Business Strategy

Differences between the five Forces Model and Resource Based Model

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The two prevailing methods for determining organizational strategies are the Resource Based Model and the Five Forces Model. The Resource Based Model purports that the organizations competitive advantage is determined through a rigorous analysis of its capabilities and resources. The Five Forces Model adopts an externalized method of strategic planning, tasking the management of an organization to assess the broader industry landscape.

The resource based model applies an introspective analysis of a firm or organization. The model follows five stages:

1.) Catalog of Strengths and Weaknesses  - Determined by comparing the firms products and services against competitors.

2.) Identify Unique Skill Sets  - Using the strengths and weaknesses defined in the first stage, determine which are truly unique within the industry. For example, nearly every firm conducts bill collection. A firm may separate itself by allowing simplified online bill pay.

3.) Assess Each Unique Skill in Terms of Returns  - A firm will test every skill against a set of measures that separate the less profitable skills from the skills that can produce real competitive advantage. This stage is the key component of the model.

4.) Determine Industry - In this stage the firm turns the focus outward to identify an industry or space where the competitive advantages can be applied for above average returns.

5.) Implement Strategy  - Traditional management and business functions are applied to support the competitive advantages determined in this process. For example, firms will promote products and services with marketing, establish metrics to gauge success and commit resources to the competitive services.

Gleaning the competitive advantages of a firm from the collection of products and services provided is the heart of the resource based model. To pass this litmus test, an offering must possess each of the four attributes. The service or product must be valuable, meaning a firm can charge more for it, it costs less or it introduces a new customer base. The service or product should be rare, available only through a limited number of channels. It must be costly to imitate, affording some protection of investment for the firm. Finally, the service or product should be non-substitutable, meaning there are few ready alternatives.

The Five Forces Model, developed by Michael E. Porter in 1979, addresses strategic planning with an externalized approach. The five forces influencing a firms strategy are:

1.) Consumer Power is the amount of choice afforded to consumers, the availability of reasonable substitutes and price sensitivity.

2.) Barriers to Entry are the investment advantages, proprietary knowledge or intellectual properties that make it difficult for a new competitor to enter the industry.

3.) Threat of Substitutes are commonly referred to as ‘switching costs’. For smaller transactions, such as the purchase of a soda, there is very little consumer expense to change products, a very low switching cost. An enterprise resource planning solution, with deep ties to an organization’s functions, would have very high switching costs.

4.) Supplier Power captures the input provider’s concentration, ability to dictate price and flexibility.

5.) Competitive Nature of the Industry is the central element that all other forces influence. Rivalry within the industry is the primary determinant in the five forces model.

The competitive nature of an industry is uniquely assessed by each firm. In industry’s with significant capital investments, such as the automotive or aerospace industry, a limited number of players compete at all levels of the industry. These industries are more likely to incorporate strong vertical integration as a result. Smaller ventures, such as web based services, may be characterized as possessing scores of niche participants with unique product offerings. The more capital intensive business, might focus more on the supplier power’s influence on the industry; while, the smaller venture may be much more concerned about the consumer’s power to influence the marketplace.

Despite these differences in approach, it should be noted that they methods have one common feature: the people who apply them. Management draws upon experience, internal and external knowledge and their own biases when applying either of these methods. The fact that a management team is applying an academically proven model for strategic planning is more likely a greater indicator of success than the influence of the particular model they choose.

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