Is the utilization of the bundle of heterogeneous resources capabilities and core competencies that can be used to create an exclusive market position?

2.1 The Firm as a Set of Resources

The resource-based view seeks to understand why firms grow and diversify. The theory grew largely out of Penrose's (1959) study, in which she cites unused managerial resources as the primary driver of growth. Penrose recognized that internal managerial resources are both drivers and limits to the expansion any one firm can undertake. This stream of literature was expanded in the 1970s and early 1980s on the heels of significant diversification and firm expansion (Rubin 1973, Teece 1980, 1982).

The resource-based view advances the importance of firm-specific resources, that is, those resources that maintain value in the context of the given firm's markets and other resources that are difficult to replicate by other firms (Wernerfelt 1984). Such resources include managerial ability, customer relationships, brand reputation, and tacit knowledge regarding specific manufacturing process. Resources are not the same as competencies or capabilities. Rather, a firm's access to resources and ability to mobilize and combine these resources in specific ways determine the firm's competence in a given product area. As a firm gathers resources for one business, these resources will, to differing extents, be sufficiently fungible for use in other product lines or markets (Teece 1982). Some of these resources will maintain excess capacities over time, especially since the units required for operations in one area are not necessarily consistent across multiple fields.

In some cases it is knowledge which is the ‘excess resource’ (Teece 1982, 1986). It is this excess capacity, coupled with profit-seeking behavior, that drives decisions to diversify. Some scholars have noted that such resources are transferable in a limited sense between firms, but such endeavors require organizational interaction beyond market contracting to include acquisitions or hybrid forms of governance (Chi 1994). This point will be considered in Sect. 4.

3.2.3 Resource-based view

Barney (1991) introduces the concept of the resource-based view (RBV) to address the limitations of environmental models of competitive advantage and attempts to provide a link between heterogeneous resources controlled by an organization, mobility of the resources within the particular industry and the strategic or competitive advantage enjoyed by an organization. A firm's resources are used to enable it to establish strategies to improve the overall efficiency and performance of the organization and these can be quite wide ranging. Barney classifies these resources into three categories:

Physical capital resources: includes the physical resources of the organization such as plant and equipment, technology, location and access to raw materials.

Human capital resources: includes the training, experience, judgment, intelligence, insight from managers and workers within the organization.

Organization capital resources: includes the formal structure of the organization, planning, controlling and coordinating systems, formal and informal reporting and planning systems, as well as informal relation among groups with the organization and between external organizations in the competitive environment.

Hence, the resources that an organization controls can be examined in terms of its attributes: heterogeneity (i.e. its uniqueness) and immobility (i.e. its obtainability by other competing firms). In terms of these two attributes, if two organizations that have the same resources, and conceive the same strategy, both will improve their efficiency and effectiveness in the same way and importantly to the same extent.

In order for an organization to have the potential of sustainable advantage the resources should have four attributes (Barney, 1991):

it must be valuable in the sense that it provides opportunities or neutralizes threats to the organization's environment;

it must be rare among an organization's current and potential competitors;

it must be imperfectly imitable;

it must be non-substitutable – there cannot be a strategic equivalent substitute for the resource that is valuable but neither rare nor imperfectly imitable.

Resources that are valuable, rare, imperfectly imitable and non-substitutable can provide sources of sustained competitive advantage to an organization. In this case we find that a resource is valuable if it has the ability to reduce cost or increase the price of a product or service. Thereby, a bundle of valuable resources can be used to conceive of and implement strategies. These can be a particular mixture of physical, human and organizational capital resources. If this bundle is not rare then another organization is capable of conceiving and imitating the same strategies. Hence, a key element of RBV is the concept of a rare resource. An organization that provides a bundle of valuable resources can be considered a rare resource, as it would be costly or impossible to imitate: imperfectly imitable. Moreover, if substitute resources are possible they must also be expensive to sustain for the competitor, if a competitive advantage is possible and sustainable. The cost of the imitation is often driven by the unique social conditions, casual ambiguity and complexity of the resources (Barney, 1991). Substitutability comes in two forms. First, if an organization is able to use similar valuable–rare resources it could conceivably develop and implement a similar strategy. Second, very different organization resources could provide substitute strategies. Resources that are valuable and rare afford a competitive advantage to the organization provided they are imperfectly imitable and non-substitutable.

2.2.1 The Harvard school's latest conceptualization of strategy

It must be emphasized that the relationship between strategy and business model depicted in Figure 2.1 only makes sense if, out of the many definitions of strategy that could be used, one accepts the Harvard school's latest definition of strategy. In this chapter we use Porter's (1996, 2001) conceptualization of strategy because it represents the latest and best of the Harvard school's thinking about strategy. By the ‘Harvard school’, we mean the work of a series of thought leaders, including academics and consultants, such as Christensen (Learned et al., 1965), Andrews (1971), Porter (1980, 1996, 2001), Porter and Millar (1985), Ghemawat (1991), the Boston Consulting Group, and McKinsey & Company, associated with Harvard. The evolution of Harvard school's thinking on strategy is depicted in Figure 2.2. The pairs of arrows numbered 1a, 1b and 2a, 2b show two ‘mutations’ in the evolution of the Harvard school's current conceptualization of strategy.

As shown at the bottom of Figure 2.2, the early strengths, weaknesses, opportunities, and threats (SWOT) conceptualization of strategy – which developed at Harvard in the 1960s – was essentially descriptive. SWOT analysis was both inward and outward looking in that it considered both a firm's internal capabilities (its strengths and weaknesses), and external competitive forces (opportunities and threats). As explained by Ghemawat (2002), and indicated by the arrows 1a and 1b in Figure 2.2, in the late 1970s insights from both SWOT analysis and the industrial organization economics (IOE) literature led Porter to define his five-forces model, and later, his value-chain model. In Figure 2.2, these models are classified as ‘theoretic’ because they provide explanations of why some industries and some firm's strategies are more successful than others.

Porter's (1979) famous five-forces framework, the result of the first ‘mutation’ in the Harvard school's conceptualization of strategy, is shown as Figure 2.3. It describes the forces governing competition in an industry, not the strategy of an individual firm. Its focus is on the factors that enable different industries to have quite different returns on equity (ROE) over long periods, for example ROE of 21% for drugs versus 4% for iron and steel in the US during the 20 years 1971–1990 (McGahan, 1992).

Due to its focus on industries, not firms, the five-forces model does not, however, explain differing returns for different firms in the one industry. For example, although McGahan (1992) found the US iron and steel industry had an average 4% return on equity over 20 years, Collis and Ghemawat (1994) found that 20-year returns on assets (ROA) in the steel industry ranged from 13% for Oregon Steel Mills to −2% for Bethlehem Steel.

What explains these large differences in ROA between firms in the same industry? Porter and Millar's (1985) paper begins to answer this question. Their value-chain diagram, structured as shown in Figure 2.4 (and based, according to Ghemawat (2002), on earlier work at McKinsey & Company), shows ‘nine generic categories’ of value-creation activities in a firm's value chain. By this stage in the evolution of conceptualization of strategy, that is 1985, the Harvard school was beginning to show an awareness that the internal workings of individual firms could be an important source of competitive advantage, and therefore an important factor to consider in development of firm-level strategy.

Independently of the above stream of literature, another body of literature, namely that of Organizational Economics (OE) (Coase, 1937; Williamson, 1979) was also developing ideas that were to become important to the Harvard school's current conceptualization of strategy. Ideas from OE led to the development of the resource-based view of the firm (Wernerfelt, 1984; Barney, 1991), which paid far more attention to the inner workings of firms. The resource-based view of the firm suggests that firms compete more on their internal capabilities than the market environment and specific products and services (Grant, 1991). The resource-based view of the firm encompasses the notions of core competency (Prahalad and Hamel, 1990), organizational learning (Teece et al., 1997), and resource commitment (Ghemawat, 1991) as sources of competitive advantage.

Recognizing the strength of OE insights, particularly those of the resource-based view of the firm, led to the second mutation in the Harvard school's conceptualization of strategy. As indicated by arrows 2a and 2b in Figure 2.2, the school's latest conceptualization of strategy is represented by Porter's (1996) paper ‘What is Strategy?’ and Porter's (2001) ‘Strategy and the Internet’. The following quotations from these two papers capture the essence of the Harvard school's latest thinking on the meaning of strategy (and also provide a reference point for the discussion of business models in the next section):

The goal of strategy is to achieve a ‘superior long-term return on investment.’ ‘Economic value is created when customers are willing to pay a price for a product or service that exceeds the cost of producing it.’ (Porter, 2001, p. 71)

‘Competitive strategy is about being different.’ (Porter, 1996, p. 64)

‘Strategy is the creation of a unique and valuable position, involving a different set of activities … different from rivals.’ (Porter, 1996, p. 68)

‘Strategy is making trade-offs in competing.’ (Porter, 1996, p. 70)

‘Strategy defines how all the elements of what a company does fit together.’ (Porter, 2001, p. 71)

‘Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in different ways.’ (Porter, 1996, p. 61)

‘Operational effectiveness means performing similar activities better than rivals perform them.’ (Porter, 1996, p. 62)

‘Strategy involves continuity of direction.’ (Porter, 2001, p. 71)

In essence, Porter (1996, 2001) argues that strategy involves defining a company's long-term position in the marketplace, making the hard trade-offs about what the company will and will not do to provide value to customers, and forging hard-to-replicate fit among parts of the ‘activity system’ the firm constructs to deliver value to customers, all with a view to making a superior return on investment. The five terms in italics are key to this latest Harvard-school conceptualization of strategy. Note that this is a much more operational, capabilities-based, and firm-specific view of strategy than high-level, generic view presented in the earlier five-forces and value-chain conceptualizations of strategy.

Towards the end of his 1996 paper, as part of a five-page discussion of fit (developing point 5 above), Porter presents a diagram that he calls an ‘activity system map’ (Porter, 1996, p. 73). Figure 2.5 shows an example of one such map, for an imaginary Online Publishing company similar to Reed Elsevier's online division. We have used solid- and dotted-line circles to correspond to the dark- and light-purple circles Porter mentions below. According to Porter (1996, p. 71):

Activity system maps, … show how a company's strategic position is contained in a set of tailored activities designed to deliver it. In companies with a clear strategic position, a number of higher-order strategic themes (in dark purple) can be identified and implemented through clusters of tightly linked activities (in light purple).

Activity system maps are so close to what many people call business models that it is not clear how Porter's conceptualization of strategy differs from what others have called business models. Given this similarity, it is easy to understand why Porter (2001), quoted in the Introduction, has such a low opinion of the business model literature. However, as discussed below, the ‘business models as abstractions of strategy’ idea advocated in this chapter may provide a useful new way of approaching the comparison of business models and strategy.

Summarizing, the definitions of strategy in Porter (1996, 2001) represent the current end point of a 50-year evolution of thinking on strategy by people who belong to what we have termed the Harvard school. Key points from the current conceptualization are summarized by the eight points listed above and activity system maps like that in Figure 2.5. We do not argue that the Harvard-school conceptualization of strategy is the only possible interpretation, but we do believe it is a good one. It is therefore this latest Harvard-school conceptualization of strategy that we use as our reference when comparing various authors’ conceptualizations of ‘business models’ with strategy.

▪ Conclusions

Strategic thinking has moved from a structural view of competitive advantage to a resource-based view. The resource-based view of the firm emphasizes the resources firms need to develop to compete. Two forms of resources exist, property-based and knowledge-based. Property-based resources contribute most in stable settings, while knowledge-based resources have the greatest utility in uncertain environments. While the resource-based view of the firm has substantial theoretical support, it has not been subject to much empirically testing. The resource-based view in the context of SMEs is largely unexplored and the role of IS is likewise untested.

This chapter discusses the role of IS as firm resources and the role of such resources in SMEs. It uses as a vehicle the identification and development of an ISS in a knowledge-based SME. Systemic, knowledge-based resources are likely to be the prime competitive tools of this type of firm. The use of core competencies or capabilities, a key aspect of resources, as a basis for an ISS is contrasted with the use of a structural approach exemplified here by the value chain. This chapter has described a SISP exercise which, informed by a core competence perspective, was hampered by the lack of tools and frameworks explicitly embodying these concepts.

From an organizational learning perspective Housing consultancy's understanding of its core competencies has enabled it to recognize the core knowledge that resides within it. This understanding provides the basis for development of new competencies that will support innovation and growth in the organization. However, to reap the benefits of any potential change it is important to consider the need for business process change. The next chapter explores business process re-engineering within the SME context.

Knowledge and the knowledge-based view

The KBV perspective has emerged from the strategic research field, as an extension of the resource-based view (RBV) of the firm (Grant, 1996). The RBV posits that an organization that possesses valuable resources and competencies not easily copied and implemented by competitors will develop a competitive advantage (Barney, 1991). Within the KBV perspective, knowledge constitutes the most critical resource for organizations as, without knowledge, organizations are not able to develop other resources or competences such as products or services (Grant, 1996; Spender, 1996). In particular, with the KBV, an organization’s primary purpose is to integrate knowledge. Organizational members are expected to be able to reuse knowledge and adapt it to their tasks at hand (Grant, 1996).

We define knowledge as an object or an asset that employees and organizations use to serve specific objectives (Alavi and Leidner, 2001). We recognize that knowledge can be interpreted in other ways than the aforementioned definition, for instance as a state of mind or as practice (Cook and Brown, 1999; Orlikowski, 2002). However, under the KBV perspective, knowledge is frequently considered as an asset that can be aggregated and transferred at the organization level (Denford and Chan, 2011; Grant, 1996).

Knowledge varies in the degree to which it can be codified (Kogut and Zander, 1992). Some knowledge is largely explicit, meaning that it can be articulated, codified, and transmitted through the use of symbols or language (Alavi and Leidner, 2001; Nonaka, 1994). Explicit knowledge can vary in complexity, ranging for instance from organizational charts to standard operating procedures (SOP). While organizational charts give an overview of an organization’s structure, SOPs provide specific and articulated written details of approved processes to perform tasks or procedures. As such, SOPs seek to codify and simplify complex knowledge about how to perform a specific task (Kogut and Zander, 1992). Knowledge that is largely based on personal experience, practice, and beliefs is usually referred to as tacit knowledge (Nonaka and Takeuchi, 1995). Because of the inherent personalized, context-sensitive nature of tacit knowledge, it is much harder to simplify and codify to facilitate its reuse by other individuals (Ford and Chan, 2003).

5.4.2 Modeling synchronization mechanisms

To deal with concurrency conflicts to shared resources, MARTE provides two possibilities, targeting different levels of abstraction:

A detailed resource-based view, for cases where the specifics of the mutual exclusion mechanisms need to be spelled out, or

A more abstract high-level representation where the mechanisms used to achieve mutual exclusion are implicit

The detailed model is likely to be more useful for purposes such as analysis and code generation, while the higher level view is better suited for more abstract architecture-level models.

5.4.2.1 A resource-based model of mutual exclusion

In this case, the devices (i.e., resources) used to achieve mutual exclusion are rendered explicitly. To this end, the general Resource stereotype is refined in several steps to capture some general characteristics of mutual exclusion mechanisms, culminating with the SwMutualExclusionResource stereotype. This stereotype is still general enough to support a variety of mutual exclusion devices and methods, as defined by the values of its key attributes:

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mechanism — Is an attribute that is used to define the specific type of mutual exclusion device represented by the stereotype. A standard set of exclusion devices is defined through a predefined enumeration type (MutualExclusionKind), which includes:

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BooleanSemaphore for the most primitive semaphores that allow only a single access to the protected resource before they block

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CountSemaphore for counting semaphores that protect multiple identical resources (see the discussion on the resMult attribute below)

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Mutex is quite similar to a Boolean semaphore, although there may be subtle differences between them in some operating systems (such as the feature that a mutex can only be released by the task that currently holds it)

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Other is a general catch-all for other types of mutual exclusion devices.

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resMult — Is inherited from Resource (see Section 4.2.2). In the case of mutual exclusion resources, this attribute can be used to represent the maximum number of simultaneous concurrent accesses that are allowed by the mutual exclusion resource before it blocks further requests (i.e., the number of identical shared resources it protects).

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waitingQueuePolicy — Is used to specify queuing discipline for handling incoming acquire requests. Associated with this attribute is an extendable predefined enumeration type (QueuePolicyKind) that specifies the standard valid choices: FIFO, LIFO, Priority, Undef, and Other. Note that, in case of Priority queuing, it is possible to provide additional detail, as described below.

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waitingQueueCapacity — Is an optional attribute that can be used for implementations where there is a limit on the size of the waiting queue. Most implementations do not impose limits.

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concurrentAccessProtocol — Is used to identify the specific protocol used by the mutual exclusion resource. A predefined set of common protocols are provided through an enumeration type (ConcurrentAcccesProtocolKind):

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PIP for priority inheritance protocols

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PCP for priority ceiling protocols; note that in this case, it is possible to specify the actual priority ceiling value through the additional attribute ceiling (an integer)

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NoPreemption is for protocols that do not allow preemption by another task, regardless of priority, until the resource is released

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Other

The use of this stereotype to model a basic binary semaphore class is shown in Figure 5.16. Note the use of the general Acquire and Release stereotypes, described in Section 4.2.3, to identify operations that are used to request access to the semaphore (p()) and to release the semaphore (v()), respectively.

Figure 5.16. Example showing modeling of a basic binary semaphore.

An example of a more complex mutex type device that uses a priority ceiling protocol is shown in the collaboration diagram in Figure 5.17. The dbSem mutex serves to protect the database (db) shared by the two concurrent tasks w1 and w2, both of which write to the database.

Figure 5.17. Collaboration diagram fragment showing use of a mutex for accessing a shared database.

A corresponding sequence diagram is shown in Figure 5.18. Recall that the parallel operator (par) in UML sequence diagrams represents all possible interleavings of the contained interaction fragments. This means that, in some cases, there could be conflicting resource accesses requests when a get() operation is invoked by one writer while the resource is busy serving the other. We capture this possibility here by including a gap on the lifelines between the reception of the get() operation call by the dbSem mutex and the actual start of operation execution.

Figure 5.18. Sequence diagram corresponding to the collaboration shown in Figure 5.17.

5.4.2.2 A higher-level model of mutual exclusion

An alternative to the above method of representing mutual exclusion is simply to declare an access control policy on the device that needs to be protected. In this case, the mutual exclusion resource is not modeled explicitly but only implied. This is done using the concept of a protected passive unit, represented by the stereotype PpUnit. This stereotype includes an optional concPolicy attribute, which can take on one of the following values:

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sequential — This means that there is no access control so that concurrency conflicts can occur.

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guarded — Involves mutual exclusion such that only a single concurrent access is allowed while others are blocked until their turn comes.

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concurrent — Represents units that support multiple concurrent accesses with no blocking and no possibility of conflicts.

For example, for the system in Figure 5.17, a more abstract representation would omit the explicit mutual exclusion device and simply model that database as a protected unit with a guarded concurrency policy, as shown in Figure 5.19.

Figure 5.19. A more abstract model of the system in Figure 5.17 using the implicit mutual exclusion approach.

12.3.2 Case study research

This chapter explores three specific areas of interest – capabilities, contracts and SLAs, and inter-organizational relationships – related to ERP outsourcing on the basis of RBV, Transaction cost theory, Incomplete contract theory and the literature on the RBV. Desk and field research involving a single ERP outsourcing case study was applied to develop these three areas further. The interviewees are detailed in Table 12.1.

Table 12.1. Interviewees of the ERP outsourcing case study

The same research protocol was followed in all interviews conducted for the case study. The same analysis techniques for collecting data were used for all interviews. All interviews were recorded, fully transcribed and further developed. The average interview was over an hour. The results were approved by the interviewees and constituted the basis for the analysis. In addition to the interviews, supporting documentation for the case study analysed was collected, including annual reports, organization charts and research reports on ERP outsourcing. The nature of this type of research is explorative. The case study method has been used, because it enables ‘reality’ to be captured in considerably greater detail than other methods, and it also allows for the analysis of a considerable greater number of variables.

In this case study the functional application support services and the ERP software licenses were addressed in all the four interviews. The Service Recipient did not allow us to interview the Service Provider, and the responsible manager of the internal automation department of the Service Recipient, which are mutually responsible for functional application support. The Service Provider responsible for the ERP software was not involved in the ERP outsourcing. This Service Provider has an independent relationship with the Service Recipient. This case study is presented anonymously, on request of the Service Recipient, to ensure the confidentiality of this ERP outsourcing relationship.

Marketing strategies pursued by firms are aimed at obtaining a sustainable competitive advantage. Competitive advantage can be achieved in two different perspectives: the external one, which focuses on the industry attractiveness; and the internal one, which focuses on the internal resource endowment of the firm. Recent developments in strategic marketing (the Resource Based View of the Strategy) are increasingly focusing on each firm's own endowment of resources, capabilities, and competencies as the main source of competitive advantage and the main driver of marketing strategies. In the article focus will be centered on market driving capabilities and trust resources as the main drivers of marketing strategies. Furthermore, in recent years firms seem to be living in a new competitive milieu, in which marketing strategies based on ‘position wars,’ dominated by the logic of market sharing, are rapidly changing in ‘movement wars,’ dominated by that of market creation and environment enaction. ‘Movement wars’ are followed briefly by ‘imitation wars.’ So, marketing strategies evolve continuously from position to movement and to imitation wars in a circular perspective. Thus, the increase in competitive pressure, for many firms and many industries, is so strong that the term hypercompetition has been coined. Marketing strategies in hypercompetitive industries are focused on the capabilities of each firm to develop and leverage its endowment of marketing resources, to co-evolve with other firms in the reconfiguration of existing markets, and in the creation on new ones, adopting leapfrog strategies.

1 What is Strategy?

First, a simple answer: Strategy may be defined as a set of fundamental choices about the ends and means of an organization. More recently it might be defined as policies and procedures that are aimed at securing competitive advantage. That said, there are several different approaches in exploring the question ‘what is strategy?’ Some focus on the content of strategy and its positioning in relation to factors internal or external to the organization that might be seen as salient to its securing competitive advantage. An example of the internal, firm-focused approach would be the ‘resource-based’ view of strategy of the firm (e.g., Barney 1991). This perspective defines firms as unique bundles of resources and suggests that the route to developing sustained competitive advantage is to develop resources internally that meet the criteria of value, rarity, being costly to imitate, and nonsubstitutability. Examples of the latter, market-focused approach might be Porter's (1980) generic strategies (low cost, differentiation, segment, or niche) in relation to his five-forces model or Miles and Snow's (1978) categorization of firms as prospectors, analyzers, defenders, and reactors, both models emphasizing market-oriented choices. Theories that bring together internal and external perspectives are life-cycle theories of the firm or product (for example, the Boston Consultancy Group's portfolio planning growth-share matrix).

A second approach, which can subsume the content approaches, focuses on theprocesses of strategy making. A famous distinction is that between ‘planned’ and ‘emergent’ strategy (Mintzberg and Walters 1985). Building on this is a useful typology of Whittington (1993), based on two axes, relating to continua of outcomes (profit maximizing/pluralistic) and of processes (deliberate/emergent). Four perspectives on strategy are identified: the ‘classical’ (profit maximizing/deliberate), ‘evolutionary’ (profit maximizing/emergent), ‘processual’ (pluralistic/emergent) and the ‘systemic’ (pluralistic/deliberate). The processes of strategy making that are ‘deliberate’ comprise of rational, planned, top-down decision making (‘classical’ model) and decision making shaped by the social systems in which organizations are embedded (‘systemic’ model). ‘Emergent’ processes are those that reflect the very bounded, incremental, and political nature of decision making (‘processual’) or, in contrast, the ‘population ecology’ view of the competitive processes of natural selection, where the market picks the winners, rendering ineffective any deliberate strategizing (‘evolutionary’). Writers typical of each of these perspectives would be Ansoff (1965) (‘classical’), Hannan and Freeman (1988) (‘evolutionary’), Mintzberg and Walters (1985) (‘processual’), and Granovetter (1985) (‘systemic’).