Culture and sustained superior financial performance

In order for a firm’s culture to provide sustained competitive advantages, three conditions must be met (Barney 1991a). First, the culture must be valuable; it must enable a firm to do things and behave in ways that lead to high sales, low costs, high margins, or in other ways create economic value to the firm. Because sustained competitive advantage is an economic con- cept, culture, to generate such performance, must have positive economic consequences. Second, the culture must be rare; it must have attributes and characteristics that are not common to the cultures of a large number of other firms. Finally, such a culture must be imperfectly imitable; firms without these cultures cannot engage in activities that will change their cultures to include the required characteristics, and if they try to imitate these cultures, they will be at some disadvantage (reputational, experience, etc.) compared to the firm they are trying to imitate.

These three characteristics are all derived from the VRIO framework presented in Chapter 3. The first requirement that a firm’s culture must enable it to do things and behave in ways that add economic value to the firm is clearly a prerequisite for generating even competitive parity. If a firm’s culture enables it to behave in ways that are inconsistent with a firm’s competitive situation, then that culture cannot be a source of superior performance, sustained, or otherwise.

The requirement that valuable cultures must be rare to generate sus- tained competitive advantages reflects the dynamics of competition created by a competitive advantage. If many firms have similar cultures that allow them to behave and compete in approximately the same way, then none will possess a culturally based competitive advantage.

Finally, even if the above conditions are met, it is still necessary for a firm’s culture to be imperfectly imitable for it to generate sustained superior financial performance. Perfectly imitable cultures, even if they are valuable, and even if they are currently rare, are subject to imitation that dissipates any competitive advantages they may provide. The culture- driven success of one firm creates an incentive for other firms to modify their cultures to duplicate that success. If the culture is perfectly imitable, it cannot give any one firm a sustained competitive advantage. Thus, for example, if the cultural attributes isolated by Peters and Waterman (1982) are, in fact, easily transferable, as is suggested on the cover of one of the paperback editions of their book, then these cultural attributes cannot be a source of sustained competitive advantage.

A firm that has a valuable, rare, and imperfectly imitable culture enjoys a sustained competitive advantage that reflects that culture. Such a firm will enjoy the positive economic consequences of its culture. Relatively few other firms will be able to obtain these same benefits, and those firms that currently do not enjoy them cannot engage in activities that will make it possible to obtain them. However, the overall performance of a firm with such advantages can be reduced if a firm fails to manage other strategically relevant functions successfully (Peters and Waterman 1982). These other functions might include both the financial and analytical characteristics of a firm’s business. In addition, while a firm with a valuable, rare, and imper- fectly imitable culture can obtain sustained advantages, other attributes of a firm, including, perhaps, unique geographic advantages and luck, also can lead to such performance (Barney 1985b).

This analysis does not imply that firms currently enjoying culturally based advantages will always enjoy these advantages, because a valuable culture today could, in different economic or competitive conditions, become an economic liability. Moreover, because other attributes of a firm also can generate sustained advantages, it is possible that several firms in an industry all can obtain sustained superior financial performance based on different competitive advantages (Lippman and Rumelt 1982). However, it will not be possible for a large number of firms to obtain such performance on the basis of a single type of organizational culture.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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