In very simple terms, the academic study of strategy and performance has shifted its attention in recent decades. From the early 1980s, people focused on how ‘industry forces’ [competitors, customers, new-entrants, suppliers and substitute products and services] impacted on the profits firms in an industry could achieve and how strategy could cope with those forces. 

By the 1990s, though, it looked like these issues did not explain much about why some firms perform better than others. Research identified that things about the business itself seemed to be more important, e.g. how much they spent on R&D or marketing. [Translation "You can do well in tough markets, and mess up in attractive ones!"] Further investigation suggested firms could sustain strong performance by developing ‘strategic‘ resources that others could not copy. This idea has crystallized into as the so-called ‘resource-based view‘ of strategy – affectionately known as RBV. 

Since we have repeatedly talked about the principle that resources drive performance, you might think that this idea and RBV are one and the same thing – they aren’t. 

An accepted definition of RBV resources is

“…all assets, capabilities, competencies, organizational processes, firm attributes, information, knowledge, and so forth that are controlled by a firm and that enable the firm to conceive of and implement strategies designed to improve its efficiency and effectiveness.“ 

Management often blames any shortfall in performance on “inadequate resources“, so it may seem self-evident that resources are important, but RBV claims that only certain special items matter. Since many resources are easy to get – cash can be borrowed, production capacity can be bought, staff can be hired – any firm that gets behind on such things simply copies what its competitors have. [Yes I know, if the academics think it's so easy, they should go try it!] So the RBV asserts that any resource can only give sustained advantage if it is valuable, rare, hard to imitate, and works with other organizational factors – the so-called “VRIO criteria.” 

To see if any resource will give you a competitive edge, RBV recommends you ask the following questions: 

• Is it durable? A resource that deteriorates or becomes obsolete quickly is not likely to provide sustainable advantage, e.g. production equipment wears out, and staff skills get out of date.
• Is it mobile or tradeable? Many resources are easily bought or taken from other firms. Equipment suppliers may sell the latest technology to your rivals as well as yourselves, customer lists can be purchased, and staff can be attracted by better salaries.
• Is it easy to copy? Many resources can be easily copied by rivals, so these too offer little scope for competitive advantage. You might launch a great new product but if it is easily copied the benefit will be short lived.
• Can the resource be substituted? Even if you cannot buy or copy your competitors? resources, you may still be able to challenge them by using something else. A common example is firms who can?t persuade retailers to sell their products can use telephone or Web sales channels instead.

So what kinds of things fulfil these criteria? – certainly not the simple tangible factors discussed in earlier briefings. RBV focuses instead on more subtle and complex things, especially intangible resources, e.g. reputation or staff morale, capabilities (or competences), knowledge and processes. We will get to those later in the strategy dynamics story, but earlier briefings explained how performance depends directly and unavoidably on resources that do not fulfil those criteria? e.g. customers drive revenue, staff and capacity drive costs. The abstract intangible factors of the RBV are important, of course, but they can only affect performance by influencing the simple, tangible resources at the core of the business system. 

DIFFICULTIES IN APPLYING THE RESOURCE-BASED VIEW  

It is hard to disagree that intangibles, capabilities and knowledge are important, but applying these things as RBV suggests is tough. As described in the literature, they are abstract, ambiguous and qualitative, so management debate degenerates into semantic discussions about what the words really mean – hardly a solid foundation on which to build a strong strategy with confident outcomes. And it?s going to be hard steering strategy and performance into the future if you can?t work out what difference a decision makes to these squishy things. 

There are even cases that don’t seem to need RBV-type resources at all. There is nothing unknown or mysterious about how Southwest, Ryanair or McDonald’s function. The two airlines pursue a completely transparent strategy, even signalling ahead how they intend to develop further. Just about every detail of McDonald’s operations is even written down and passed around in its franchise manuals! Many hundreds of executives have had experience in these companies during their long periods of success, and are deeply familiar with their inner workings. Why, then, have such individuals not been able to replicate that success elsewhere? The RBV says this is because of some still more abstract capabilities of the senior management – strategy dynamics says it’s because of the power of the system! So the approach differs from RBV in three main ways: 

• First, we don’t ignore the tangible factors that comprise the heart of any business or organization – we make them explicit, quantify them and connect them to the organization?s performance outcomes.
• Secondly, we go beyond resources that are “owned or controlled“. To influence performance, you only need a resource to be somewhat reliable – “If it is there today, it is likely to be there tomorrow.” This means in particular that “customers” become part of the business system – newspapers and TV channels keep customers for many years, and customers’ relationships with sports clubs and banks often last longer than their marriages!
• Thirdly, strategy dynamics makes explicit how exactly resources work together – but more on that in future briefings.

Until next time… 

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“Ockham’s razor” 

“What on earth is that?!” you may wonder. It is a rather simple idea, supposedly set out by a 14th-century friar, William of Ockham. 

All it says is that, given a number of possible explanations for something, the simplest and most concrete explanation is likely to be the best. At the very least, a simple, concrete idea needs to be disproved before we go looking for abstract and complicated answers. 

You might bear William in mind whenever you read articles and books about strategy and business. 

Read more about the book on our website

 

And here are those references… 

Michael Porter (1980) Competitive Strategy, Free Press, New York is the seminal reference book on how external forces determine performance and how strategy can deal with them, or even exploit them.  

Jay Barney, J. (2002) Gaining and Sustaining Competitive Advantage, 2nd ed?n, Pearson, Upper Saddle River, NJ gives an eloquent explanation of RBV and its implications for strategic management, together with comprehensive coverage of the supporting literature.  

Robert Grant (2005) Contemporary Strategy Analysis, 6th ed?n, Blackwell, Oxford, Chapter 5 gives a managerial explanation of how to analyse resources and capabilities in the way RBV suggests. There is also a neat article on the idea ? David Collis and Cynthia Montgomery (1995) Competing on resources: Strategy in the 1990s. Harvard Business Review, Vol 73, No. 4, pages 118?128.  

He is being too kind – not even relevance is needed. The subject that should above all others show how organizations work – breaking across all those silos – is strategy, but the resource-based view [RBV] that has dominated strategy ‘research’ for 20 years is of no practical value. Beyond the trivial observation that it is good to have resources and capabilities competitors can’t easily copy, RBV goes off into arcane and abstract theorising that is of no actual use. So executives and MBAs are mostly still being taught with static tools that do little more than help choose a strategic ‘position’ – important, but a very small part of competent strategic management.

I have no problem being shown to be wrong on this. It’s no fun trying to justify working in a field that has failed so badly. So it would be great to see some detailed examples of RBV – as defined in the strategy academy – being really used. What was the situation, what RBV analysis was done on what data, leading to what choices and decisions, adapted in what way as conditions changed , to deliver strong and sustainable performance? It would be even better if anyone can show how RBV helped an organization anticipate the recent crisis and protect itself against harm. Please anyone, if it’s out there, tell us.

The background is that ‘strategy’ courses in business schools [notably Harvard] were originally called ‘business policy’ and focused on what the general managers do to direct their organizations – i.e. the practice of strategic management. This was supported by powerful case-based teaching, which reinforced the idea of strategy as a craft, to be learned by kneeling at the feet of masters – a stance still driven hard by Henry Mitzberg and his followers.

From ‘business policy’ to ‘strategy’

Then Harvard and others got worried that there was no academic rigor supporting this approach. Michael Porter came to the rescue with micro-economics to explain what ’caused’ profitability and strategy became academically respectable. This is critical, because academics only get on by publishing within a large community of like-minded scholars who share an accepted theory – a paradigm of how the world works [or at least the bit of it that interests them]. So we saw enthusiastic academic engagement with ‘strategic management’ [actually, industry analysis], and very popular strategy courses. MBAs could only get jobs in consulting and banking firms if they mastered these concepts.

Industry analysis runs out of road

There was nothing wrong with industry structure theory or the insights it offered, but two problems followed. First, research showed that it explained rather little of why some firms outperformed others – management matters! So concepts around capability and competence blossomed. Unfortunately, these had little rigorous theory-base, so proved disappointingly unreliable and lacking in much that professionals could build on.

Then, the dot-com era seemed to blow apart the whole idea of industry structure, competitive forces and profitability [it didn't, as it happens - there's a perfectly good story of how industry forces changed and drove the upheavals of the dot-com boom and bust]. Unfortunately, industry analysis still didn’t explain much about how firms won or lost, and wasn’t much use to executives wanting to work out what to do to drive performance into the future.

Then came the resource-based view [RBV]

This motivated strategy academics to look into the stronger explanations for performance – in the ‘resources’ of the business itself. Unfortunately, theoretical economists were still in the driving seat, and  dismissed simple, tangible factors, like products, capacity, cash and staff as irrelevant – they were easy to copy or buy, so couldn’t provide any sustainable advantage. The field has since spent 20 years investigating abstract and arcane concepts. I’ll get beaten up for saying this, but here goes – RBV has been useless. Just ask the top teams at any significant, successful organization or partners at the top consulting firms when they last did an RBV analysis for a business.

Strategy tools – not fit for purpose

So, that’s how we have come to this point. Students don’t like strategy courses because they don’t learn anything useful. Recruiters don’t like what students learn because it’s no use. Executives don’t use the tools because they don’t help with real-world strategy. And academics don’t join the discipline because it isn’t one – they prefer to stick to true disiplines, such as economics, finance or organizational behavior.

Why are strategy tools not fit for purpose? Two reasons:

1. Strategy tools aim to answer the wrong question - why are some firms more profitable than others? We have known since the 1950s that superior profitability is neither sustainable nor of much interest. ROA is high in pharmaceuticals, but low in basic materials, but that doesn’t mean basic materials firms have zero value. Then, would you rather have 20% ROA in a shrinking business or 12% in a growing one? The question we really need answered is why some firms deliver stronger sustained growth in cash-flows than others. For theory to be valuable, it needs to meet three criteria – being general, useful and true. ["All red-heads are quick-tempered" would be general and useful, but unfortunately is not true.] The micro-economics of industry profitability is general and true, but is simply not useful for this purpose.
2. Strategy tools deal with strategic positioning, not strategic management. Industry forces analysis says how to position a firm compared with rivals, as does the value curve. But as I’ve posted on before, the simple fact is that firms very rarely need to re-ask this question. Strategy academics don’t like the idea that strategy is a once-a-decade question, so this obsession with ‘position’ has led to a further obsession with strategic innovation, tranformation and business model redesign – all of which are nearly always irrelevant to nearly all organizations.

The available strategy tools say nothing much about how to make the continuous stream of decisions, across the entire organization, that have to be made from week to week, month to month.

By the way, a regrettable by-product of this mis-direction is that strategy had little or nothing to say of any value to non-commercial organizations – public services, charitable groups and non-governmental organizations. They may not be pursuing growing cash flows, but they are aiming for continuous improvements in other outcomes.

A way forward

The journal articles offer some solutions to the crisis in the strategy field. Professor Joseph Bower urges a focus on organizations’ values. That’s fine, but it’s another example of a one-time choice. Having decided on their values, exemplars like Johnson & Johnson, Infosys, P&G etc don’t change them every week, month, or year. So what do strategic managers actually do in between? Professors Richard Whittington and Paula Jarzabkowski urge a refocus on strategy-as-practice. But it’s not clear there’s much theory here, and identifying what managers do on strategy is not the same as working out what would be best to do. Professor Robert Grant urges a return to a solid theory-based approach – problem is that the only theory we seem to have is micro-economics, which has nothing much to say about the continuing management of strategy.

If executives, consultants and students are going to find strategy useful, we need a rigorous, theory-based explanation for why organizations perform as they do over time, and how management decisions can improve that performance. Only then can we teach students and advise management how to develop and implement policies that will deliver sustained, strong performance.

I have offered one possible answer to this challenge with strategy dynamics – a management implementation of the rock-solid, deep theory of ‘system dynamics’. I am entirely happy to subject this approach to the standard scientific test – falsification. So please, if you think it doesn’t work, please prove it. It meets the three requirements of valuable theory – it’s universally general, very useful and demonstrably true in every case.