many suppliers does your company have? Uniqueness of the product or service that they provide? How many alternative
suppliers can you find? Prices in comparison to your current supplier? Cost & Effort involved in switching from one supplier to another?
It’s also crucial to keep in mind that your supplier will also think strategically, just as your company. If they understand their market- they would know if only a few other companies could fulfill the same need as yours, and might charge you more for the unique service requirement of your company — Have your BATNA ready!
4. Bargaining power of buyers
Your company needs to determine whether buyers have the potential to push your prices down. Consider — How many buyers control your sales? Size of orders/sales? Ability and the cost to switch suppliers by the buyers? How unique is your value proposition to the buyer? — This will help your company assess the leverage your buyers have to dictate cost. Higher the customer base the company gains, the more power the company holds.
5. Competitive rivalries
This assesses the number and strength of the company’s existing competitors. This requires the company to answer the following questions from the competitive research analysis — No. of direct / indirect competitors, Biggest Competitor, Comparison of the companies on the basis of quality of their products/ services, point of differentiation between them & you, Cost & effort it takes for your customer to switch the any competitor.
Connect between the frameworks (1) Both the models agree that the company’s end goal is to land a sustainable competitive advantage — how can competitive advantage be sustainable is the debate. (2) Both Porter’s five forces and RBV models are prescriptive in nature and assume that managers are rational.
Five forces model: The manager’s task is to take the right decisions and choose the most suitable strategy to handle the five competitive forces so that it positions the organization better, resulting in earning above average profits.
RBV: Here, Strategy is not only about the ability to make right decisions, but also about their ability to work creatively with the resources & capabilities possessed by their firm and their environment, to respond appropriately when their firm’s organizational structure finds good strategies and to create decision structures and procedures that allow a firm to respond to its environment adaptively. Therefore, in RBV managers have the tasks of identifying, developing and deploying key resources to earn and sustain superior profits.
They are mutually exclusive because — RBV is an internal / inward or Inside-Outside looking model whereas the five forces is an external/outward looking or an Outside-Inside model. Differentiation based on unit of analysis : Porter’s five forces model considers “industry” as a unit whereas a resource based view chooses a “firm” or an “individual resource” as a unit of analysis.
Why? — In RBV, resources and capabilities are considered as a root, from which the firm extracts various products & unique value propositions for various markets. Therefore, in RBV, strategy focuses on leveraging resources and capabilities across many markets and products instead of targeting specific products for precise markets.
However, Porter’s Five forces model describes the relationship of a firm’s strategy in correspondence to its unique value proposition of the product/ service and market positioning — — basically the products it makes and the market it serves. This model highlights the external impact on strategy development and encourages companies to evaluate the forces described earlier in an industry, which gives rise to opportunities and threats. Hence, the resultant strategy comes down to choosing an appropriate industry and positioning the company within that industry according to the five forces.
