Composition-Based View

Last updated September 09, 2019

The composition-based view (CBV) was recently developed by Luo and Child (2015).^[1] It is a new theory that explicates the growth of firms without the benefit of resource advantages, proprietary technology, or market power. The CBV complements some existing theories such as resource-based view (RBV), resource management view, and dynamic capability – to create novel insights into the survival of firms that do not possess such strategic assets as original technologies and brands. It emphasizes how ordinary firms with ordinary resources may generate extraordinary results through their creative use of open resources and unique integrating capabilities, resulting in an enhanced speed and a high price-value ratio that are well suited to large numbers of low- to mid-end mass market consumers. The CBV has been commented as “a new view with significant application” for emerging market firms and for small and medium sized enterprises in many countries.^[2] The view cautions though that composition-generated advantages are temporary in nature and that composition itself mandates special skills in distinctively identifying, leveraging, and combining open or existing resources inside and outside the firm.

The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper Dynamic Capabilities and Strategic Management, as "the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments".

Definition

According to Luo and Child (2015), the term “composition” refers to the identification, configuration, and integration of (a) different sources of resources (e.g., acquiring applied technology and key components through licensing or purchasing, which are then further integrated with in-house production) and (b) different means of competition (e.g., price, value, design, technology, features, and services) to create a competitive advantage manifested in extended offerings (e.g., new product functions, extended consumer experience, and total business solutions), rapid market responses, and superior price-value ratios that suit particularly well the mass market.

There are three important concepts or notions that constitute composition. First, Compositional Offering – the firm uses open or available resources to provide customers with amalgamated values, services, and convenience at a reduced cost. It occurs when the firm extends product features, functions and services for customers who not only look for high value-price ratio but also total solutions, one-shop-for-all convenience, and amalgamated functions or services in a single product. Fast-paced life style, along with the expansion of middle-class consumers and digitization-based new consumerism,^[3] prompts the need for compositional offering.

Second, Compositional Competition – the firm combines and integrates different means of competition (e.g., quick responsiveness, low cost, new functions and features, customer-focused design, and extended warranty) to win competition. Compositional competition combines low cost, speed and quality means, providing customers with quick market responses and high price-value ratio. Compositional competitors deliver suitable technology at a low cost by leveraging mature technologies or R&D resources and by using open architecture or platforms that can significantly reduce production costs.^[4] These firms are astute in business intelligence involving both markets and technologies.

Open architecture is a type of computer architecture or software architecture intended to make adding, upgrading, and swapping components easy. For example, the IBM PC, Amiga 500 and Apple IIe have an open architecture supporting plug-in cards, whereas the Apple IIc computer has a closed architecture. Open architecture systems may use a standardized system bus such as S-100, PCI or ISA or they may incorporate a proprietary bus standard such as that used on the Apple II, with up to a dozen slots that allow multiple hardware manufacturers to produce add-ons, and for the user to freely install them. By contrast, closed architectures, if they are expandable at all, have one or two "expansion ports" using a proprietary connector design that may require a license fee from the manufacturer, or enhancements may only be installable by technicians with specialized tools or training.

Third, Compositional Capability – the firm’s ability to bundle different resources and competitive attributes to create a certain competitive advantage. It shifts a focus from developing new resources to bundling existing resources, including those accessible from domestic or global open markets, as well as bundling competitive attributes such as quality, features, price, speed, innovation, design, and services. Entrepreneurial vision, market intelligence, absorptive capacity,^[5] and combinative capability^[6] are essential to accomplishing compositional capability.

In business administration, absorptive capacity has been defined as "a firm's ability to recognize the value of new information, assimilate it, and apply it to commercial ends". It is studied on individual, group, firm, and national levels. Antecedents are prior-based knowledge and communication. Studies involve a firm's innovation performance, aspiration level, and organizational learning. It has been said that in order to be innovative an organization should develop its absorptive capacity.

Main Points

According to Luo and Child (2015), compositional capability serves as the foundation on which compositional competition and compositional offering can build and forge ahead. This foundation determines how far the firm can go in adopting composition-based strategy. While compositional competition manifests the firm’s business-level strategy, focusing on the logic of using compositional building blocks for achieving a competitive edge, compositional offering expresses the firm’s operational-level strategy, pinpointing the value offering propensity (e.g., total solutions, one-stop services, or integrated functions) in a cost-effective manner. The above three elements reinforce one another, reflecting the faces of composition at the product level (compositional offering), market level (compositional competition), and organizational level (compositional capability). Yet, they collectively demonstrate a pragmatic and viable solution for the growth of ordinary firms that possess ordinary resources.

The CBV argues that firms with ordinary resources can establish some competitive position, at least temporarily, by creatively assembling and integrating the open and generic resources they possess or purchase. The term ‘ordinary resources’ refers to resources that are neither idiosyncratic nor costly to copy, and that can be purchased in an open market or secured from partner firms. The CBV informs the ways in which ordinary firms can survive by creatively using and bundling ordinary resources. CBV changes the view from developing and leveraging distinctive resources to distinctively using generic and open resources that are available. It is essentially a compensational remedy and a catch-up strategy for these companies in their efforts to compete against resourceful and powerful rivals equipped with strategic assets. Composition is a deliberate, intelligent, and pragmatic approach, offsetting these firms’ competitive weaknesses, yet requiring savvy organizational skills to achieve compositional advantages.

Facilitating Conditions

While the CBV logic applies to any firm endeavoring to catch up with better endowed competitors, it aligns well with the case of emerging economies enterprises and small- and medium-sized enterprises in developed or developing countries. There are several external conditions that provoke the adoption of composition-based strategy, including:

Sheer number of consumers who are sensitive to a product’s price, features functions, convenience and amalgamated values
Availability of many specialized industrial design companies from home and abroad
Industrial clusters and parks that support various value chain activities needed for domestic and foreign customers
Presence of global and domestic open markets for technologies, key components, industrial tools, and specialized intermediaries
Technological modularization or standardization and the pervasiveness of information and communication technologies (ICT)
Growing business networks and partnerships

Compositional Process

The composition-based strategy is achieved through the compositional process, which relies on the recognition and management of interdependencies, both inside the firm and with external network partners. Compositional process entails a set of key process capabilities, including:

A strong entrepreneurial orientation aimed at exploiting external opportunities. Firms that follow the composition-based strategy are often led by executives who have sharp vision and who have adopted pragmatic measures in order to tap into new markets with a heightened entrepreneurial orientation.
Network competence in the sense of an ability to pull together the resources required to enable the exploitation of external opportunities. Leveraging external resources requires drawing from a range of various sources and ties.
An adept management system within the firm that maintains a fine balance between central direction and decentralized adaptive initiative. The combination of top-down vision with decentralized horizontal flexibility enables firms with ordinary resources to secure a competitive advantage by reducing lead times, speeding up problem solving, and hence adapting rapidly to market opportunities.
A form of organizational ambidexterity that requires simultaneous attention to different resource categories with a view to their creative combination. The ambidexterity entails the balancing and integration of a range of resources in the bundling of competitive attributes.

Links with Other Theories

The RBV argues that resources that are rare, valuable, inimitable, and non-substitutable are considered to be the source of sustained competitive advantage.^[7] The CBV complements with the RBV in that it does not emphasize possession of superior strategic resources as a necessary condition for the firm’s competitive advantage. Instead, the CBV underscores the use of multiple sources of open or generic resources – resources which when used in a creative composition may yield a competitive edge to the firm, at least temporarily. Also, the CBV points out that composition process is a distinct competence and critical capability that is valuable, heterogeneous, and not always easy to imitate.

Resource management is the comprehensive process of structuring the firm’s resource portfolio, bundling the resources to build capabilities, and leveraging those capabilities with the purpose of creating and maintaining value for customers and owners.^[8] However, in the resource management literature, the bundling process deals with internal or existing resources, the CBV extends this view by considering the composition of external open resources.

Consistent with the dynamic capability perspective, the composition process itself is a distinctive, firm-specific, and dynamic capability, that is, “the firm’s ability to integrate, build, and reconfigure internal and external competence to address rapidly changing environments”.^[9] While the dynamic capability perspective assumes that executives need to engage in resource adaptation or renewal because the value of existing resources depreciates in the light of external changes, the CBV focuses on the competitive advantage that can be gained from combining existing resources in novel ways.

Limitations

According to Luo and Child (2015), there exist several limitations of the composition-based strategy:

It increases the difficulty in building brand awareness and customer loyalty because firms that adopt this strategy serve pragmatic consumers who are indifferent to brands but mindful of product offerings. Therefore, these firms are facing competitive pressures from new entrants that use a similar composition strategy and from substituting products or services offered by similar rivals.
Composition mandates a myriad of inter-unit synchronization within the firm and requires inter-firm coordination with outsiders residing in a related upstream and downstream vertical chain, as well as specialized intermediaries and service providers from supporting industries. Coordination costs and difficulties of orchestration may undermine composition-based success.
Composition-based strategies may cause the firm to depend on external resources. However, the open markets are not yet perfect and may cause a higher level of uncertainty and vulnerability to the firms. Also, the firms that do not have strong power in network exchanges will suffer from unintended consequences stemming from resource dependency.^[10]
The advantages of composition are temporary in nature and will decline over time, especially after the firm passes the imitative or catch-up stage, due to the lack of patented technologies, corporate credibility, and organizational reputation,

Related Research Articles

In commerce, supply-chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the "design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." SCM practice draws heavily from the areas of industrial engineering, systems engineering, operations management, logistics, procurement, information technology, and marketing and strives for an integrated approach. Marketing channels play an important role in supply-chain management. Current research in supply-chain management is concerned with topics related to sustainability and risk management, among others. Some suggest that the “people dimension” of SCM, ethical issues, internal integration, transparency/visibility, and human capital/talent management are topics that have, so far, been underrepresented on the research agenda.

In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's top managers on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization operates.

In economics and marketing, product differentiation is the process of distinguishing a product or service from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own products. The concept was proposed by Edward Chamberlin in his 1933 The Theory of Monopolistic Competition.

Marketing management is the organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and activities.

In business, a competitive advantage is the attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology.

A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel. It can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace" and therefore are the foundation of companies' competitiveness.

Porter's Five Forces Framework is a tool for analyzing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.

Porter's generic strategies describe how a company pursues competitive advantage across its chosen market scope. There are three/four generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus or industry-wide, offering its product across many market segments. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope. The concept was described by Michael Porter in 1980.

The word ‘dynamics’ appears frequently in discussions and writing about strategy, and is used in two distinct, though equally important senses.

Marketing strategy is a long-term, forward-looking approach to planning with the fundamental goal of achieving a sustainable competitive advantage.

VRIO is a business analysis framework that forms part of the firm's larger strategic scheme. The basic strategic process that any firm goes through begins with a vision statement, and continues on through objectives, internal & external analysis, strategic choices, and strategic implementation. The firm will hope that this process results in a competitive advantage in the marketplace they operate in.

Open innovation is a term used to promote an information age mindset toward innovation that runs counter to the secrecy and silo mentality of traditional corporate research labs. The benefits and driving forces behind increased openness have been noted and discussed as far back as the 1960s, especially as it pertains to interfirm cooperation in R&D. Use of the term 'open innovation' in reference to the increasing embrace of external cooperation in a complex world has been promoted in particular by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation of the Haas School of Business at the University of California,.

Global marketing is “marketing on a worldwide scale reconciling or taking commercial advantage of global operational differences, similarities and opportunities in order to meet global objectives".

Competence-based strategic management is a way of thinking about how organizations gain high performance for a significant period of time. Established as a theory in the early 1990s, competence-based strategic management theory explains how organizations can develop sustainable competitive advantage in a systematic and structural way. The theory of competence-based strategic management is an integrative strategy theory that incorporates economic, organizational and behavioural concerns in a framework that is dynamic, systemic, cognitive and holistic. This theory defines competence as: the ability to sustain the coordinated deployment of resources in ways that helps an organization achieve its goals. Competence-based management can be found in areas other than strategic management, namely in human resource management.

Competitive heterogeneity is a concept from strategic management that examines why industries do not converge on one best way of doing things. In the view of strategic management scholars, the microeconomics of production and competition combine to predict that industries will be composed of identical firms offering identical products at identical prices. Deeper analyses of this topic were taken up in industrial organization economics by crossover economics/strategic-management scholars such as Harold Demsetz and Michael Porter. Demsetz argued that better-managed firms would make better products than their competitors. Such firms would translate better products or lower prices into higher levels of demand, which would lead to revenue growth. These firms would then be larger than the more poorly managed competitors. Porter argued that firms in an industry would cluster into strategic groups. Each group would be similar and movement between groups would be difficult and costly. Richard Rumelt and Stephen Lippman demonstrated how firms could differ in an industry in partial equilibrium-like circumstances. Richard Nelson and Sidney G. Winter discussed how firms develop differing capabilities. During this time, industrial economics focused on industry characteristics, treated the differences among firms in an industry as trivial. This was a point of contention within strategy and between strategy and economics from about 1980 to the mid-1990s.

Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. "Capability Management" seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.

The springboard theory or springboard perspective is an international business theory that elucidates the unique motives, processes and behaviors of international expansion of emerging market multinational enterprises. Springboard theory was developed by Luo and Tung (2007), and has since been used to examine EM MNEs. At the core of this theory is the argument that EM MNEs systematically and recursively use international expansion as a springboard to acquire critical resources needed to compete more effectively against their global rivals at home and abroad and to reduce their vulnerability to institutional and market constraints at home. These efforts are systematic in the sense that “springboard” steps are deliberately designed as a grand plan to facilitate firm growth and as a long-range strategy to establish more solidly their competitive positions in the global marketplace. They are also recursive because such “springboard” activities are recurrent and revolving.

Jay B. Barney is an American professor in strategic management, best known for his contributions to the resource-based theory of competitive advantage.

References

↑ Luo, Yadong; Child, John (2015). "A Composition-Based View of Firm Growth". Management and Organization Review. 11 (3): 379–411. doi:10.1017/mor.2015.29.
↑ Burton, Richard M. (2015). "Extraordinary Survival from Ordinary Resources – How So?". Management and Organization Review. 11 (3): 413–417. doi:10.1017/mor.2015.38.
↑ Boumphrey, Sarah. "The New Consumerism: Redefining Ownership, Values and Priorities". www.euromonitor.com.
↑ Zeng, Ming; Williamson, Peter J. (2007). Dragons at your door : how Chinese cost innovation is disrupting global competition . Boston, Mass.: Harvard Business School Press. ISBN 9781422102084.
↑ Cohen, W. M.; Levinthal, D.A. (1990). "Absorptive capacity: A new perspective on learning and innovation". Administrative Science Quarterly. 35 (1): 128–152. doi:10.2307/2393553. JSTOR 2393553.
↑ Kogut, B.; Zander, U. (1992). "Knowledge of the firm, combinative capabilities, and the replication of technology". Organization Science. 3 (3): 383–397. doi:10.1287/orsc.3.3.383.
↑ Barney, J.B. (1991). "Firm resources and sustained competitive advantage". Journal of Management. 17: 99–120. doi:10.1177/014920639101700108.
↑ Morrow, J. L.; Sirmon, D. G.; Hitt, M. A.; Holcomb, T. R. (2007). "Creating value in the face of declining performance: firm strategies and organizational recovery". Strategic Management Journal. 28 (3): 271–283. doi:10.1002/smj.579.
↑ Teece, D.; Pisano, G.; Shuen, A. (1997). "Dynamic capabilities and strategic management". Strategic Management Journal. 18 (7): 509–534. CiteSeerX 10.1.1.390.9899 . doi:10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z.
↑ Pfeffer, Jeffrey; Salancik, Gerald R. (1978). The external control of organizations : a resource dependence perspective. New York [u.a.]: Harper & Row. ISBN 9780060451936.

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.

[1] Luo, Yadong; Child, John (2015). "A Composition-Based View of Firm Growth". Management and Organization Review. 11 (3): 379–411. doi:10.1017/mor.2015.29.

[2] Burton, Richard M. (2015). "Extraordinary Survival from Ordinary Resources – How So?". Management and Organization Review. 11 (3): 413–417. doi:10.1017/mor.2015.38.

[3] Boumphrey, Sarah. "The New Consumerism: Redefining Ownership, Values and Priorities". www.euromonitor.com.

[4] Zeng, Ming; Williamson, Peter J. (2007). Dragons at your door : how Chinese cost innovation is disrupting global competition . Boston, Mass.: Harvard Business School Press. ISBN 9781422102084.

[5] Cohen, W. M.; Levinthal, D.A. (1990). "Absorptive capacity: A new perspective on learning and innovation". Administrative Science Quarterly. 35 (1): 128–152. doi:10.2307/2393553. JSTOR 2393553.

[6] Kogut, B.; Zander, U. (1992). "Knowledge of the firm, combinative capabilities, and the replication of technology". Organization Science. 3 (3): 383–397. doi:10.1287/orsc.3.3.383.

[7] Barney, J.B. (1991). "Firm resources and sustained competitive advantage". Journal of Management. 17: 99–120. doi:10.1177/014920639101700108.

[8] Morrow, J. L.; Sirmon, D. G.; Hitt, M. A.; Holcomb, T. R. (2007). "Creating value in the face of declining performance: firm strategies and organizational recovery". Strategic Management Journal. 28 (3): 271–283. doi:10.1002/smj.579.

[9] Teece, D.; Pisano, G.; Shuen, A. (1997). "Dynamic capabilities and strategic management". Strategic Management Journal. 18 (7): 509–534. CiteSeerX 10.1.1.390.9899 . doi:10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z.

[10] Pfeffer, Jeffrey; Salancik, Gerald R. (1978). The external control of organizations : a resource dependence perspective. New York [u.a.]: Harper & Row. ISBN 9780060451936.