A strategic analysis of an SME;
Creating strategic options for a
healthy company
University of Groningen
Faculty of Business and Economics Msc. Small business and entrepreneurship First supervisor; Dhr. R. van der Eijk Second supervisor; Dr. C.H.M. Lutz
Dennis Apotheker Walstraat 6
2 Abstract
The purpose of this study was to make a strategic analysis of Apotheker BV, a wholesaling company of fresh fruits and vegetables. The research model is based upon the resource-based view of a firm and complemented with Porter’s five forces. The research steps follow Rangone’s (1999) logic. The analysis showed that the company has three strategic resources; customer knowledge, knowledge and experience of the owner and the sales employees. However the industry analysis showed that their competitive advantage is under pressure. The important strategic options for Apotheker are to focus on other types of customers, make use of modern day technologies and prepare for the succession of the sales employees.
Keywords; Resource-based view, SME, strategic analysis, strategic options, resources and
3 Acknowledgements
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Executive summary
The goal of this research is to make a strategic analysis of Apotheker BV. Apotheker BV is a wholesaling company of fruits, vegetables and potatoes. The strategic analysis is based upon the resource-based theory of the firm. This theory is developed by, among others, Barney (1991) and views the resource base of a company as the basis on which a competitive advantage can be developed. For this research there is a distinction made between resources and capabilities. The difference between is explained by the dependence of resources on capabilities in order to become valuable. The RBV argues further that not all of the resources are strategic and thus suitable to develop a competitive advantage. Therefore all the relevant resources of Apotheker will be tested through five different tests; competitive superiority, imitability, duration, appropriability and substitutability following Collis & Montgomery (1995).
The model of Rangone (1999) is used as a starting point for this research. The model is however modified and improved, most notable by adding Porter’s five forces model. The research showed that there are eight different key performances in the industry of Apotheker; new products, purchasing, distribution process, broad range of products, marketing awareness, advertisement, service and quality. The research on the resources determined three strategic resources for the company; the knowledge and experience of the owner, the customer knowledge and the sales employees.
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Contents
1. .... Introduction ... 7
2. .... Theoretical framework ... 9
2.1 Strategy and strategic management ... 9
2.2 Resources ... 11
2.2.1 Definition and list of resources ... 12
2.2.2 Competitive tests for resources ... 16
2.3 Capabilities ... 18
2.4 Competitive advantage ... 21
2.5 Criticism on the Resource-Based View approach and research justification ... 23
2.6 Critical Success Factors ... 27
2.7 Chapter summary ... 32 3. .... Research model ... 34 4. .... Methodology ... 35 4.1 Research method ... 35 4.2 Data collection ... 36 4.3 Research steps ... 38
4.4 Quality standards of the research ... 42
4.4.1 Internal validity ... 42
4.4.2 Generalizability ... 43
4.4.3 Construct validity ... 43
4.4.4 Reliability of the research ... 43
4.5 Chapter summary ... 44
5. .... Results ... 44
5.1 The firm and its environment ... 45
5.1.1 Products, strategy and customers ... 45
5.1.2 Porter’s five forces ... 49
5.1.3 Critical success factors ... 54
5.2 Basic capabilities and key performances... 61
5.3 Resources and the key performances ... 64
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5.3.2 Competitive tests of the resources ... 72
5.4 Strategic options ... 82
5.4.1 Resources and strategic options ... 82
5.4.2 Industry factors and strategic options ... 85
5.4.3 Strategic options and competitive advantage ... 87
6. .... Discussion... 88
7. .... Conclusion ... 90
7.1 Implications for practice ... 90
7.2 Implications for theory ... 91
7.3 Limitations ... 92
7.4 Suggestions for future research ... 92
8. .... Action plan ... 93
List of references ... 95
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1. Introduction
The goal of this research paper is to make a firm level strategic analysis of Apotheker BV. Apotheker BV is a wholesaling company of fruits, vegetables and potatoes. They offer a large and diverse set of fresh products. The company is located in Groningen and is operating for almost a hundred years now. Apotheker BV can be considered a small and medium-sized enterprise (SME). According to an official document released by the European Commission (The new SME definition, 2003) ‘the category of micro, small and medium-sized enterprises consists of companies which employs fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro’. Apotheker currently employs 20 fulltime employees and has a turnover around 10 million. Over the years changes in the fruits and vegetables market occurred, with several companies experiencing financial trouble and being unable to continue their business. However Apotheker managed to survive and withstand the upcoming competition from supermarkets. This fact makes the company suitable and interesting for a strategic analysis. What are the reasons/explanations for the performances of Apotheker BV? How do they succeed in this market, whereas others have failed? The owner of the company, Frank Apotheker, is interested in an in-depth analysis of the current situation of the company in order to be better positioned for the future. Several papers have been published about strategic planning in SME’s and its effect on performances, however few articles have been published on how to perform a strategic analysis (Bracker & Pearson, 1986; Ibrahim et al., 2004; MeKiernan & Morris, 1994). This research makes use of the resource-based view approach for a strategic analysis. The framework that will act as guidance for this research is developed by Rangone (1999), who developed a strategic analysis specifically aimed at SME’s. In the article the necessary research steps are described. However there are still some weaknesses in the model developed by Rangone, by using several other sources of literature, including recent publications about the RBV theory, the model will be adapted in order to perform a useful and in-depth strategic analysis of Apotheker.
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resources, capabilities, sustainable competitive advantage and key success factors. All those factors are necessary to complete a strategic analysis. The different concepts are visualized in a research model which illustrates the process of a strategic analysis. After the concepts have been discussed, the research methodology is presented. This section elaborates on the methods of data collection and the research steps leading towards the strategic options. After describing the data collection, the next section presents the collected data. The result section presents the collected data and analysis. The following discussion section elaborates on the presented results and the relation with the used theory. After this the conclusion will be presented in which the main research question will be answered and an action plan for Apotheker is described. The conclusion will provide an answer to the following main research question of this paper;
- What strategic options does Apotheker BV have if a resource-based view analysis is
applied?
In order to answer the main research question, the following sub-questions are formulated;
- What is the strategic intent of Apotheker BV and what are the key performances? - Which resources are influencing the key performances?
- What is the strategic value of the resources and can they create a sustainable competitive advantage?
- What are the strategic options for Apotheker BV?
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2. Theoretical framework
This chapter will present the theoretical framework of this research. The framework is the foundation of the research and sets the boundaries by giving definitions of important concepts. The following concepts will be discussed; strategy, resources, capabilities, sustainable competitive advantage, criticism on the resource based view and research justification and critical success factors.
The goal of this research is to perform a strategic analysis of an SME. There are three different levels on which a strategic analysis can be performed, which are; corporate, business and functional. According to Beard & Dess (1981) a business level strategy is concerned with the way a company competes in a particular industry or product market segment. The business level strategy is about the distinctive competences of a company, which allows it to create a competitive advantage over its competitors. Rangone (1999) developed a framework in order to analyze a strategic position, his article differs from other approaches since it is directly aimed at SME’s. The framework makes use of the principles and concepts of the RBV. However critically analyzing the different parts of the framework shows some gaps and room for improvement. The following sections will, as mentioned before, discuss the different parts of the RBV and Rangone’s (1999) framework in greater depth. The gaps in the framework will be addressed and dealt with correctly in order to make the framework more comprehensive.
2.1 Strategy and strategic management
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development and in more depth the Resource-Based View (RBV), since that theory forms the basis of this research.
2.1.1 Origins of strategic management
The concept of strategic management is developed during the twentieth century. In the 1960’s and 70’s academic research on the topic of strategy and strategic management started to evolve, due to important contributions from Ansoff (1965), Chandler (1962) and Andrews (1971). In their view strategy was a planning process aimed at maximizing profits. The higher management was responsible for setting organizational goals and making plans on how to allocate resources in order to achieve these goals. Andrews presented the still widely used SWOT (Strengths, Weaknesses, Opportunities and Threats) framework in his 1971 book.
During the 80’s the perspective changed from the company towards the industry (Ghemawat, 2002). In 1985 Porter published his Competitive Advantage book. This book discussed his famous ‘five forces model’ (suppliers, buyers, new entrants, substitutes and competitors) for the first time. It also presented the generic strategies approach, which is visualized in figure 1. Porter developed the idea of looking at the aspects of the industry to form the strategy on.
COMPETITIVE ADVANTAGE
COMPETITIVE SCOPE
Lower Cost Differentiation
Broad Target
Narrow Target
1. Cost Leadership 2. Differentiation
3A. Cost Focus 3B. Differentiation Focus
Figure 1 Porter's generic strategies
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The resource-based view changed the focus again from the industry back to the company. The theory is built upon three important articles (Barney & Arikan, 2001); Wernerfelt (1984), Rumelt (1984) and Barney (1986). Wernerfelt (1984) argued that the competitive advantage rested on the ownership of scarce and firm-specific resources, instead of industry characteristics. Rumelt (1984) developed the strategic theory of the firm, which contains many attributes of the resource-based view. He, for example, defines a firm as a bundle of productive resources, which value depends on the applied context. The discussion of isolating mechanisms, these mechanisms can enhance the imitability of resources, is another example. Barney (1986) argued that the superior performance of companies are related to the way it acquired and and/or developed its resources. These developed resources are more often the basis of superior performances, and not the externally acquired resources. The three papers state the basic principles of the RBV theory; performance difference explained by firm’s resources, different attributes those resources must possess and a unique bundle of resources can enable a superior performance (Barney & Arikan, 2001). These principles were formalized by Barney in 1991, which was the first article that presented a comprehensive and testable framework for the RBV (Newbert, 2007). Following the basic principles of the RBV, a lot of research has been performed to further develop and test the RBV theory. The theory has been improved by important contributions from Amit & Schoemaker (1993), Grant (1991), Helfat & Peteraf (2003), deSarbo et al. (2006) and Teece (1997). Their contributions will be explained in other parts of this literature review. These parts will discuss the different components of the RBV (resources, capabilities, key performances and competitive advantage) in greater depth. For this discussion several other sources of literature are used, more recent publications about the RBV are implemented to improve the theory, and the criticisms on the RBV will be discussed as well.
2.2 Resources
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Dollinger, 1999; Rangone 1999). The section ends with an overview of the resources that will be examined and their respective definitions.
2.2.1 Definition and list of resources
Amit & Schoemaker (1993) discuss the characteristics of resources and come up with a definition of their own. In their article they define resources as stocks of available factors that are owned or controlled by the firm. The resources are converted into final products by using several other firm assets. These assets include for example the technology, information system and trust between management and labor. Grant (1991) uses a similar definition in his article. He defines resources as inputs in the production process and claims that resources are the basic unit of analysis. Both articles view the firm’s resources more or less as inputs into the production process of a firm. Another similarity is that both articles give indefinitely classes of resources (Amit & Schoemaker end with ‘etc.’ and Grant finishes with ‘and so on’). Both articles give a useful definition and description of what a resource means. However both articles fail to come up with a classification to distinct the resources. The following subsections will present classifications of resources, which is necessary in order to research resources in a company.
Barney
Barney discusses in his 1991 article the relation between the resources of a firm and sustainable competitive advantage. His article builds upon the logic from the resource-based view. Two important assumptions about resources are behind the reasoning of Barney (1991). The first assumption is that firms within a specific industry can control heterogeneous resources and the second assumption is that these resources are not perfectly mobile, which can lead to long-term heterogeneity between firms. Heterogeneous resources mean that resources differ from each other and can differ per company as well. The mobility of resources depends upon the efforts needed to transfer them and acquire them.
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effectiveness’. However not all of the resources owned and controlled by the company are important. Those resources that enable the firm to implement strategies that improve the effectiveness and efficiency of the firm are important and can be considered strategic (Barney, 1991). The conditions resources need to meet to be considered strategic will be discussed later.
Barney (1991) classifies resources in three different classes, namely; physical capital resources, human capital resources and organizational capital resources.
Physical capital resources
The physical capital resources of a company are defined as the physical technology and equipment used in a firm’s plant, the geographic location of the firm and its access to raw materials.
Human capital resources
The human capital resources of a company are the training, experience, judgment, intelligence, relationships and insight of the individual managers and employees working in the firm.
Organizational capital resources
The organizational capital resources are the firm’s formal reporting structure, the formal and informal planning, controlling and coordinating systems, and the relations among groups within a firm and between a firm and its environment.
Rangone
14 Dollinger
One chapter in the book about entrepreneurial strategies of Dollinger (1999) is about resources. In this this chapter a rather broad definition of resources is used, however the strength of this chapter is the list of resources Dollinger (1999) writes about. He presents six different classes of resources, which will be defined below. The advantage of this list is that, unlike Rangone (1999), Dollinger (1999) elaborates on each class. This is very useful for this research, since there is a smaller chance of overlooking a resource. The six classes are still broad, but cover the relevant and important resources a company can possess. Barney (1991) only discusses three broad classes, which is not enough to capture all the relevant resources. The descriptions by Dollinger (1999) are used to develop interview questions, but this will be discussed further in the methodology section.
Physical
Physical resources are the tangible assets a firm uses to produce products. This includes the firm’s plant and equipment, the location, the facilities available at the location and the natural resources a firm might possess.
Reputational
Reputational resources are the perceptions that people in the firm’s environment have of the firm. This includes the global image as well as brand loyalty. The reputation of a firm is long-lasting, developing a reputation takes a lot of time and effort.
Organizational
Organizational resources include the firm’s structure, routines and systems. These resources refer to the firm’s formal reporting systems, its information system, decision making system and formal or informal planning.
Financial
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internal operations. Several ratios can be used to check the financial management of a company, such as the debt-to-equity and cash-to-capital investment ratio.
Intellectual and human
The intellectual and human resources represent the knowledge, training and experience of the entrepreneur and the team of employees. This includes the judgment, insight, creativity, vision and intelligence of each individual member.
Technological
The technological resources of a company are the processes, systems or physical transformations. This may include labs, research and development facilities and quality control facilities. Also the patents, trademarks and licenses created and claimed by the company are included.
Table 1 presents the classes of resources and a short description which will be used for this research. The classification of Dollinger (1999) is used, combined with elements from Barney (1991).
Resources Characteristics
Physical Plant equipment, geographic location, raw material access, facilities
Reputational Image, brand loyalty, brand strength
Organizational Reporting structure, planning and control, information system
Financial Borrowing capacity, internal cash generation
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Technological Research and development facilities, patents, trademarks and licenses of the company.
Table 1 Classes of resources
2.2.2 Competitive tests for resources
The classes of resources have been defined in the previous section. However not all of the resources a company owns are important and have the potential to create a competitive advantage for a company. In the literature there are several tests presented which help distinguishing ordinary resources from strategic resources. This section discusses the literature on this topic.
In his article Rangone (1999) states that not all of the firm’s resources are strategic. Only the resource that passes certain tests can be considered strategic and form the foundation for the sustainable competitive advantage of the company. The strategic resources are the most important resources for an entrepreneur, because with these resources a competitive advantage can be achieved and possibly sustained. The other resources of the company are called ‘common’ or ‘non-strategic’. These resources are of little competitive value for a company and can be easily bought and or developed by competitors. An example can be the furniture or computer a company owns. The list of tests Rangone (1999) suggests is based upon the discussion in the article of Collis & Montgomery (1995). There are however different frameworks available, such as the VRIN framework described by Barney (1991) and the VRIO framework from Barney & Hesterly (2005).
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However for this research the framework of Collis & Montgomery (1995) (also published in 2008) will be used. In their article they present an in-depth discussion of five different tests for resources. Barney’s (1991) ideas are used as a basis for their paper. This can be seen from the similarities in the tests of imitability, substitutability and appropriability. The tests of competitive superiority and duration are valuable additions to the VRIO framework. Collis & Montgomery use the tests of substitutability and imitability as two separate tests. This is necessary, since the two are related but have subtle differents. Imitability is concerned with the direct copying of a resource and substitutability is about replacing the resource with another resource to achieve the same benefits. Collis & Montgomery (1995) succeed in explaining the difference with their definition and relevant examples from business studies. The combined tests provide a good analysis of the value of the resource for the company. The examples are useful because it makes clear how to interpret the tests and what aspects to focus on.
Competitive superiority; this test evaluates if and to what extent the resource helps the company to differentiate itself from competitors. This should be done by comparing the resource to competitors. Companies do not always assess the relative value of the resource. The company makes an internal analysis of what it does best and mistakenly thinks that this is the competitive advantage or strategic resource. An external assessment should be made in order to analyze what distinct them from competitors (Collis & Montgomery, 1995).
Imitability; this test analyses the difficulties of actual and potential competitors experience when imitating the resource. The imitability of a resource will not last forever, sooner or later competitors will discover ways to copy the resource (Collis & Montgomery, 1995). Companies can however protect their resources for a while by giving the resource one of the following characteristics; path dependency (accumulation along the path made the resource unique), physical uniqueness, causal ambiguity (impossible to discover where the value stems from) and economic deterrence (require a large investment, important when competing in small markets).
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stable for a long time, some are very volatile and dynamic. The more dynamic a market is, the faster a resource depreciates (Collis & Montgomery, 1995). Schumpeter’s (1934) theory of creative destruction explains this phenomenon as well. The theory describes waves of innovation which give early movers an opportunity to dominate the market and make large profits. Their innovations however are imitated or even surpassed by new innovations and their profits disappear either partly or completely.
Appropriability; the test of appropriability looks at the exploitation potential of the resource for the company. This test is important since the company that owns the resource does not always reaps all the benefits from it. The value of a resource is influenced by several other groups, including customers, suppliers etcetera (Collis & Montgomery, 1995). This is related to the ‘O’ in the VRIO framework, where Barney discusses the capability of the organization to capture the value from the resource.
Substitutability; this test assesses how difficult it is for competitors to replace to resource with an alternative that gives the same advantages. Collis & Montgomery illustrate with an example from the airline industry. In the early eighties Public Express offered low cost fares to its customers, by cutting back on the service and changing the infrastructure. The bigger airlines could not duplicate this approach, but were able to offer the same low fares by more sophisticated use of their reservation system and yield-management skills. This drove Public Express out of business.
The tests of Collis and Montgomery (1995) are used in this research. The identified resources will be tested for competitive superiority, imitability, duration, appropriability and substitutability. The analysis section presents the outcomes of the tests for each separate resource.
2.3 Capabilities
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capabilities and also the reasoning for treating resources and capabilities separately will become clear.
Rangone’s (1999) article features a distinction between resources and capabilities, however the differences are not elaborated on to a great extent. He classifies the capabilities into three different basic categories which form the basis of a competitive advantage for an SME; innovation, production and market management. The basic capabilities of an SME are built upon the endowment of the strategic resources (Rangone, 1999).
Innovation; innovation capability is the ability of the company to develop new products and processes and achieve superior technological and/or management performance (development cost or time-to-market for example).
Production; production capability is the ability to produce and deliver products to customers, while ensuring competitive competences (quality, flexibility, lead time, cost and dependability for example).
Market management; market management is the ability of the company to effectively and efficiently market and sell products to customers.
According to the model of Rangone (1999) a company, either intentionally or unintentionally, focuses on one or more of the basic capabilities. This definition leads to a continuum of strategies a company can follow. On one end of the continuum there is the case where a company focuses on exploiting just one capability, a mono-dimensional strategic intent, and the other end there is a company which focuses on all of the three categories.
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Several authors come up with a clear distinction between the concept of resources and the concept of capabilities. Both concepts are related with each other and one cannot see resources without capabilities and vice versa. According to the RBV theory any organization is characterized by a set of specific and interrelated resources, capabilities and organizational routines. Some articles however do not make a difference between capabilities and resources (Barney, 1991; Wernerfelt, 1984). In their articles capabilities are part of the resources and assets a company possesses. Amit & Schoemaker (1993) and Grant (1991) made important contributions to the RBV theory and began to explicitly distinct resources and capabilities. This was followed by Teece et al. (1997) who discussed dynamic capabilities and developed the capability theorem as an addition to the RBV. Henderson & Cockburn (1994) were one of the first to prove that the RBV not only extents to the assets of a company, but also to the capabilities the company possesses. Several authors emphasize the difference between resources and capabilities and Rangone (1999) follows their logic, although he does elaborate it to a great extent.
Amit & Schoemaker (1993) describe a capability as a capacity of a company to deploy resources, by using organizational processes, to create a desired end. Capabilities are developed over time through interactions among the resources of the firm. The human capital plays an important role in the development of capabilities. According to Amit & Schoemaker (1993) the capabilities are formed by developing, carrying and exchanging information by the human capital of the firm. Grant (1991) describes a capability in similar matter. According to his theory capabilities form the basis of what a firm does, and are based upon the resources working together: ‘a capability is the capacity for a team of resources to perform some task or activity’. The most important capabilities are those that arise from the integration of several individual capabilities, these capabilities are developed over time in the organization by the routines established in the organization. The deeply rooted capabilities are often hard to imitate by competitors (DeSarbo et al, 2006).
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Cockburn (1994) also emphasized the importance of capabilities, but did not develop a theory. The articles of Amit & Schoemaker (1993) and Grant (1991) were published before, however Teece et al. (1997) declared that resource deployments (through the use of organizational capabilities) were more effective as drivers of competitive advantages. This logic is contrary to Barney’s (1991), who uses resource heterogeneity as driver of competitive advantage. Teece’s et al. (1997) article discusses that capabilities are deeply embedded in the organization. They help connect the resources and the activities which directly influence the performances of a company. Furthermore capabilities develop and evolve over time by the organizational learning processes (Helfat & Peteraf, 2003; Teece et al., 1997). Another feature of capabilities is the path dependency. Next to the evolving part, capabilities are shaped by the path dependency of the company and its developed routines (Teece et al., 1997).
The article of Helfat & Peteraf (2003) came up with a sound definition of a capability: ‘An organizational capability refers to the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular end result’. The description is similar to the previous ones, but this particular one is well written and usable, and therefore this definition will be used in this paper.
The reasons for dividing resources and capabilities are presented in this section. The arguments of Teece (1997) and Henderson & Cockburn (1994) provide arguments to make a distinction since the capabilities are what make resources useful. This can also be concluded from the definition used in this research, which is presented by Helfat & Peteraf in 2003.
2.4 Competitive advantage
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firm. The logic behind the second argument is that the profits of a firm depend upon the competitive advantage a firm has over its rivals. The sources of competitive advantage are the resources and capabilities of a firm, the differences in resource bases explain the difference in profits between firms in the same industry (Grant, 1991). This is for example confirmed by Rumelt (1991) who did an extensive study on whether the industry effects or firm specific effects are more important in explaining economic rents. The study draws upon a large database of U.S. manufacturing companies and concludes that the business specific effects strongly outweigh the industry effects. The performance of a company is more associated with the unique endowments, positions and strategies of that particular company (Rumelt, 1991).
Barney (1991) elaborates on the topic of competitive advantage for firms and the sources that create these advantages. In his article he explains the difference between having a competitive advantage and having a sustainable competitive advantage. Barney (1991) describes having a competitive advantage as a value creating strategy implemented by the firm which is not simultaneously implemented by any current or potential competitors. A sustained competitive advantage is described as a value creating strategy which is not simultaneously implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy (Barney 1991). These definitions include not only the current competitors of the company, but also the potential competitors which may enter in the future. Barney (1991) uses the ideas of Baumol, Panzar & Willig (1982) for the influence of potential competitors. In their book they describe the characteristics of contestable markets and argue that potential competitors can be as effective as actual competitors in influencing the incumbents’ behavior. Furthermore the definition is of a sustained advantage is not tied to a calendar time the company enjoys the advantage. The sustainability depends on duplication efforts made by (potential) competitors. The advantage can be considered sustainable if it continues to exist after attempts to duplicate have ceased. The benefit of this definition is that it avoids a never-ending debate about the precise time a company must possess an advantage before it can be considered sustainable (Barney, 1991).
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definitions used by Barney (1991) and Peteraf (1993). The article responds to the challenges made and replies with further clarification on definitions of the competitive advantage theme and defends the resource-based view as an ‘’integrated theory of management and economic perspective’’. They achieve this by setting the boundaries of the resource-based theory and elaborate in depth about competitive advantage and the ability to create rent, while also commenting on other competitive advantage theories. In their article they define a competitive advantage when a company is able to create more economic value than the breakeven competitor in its product market
2.5 Criticism on the Resource-Based View approach and research justification
The RBV is a widely used and accepted theory, but as is the case with all widely accepts theories there is a fair share of criticism on the theory. This section presents the criticism on the RBV and discusses the arguments and the effect for this research. The section will end with a conclusion in the form of a research justification, which proves that the RBV is appropriate for this research. Kraaijenbrink, et al. (2010) published a review of the criticism found in literature on the RBV. They place the criticisms in eight different categories: ‘… (a) the RBV has no managerial implications, (b) the RBV implies infinite regress, (c) the RBV’s applicability is too limited, (d) SCA is not achievable, (e) the RBV is not a theory of the firm, (f) VRIN/O is neither necessary nor sufficient for SCA, (g) the value of a resource is too indeterminate to provide for useful theory, and (h) the definition of resource is unworkable’. The authors conclude that the RBV can withstand the first five points of criticism, however the last three are difficult to refute and are in need of further research. The categories will be discussed in more detail below.
The RBV has no managerial implications
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‘As is well known, there cannot be a “rule for riches.” If the application of a theory to a firm without any special resources can be used to create competitive advantages for that firm, then it could be used to create competitive advantages for any firm, and the actions undertaken by any one of these firms would not be a source of sustained competitive advantage’
The RBV does however provide some managerial implications, especially in this research. As Barney & Arikan (2001) argue in their article, the RBV gives managers an overview of current resources and their value and can also point out the missing resources. This gives the managers an indication of the strengths of the company and also threats and possibilities. This logic also applies to the fifth point of critique, that the RBV is not a theory of the firm. Criticism aroused that the RBV is able to explain why firms exist and cannot be seen as a replacement for the transaction cost theory (Foss, 1996). The goal of the RBV has never been to explain the existence of firms. The theory aims to explain the difference in performances and the existence of competitive advantages.
The RBV implies infinite regress
The second category of criticism is about infinite regress. Infinite regress can be illustrated by first and second order innovation capabilities. The first order is the capability to innovate and the second is developed structures to better innovate. The second order is more valuable than the first, since it will surpass the first order in the future. According to the critics this pushes the RBV into ad infinitum, sending companies on a never ending quest for higher levels of capabilities. This is however not completely the case for the RBV, since every higher level takes the analysis away from the practical implication. Kraaijenbrink et al. (2010) refer to this critique as being ‘overly academic’.
The RBV’s applicability is too limited
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impossible (Gibbert, 2006), it only applies to large firms with significant market power (Connor, 2002) and only companies with strategic resources can attract new strategic resources (Miller, 2003). Gibbert’s (2006) critique is once again overly academic, since it is possible to generate useful insights on resource uniqueness. The second argument about large firms can also easily countered, for instance the entrepreneur itself can be a unique resource or possess capabilities which gives small firms an advantage (Kraaijenbrink et al., 2010). This logic also applies to the third group. Barney (2002) argues that the applicability of the RBV becomes less when the environment faces quick and/or drastic changes. This research is about a company which has been remarkable stable, and although there have been changes in the market this has been a gradual process.
SCA is not achievable
The fourth category of critique concerns the sustainable competitive advantage. According to Fiol (2001) a sustainable competitive advantage cannot be achieved. He argues that markets are not static and thus competitive advantages can only be momentarily. His critique is correct in that a competitive advantage cannot last forever, however the concept draws the attention of managers towards the dynamics supporting it (Kraaijenbrink et al., 2010). The RBV is applicable to static resources and capabilities as well as dynamic resources and capabilities. Dynamic capabilities can form the basis of a competitive advantage, and help the company change and adapt to the new environment (Helfat & Peteraf, 2003).
VRIN/O is neither necessary nor sufficient for SCA
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2003). The necessity criticism comes from Foss & Knudsen (2003). They argue that uncertainty and immobility are the only true basic conditions for a competitive advantage. Another stream of research argues that is the synergy of the resources and the influence of entrepreneurs and managers that create the advantage (Grant, 1996; Foss et al., 2008). These critiques are justifiable, however in the context of this research not all are correct. The influence of the entrepreneur is important and Rangone (1999) states that the entrepreneur is a special type of resource, one that supports the others. By interviewing the owner an assessment can be made of his entrepreneurial and managerial capabilities. This research will also take into account the key performances in the environment. They will be defined and the performances the company focusses on will be mapped. The conditions of Foss & Knudsen (2003) will not provide an answer to question whether a resource is strategic and thus useful for the company in reaching their strategic goals.
The value of a resource is too indeterminate to provide for useful theory
According to Kraaijenbrink et al. (2010) the RBV is a tautology: ‘Value and uniqueness appear in both explanans and explanandum. The main problem here lies in the RBV’s indefinite notion of value’. The tautology stems from the identical terms used for the value of a resource and the competitive advantage it generates. This tautology is the heart of the critique leading Kraaijenbrink et al. (2010) to state that the RBV is not yet suitable as a substantial theory about resources and competitive advantage, but that it is more a heuristic theory. In order to resolve this issue, the value of a resource should be different internal to the company as compared to the value for customers. To solve this issue for this particular research the concept of key performances is added. The key performances are formed outside of the company’s reach and influence the resources owned by the company and the value it is able to create.
The definition of resource is unworkable
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critique is true and the RBV could be improved by a better understanding of the effect of different resource classes on the competitive advantage. However for this research the definition and classes of resources have been carefully developed, in order to capture all the relevant resources.
Research justification
Despite the criticisms found by Kraaijenbrink et al. (2010) the RBV stands firm as the basis for this research. From the eight categories distinguished, the RBV can withstand five of them without changing any concept. The other three categories are more difficult to withstand. By arguing from a different perspective, the RBV can be proven useful for this research. Whereas Kraaijenbrink et al. (2010) argue from scientific perspective, trying to test the RBV as a theory in all its aspects, this research argues from the applicability perspective. The goal is to make an analysis of a company. The RBV is therefore complemented with the concept of key performances and Rangone’s model (1999).
2.6 Critical Success Factors
Next to the internal analysis of the company’s resources and capabilities, the external environment of the company is also an important part of the strategic analysis (McGee et al., 2005). Key performances, also referred to as strategic industry factors or critical success factors, form the match between the internal side of the company and the business environment. Key performances provide means to identify the opportunities and threats in the environment and the specific resources and capabilities needed to successfully address them (Amit & Schoemaker, 1993; de Vasconcellos & Hambrick, 1989; Rangone, 1999). This section discusses the characteristics of key performances and how the concept fits in this research.
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which are quality, dependability, cost etc. The second category is new product development, which include both the technological and managerial performances (such as development cost and time to market). Marketing is the last category, where the important performances are creating brand awareness, reputation and customer loyalty for example. Rangone (1999) visualizes the relation between the critical resources, key performances, capabilities and competitive advantage in the resource tree (see figure 2). A few notes should be made however about the resource tree. The first is that the capabilities can be related to each other. A single strategic resource can influence more than one basic capability (a service center draws upon both the production and marketing management capability). The tree does not make a statement about the way of exploiting the advantage. The way of exploiting depends upon the strategy of the company, which can differ between growing or increasing profitability for example. The last note is that the financial performance is not directly depended on the endowment of critical resources. This also determined by again the strategy, the industry, market size and the entrepreneurial and managerial skills for example (Rangone, 1999). The distinction Rangone (1999) makes is too narrow for this research. There are more than three categories of success factors, yet the logic of the relations between the concepts is important.
Figure 2 The resource tree (Rangone, 1999)
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asymmetric distributions over firms’. The strategic industry factors are formed at the market level by complex interaction among the company’s competitors, customers, regulators, and other stakeholders. Amit & Schoemaker (1993) present a table of ten different characteristics possessed by strategic industry factors (see Table 2). However they explain in their article that strategic industry factors cannot be predicted with certainty a priori, this is where the challenge lies for companies. Managers are supposed to draw up a list of important factors to focus on and work on developing the resources and capabilities to address them. According to Amit & Schoemaker the resources and capabilities form the basis for addressing the strategic factors and ultimately create a competitive advantage.
De Vasconcellos & Hambrick (1989) published an interesting article on how to derive key success factors a priori. They define key success factors as; ‘… those tasks or attributes which are particularly mandated by the task environment’. In order to derive the factors, a framework of 17 important attributes, divided into five categories (information and communication, product, product cost, product delivery and production) was used (de Vasconcellos & Hambrick, 1989).
Table 2 Characteristics of strategic industry factors (Amit & Schoemaker, 1993)
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environment. The first level, firm specific, is an internal focus which provides the link between possible factors. This is similar to the view of Rangone (1999), linking resources and key performances. The second level, industry, identifies factors that significantly influence all the companies in an industry. The third level is on the macro-economic factors, which lies beyond the scope and goal of this research. The quality of the article lies in the identification techniques that are discussed. The first two levels are relevant for this research, however the first level concerns the resources of the company. This aspect of the analysis has been discussed already in previous sections. The industry level is important in order to map the business environment of Apotheker BV. Therefore only the techniques for the industry level analysis of success factors will be used from the Leidecker & Bruno (1984) will be discussed. Two techniques are useful for this research, namely; industry structure analysis and use of industry experts. The industry analysis is done by Porter’s famous five forces model:
Threat of entry
The threat of entry in an industry depends on the entry barriers endured and perceived by the entrants and the expected retaliation of incumbents. Porter (2008) list seven different sources; supply-side economies of scale, demand-side benefits of scale, customer switching costs, capital requirements, incumbents advantage independent of size, unequal access to distributions channels and government policy.
Power of suppliers
Powerful suppliers capture more of the value for themselves by asking higher prices for example. They can squeeze out industries if customers cannot pass on the higher prices to their own products. The power depends on; concentration of suppliers, dependency on the industry, switching cost, diversity and the credibility of threat to integrate forwards in the industry (Porter, 2008).
Power of buyers
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on; the number of buyers, standardization of industry products, switching costs, credibility of the threat to integrate backwards and the price sensitivity of the group (Porter, 2008).
Threat of substitutes
A substitute performs the same or similar function as an industry’s product, but only by different means. The threat of substitutes influences the profitability of an industry, companies need to protect themselves by their marketing strategies or product performance and keep track of developments in other industries. The threat depends on; the price-performance trade-off and the switching costs (Porter, 2008).
Rivalry among existing competitors
The rivalry among existing competitors can focus on several areas, like pricing, new products, advertising or service levels. The degree to which rivalry forces down the industry’s profit depends on the intensity and basis of the rivalry. The intensity is influenced by; number and size of competitors, industry growth rate, exit barriers, commitment and aspirations of competitors and the readability of signals. The basis of the rivalry differs, but competing on the basis of price has the largest influence on the industry. Price competition is likely when; similar products, high fixed costs and low marginal costs and perishability of the products (Porter, 2008).
According to Leidecker & Bruno (1984) the evaluation and interrelationship between the components provide the company with useful data to identify and justify the industry critical success factors. The use of industry experts provides the company with a rich source of data, namely the ‘conventional wisdom, insight or intuitive feel’ of an industry expert (Leidecker & Bruno, 1984).
32 2.7 Chapter summary
The theoretical framework presented in this chapter forms the basis of the research. Firstly the topic of strategic management and the principles on which the RBV is based are discussed. The logic of Barney (1991) explains how companies perform and the role of resources in these performances. The resource section shows what constitutes a resource and which classes can be distinguished. Table 1 presents the final classes of resources and its definitions. The value of resources is determined by five different tests described by Collis & Montgomery (1995). The five different tests are; competitive superiority, imitability, duration, appropriability and substitutability. There is difference made between resources and capabilities for this research. The concept of capabilities is different from the concept of resources. The next section discusses the concept of sustainable competitive advantage. Barney (1991) and Grant (1991) have made important contributions to this topic and their arguments are complemented with more recent literature. The concepts of resources, capabilities and competitive advantage are part of the basic foundation of the RBV. After these different principles were explicated, the criticism on the theory was dealt with. The eight categories identified by Kraaijenbrink et al. (2010) give a good overview of the different forms of criticism. However the arguments are refuted for most categories and a justification of the research concludes the section. Following the internal part, the external part starts with the section of critical success factors. Reasons are provided about the usefulness of performing an external analysis as well as an internal analysis. The ideas of de Vasconcellos & Hambrick (1989) are still relevant in the process of discovering critical success factors of the industry. The external side finishes with the discussion of Porter’s (2008) five forces.
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3. Research model
Figure 3 Research model Internal analysis -Resources -Capabilities
External analysis -Key success factors -Porter’s five forces
Competitive tests
Strategic resources
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4. Methodology
This chapter presents the methods of research used in order to collect the data. Firstly Yin’s (2003) theory on performing a case study is discussed and arguments are given why a case study is relevant for this research. Following the case study logic, the research steps taken are presented. The research steps are similar to Rangone’s (1999) model, but based upon the arguments in the literature section changes have been made and will be elaborated on. Lastly the quality standards of the research are discussed, which includes the validity and reliability of this research.
4.1 Research method
The type of study conducted to answer the main research question is a case study method. Yin (2003) explains in his book what entitles a case study, when a case study is appropriate and the data gathering methods. According to Yin’s (2003) definition a case study is ‘an empirical inquiry that investigates a contemporary phenomenon within its real-life context’. The method is appropriate when; the focus of the study is to answer ‘how’, ‘why’ and ‘what’ questions, the researcher cannot manipulate the behavior of those involved in the study, to cover contextual conditions relevant to the phenomenon or if the boundaries are not clear between the phenomenon and the context (Yin, 2003).
The research questions formulated for this study are almost all ‘what’ type of questions. The study aims to explain the performance of Apotheker BV in its environment. Therefore the object in this case study is the firm. The contextual conditions have a large influence on the performance of Apotheker. The literature section explains that a strategic analysis needs to include both the internal side and the external environment of a company.
36 4.2 Data collection
According to Yin (2003) there are several methods of data gathering for a case study research. The following methods are discussed; documentation, archival records, interviews, physical artifacts, direct observations and participant observation. In order to gather the needed data for this research, three methods of Yin (2003) have been used; interviews, participant observation and documentation.
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Interviewee Characteristics
Frank Apotheker Owner of the company, responsible for all strategic decisions and also the purchasing and part of the selling.
Sjaak Baars Middleman between wholesalers and auctions, has a lot of knowledge and the experience in the industry.
Jeroen Zwerwer Customer, actively innovative and knowledgeable about the local fruit and vegetable market.
Table 3 summary of the interviewees
The interviews consisted of open questions rather than closed questions. The strength of using open questions is that it invites people to explain their views and talk about the subject questioned instead of receiving just a yes or no answer. The interviewees are able to better explain concepts. This is particularly useful for this research since it aims to discover the reasoning and logic behind the subjects that influence the performance of Apotheker. The in-depth information received through the use of open questions resulted in richer and more valuable data. A questionnaire was created on forehand and can be found in the appendix. The interviews were semi-structured. During the interviews the sequence of the questionnaire was maintained, but follow-up questions were asked to get more information or explanation on certain subjects. These questions were based upon the answers given by the interviewee.
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segment is not focused on innovation, they usually followed in their parent’s footsteps and simply continue on the same track. The other segment consists of younger people looking for new markets and ways to earn money. For this research a customer from the last group was interviewed. The interviewee is young and innovative, but also has a lot of knowledge and experience in the field. He started working when he was only 14 for his parents market stall. This made him even more suitable for the research. He learned from his parents, but also from his uncles who are also active in the industry and he has his own ideas about the future. He operates his own market stall on several street markets and also supplies other companies with fruit and vegetables (the University of Groningen among others for example). The reason this customer was chosen was because of his experience, new ideas, background and intelligence.
The final method of data gathering is the use of external reports. There are several agencies, including banks and retail shop agencies, performing analyses on the fruits and vegetables industry. For the external analysis several of these reports were consulted in order to give numerical background information on the industry.
The different methods of data gathering are discussed and in table 4 the measured concepts are shown and method used to gather the data.
Concept Method
Strategy Interview, observation
Classes of capabilities Interview, observation, documentation
Classes of resources Interview, observation, documentation
Key success factors Interview, observation,
Five forces Interview, observation, documentation
Table 4 Concepts and data gathering method
4.3 Research steps
39 Research steps;
1) Define Apotheker’s strategic intent and key performances;
The first step in the research is defining the strategic intent and key performances of Apotheker BV. The strategic intent of the company is defined by the owner of the company. According to Rangone (1999) the strategic intent is based upon the three dimensions of capabilities (production, market and innovation) on which the company will rely and the key performances of the industry. The owner was asked questions about the strategy of the company and the corresponding capabilities on which Apotheker focuses.
The key performances of the company are studied with the use of de Vasconcellos & Hambrick’s (1989) method. Their research method is used in interviews with the mediator and the owner. De Vasconcellos & Hambrick (1989) propose to use a list of key success factors in the market and interview several people from the industry to rate them. The list of de Vasconcellos & Hambrick (1989) is altered a bit, since the list is originally intended for production companies. Therefore some possible key success factors were left out, because they were not relevant for a servicing company like Apotheker.
Following the papers of Rangone (1999) and Bruno & Leidecker (1984) the mediator is suitable as an interviewee for the key success factors. He has a lot of experience in the market and has daily contact with both the wholesalers and the larger companies. The customer was also interviewed about the success factors, in order to uncover what customers perceive as important and what they look for in a supplier. The combination of the mediator and customer gives a broad perspective on the industry Apotheker is in.
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analysis of both the internal and external side of the organization. The competitive position and the competitive forces have an influence on the company and also on the valuation of the resources. The resources cannot be valuated accurately without having knowledge about the industry. The five competitive tests cannot be answered without looking at the environment and Porter’s (2008) five forces model is a widely used model by academics and businesses to analyze the environment.
2) Identify Apotheker’s resources influencing key performances;
The resources that the company possesses are identified in this step by interviewing the owner. The defined classes of resources, as discussed in the literature section were explained to the owner and questions were asked about each class. This way the chances of missing an important resource are small. The list discussed is extensive and provides a clear overview of Apotheker’s resources. The owner was asked to explain the resources in depth, for a better understanding of the resources which was necessary to complete not only this research step, but also the following one. The identified resources are linked to the key performances of the company, which were defined during the first research step. The resources of the company can be allocated to each category. A single resource is not limited to one key performance, since it can have an influence on several performances. The knowledge and experience of the owner for example is a resource that influences several performances.
3) Assess the strategic value of resources
During this step the resources were analyzed by the criteria from the competitive tests list developed by Collis & Montgomery (1995). After the tests were applied, the strategic resources were identified. As was noted in the literature discussion, the strategic resources are the most important resources for an entrepreneur. These strategic resources can allow the company to achieve and maintain a competitive advantage in the market. The following tests have been applied;
-Competitive superiority -Imitability
41 -Appropriability
-Substitutability
The tests were performed by analyzing the data retrieved from interviews with the owner, mediator and customer. Based on their answers a judgment was made about the score of the different resources. There will be a reflection on the scores of the resources and a discussion on the strategic value.
In the method of Rangone (1999) there is another step before the strategic options are created, namely assessing the strategic consistency of resources. He describes this as ‘the ability of resources to contribute to the achievement of the company’s strategic intent’. However in this research this step is performed in the third step by analyzing only those resources which not only influence the capabilities of the company, but are also in line with the strategic intent of the company. This means that only the relevant resources of the company are analyzed and makes Rangone’s (1999) step not required. The resources are determined after the key performances have been identified by interviewing the owner, mediator and customer.
4) Generating strategic options;
The final step in the model was to generate the strategic options for the company. This step is also slightly different than in Rangone’s (1999) model. This is because as is described in the third research step, only the relevant resources are investigated. The result following this decision is that the consistency of resources is already been taken into account. Rangone’s (1999) logic is combined with insights from Amit & Schoemaker (1993). They give the following options;
-The resources which score high on the competitive tests should continually be exploited, so there is no value lost. These are the most important resources for a company, since they can create a competitive advantage.
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However resources can still be important for a company, also if they fail to create a competitive advantage. The assessment of the resources will be discussed in full detail and also the options for improving them. Furthermore the overall importance of a resource will also be further elaborated on.
The research steps have been identified and the parameters of the case study are also set. The methods of collecting data involved semi-structured interviews, observation and use of external reports.
4.4 Quality standards of the research
The last step in the methodology chapter is to present the quality standards of the research. The three concepts of validity; internal, external (also referred to as generalizability) and construct (Yin, 2003) and the reliability of the research are discussed.
4.4.1 Internal validity
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4.4.2 Generalizability
External validity is, according to Riege (2003), concerned ‘with the extrapolation of particular research findings beyond the immediate form of inquiry to the general’. External validity is also referred to as generalizability. For case study research this means that the focus lies on understanding and explaining them in the light of previously discussed theory. External validity is a complex subject for case studies and especially single case studies (Yin, 2003). A single case study cannot prove or disprove a theory given the small sample size. This research enhances the external validity by using a lot of academic papers and combining well tested and respected models and research methods. The theoretic framework discusses all the different concepts tested in this research. Furthermore it needs to be noted that this research is aimed at creating strategic options for a single company and a model is constructed to achieve this goal. Therefore the model is constructed to fit all the important aspects of this research and not to create a model applicable for general use. The generalizability is therefore low. The unique resources and strategic position of Apotheker makes the results of this analyze difficult to generalize.
4.4.3 Construct validity
Construct validity is about establishing appropriate operational measures to the theoretical concepts researched. Riege (2003) argues that case study research is more subjective, because of the close and personal contact researches usually have with the organization. Therefore efforts need to be made in order to refrain from subjective judgments. The construct validity is increased by using multiple sources of data gathering. The concepts discussed with the different interviewees were held in the same manner and with the same set of questions. Although there were small differences in the interviews, since follow-up questions were asked depending on the answers of interviewees. The observations made also helped in making judgments about statements made by the owner and customer. The final technique discussed is letting another researcher review the final report and change the unclear aspects, which has been accomplished by receiving and implementing feedback from two academic researchers.
4.4.4 Reliability of the research
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interviewing techniques and procedures (Riege, 2003). Several methods were used to increase the reliability of the research. Following Yin’s (2003) guidelines, all the concepts are clearly described using other studies and the operationalization of concepts is provided as well. Furthermore in the appendix the used questionnaire can be found. The interviews held with the owner, customer and mediator were recorded with the help of a tape recorder. This has several advantages; it allows the researcher to fully focus on the interviewee and interview for example. This is important since the interviews were semi-structured and the focus was needed to come up with quality follow-up questions. Additionally the interviews can be listened to again, in order to clarify doubts the researcher may have about the answers provided.
4.5 Chapter summary
This chapter presented the methodology used for this research. A case study is appropriate for this research, since it is aimed at analyzing one company and its unique environment. The research is focused upon discovering the relations the company has with the environment and how it is positioned in order to come up with strategic options for the future. The research steps explain which different stages there are in the research and what the goal is during each stage, which sets the boundaries of the research and finally the different quality standards of the research are discussed.
5. Results
