Pick a leading company. Now use the Resource-Based-View to analyze that company. How does this analysis differ from Porter's Five Competitive Forces model? In this essay, I will set the scene for Starbucks Corporation, henceforth referred to as Starbucks and mention briefly its origins and some up to date financial information. I will apply the Resource-Based-View (RBV) approach to Starbucks, to identify its core competencies and strengths which have enabled it to grow. I shall compare and contrast the RBV with Porter's Five-Forces (FF) model, finally drawing conclusions to what has helped Starbucks the most to remain ahead of the field in the coffee bar industry, and reap considerable profits.
I have chosen Starbucks as a leading company because it has demonstrated a phenomenal rate of growth over the last decade. Since starting out in 1971, there are now more than 8000 stores in over 30 countries (web). The company's success could be credited to a solid business strategy, which will be analyzed subsequently using RBV. RBV is a relatively recent approach to competitive advantage, which focuses on the firm's specialized traits. There has been a lot of literature about RBV, and many ambiguities and difference of terminology, which Peteraf tried to reconcile with his 1993 article on "The cornerstones of competitive advantage: a resource-based view". I will use her interpretation of RBV, because it covers most of the significant research and standardizes authors' works and ideas.
Porter's (1979) FF model, on the other hand, is arguably a central concept to industry structure analysis. This is also the key difference regarding RBV; that FF applies to the industry, and not the firm itself. Porter (1979) implies that to render the highest rents, the industry must be taken into consideration, and the implications of the five competitive forces in the industry (Threat of entry, Powerful suppliers, Powerful consumers, Substitute products and Jockeying for position) should be examined to ensure that the firm in question takes the best stance against them. This can be shown in the diagram below: Fig 1, Porter, M.E. (1979) How competitive forces shape strategy. Harvard Business Review, Vol. 57 (2), p 141 Whilst strategy following Porter (1979), focuses on positioning firms in concentrated, rentable industries, there have been examples which have shown that this is not enough to guarantee success. Prahalad and Hamel (1990) present cases where Porter's model failed to maintain high profits.
RBV, on the other hand, enables the firm to find its traits and to capitalize on them and to sustain these profits over time regardless of its position in the market. Peteraf (1993) suggested that there are 4 central conditions to RBV which must be attained. These conditions can be seen in her model below: Fig 2: Peteraf, M. A (1993: 186), The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal, 14 (3) I will now apply this model to Starbucks. Heterogeneous resources can be observed in competing coffeehouses, and include locations, staff, and most importantly, coffee. Starbucks aims to distinguish itself from its competitors by concentrating on the excellence of its coffee blends, as the mission statement clearly shows:" Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. ' (web) Therefore the company, since 1971, has been all about coffee. It still advertises the House Blend Coffee, which was the original blend right in the beginning when the company was a coffee roaster and blender.
Other superior resources include trained staff and strategically placed coffee bars (in cities, bookshops, supermarkets, hotels etc). Starbucks coffees are also tailored to customer needs, as the company, though adopting a customizing method drinks creation. The phrases "Tall skinny mocha" and "Grande cappuccino" are standard at Starbucks coffeehouses, and the coffees therefore appeal to a wide range of customers, who can choose exactly what they want. The variety of espresso based coffees (latte, mocha, cappuccino, espresso, etc) also enables Starbucks to capitalize on bespoke espresso machines and specific staff training, because the drinks are based on one core ingredient. The company could therefore save on its production and training costs due to the spreading of the overheads.
As for coffeehouse venues, Starbucks acquired some cafes from rivals, for example in the UK", [Coffee Republic] has sold huge parts of its estate, much of it to Starbucks and Nero, to combat debt". (web). Starbucks coffeehouses are comfortable and atmospheric, catering for business meetings and relaxation alike, which attracts customers and develops their loyalty. Starbucks's popularity therefore brings an inflow of customers who are willing to pay a marked up price for their coffee, thereby generating profits for the company. To maximize customer loyalty, Starbucks launched loyalty cards, and is innovating ways in which to capitalize on them (1), and to stay ahead of competitors.
This is similar to the FF concept of product differentiation and branding to stay above existing competitors, but also to the suggestion combating threat of entry, as brand image and customer loyalty are barriers to entry. However, these barriers are linked to the Starbucks core competency: fresh quality coffee, and not unrelated. Porter (1979) does not distinguish between the types of entry barriers which would be the most efficient at protecting the firm from new entrants. As for ex post limits to competition, Starbucks sustains its profits by enhancing the coffee experience. This goes hand-in-hand with imperfect resource mobility, as other firms would be unable to recreate Starbucks, due to the unique combination of furnishings, music, jargon and specialized coffee blends. Even if a new coffee bar entrant purchased Starbucks music, this by itself would not render as much rent as it does for Starbucks, because of co-specialized assets (Teece, 1986; as mentioned in Peteraf, 1993).
This means that the music is only a part of complementary assets of the company, and that separated from the network of additional enhancing resources would not be as profitable. Also, in 1999, Starbucks correctly deduced that 70% of its customers were internet users (1), and planned in advance for future technological developments, which would make wireless access more affordable for the average customer. In 2002, therefore, Wi-Fi hot spots were installed in many Starbucks outlets. This would increase the costs to new entrants to the coffee bar market. Starbucks also claims to take care of its employees, which means that the coffee specialists could be bound to the company. Through bonuses, rewards and health plans as outlined on the Starbucks website, the company ensures employee loyalty.
This would decrease the chance of competing companies poaching workers, and thus would protect rents over time. Innovation of providing Wireless Internet access helps counter Porter's (1979) competitive force of Substitute products. Starbucks adapted itself to the changing technological industry, which has decreased the amount of substitutes for its service for now. However, I think that coffee, the core competence, led to this innovation, and not an external view of the coffee industry. Therefore, this may have been achieved through RBV, and not through FF.
Ex ante limits to competition imply that the costs of setting up should not outweigh the rents received. The pioneering step in coffeehouse history was when Starbucks first started pursuing such bar culture in 1984, so there was little competition in this specific field. Due to a considerable part of Starbucks venues acquired from existing cafes, costs of expansion were kept low. Furthermore, Starbucks's prior reputation as a coffee specialist helped it gain ground in the coffeehouse market, as customers knew the quality of the product.
As Starbucks expanded, it vertically integrated backwards, being aware of its roots as roaster. Teece et al (1997), mention the importance of firm history which constrains the firm's future. This is important, as Starbucks made the most of its expertise in coffee roasting to cater for its mainstream coffee bar business, and decided to open coffee roasting plants, in 1990, 1993 and 2000. This means that the company nurtures and refines its core competence - coffee, which is the key to its success. The FF model mentions that a firm should be aware of Powerful suppliers, if they possess the potential to integrate forward. However, by focusing on coffee and growing large, it is Starbucks that holds the power, as it has a low concentration of suppliers, and buys large amounts of coffee beans.
This also means that Starbucks has fewer suppliers in different product areas, so there are fewer unprotected links. At the other end, Starbucks main distribution mostly takes place through its own retail outlets, and the end customers are so diverse that there is little danger of them integrating backwards. Starbucks's focus on coffee and coffee bar atmosphere meant that it was able to pursue different markets whilst keeping diversification to an appropriate level. Peteraf (1993) suggested that there is an optimal amount of diversification that a company can have before " [marginal] market rents are zero", as implied by Montgomery and Werner felt (1989). What I find interesting, is that Starbucks's different market interests are related to either improving the coffee or the coffee experience, or improving the brand image.
Examples include: Kraft Foods Inc partnership to improve selling Starbucks fresh coffee in grocery and warehouse markets (1), acquiring Hear Music, a music company, in 1999, to pursue the development of background music in coffeehouses; stepping into partnerships with bookshops such as Borders, to appeal to readers; and supporting Fair Trade coffee to promote the company's (Starbucks) social responsibility (2). Starbucks specifically chose not to concentrate on the online sales business, rather to use its website to direct customers to coffeehouses, and to further improve brand image. This demonstrates commitment to development of core competencies, according to Prahalad and Hamel (1990), vital for an organization; they state that to succeed, companies must "identify, cultivate and exploit the core competencies that make growth possible" (1990: 79). In conclusion, I think that Starbucks adheres to both the RBV and to the FF models. Nonetheless, there is a problem with Porter's interpretation of 'industry'.
For example", [Starbucks's market share] is 5% or less of all the coffee consumed in North America, so the opportunity for Starbucks to expand is obviously tremendous". (3) But when compared to coffee chains in the UK, Starbucks has 25% of the market. Depending how broadly we define the coffee industry, Starbucks can be seen as a small scale contributor to a low concentrated industry, or as the largest firm in a 3-firm concentration ratio of 57% (web). The importance, and the advantage of RBV over the FF model is that RBV does not require the concept of the industry and of having the highest market share initially, to be able to grow and to generate sustainable profit. Porter's model is constrained by the industry in which the firm operates, but applying core competence analysis and concentrating on firm specific resources, firms adopting RBV will be able to expand beyond one industry, whilst still focusing on their traits, as the Starbucks analysis has shown.
1) web projects / Final%20 Report%20 Starbucks. com. pdf (2) web (3) web K.R. (1991).
A historical comparison of resource based theory and five schools of thought within industrial organization economics: do we have a new theory of the firm? Journal of Management, 17 (1), pp. 121-154. Peteraf, M. A (1993) The cornerstones of competitive advantage: a resource-based view.
Strategic management journal, 14 (3), pp. 179-191. Porter, M.E. (1979) How competitive forces shape strategy.
Harvard Business Review, Vol. 57 (2), pp. 137-145 Prahalad, C.K. & Hamel, G. (1990).
The Core Competence of the Corporation. Harvard Business Review, May-June, pp. 79-91. Teece D, Pisano G and Shue n A. (1997), Dynamic Capabilities and Strategic Management.