The Market Based View and the Resource-Based View are two important strategic lenses to understand firm profitability. As discussed below, the two different orientations take a different perspective on key sources of profit variability.
What is the market-based view?
The market-based view explains differences in profitability by the different markets, or industries, that firms operate in. Some industries have high historic profitability, whereas others have much lower profitability.
Porter’s Five Force is one analysis that takes a market orientation. It looks to explain profitability five forces (buyer power, supplier power, threat of entry, substitute products, and inter-industry rivalry) – all approximately impacting firms in the same market comparably.
What is the resource-based view of the firm?
While the market-based view looks at profitability as been explain by market-level factors, the resource-based view looks specifically at firm-level factors. It helps examine within market variations; why some firms a market or industry tend to outperform others.
The resource-based view explains differences in firm profitability not by the market that the firms are in, but rather by differences in their underlying resources. Firms within the same market have different resources (some of which are hard for other firms to imitate), and this helps explain performance differences.
How the marke- based view and the resource-based view complement one another
While the market-based view and the resource-based view look at different aspects, they are not incompatible with one another. Rather, a certain proportion of profit is explained by market-level factors, and a proportion is explained by within-industry differences in firm resources. Being aware of both the forces that impact firms at the industry, and differences that exist within the industry between firm resources, can help gain a more complete understanding of firm performance.
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