Industrial Organization vs. Resource-Based View of Management
Analyzing the Differences Between Resource-Based and Industrial Organization-Based Views of Strategy
In identifying the common and differing aspects or themes of the industrial organization (I/O)-based strategy which is also often referred to as the Competitive Forces Approach (CFA) (Porter, Stern, 2001) versus the Resource-Based View (RBV) (Barney, Ketchen Jr., Wright, 2011) this analysis identifies the differences and similarities between the two views. A major factor that previous analysis of these two views of strategies have either not covered at all or have only partially mentioned is how knowledge creation and its speed of transformation into a competitive asset, predicated on external conditions, is actually an asset (Dyer, Nobeoka, 2000).
Most relevant to managing a 21st century enterprise is the ability to respond intelligently and quickly to unforeseen events, capitalizing on opportunities and mitigating risks. Organizations are having to find a middle ground or hybrid architecture to support both an CFA-based approach to stay agile and able to respond to market threats and opportunities, while also maintaining stability in their RBV-based frameworks so that cost and time efficiencies can continually be attained (Cao, Wiengarten, Humphreys, 2011). The 21st century will favor the more agile, less hierarchical, more insightful organisations that can combined a RBV-based series of frameworks to either capitalize on or mitigate the effects of competitive forces as crystalized in the CFA frameworks including the determinants of competitive advantage (Porter, Stern, 2001) and the Five Forces Model (Porter, 2008).
Analysis of Similarities and Differences between the CFA and RBV Views of Strategy
In terms of similarities, both the CFA and RBV-based views see the organization as sovereign and distinct from any other business or enterprise (Barney, Ketchen Jr., Wright, 2011) (Porter, 2000). The degree of autonomy given environmental constraints and opportunities however is where the CFA and RBV-based views of strategy diverge. Another common similarity is that all assets of the firm, from the plant, equipment and fixed assets to the most critical including intellectual property and the knowledge generated form continual improvement of processes
(Dyer, Nobeoka, 2000) are highly relevant to a given organizations' long-term viability. Like the similarity of an organization being distinct, unique and sovereign in its definition of its vision, mission and values, this second attribute is more of a continuum, less of a binary condition. The extent to which a given organization can transform its many forms of tacit and implicit knowledge into a competitive factor so potent that it has the potential to transform price as a differentiator, as Toyota as done with supply chains (Dyer, Nobeoka, 2000) or WalMart with supply chain management (van Hoek, Johnson, 2010) are a case in point. As process-centric expertise and intelligence overcome price, promotion, or discounting, organizations are forced into a more hybrid-like structure of CFA and RBV-based approaches to managing their organizations.
Despite these similarities that are more defined by continuums and less by stark binary contrasts of theory and corresponding practical examples, there are so significant of a series of differences between CFA and RBV-based views that it is common to find organizations completely adopting one framework while ignoring or completely discounting the other. The RBV approach, which includes value chain management and has been adopted into organizations who are streamlining their operations through Six Sigma are a case in point (Wernerfelt, 1995). The RBV contends that the highest potential Return on Investment (ROI) and Internal Rate of Return (IRR) can only be achieved when organizations streamline their internal processes to such an extent that they attain operating efficiencies far superior to their competitors (Barney, Ketchen Jr., Wright, 2011). The CFA approach does not place as high of a priority on internal process efficiencies and the continual pursuit of Six Sigma levels of performance in core transaction areas that RBV does (Wernerfelt, 1995) yet it does concentrate heavily on gaining competitive advantage through either location to gain innovating assets (both physical assets and intellectual property )(Porter, Stern, 2001) or human productivity (Porter, 2008). The RBV approach also concentrates on analyzing the current series of physical and intellectual assets within an organization along the dimensions of durability, transparency, transferability and replicability (Barney, Ketchen Jr., Wright, 2011). Starting with durability as an attribute of any physical or intellectual asset, this factor is responsible for long-term stability and higher levels of ROI being generated over time by an organization when analyzed using the RBV school or frameworks (Conner, 1991). Durability could apply for example to a series of patents held by Intel on its microprocessor, motherboard, networking and advanced technologies divisions or the state-of-the-art process improvements in WalMart's logistics and supply chain operations (van Hoek, Johnson, 2010). Durabili8ty then can just as easily apply to a process as it can to a given hard asset or element of intellectual property (Wernerfelt, 1995). This is precisely why the Toyota Production System's approach to continual process improvement in the areas of supplier on-boarding, quality management and collaborative planning and forecasting (Dyer, Nobeoka, 2000) are all critical to making the most of the idiosyncratic nature and strengths of the auto manufacturer's supply chains. Another aspect of where RBV differs the most significantly from CFA is in the areas transparency and transferability. Both of these attributes are from an RBV perspective the most differentiating from the CFA school or framework of strategies. Transparency is the extent to which one firm can emulate the strategy of a rival and therefore gain a comparable competitive advantage (Barney, Ketchen Jr., Wright, 2011). Transferability from an RBV standpoint defines how difficult it is for a given core competency to move from one organization to another (Wernerfelt, 1995). A third factor of replicability, or the ability of one competitor to guard or protect their core competencies and make them difficult to emulate or imitate is also one of the most differentiating aspects of RBV to CFA. The value derived from these areas of a given business model, when analyzed using the RBV approach also shows imperfect substitutability and imperfect imitability (Barney, Ketchen Jr., Wright, 2011). Taken together, these factors differentiate and show the greatest contrast between the CFA and RBV-based approaches to strategy. The performance gains possible with an RBV-based view of an organization must be coordinated with those of the CFA school or approach to ensure an organization stays aware and agile enough of the external environment without becoming to myopic and only seeing its internal performance as the primary determinant of competitive advantage (Cao, Wiengarten, Humphreys, 2011). The following section analyzes which school or approach is best aligned to the needs of 21st century organizations.
Which School or Approach Is Best Aligned To The Needs of 21st Century Organizations
The industrial organization (I/O) or CFA view looks primarily to external factors to explain a firms' performance over time, making the assumption that all firms are performing with comparable resources and insights into best practices, process gains and performance of their business models (Porter, 2008). The CFA school also defines the parameters of environment defining strategy, firms possessing comparable resources choosing similar strategies (Porter, 2000) and the implied assumption of resources being mobile (Porter, Stern, 2001). This approach also assumes that the managers and owners of a firm will act rationally and in an economically-prudent way to maximize returns over the long-term (Cao, Wiengarten, Humphreys, 2011). Given the turbulent economic conditions of the last four years, the lack of consistency in even the most robust and growing markets including the Internet-based start-ups, it is clear that just taking a CFA-based approach to managing an organization is not enough.
The need for greater agility, insight, and the innate strength of firms to translate their core knowledge into a competitive advantage that surpasses pricing, promotion or products is critical. Toyota was able to accomplish this by concentrating on transforming knowledge sharing and collaboration into the most potential competitive advantage of any auto manufacturer's supply chain (Dyer, Nobeoka, 2000). To compete in the 21st century, organizations need to have a CFA-based foundation to manage the continual monitoring of external environment and stay agile in the face of increasing market turbulence. Being entirely focused on the CFA school or frameworks however is not enough to ensure an organization of stability and growth in the 21st century.
While scoping and tracking external factors can keep an organization stable, the need for managing internal processes to align to market opportunities is also needed. The RBV approach is also critically important. The gains and advances in WalMart's global performance as a leader in retailing can be easily analyzed and seen in the following analysis of their value chain.
Figure 1: WalMart's Value Chain
Source: (WalMart Investor Relations, 2011)
This analysis illustrates that a 21st century organization needs to have an RBV-based strategy internally to optimize internal processes while incorporating the most effective approaches to CFA. Ideally CFA becomes a support function -- for example market research -- to guide the RBV-based framework and keep it more market-centric.