Porters Five Forces Model of Competitive Advantage

Porters Five Forces Model of Competitive Advantage The aim of this paper is to critically analyse Porters 5-Forces framework and the concept of the Resource-Based view (RBV) which originated from Wernerfelt (1984) to develop strategy as a source of competitive advantage. A comparative analysis between the two approaches is undertaken. This paper further attempt to contrast the two frameworks taking into consideration what researchers have identified throughout the development of both theories. The methodology applied to approach this paper commences by briefly defining both concepts and their focus of attention. The analysis then identifies common elements found in both theories supported by diverse researchers opinions and views. This section undertakes a critical approach which serves a primary need to reach the objectives of the paper. The paper then proceeds with an essential critique of fundamental differences between the two approaches under investigation. Specific uncomplimentary elements are identified within both framework and which are critically expounded. The paper concludes with a discussion on what could be the future of both theories and their contribution towards strategy formulation for organisations to gain competitive advantage. The Key Elements of Porters and RBV Theories It is pertinent to define briefly the key elements of both theoretical frameworks on which this paper will based to carry out a critical and contrast analysis. Porters 5-Forces The theory originating from industrial economics forms part of the classical perspectives of strategies developed throughout the last fourty years of the twentieth century (Whittington 2001). Porter (1980), specialising on competitive strategy, designed a model of five competitive forces, to assess the attractiveness of the industry via which the corporate strategy can effectively capitalise on both present and emerging market opportunities. This model serves as an indispensible tool in critically analysing both the structure and dynamics of the industry in which the organisation pertains (Fortenberry 2009). These five forces incorporate the threat of new entrants and substitute products or services to the industry on a horizontal dimension and the vertical dimensions of suppliers and customers bargaining powers. Both dimensions intersect on the fifth force consisting of the rivalry amongst current competitors in the industry (Porter 1980:4). The theory claims that profitability is h ighest when competition is lower and that competition erodes profits (ibid). It further sustains that some competition should be avoided and the theorist gives advice on how firms can maximize profits through maintaining or changing fundamental industry structures. However, empirical investigation has failed to support the link between industry structure and profitability (Grant 1991:117). Furthermore, Grove (1996) claims that government strategic forces are ignored in Porters theory. The Resource -Based View The RBV framework designed by Wernerfelt (1984), is essential to assess strength and weaknesses within a business concern so as to engineer a strategic competitive advantage. Wernerfelt (cited in UoL 2009:65) advocated, that Sustainable competitive advantages are conferred by resources which are hard to imitate and scarce relative to their economic value. The RBV strategic theory links resources, capabilities, competitive advantage and profitability and their synergistic combination, ensures a sustainable competitive advantage to the firm (Grant 1991). Theorists such as Fahy and Smithee (1999) remarked that the development of this framework took a step forward when diverse strategists became bored with Porters 5-forces theory, and found possible alternatives in the RBV theory. Grant (1991) claims that this theory can be appropriately applied in the development of robust long tern strategies. Primarily the RBV is focused on the maximisation of resources to economically perform efficie ntly and fulfill customer requirements. It is not surprising that this theory has its critics. Hooley et al. (1998) disagrees with this theoretical approach by arguing that due to its internal focal point it jeopardises the importance of external market requirements. Furthermore, Grant (1991) implies that little effort has been done to provide practical applications of the RBV which brought him to develop his 5-stages approach to strategy analysis. Common elements in both Porters and RBV frameworks Diverse researchers such as Spanos and Lioukas (2001) claimed that both Porters and RBVs perspectives on strategic formulation are similar. Firstly, they both assume that regular higher profits are possible to achieve and secondly both approaches attempt to define the term competitive advantage (ibid). Conversely, one can notice that both theories have contradicting and differing definitions of competitive advantage Grant (1991). This is further supported by claims made by Fahy and Smithee (1999) that both theoretical frameworks could have elements of vagueness and uncertainty in their methodology and both are obscure in their pragmatic approach. Both theorists have been criticised for their stagnant approach towards the strategy development which in its originality is definitely ever-changing (Dickson cited in Fahy and Smithee (1999). Porters and Wernefelts approaches to strategy development for competitive advantage were critised by various researches for their lack of practical applications when strategic managers formulated their strategies to combat competition (Conner 1991; Grant 1991; Foss 1996). Besides, there is little evidence on to what extent both theories assist managers to take strategic decisions (Bridoux n.d.). Fundamental Differences between Porters 5-Forces and RBV The RBV and Porters framework, endorse a number of differences. Porters 5-forces (1980) model adopts a macroeconomic perspective of the industry whilst the RBV approach focuses on the micro perspective of the firms resources. Foss (1996) claims that Porter failed to assess the businesses potential of exploiting their resources so as to effectively implement their strategic plan. Furthermore, researchers such as Bridoux (n.d.:7) claims that In Porters framework, the accumulation of resources is part of the implementation of the strategy dictated by conditions and constraints in the external environment. This is in contrast with RBVs framework where managers apply their resources and capabilities to lead organisations to competitive advantage over their rivals. Therefore, one can argue that Porters theory ignored the potential of the use of internal resources to determine strategies. Although the RBV can be applied tactfully so as to assess both resources and capabilities, however, it focuses simply on the internal infrastructure of the organisation. Conversely, Porters model adopts a wider macroeconomic perspective, capitalising on an outside approach. The nature of performance that an organisation can attain marks also a fundamental distinction when contrasting Wernerfelt and Porters theories. On reviewing the RBV, it transpires that it represents efficiency in terms of how the business resources perform to maximise their over-capacity and in the meantime satisfy customer demand. In contrast, Porters approach focuses on the ability of the firm to exploit the monopolistic benefits of the market that differentiate between industries performance (Conner 1991). Besides the contrasting disagreements between both theoretical frameworks mentioned above, Foss (1996) claimed that the RBV approach is focused on long term strategy and can be applied to identify potential hazards by assessing opponents resources and capabilities. Conversely, Porters framework is oriented towards the external environment in terms of the short run with concepts such as commitment, signaling, the role played by exit barriers (Foss cited in Bridoux n.d:6). Uncomplimentary Elements within Porters 5 -Forces and RBV Frameworks The author of this paper identified various elements within both frameworks and which are uncomplimentary to each other. These are critically anaylsed. This paper approach will contribute to the comparative analysis undertaken and furthermore enhance the contrasting discussion of the two models under investigation. One of the characteristics that is claimed to be found in the RBV by Barney et al. (2001) is that an entrepreneurs can be illuminated through this theory as they can value their resources as a competitive advantage over their rivals. One can argue that the term entrepreneurial knowledge can be by far easily associated with the RBV approach rather than Porters framework. With respect to emerging markets, RBV research has been important in suggesting that local firms are interested in using foreign alliances to acquire advantages over their domestic rivals, in emphasising the importance of network ties as an intangible resource for entrepreneurial start-up and in understanding the changing benefits of unrelated diversification as economic institution develop. (Barney et al. 2001:630). Other diverse researchers advocate that the RBV can assist firms to evaluate competitive advantage through an ethical approach by applying Corporate Social Responsibility in theory strategy formulation (Russo and Fouts cited in Barney et al. 2001). Besides, one cannot ignore what Powell and Dent-Micallef (cited in Barney et al.2001) remarked that the human resource skills combined with the use of Information and Communication Technology (ICT) can play an important role within organisations to enable them to compete. A prominent and complimentary element of the ethics and ICT approaches found in the RBVs framework and which is not found in Porters theory is the contribution towards the appreciation of strategic Human Resources Management (HRM) (Wright et al. cited in Barney et al. 200l). Supporters of RBVs theory claim that the approach towards the perceived benefits of using human resources practices can be used by firms as a competitive weapon. However, Barney remarked that: As yet research has failed to test empirically whether HRM practices are path dependent, casually ambiguous, or imitable. Similarly, there is a lack of evidence that HRM practices impact the skills and behaviour of the workforce, or that these factors are linked to performance. (Barney et al. 2001:628) Moreover, Grant (1991:119) when referring to the association of HRM with the RBV framework remarks that probably the most strategically important resources of the firm can be highly vulnerable because they are mobile and can be attracted by competitors. There are even some conflicting views by different authors whether Porters framework appreciates the role of industry co-operation when determining strategies. For example, Bridoux (n.d.:5) claimed that Porter 1980s work is that it over emphasises competition to the detriment of co-operation. Conversely, Aubert and Morel Guimaraes (n.d.) states that Porters embraces a strategic approach towards co-operation between industries. In fact, quoting Aubert and Morel Guimaraes (n.d.:5) Porter argues that by strategy of cooperation, the companies achieve a stronger positioning together than they would in individual, in isolation. Conclusion Throughout this critical assessment of both theories, it emerged with a degree of certainty that Porters theory greatly differs from the RBV approach as it is focused on industry rather than on the organisations resources. Also, it can be concluded that both strategic frameworks are focused towards achieving profitable maximisation through competitive advantage. However the RBV recommends the use of resources to achieve this goal whilst Porter approach uses the ability of the industry to position itself appropriately within its competitive forces. Surprisingly, this paper found out that theories have been critised for their severe practicality limitations. Imai (n.d.) advocated that Each organisation is a collection of unique resources and capabilities that provides the basis of its strategy and the primary source of its returns. However, from a critical perspective, the author of this paper concludes that although the performance of an organisation is determined by its unique resources and capabilities, the industrys structural characteristics cannot be granted secondary consideration.