The Resource-Based View of Corporate Strategy
In my post Porter’s Five Forces for Enterprise Mobile Solutions I reviewed the classic but powerful theory elaborated by Michael Porter, a key thought leader in what is known as the Market-Based View of strategy. This externally-focused view of competitive strategy is predicated on analyzing the industry in which a firm competes, the position a firm takes as one of many competitors, and the economic implications of that position. This is often easier in hindsight and can be difficult to employ for strategic planning for some businesses – because the Five Forces method focuses on the economic value captured by a firm after external pressures erode the value created, rather than why or how that value is created in to begin with, the Market-Based View can leave business leaders scratching their heads. Moreover, even when the impact of the Five Forces is clear at the business level, it becomes extremely problematic when looking at a multi-business corporation. When a publicly-traded corporation has a diversified portfolio of unrelated businesses, what value does the corporation create for its shareholders independent of the businesses competing in their unique markets? How does the multi-business corporation position each business in a way that creates synergy and sustainable, long-term competitive advantage?
Collis and Montgomery have dedicated their careers to answering the difficult questions in corporate strategy as thought leaders for the Resource-Based View. They provide valuable guidance in answering the problem of how multiple businesses can create more long-term value together rather than separately. In this post, I will summarize key elements of the Resource-Based View and apply them to enterprise mobile app portfolio strategy.
Sustainable Competitive Advantage
Businesses exist to create economic value that can be consumed in exchange for capture of a portion of the value created. While Porter’s Five Forces focuses on the pressures that erode the value a firm can capture, the Resource-Based View looks at how to plan competitive advantage at the corporate and business level so that the competitive positioning a firm takes has long-term sustainability.
Let’s start with the their definition of corporate strategy:
“Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.”
Whether the corporation manages multiple product lines within a single industry (such an automotive corporation that competes in both the low-price and luxury markets) or manages multiple businesses in disparate industries, a firm must align the core value-creation processes to maximize efficiency, effectiveness, and longevity.
While I will revisit the topics of administrative context, scope of the firm, and the role of culture and managing change in future posts; the fundamental key to maximizing sustainable competitive advantage is understanding the resources that make your firm competitive and how to organize around them.
For a resource to be a source of sustained competitive advantage, it must be valuable, rare, inimitable, and non-substitutable:
Valuable – A resource must enable a firm to employ a value-creating strategy by either outperforming its competitors or reducing its own weaknesses. The value factor requires that the costs invested in the resource remain lower than the future rents demanded by the value-creating strategy.
Rare – To be of value, a resource must be rare by definition. In a perfectly competitive strategic factor market for a resource, the price of the resource will reflect expected future above-average returns.
Inimitable – If a valuable resource is controlled by only one firm, it can be a source of competitive advantage. This advantage can be sustained if competitors are not able to duplicate this strategic asset perfectly. Knowledge-based resources are “the essence of the resource-based perspective.”
Non-substitutable – Even if a resource is rare, potentially value-creating and imperfectly imitable, of equal importance is a lack of substitutability. If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents, resulting in zero economic profits.
In Porter’s Five Forces for Enterprise Mobile Solutions I showed how custom enterprise mobile solutions can be employed against each of the Five Forces by protecting the efficiency, effectiveness, and consistency of organization’s core processes. To plan an entire roadmap of apps, it is critical to judge the resources in each core process according to their unique value, rareness in the industry, difficulty to imitate, and resistance to substitution.
Resource-Based Strategy for Enterprise App Portfolios
We have seen that multi-market corporations must organize around unique resources to create high-margin value. This is also why I discuss “enterprise” mobile app “portfolios” – the core operational processes at the team-level must come together seamlessly at the business level, while these business-level app “suites” or must come together in at the enterprise level. The business level may be a separate competitive market for the operations process or the unique functional group in the corporate processes. In either case, these processes are “proprietary” and deserve protection through custom solutions only insofar as the resources in each process are valuable, rare, inimitable, and non-substitutable.
Thus, the two critical questions that must guide your enterprise app portfolio investment strategy are:
- How does any single app upgrade your key resources?
- How does each app create and capture value as part of a portfolio in excess of the value it creates as an individual tool?
Because the driving vision of an app portfolio will only be as coherent and consistent as the strategic alignment of organization that creates it, planning a roadmap needs C-Level champions and cross-functional buy-in. That said, what does it mean to find the “right” apps?
Let’s use two examples as we explore the idea of “upgrading” resources to increase competitive advantage, one that has a product that is primarily service-based, one that has a physical product that results from manufacturing processes.
- Example A: Service provider – A national hospital corporation with several medical centers, acute care, surgical, and other facilitates that operates in multiple geographic regions.
- Example B: Product manufacturer – A US-based die forging company that shapes metal parts for other manufacturers across several industries. Through high quality standards and technological investment, the company has “locked-in” several large clients that rely on them exclusively.
First, let’s analyze what is similar about these two corporations.
- Both corporations have three main meta-processes – Operations, Business Development (including sales, marketing, and advertising), Corporate Overhead (including corporate leadership, accounting, finance, HR, legal).
- Both corporations have skilled laborers and a strong culture of shared values.
- Both corporations prioritize quality as a differentiation metric and believe in maintaining unmatched transparency. Internal and 3rd-party audits are common.
- For the sake of this example, business development and overhead are industry-homogenous and are not a source of competitive advantage for either corporation
Next, let’s identify and evaluate the top three resources critical to the competitive strategy for our example hospital corporation. To select the right workflow that can be improved with a custom mobile solution, we must first know what resources are scarce, demanded by the market, and difficult to appropriate so that we not only upgrade the value creation of the resource but also capture economic rents long term. This is our path to sustained competitive advantage through investment in a custom mobile app portfolio.
Example A: Hospital Corporation
Skilled Labor (Doctors, Nurses, and Technicians)
- Valuable – Doctors, especially nationally acclaimed surgeons, are in high demand. The skilled nurses, medical technicians that support the doctors as part of the hospital’s value stream are all well-educated, heavily trained, and uniquely qualified to create specific value-add
- Rare – A top surgeon must have high aptitude, a long and successful academic career, and years of residency and practice in order to gain their skill and reputation. Because the cost and time for education and training are a major barrier to entry into the field, and medical school enrollment is tightly controlled, the surgeon is an extremely scarce resource. While the nurses and medical technicians are less scarce and education is less of a barrier to entry, competition remains high in geographic regions that have large competitors.
- Inimitable – Hiring and training practices are easily copied by competitors. Corporate leadership expresses that strategic alignment, a shared value system, and the intense focus on quality differentiates their services. While these could also be copied, late adopters would have significant learning curve disadvantages.
- Non-substitutable – While direct competition from small primary care practices and geographically-near hospitals (per market) is high, substitution for acute or surgical care is extremely low.
- Valuable – Investment in specialized equipment is not only a major barrier to entry, many advanced treatments that this hospital system provides cannot be accomplished without this equipment. As such, announcement of a new program and its associated technological investment is a common Game Theory technique for avoiding direct competition.
- Rare – Because hospitals avoid direct competition for advanced treatment by limiting duplicate investments, the scarcity of supply to the market is high.
- Inimitable – Although hospitals avoid direct competition, the approach of announcing investments ahead of time make imitation easy.
- Non-substitutable – There is no risk of substitution of advanced technology for this market, because substitutes were typically ruled out or attempts prior to demand for the advanced treatment.
Reputation for Quality
- Valuable – Investment in business intelligence, consistent transparency to investors and the medical community, and a long history of audits by multiple 3rd parties has made the Reputation for Quality a critical differentiator in the competition for market share and for human resources.
- Rare – Due to the extensiveness of focus and investment, this corporation’s care quality metrics are unmatched. However, not all consumers are sensitive to this as a decision.
- Inimitable – Although this approach is at risk of imitation, the late-adopter would always be years behind in building a history of transparent, verified data.
- Non-substitutable – The only substitute for quality is quantity. The highest-margin specialized treatments are not at risk, while acute or emergency care is at high risk of substitution.
While every business has core competencies, only distinctive competence – highly demand, scarce resources value streams that are difficult to appropriate – will result in competitive advantage. For our Example Hospital Corporation, the clear resource to upgrade is the is the doctors and surgeons that provide the highest-margin specialized care. To upgrade the specialized treatment physicians as an economic resource, the competitive strategy of the Hospital must make the doctor, as a human resource, more valuable, rare, inimitable, and/or non-substitutable.
We can see some obvious tactics for upgrading the economic value of this resource:
- Increased value to the market – by continuing to be a first mover for providing advanced technology for research and practice, these key resources will not only be attracted, but may be monopolized. High barrier to entry from competitors into highly specialized treatment programs will likewise create high barrier to exit for the surgeons practicing these treatments. Monopolizing a service, in this case, will monopolize the resource pool allowing high economic rents.
- Increased scarcity in the market – by monopolizing any given hi-tech, highly specialized services as above, the market will be in a state of information asymmetry and economic rents can be preserved long-term.
- Reduce imitation – To whatever extent the hospital can own the rights to Intellectual Property surrounding the training and practice of specialized services, the market will not be able to copy through resource appropriation.
- Eliminate substitutions – in this case, substitutions are not a major risk so focus should be on reducing transferability of knowledge and raising barriers to exit for the physicians.
Although we have clearly established that technological investment is the right approach to upgrading this resource (the high-profile, ultra-specialist doctor) by increasing scarcity and information asymmetry, raising barriers to transferability and imitation, and increasing the value of the information property that is created, we have not found a compelling case to add a custom mobile solution to the existing technological investment.
While a high-performance, beautifully-designed app aimed at these world-class care providers may increase the effectiveness of existing resource upgrade plans, this is a perfect example of an “obvious” app that may be perfect as part of broader app portfolio strategy but is not the best first app in the Example Hospital Corporation’s roadmap.
“Businesses are full of pain points and apps today are hitting the obvious, low impact problems. We have to understand what the business impact of the problem really is and quantify why it is worth solving.”
– Alex Bratton, Founder and “Chief Geek” of Lextech Global Services
Instead, using the Resource-Based View of strategy, we need to look for resources that do not have an effective upgrade plan in place, resulting in transferability and negative economic rents.