“Looking Inside for Competitive Advantage”

by Jay B.Barney

Barney builds on Penrose`s work by focusing on the role of resources and capabilities. He argues that
to develop a sustainable competitive advantage, firms must not only search for environmental
opportunities (i.e. for high opportunity, low-threat environments), they must also search for and
develop their internal resources and capabilities.

A firm's resources and capabilities include: -

All of the;

 financial (i.e. debt, equity, retained earnings)

 Physical (i.e. machines, manufacturing facilities, and building firms use in their operations)
 Human (i.e. experience, knowledge, judgment, risk taking propensity and wisdom of
individuals associated with a firm)
 Organizational assets (i.e. history, relationships, trust, and organizational culture along with
a firm's formal reporting structure, explicit management control systems, and compensation
policies) used by a firm to develop, manufacture, and deliver products or services to its
customers.

And interact with the appropriate organizational structure

Barney claims that sustainable competitive advantage (the object of strategy) is developed when
resources and capabilities can:

 Add value to firm.

 Are rare.
 Are hard to imitate.
 And interact with the appropriate organizational structure

The question of value:

(Do a firm's resources and capabilities add value by enabling it to exploit opportunities and/or
neutralize threats?)

 Some firms answer yes, such as Sony as it used it resources and their specific technological
skills and their creative organizational cultures – make it possible for these firms to respond
to, and even create new environmental opportunities.
 Some firms answer no, such as USX (traditional steel-making co.). They could not recognize
new opportunities and threats; they delayed its investment in, among other opportunities
(thin slab continuous casting steel manufacturing technology). Also, Sears was unable to
respond to changes in the retail market that had been created by WalMart.
 Although a firm's resources and capabilities may have added value in the past, changes in
customer tastes, industry structure, or technology can make them less valuable in the
future. (i.e. IBM mainframe against personal & mini computers).
 The most important responsibilities of strategic managers is to continuously evaluate
whether or not their firm's resources and capabilities continue to add value, despite changes
in the competitive environment.
(How can we use our traditional strengths in new ways to exploit opportunities and/or neutralize
threats?)

 Many firms finding new ways to apply their traditional strengths, such as Hunter Fan Co.
(due to the invention of air conditioning the sales of fans to cool manufacturing facilities had
been reduced energy price had been raised and energy conservation became required, so
they exploit this opportunity and shift to reduce home energy consumption, and develop
some new skills as well, and new distribution networks).
 By answering the question of value, managers link the analysis of internal resources and
capabilities with the analysis of environmental opportunities and threats. Firm resources are
valuable only when they exploit opportunities and/or neutralize threats.
 The resources and capabilities of different firms can be valuable in different ways, even if
firms are competing in the same industry (such as Rolex: very expensive watches and Timex:
practical, reliable, low cost timekeeping manufacture watches).

The question of rareness:

(How many competing firms already own/have these valuable resources and capabilities?)

Consider for example two firms such as NEC and AT&T competing in the global communications and
computing industries, which are developing many of the same capabilities which are not rare. If they
are not rare, they can't be sources of competitive advantage for any one. To gain competitive
advantages, they must exploit resources and capabilities that are different from the communication
and computing skills they are both cited as developing.

(How many competing firms already own/have these valuable resources and capabilities?)

While resources and capabilities must be rare among competing firms in order to be a source of
competitive advantage, this does not mean that common, but valuable, resources are not important.
Indeed, such resources and capabilities may be essential for a firm's survival. On the other hand, if a
firm's resources are valuable and rare, those may enable a firm to gain at least a temporary
competitive advantage.

The question of imitability:

(Do firms without resource or capability face a cost disadvantage in obtaining it compared to firms
that already own/have it?)

Imitation is critical to understanding the ability of resources and capabilities to generate sustained
competitive advantage. Imitation can occur in 2 ways:

 Duplication: occurs when an imitating firm builds the same kinds of resources as the firm it
is imitating.
 Substitution: firm may be able to substitute some resources for other resources. If these
substitute resources have the same strategic implication and are no more costly to develop,
then imitation through substitution will lead to competitive parity in the long run.
(Do firms without resource or capability face a cost disadvantage in obtaining it compared to firms
that already own/have it?)

Most of resources and capabilities of firms may be costly to imitate, because of three factors that
caused the internal dynamics of a firm to be unique:

 The importance of history

 The importance of numerous small decisions
 The importance of socially complex resources

The question of organization:

(Is a firm organized to exploit the full competitive potential of its resources and capabilities?)

Numerous components of a firm's organization are relevant when answering the question of
organization, including its formal reporting structure, its explicit management control systems, and
its compensation policies. These components are referred to as complementary resources because
they have limited ability to generate competitive advantage in isolation.

However, in combination with other resources and capabilities, they can enable a firm to realize its
full competitive advantage.

(Is a firm organized to exploit the full competitive potential of its resources and capabilities?)

(Caterpillar management implement a global formal reporting structure, global inventory and other
control systems, and compensation policies that created incentives for its employees to work around
the world, so it realized a competitive advantage).

In other hand Xerox was prevented from taking full advantage of some of its most critical valuable,
rare, and costly to imitate resources and capabilities because it lacked such organizational skills