The Market Based View derives its tenets from the work of Porter (1980, 1985, and 1996). The theory is rooted in the industrial organization (IO) economics (Hoskisson, Hitt, Wan & Yiu, 1999). Industry organisation economics analyzes the industry structure, the boundaries between firms and markets, and the effects of concentration on competition among other factors (Hoskisson et al., 1999; Barney &
Clark, 2007).
To analyse the relation between the structure of the industry (for example the competitor's cost structures, the number of buyers and sellers in the industry, the entry/exit barriers), the industry conduct (for example the investments in research and advertising, pricing and product strategies and distribution strategies), and the resulting industry performance, the industry organisation theorists developed the Structure–Conduct–Performance (SCP) paradigm (Grant 2010; Houthoofd & Hendrickx, 2012; Barney
& Hesterly 2010; Spanos, et al., 2004). The model was popularised between the 1940s to the 1960s (Bain, 1968; Barney & Hesterly 2010). Huang (2012:09) pointed out that:
The core basis of the SCP paradigm is that the conduct of a firm corresponds to the external environment in which it operates. As a result, the industry is the most direct environment that affects the firm's operation. The structure of the industry determines the scope of competition, thus determining the level of underlying profit.
The SCP paradigm help to explain performance variation between firms largely through the industry structure (Spanos & Lioukas, 2001). Huang (2012) claims that the merits of the SCP approach lie in its simplicity in understanding the relationships and the structural characteristics of a market (i.e. an industry) that can be easily recognised (Wood, 1999).
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Disappointed with some of the demerits of the SCP paradigm, Porter (1980) developed the MBV theory.
Porter (1980) argues that firm-specific strategies are difficult to develop from the framework as the SCP paradigm concerns the industry as a whole (Mintzberg, 1990). Hence, he proposes that a firm performance relies on industry attractiveness and the firm's position relative to its rivals (Wang, 2014).
Porter (1996) cited in Wang (2014) further claims that the primary determinants of firm performance are the micro-industry factors and the macro-external market factors.
Porter (1980) postulates that the attractiveness of an industry is determined by five competitive forces that mould the prospect for a healthier performance in the particular industry, in what he called the Five Forces Model. The five forces include the bargaining power of customers, threat of new entrants, bargaining power of suppliers, rivalry amongst existing firms and the threat of substitute products/services (Porter, 2008:3). These forces dominate the Market-Based View (Hove, 2012; Wang, 2014) as they influence the industry's profit potential (Spanos & Lioukas, 2001). According to Bea &
Haas (2005) the industry is attractive when the five forces collectively are weak and there is less intense competition. Proponents of the MBV state that healthier performance is due to competitive advantage against other industry players (Spanos & Lioukas, 2001).
Porter (2008) suggests that when firms are well-positioned in the market they can command monopoly rents (Schwenker & Spremann, 2009). Thus, instead of being price takers, superior positioning enables firms to retain control over prices (Schwenker & Spremann, 2009). In the same vein, Porter (2008) proposed three generic strategies that firms can pursue to achieve a superior position in an industry.
4.2.1 Market Based View and strategy formulation
Wang (2014) posits that the model is arguably the most pervasive frameworks, currently being taught and used in marketing, entrepreneurship and management schools worldwide. More so, the model provides a methodical approach to assessing rivalry in an industry (Henry, 2008; Weigl, 2008). Thus, Rivard, Raymond and Verreault (2006) posit that from such an angle, an SME has to assess these forces and establish ways to find a competitive posture in the market. Porter (2008) suggests that if a firm is to position itself competitively and strategically, it should preferably cause significant difficulties for others to imitate. In this way, it produces a sustainable competitive advantage which ultimately produces profit (Hove, 2012; Wang, 2014).
The MBV uses strategy to position firms in their markets and submits that businesses can protect their competitive advantage by building structural barriers in the industries (Bamiatzi et al., 2016). The MBV further claims a firm will gain a competitive advantage by positioning itself either as a low-cost leader or differentiator or operating in a broad or narrow market (Porter, 1980b).
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Thus, the Market Based View recommends firms to formulate strategies based on the external industry- level factors and not on their internal resources and capabilities (Bamiatzi, Bozos, Cavusgil & Hult, 2016). Porter (1980a) advises managers to scan their micro-industry environment to enhance their competitiveness and, consequently, their performance. According to Houthoofd and Hendrickx (2012), by looking at industry forces, organisations can formulate strategies that are well informed, thus enhancing their performance.
4.2.2 Limitations of the Market Based View
Porter’s work provides enormous contributions to the management and marketing disciplines (Barney, 2002) as demonstrated by its popularity (Wang, 2014). However, the MBV has its set of weaknesses (Grimm, Lee & Smith, 2006; Arend, 2009; Tavitiyaman, Hailin & Zhang, 2011; Spanos & Lioukas, 2001).
Firstly, some scholars have questioned the relevance of the MBV (Barney, 1991), especially its two main assumptions; resource homogeneity and the mobility of resources. With MBV firms are considered to be homogeneous organisations (Roquebert, Phillips and Westfall, 1996 cited in Knecht, 2014). Early management scholars such as Barnard (1938) and Chandler (1962) refute this proposition, instead believe that firms in an industry are heterogeneous.
However, the advocates of the MBV posit that if there is a temporary heterogeneity between firms, it is quickly corrected by market mechanisms and the unrestricted mobility of resources (Zahn, Foschiani, and Tilebein, 2000). This is a shameless assumption that does not hold water in reality as Prahalad and Hamel (1994:10) cited in Bridoux (nd) claim that “the reality of business during the 1990s is that industry structures are far from stable and are undergoing major transitions”. In the same vein, Sampler (1998) observes that in information technology-related industries, industry boundaries are blurred as many industries overlap and converge.
Secondly, Porter's work has also been criticised as it overstresses competition to the detriment of relationships, networks, and integration. Hence, Gummerson (2002) treats the five forces model as one of the adversarial models which view the market place as a battlefield. Ultimately relationships with customers, rivals, and suppliers are condensed to battles for profits. More so, Porter (1980) calls for product and service differentiation and the building of entry barriers (Porter, 1980; Bea & Haas, 2005:
27). McWilliams and Smart (1993) believe that the costs incurred in building these barriers may outweigh the incremental benefit from the resultant monopoly rents and the erection of these barriers may benefit existing rivals who are active in the industry.
Thirdly, Porter’s assumption of a static snapshot of the industry in today’s increasingly complex and dynamic business environment may not be appealing in strategy development. Wood (1999) claims that
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the relationship between industry structure and firm performance is always predictable, given a degree of stability. However, the industry environment is constantly changing from politics to economics, this leaves firms failing to sustain their market position. For instance, consumer income and preferences change over time and also the company's strategies change to reinforce demand (Besanko et al., 2007).
Hence, McWilliams and Smart (1993) call for dynamic analysis of the environment to understand their relative ability to sustain competitive advantage over time.
The MBV is also criticised for disregarding a firm's internal dynamics that are characteristics, resources, and resources (Foss, 1996; Spanos & Lioukas, 2001) as it focuses much on the industry structure as a condition to superior performance (Hawawini, Subramanian & Verdin, 2003). Thus according to MBV, the market structure provides the basis for strategy formulation that is, only strategies that allow a firm to fully exploit its resources relative to the competitors should are adopted (Hawawini et al., 2003).
Roquebert et al. (1996) claim that the MBV fails to explain performance differences between firms. In this regard, they argue that industry effects play a minor role as compared to firm-specific effects. Its external focus is inadequate to fully explain the performance variations between firms (Knecht, 2014).
Notwithstanding these shortcomings, empirical evidence submits that the MBV is important in shaping and explaining firm strategy and performance (McGahan & Porter, 1997; Porter, 1998; Mauri &
Michaels, 1998; Powell, 1996; Chang & Singh, 2000; Spanos & Lioukas, 2001; O'Cass & Julian, 2003;
Kim & Oh, 2004; Galbreath & Galvin, 2008; Gjerde, Knivsfla & Saettem, 2010; Short, Mckelvie, Ketchen & Chandler, 2009; Houthoofd & Hendrickx, 2012; Karabag & Berggren, 2014; Karniouchina, Carson, Short & Ketchen, 2013; Takata, 2016). The following section presents the Resource-Based View, a more internally focused, firm-specific view model.