In the article, the authors introduce a new approach to strategic management called the “Resource Based View of the Firm” – RVB. RVB attempts to develop a business model framework that helps describe how a company’s resources drive its performance in a dynamic competitive environment. This approach integrates the internal analysis of the company (i.e. core competencies) with the external analysis of the industry and the competitive environment (i.e. Porter’s Five Force Model). The article argues that both analyses are required to accurately assess a company’s competitive position. While Porter’s Five Forces Model helped strategic managers choose the right industries and, within them, the most attractive competitive positions, it did not place a high enough emphasis on a company’s core competencies. The emphasis in the model was clearly on the phenomena at the industry level. Likewise, the core competencies approach emphasized the importance both of the skills and collective learning embedded in an organization, but little emphasis was placed on the external environment.
From Prahalad’s article titled “The Core Competence of the Corporation”, core competencies entail the collective learning in an organization and how diverse production skills and multiple streams of technologies are integrated. Core competence involves communication, involvement and a deep commitment to work across organizational boundaries. He argues that core competence does not diminish with use, unlike physical assets. He also argues that roots of competitive advantage arise from within the organization and that new strategies and improved competitive positioning are only constrained by the current level of the company’s resources. Herein lies the key differences in the analyses carried out by Prahalad and Collis. Collis first argues that core competencies cannot be evaluated in isolation, because their value is determined in the context of the present market forces. In order to accurately assess a company’s competitive strength, one must analyze a company’s specific resources (i.e. physical and intangible assets) and capabilities in the context of the competitive environment. Furthermore, Collis argues that core competencies do erode over time and by competition and that continuous reinvestment is required.
The RVB approach views core competencies as the heart of a company’s competitive position, subject to the effects of three fundamental market forces: 1) market demand, 2) scarcity and 3) appropriability. RVB translates these general economic requirements into the following five tests:
1)Test of inimitability – is the resource difficult to copy? Having a resource that competitors can easily copy only generates temporary value creation. If a resource is inimitable, then profits will be more sustainable. However, inimitability does not last forever. Competitors can eventually find ways to copy most valuable resources. Managers can delay the onset of competitors and sustain profits for a while longer by building strategies around resources that have at least one of the following characteristics: 1) physical uniqueness (i.e. patents), 2) path dependency (i.e. resources that are unique because they have been built over time and cannot be purchased, like brand name), 3) causal ambiguity (i.e. competitors does how to recreate the resource, like company’s recipe to innovation), 4) economic deterrence (i.e. company preempts a competitor by making a sizable investment in an asset).
2)Test of durability: How quickly a resource depreciates? Current technologies will inevitably be surpassed by the next great innovation. It is critical that companies realize this and respond to macroenvironmental forces appropriately.
3)Test of appropropriability: Does the company capture the value that the resource creates? Key individuals are often times viewed as the key resources and can leave an organization at any given notice. It’s important to base a strategy on resources that are bound to the company as a whole.
4)Test of substitutability – can a unique resource be replaced by a different one? This deals with the threat of substitute products. The threat of substitutes can render unique resources obsolete, as was the case in the steel industry when aluminum manufacturers stole the market share for beverage cans.
5)The test of competitive superiority – which organization’s resource is superior? Strategic managers need to evaluate their organization’s resources relative to their competitors’.
6)Competence that is valuable in a particular industry or at a particular time might fail to have the same value in a different industry and different time. Collis
A closer analysis of these tests shows that RVB is an extension of the Prahalad’s three tests for identifying core competencies with the added consideration of the effects of market competition, as described in Porter’s Five Forces Model. Prahalad’s three tests involves the following: 1) provides potential access to a wide variety of markets, 2) makes a significant contribution to the perceived customer benefits of the end product and 3) should be difficult for competitors to imitate. Both Prahalad and Collis argue that core competencies need to be leveraged across functional divisions within an organization (i.e. SBUs) and that management needs to have the oversight to identify leveraging opportunities.
RVB emphasizes that the value of distinctive competence erodes over time and by competition. In a market of continuous change, organizations need to maintain the pressure of constantly developing and reinvesting into the right distinctive competencies, preparing for the next round of competition. However, it is critical that organizations invest in core competencies while at the same time examine the competitive dynamics that determine industry attractiveness. An example cited in the article involves Masco Corporation; a company that built competence in metalworking and diversified into other closely related industries. Unfortunately, the returns from this strategy were lower than what the Masco had expected because the bargaining power of the buyers was high, buyer switching costs were low, entry barriers were low and the bargaining power of suppliers were high. No amount of metalworking expertise could have helped Masco improve profits in such an unattractive industry.
RVB takes a “larger picture” approach to analyzing the competitive position of a company. It adopts the core competencies principle described by Prahalad and adds to it effects of the fundamental market forces that drive industry competition and attractiveness.