Problem and Objective
This paper aims to provide a critical review of strategic management, focusing on a resources-based approach and industrial organization view. Based on a strategy, a company develops its marketing and competitive strategy (Barney et al., 2001). There are two main models to realize the strategic preferences of the company: the model of industrial organization and the resource model. The main objective of this paper is to show the differences between these views to better understand their advantages, pitfalls, and potential contribution to practice.
Research Question and Contribution
The research question is on the slide. The expected contribution of this work is to provide a critical review of these two approaches and enrich the knowledge of students through this paper. Moreover, it is expected to outline the prospects for future research, which seems to be beneficial to realize the areas that require more attention.
Theoretical Framework Hypothesis
The theoretical framework by Porter (1981) is based on the traditional Mason and new paradigms that are used to discuss the industrial organization view. At the same time, the resources-based framework is utilized to critically evaluate the nature of this second view. It is hypothesized that the industrial organization view is associated with the outside-in perspective and strategic marketing positioning, while the resource-based view employs the inside-out perspective and the synthesis of capabilities and resources.
To achieve the stated objective and answer the research question, the method of a critical literature review is used. In particular, three academic articles are selected to discuss different thoughts on strategic management. The article by Hoskisson et al. (1999) is the key source that examines the theory and research regarding the two mentioned topics. Barney et al. (2001) focus on the resource-based view, distinguishing between various fields and identifying future research agendas. Ultimately, the study by Porter (1981) is used to critically reflect on the industrial view of strategic management, with an emphasis on the paradigm, its limitations, and proposed extensions.
A resource-based view (RBV) of strategic management implies a focus on an organization. The main perspective of this approach is directed at organizational resources and dynamic capabilities, which prioritize inside-out performance (Barney et al., 2001). In this connection, a company’s competitive advantage can be identified as a strategy that creates value (Porter, 1981). The effectiveness of the company is measured with regard to its resource usage and internal characteristics.
Industrial Organization (IO) Perspective
An industrial organization (IO) view is based on the advantages of the external environment, while the resource view focuses on the benefits of the internal one. By making a choice in favor of one or the other model, the organization concentrates its efforts either on the analysis of the external environment, differentiation in the market, and protection from the negative influence of competitors or on the development of internal potential and its uniqueness (Hoskisson et al., 1999).
The IO view has the following prerequisites:
- The external (industry and competitive) environment creates pressures and constraints that determine strategies ensuring high profits;
- most companies competing within a particular industry control similar industry-relevant resources and follow similar strategies with regard to these resources;
- the resources used to implement the strategy are highly dynamic, and resource differences that can develop between companies will be short-term (Porter, 1981).
Based on the model of industrial organization, it can be argued that the difference between firms is determined not by their internal dissimilarity but by whether they are better or worse oriented in the environment.
The RBV of the company’s strategic behavior stems from the following premises:
- A company has a unique set of resources and capabilities that provide the basis for its strategy, serving as the main source of its profitability;
- Resources are not necessarily highly mobile. The differences in resources and inability to quickly overcome the duplication of opportunities are the basis of the competitive advantage;
- over time, a company may acquire different resources and develop various capabilities; some companies operating within the same industry may not have the same strategically relevant resources and internal capabilities.
RBV: Fields of Study
The implementation of the RBV is proved to be effective in five fields of study, including human resource management (HRM), economics and finance, marketing, entrepreneurship, and international business. Barney et al. (2001) claim that the emphasis on the company’s workforce as a strategic asset promotes the creation of human capital skills. However, it is also stated that there is a lack of research regarding the impact of RBV on employees’ behaviors and attitudes. In terms of economics, the use of the RBV is limited by the ambiguity and heterogeneity of companies, while an in-depth understanding of this area is likely to help in identifying a firm’s diversification performance. With regard to marketing, Barney et al. (2001) state that the analysis of resources is beneficial for determining customers’ values and attitudes that should be met. The field of entrepreneurship should be studied to discover market opportunities and learn more about ongoing changes. Ultimately, the area of international business is noted as an important field, contributing to the entry of new companies and the development of multinational corporations. The cooperation between foreign and local firms is another potential advantage of adopting the RBV in the context of international business.
IO: Mason vs. New Perspective
While the traditional Mason framework of the IO view followed the standard scheme (industry structure – conduct (strategy) – performance), the new perspective implies a greater link between the theory and its practical translation (Hoskisson et al., 1999). Moreover, the new perspective can be characterized by completeness, determinism, static tradition, and oligopoly theory. In particular, the above progressive features overcome such limitations as a static perspective, varying views on decision-making, different loss functions, as well as abstract oligopoly theories (Hoskisson et al., 1999). Accordingly, these limitations were used as research frontiers to formulate the new approach to the IO as a strategic management thought.
The stages of strategic management for the IO view of the organization will be as follows:
- the evaluation of the external environment;
- the selection of an industry with a high potential for profitability;
- the choice of marketing and competitive strategy that promotes developing technologies, acquiring knowledge and experience necessary to implement the chosen strategy;
- the implementation of the strategy using the strengths and weaknesses of the company (Hoskisson et al., 1999);
- External environment analysis;
- determining the internal capabilities of the firm;
- assessing the potential of the firm’s resources and its internal capabilities in terms of sustainable competitive advantages;
- selecting and implementing a strategy that will allow to making the best use of its resources and internal capabilities in the external environment (Barney et al., 2001).
For RBV-based companies, it is advisable to start the analysis with the study of the external environment and, after assessing the opportunities and threats of the organization coming from the outside, consider the resource potential (Barney et al., 2001). Accordingly, the prospects for activities to meet the needs of the market should be taken into account as well. The importance of researching the external environment is also explained by the fact that its possibilities are limited.
Disadvantages of RBV and IO
The focus on uniqueness only does not contribute to the creation of a sustainable competitive advantage but allows it to stand out in the market only for a short period. In this connection, IO-based companies should pay more attention to the relationships with their customers to remain aware of their needs and expectations (Hoskisson et al., 1999).
In turn, the resource-based approach creates more opportunities for the formation of sustainable competitive advantage, as well as for achieving leadership due to the uniqueness of the business approaches used and the implemented marketing strategy. However, the resource-based approach does not take into account the sharp changes in the market paradigm, which can lead to the failure of the chosen method of promotion and achieving an effective competitive position.
The key limitation of both views is that the field of strategic management develops rapidly, which requires keeping the growing body of the literature relevant. Considering that the articles used were published almost 20 years ago, one may suggest that there are some new insights. Nevertheless, these articles provide fundamental knowledge that is related to the nature of RBV, and IO approaches. Another limitation refers to the inability to select only one view since strategic management is a multi-paradigmatic discipline. In some cases, it may be necessary to employ the RBV, while it can be more appropriate to use the principle of the IO according to the market conditions.
The evidence presents a range of future research directions, of which the most pertinent should be noted. Currently, there is a lack of studies that focus on the institutional context of applying strategic management theories (Porter, 1981). Namely, it is not clear if the strategies that are effective in the US would work in China or India, for example. Considering that the mentioned countries have distinct cultures and approaches to business, some adjustments seem to be necessary, but they should be examined empirically. The second direction of research is likely to result in greater awareness of the links within and between various levels.
Specifically to the RBV, Barney et al. (2001) identify several research agendas, including corporate governance, management buy-outs, venture capital financing, entrepreneurship, and institutional environment. For example, the use of the RBV in relation to the corporate government is deemed to be useful in examining the role of human capital and identifying resource-improving strategies. Another area of entrepreneurship emphasizes that the majority of articles explore large companies, while smaller firms are not taken into account. Therefore, their basic capabilities and market management resources should be researched. As for the particular research areas for the IO, Hoskisson et al. (1999) state that the methodological contributions should be discussed, for example, the elaboration of a competitive interaction model for multinational companies that operate in different markets.
Barney, J., Wright, M., & Ketchen Jr, D. J. (2001). The resource-based view of the firm: Ten years after 1991. Journal of Management, 27(6), 625-641.
Hoskisson, R. E., Wan, W. P., Yiu, D., & Hitt, M. A. (1999). Theory and research in strategic management: Swings of a pendulum. Journal of Management, 25(3), 417-456.
Porter, M. E. (1981). The contributions of industrial organization to strategic management. Academy of Management Review, 6(4), 609-620.