In plain English
There is no single theory of why one company beats another. Each lens is a different question: is the industry structurally profitable, does the firm own something rivals cannot copy, can it change faster than the market, should the activity sit inside the firm at all, are managers even trying to maximise value, and is the environment so uncertain that the right move is to buy an option rather than commit?
The advanced view
Strategy research runs on competing explanations of persistent profit dispersion. Structure-conduct-performance attributes rents to industry structure and mobility barriers; the resource-based view attributes them to factor-market imperfections and inimitable resource positions; dynamic capabilities relocate the explanation to the rate of resource reconfiguration; transaction cost economics explains the boundary of the firm through asset specificity and contractual hazard; agency theory treats observed strategy as an equilibrium of incentives rather than of optimisation; real options treats irreversibility plus uncertainty as a reason to stage commitment; the institutional view explains isomorphism and legitimacy-driven choices that no efficiency argument predicts.
The interview and exam skill is not naming the lenses. It is choosing the one that fits the question and saying why the others are weaker here. An entry question in a concentrated, regulated market is an IO question. A question about why a leader lost share to a smaller rival after a technology shift is a dynamic-capabilities question. A make-or-buy question is transaction cost economics. A 'why did the board approve this obviously value-destroying deal' question is agency theory.
Frameworks
Industrial organisation (Porter)
Profit comes from industry structure and defensible position. Strong when structure is stable; weak when the boundaries of the industry are moving.
Resource-based view
Profit comes from VRIN resources acquired below their value. Strong at explaining persistence; weak at telling you how to build the resource.
Dynamic capabilities
Sense, seize, reconfigure. Explains advantage in fast-moving markets; criticised as hard to falsify or measure.
Transaction cost economics
Firms exist where markets are costly to use. Asset specificity plus uncertainty plus opportunism pushes activity in-house.
Agency theory
Managers are agents with their own payoff. Explains empire building, overinvestment and short-termism.
Real options
Under irreversibility and uncertainty, the right to invest later has value. Justifies pilots, staged entry and licence acquisition.
Institutional view
Firms copy legitimate practice. Explains why an industry converges on the same strategy even when it destroys value.
Strategy connection
Each lens has a financial signature. IO shows up as sustained ROIC above WACC across the industry; RBV as a single firm's spread against its peer set; agency as acquisitions with negative announcement returns; real options as the value of staged capex versus a single committed build.
Worked example — choosing a lens
Step 1 of 7
- 1Question: a Nordic retailer earns ROIC 6% while its cost of capital is 8%.
Common pitfalls
- ×Listing four frameworks instead of committing to one diagnosis.
- ×Using RBV as a label ('they have great culture') without the inimitability test.
- ×Treating industry attractiveness as destiny when the firm's spread differs sharply from peers.
- ×Ignoring agency explanations when the decision only makes sense for management.
Must know cold
- ✓Advantage = value created (willingness to pay − cost) captured by the firm.
- ✓VRIN/VRIO: valuable, rare, inimitable, organised to exploit.
- ✓Asset specificity plus uncertainty plus small numbers ⇒ integrate.
- ✓Persistent ROIC − WACC > 0 is the empirical test of advantage.
Exercises
Try each one on paper before revealing the worked solution.
Exercise 1
A software firm's gross margin is 82% and it earns ROIC of 25% vs WACC of 9%. Rivals earn 11%. Which lens explains the 14-point spread, and what evidence would falsify your answer?
Exercise 2
Messy prompt: a client asks whether to buy its main component supplier. Structure the analysis using two lenses before touching any numbers.