Playing To Win
The Battle for the Soul of Strategy
It’s Both Sides, Stupid!
I am writing my 49th Playing to Win/Practitioner Insights piece on the Battle for the Soul of Strategy. While at one level, it’s an obscure academic battle, it has spilled over into the real world with challenging implications for all practitioners of strategy. (Links for the rest of the PTW/PI series can be found here.)
History of the Battle
It is helpful to understand a bit about the history of business strategy to understand the current battle. The first seminal figure in business strategy was not an academic. It was Bruce Henderson, a long-time Westinghouse executive who went on to found the world’s first strategy consulting firm, Boston Consulting Group (BCG) in 1963. He wrote extensively about business strategy from outside the academy in the 1960s and 1970s and brought influential concepts such as the growth-share matrix and the experience curve to the nascent field of business strategy. Thanks largely to Henderson and other consulting colleagues, in the 1960s and 1970s, thinking on strategy was led from outside the academy.
But more germane to this discussion is the second seminal figure in business strategy, Harvard Business School (HBS) professor Michael Porter who published Competitive Strategy in 1980, which introduced the world to the five forces model and generic strategies. It became the first ever best-seller in the business category, paving the way for others like In Search of Excellence and Good to Great. The book’s unprecedented success made Porter a certified guru across the business world. However, as an academic writing a business best seller that was read widely outside his academic community, he committed the unforgivable academic sin of addressing himself to non-academics.
The academy struck back in the way that it classically does. It caricatured his theories and proposed an alternative theory around which it closed academic ranks. These business academics cast Porter as the father of “the positioning school” (TPS), which they claimed held that all you need to do is use the five forces model to find a structurally attractive industry and then position yourself in that industry to statically exploit the high profitability that it affords you. Their alternative theory, “the resource-based view (RBV) of the firm,” (first articulated in 1984 by Berger Wernerfelt and later by Jay Barney, both of whom dutifully speak exclusively to other academics) holds that in the modern, fast changing business world, the static TPS approach is bankrupt and that the key to strategy is to accumulate resources which must be Valuable, Rare, Inimitable, and Non-substitutable (hence RBV’s VRIN model — sometimes modified to VRIO by replacing “Non-substitutable resources” with “Organized to exploit”).
The important thing for the outside world to understand is that within the academy, RBV dominates. In most of America’s top 50 business schools, you would have a better shot of getting a tenure stream position in strategy if you revealed you were a convicted felon than if you admitted that you don’t subscribe to RBV. In those schools, strategy students are routinely taught TPS as an example of a deeply flawed theory, especially in comparison to the far superior RBV. As an example of RBV’s academic control, even though I was Dean of Rotman School for 15 years, and quite a powerful one due to the success of the School under my tenure, I was never permitted by those in charge of Strategic Management to teach a strategy course in the MBA/EMBA program based on my approach, one which doesn’t pay the requisite homage to RBV!
The Silliness of the Battle
The fundamental problem with the battle is that it is silly. Every time RBV aficionados explain to me how Porter/TPS says that industries are stable, and that a company should just find a structurally attractive one and mint money in it for all time, I ask them to show me where in Porter’s writing he suggests that. They tend to cavil at the question claiming that everyone knows he says that. It is a classic case of if you repeat a lie enough times, it becomes the truth. Never has an RBV aficionado been able to come up with anything that remotely supports their contention about Porter — though most act as if that doesn’t change anything.
And whenever I consider RBV, it is hard for me to see past the tautological structure of this purported strategy model. It holds that you should invest in resources that are valuable but from what I can discern from the writings on the model, the only way to ascertain that a resource is valuable is that it that after you have invested in it, the resource becomes valuable. That is, there is no other definition of ‘valuable’ other than ‘valuable.’ Then, the resources should be rare. I guess that explains why a bunch of families got super-rich by gaining control over water rights for arid south and central California where freshwater is rare while nobody has gotten rich gaining control over water rights in Southern Ontario, which is flanked by three of the largest bodies of fresh water in the world (Lakes Huron, Erie, and Ontario) making freshwater very plentiful. Thus, it would appear to me that ‘rare’ is simply a feature of ‘valuable.’ Similarly, ‘inimitable’ is a feature of ‘rare’ because inimitability makes rare things rarer and thus more ‘valuable,’ and likewise for ‘non-substitutable.’
Net, RBV says that strategy entails investing in resources that are valuable by being rare, inimitable, and non-substitutable. And you would know that they will be valuable resources because they will be valuable. This of course is true in the same way that Karl Popper points out that the theory of survival of the fittest is always true because the model’s definition of ‘fittest’ is those species that survive. That tautology notwithstanding, business students are generally taught that RBV is correct and TPS is just plain wrong.
But the answer is not that one is wrong and the other is right. Both address critical pieces of the strategy puzzle. Of course, positioning matters. As the water example illustrates with a geographically defined where, the identical resource, water rights, has a completely different impact and value in California versus Ontario. Devoid of a theory of where, RBV is a useless construct. But similarly, any theory of positioning is useless without consideration of the capabilities a firm needs to possess to compete successfully in the chosen where. (Porter, by the way, has extensive discussion of capabilities in his strategy work — though this is ignored by TPS critics who want to frame and win an either/or battle.)
I try to ignore the battle and recognize explicitly that strategy clearly has both positioning aspects and resource aspects. Good strategy needs to bridge both and have a unified theory of how to link them, which is what I do with the Strategy Choice Cascade. The second box, Where to Play (WTP), deals explicitly with positioning and makes it clear that a company’s strategy choice needs to specify a place (whether product type, customer set, geography, price tier, etc.) that it will compete. The fourth box, Must-Have Capabilities (MHC), deals explicitly with the resources that must be in place for the strategy to have its desired effect. (Parenthetically, the fifth box supports the fourth box in that it specifies the Enabling Management Systems (EMS) that need to be in place to ensure that the MHC get built and maintained.) The glue that holds together the WTP positioning and the MHC/EMS resources is the middle box — How to Win (HTW), which is the theory as to how, in its chosen WTP, the company seeks to win and what MHC/EMS that it therefore must build to realize the fruits of that HTW theory.
A Pox on Both Houses
Silliness of the battle aside, I would note that I am not a fan of either school’s lack of attention to how one develops a winning strategy. Both theories are clear on what features the eventual strategy must have: for Porter/TPS it is a low cost or differentiation strategy and for RBV it is possession of VRIN resources. Yet both are also deafeningly silent on how one would transition from a state of having a strategy lacking those features to having one that possesses them. That is why I have spent so much mental energy and practice time on developing a process for upgrading from an inadequate strategy to a great one. It is something that is largely missing in strategy education. In the main, it focuses instead on teaching analytical frameworks — like five forces, VRIN, and myriad others — at the expense of teaching a process for creating strategy.
The strategy practitioner problem resulting from this state of play is twofold. First, for the last couple of decades, strategy students have been dominantly taught that RBV is right and TPS is wrong, a classically false either/or choice. Second, they have increasingly been taught a proliferation of analytical tools, rather than how to create strategy, regardless of whether that strategy might be based on TPS or RBV. These are two central reasons why strategy is becoming the lost art in the real world of business.
If you a student in a strategy course at a business school, don’t get on the RBV hype-train. Ask your professor how it is you would know in advance, not after the fact, that you are investing in a valuable resource? And how you would use RBV to upgrade from an unsuccessful strategy to a successful one? If your professor simply repeats the characteristics of a great RBV/VRIN strategy and reiterates that RBV is a great model, explain that your questions haven’t been addressed, and keep asking until you get a better answer. It will be good for both you and your professor.
If you have graduated from business school into the business world and you present your boss with a VRIN analysis, don’t expect it to be greeted with excitement and enthusiasm. The business world isn’t particularly interested in tautological models that don’t help decisions get made because the business world cares more about effectiveness than what tenure stream strategy professors think. Get beyond the silly either/or academic battle and work on learning how to practice strategy in a way that helps you make real choices — which is, as I hope is obvious, the aim of this PTW/PI series.
If as a manager, you receive a VRIN analyses of dubious utility from a subordinate, recognize that it is not your subordinate’s fault. It is just what your subordinate was taught as strategy gospel. Recognize that in the modern business world, most managers will have to learn strategy somewhere other than at business school and you will need to support your subordinates on that learning journey.
I really wish that none of the above was the case. But I am afraid that, in the main, it is. While I can name exceptional strategy professors who teach exceptional strategy courses, they are the proverbial exception, not the rule. So as always, I believe that forewarned is forearmed.