Barney (1995) on VIRO

I’m reading: Barney, J., 1995. Looking inside for competitive advantage. Academy of Management Executive, 9(4), pp.49–61. Available at: http://www.jstor.org/stable/4165288

This article is one of Barney’s most famous. In it he outlines his VIRO model and further consolidates his thinking about the resource based view of the firm. Arguing that firms are made up of unique bundles of resources and capabilities that can be mobilised to deliver competitive advantage, Barney suggests that organisational resources and capabilities which are Valuable, Rare, Inimitable, and that are Organised effectively, when matched against environmental opportunities and threats, can lead to superior firm performance.

Quotes and Notes:

p.49: “However, the SWOT framework tells us that environmental analysis—no matter how rigorous—is only half the story.” – Highlighted 2015 Dec17

  • What’s ‘left out’ here is the how of the organisation matching their internal strengths with the external opportunities and threats posed by the environment. Can the organisation ‘double down’ on activities that it has advantages over competitors in? Can the organisation use its strengths in new way to reduce the relative threats posed by actors in the environment?

p.50: “In the process of filling in the ”internal blanks“ created by SWOT analysis, managers must address four important questions about their resources and capabilities: (1) the question of value, (2) the question of rareness, (3) the question of imitability, and (4) the question of organization.” – Highlighted 2015 Dec17

  • This is the VIRO model that is well known. For this to be used properly, however, it requires a strategist to think deeply about the relative affordances of the resources within the organisation and to apply a creative mind to how they might be used in other ways.

p.50: The Question of Value

p.50: “Do a firm’s resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?” – Highlighted 2015 Dec17

p.51: “Although a firm’s resources and capabilities may have added value in the past, changes in customer tastes, industry structure, or technology can render them less valuable in the future.” – Highlighted 2015 Dec17

p.51: “…how can we use our traditional strengths in new ways to exploit opportunities and/or neutralize threats?” – Highlighted 2015 Dec17

p.52: “By answering the question of value, managers link the analysis of internal resources and capabilities with the analysis of environmental opportunities and threats.” – Highlighted 2015 Dec17

  • The very first step is to do the mapping exercise and then focus on the current understanding of opportunities and threats posed by the external environment. However these will then need to be prioritised – some opportunities might only exist for a limited time; some threats might be more significant that others. To really turbo-charge this activity, the co-dependencies will need to be acknowledged. Does a single asset form part of a relative advantage for the firm in more than one area? If that asset is re-purposed, will it have more wide ranging consequences? Is the asset ‘mission-critical’ in some way? If so, the strategist will need to think very, VERY carefully how that assets is deployed. Of course the problem here is that strategists are as prone to the escalation of commitment bias and also the status quo bias as everyone else.

p.52: The Question of Rareness

p.52: “That a firm’s resources and capabilities are valuable is an important first consideration in understanding internal sources of competitive advantage. However, if a particular resource and capability is controlled by numerous competing firms, then that resource is unlikely to be a source of competitive advantage for any one of them. Instead, valuable but common (i.e., not rare) resources and capabilities are sources of competitive parity.” – Highlighted 2015 Dec17

p.52: “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.” – Highlighted 2015 Dec17

The issue of value is intricately linked to rareness. One way to increase the value making capacity of resources in the firm is to think about if those assets can be redeployed into alternative, under-served markets. If a common asset that the firm controls is relatively rare in the context of another industry or market, this might deliver superior profits to the firm. A strategist will always be on the look-out to see if a redefinition of the key market might make some rare resources that the firm controls currently not valuable to one set of customers, valuable to another set. I think this is the key aspect of ‘strategic thinking’: the ability to be creative when thinking about what the firm can achieve and how it should go about it. Gaining efficiencies is important, but it is not all important. Constant environmental scanning to sense weak signals and to adjust resources and capabilities in a timely manner to take advantage of upcoming opportunities, or to nullify potential threats, is just as important.

p.53: The Question of Imitability

p.53: “A firm that possesses valuable and rare resources and capabilities can gain, at least, a temporary competitive advantage. If, in addition, competing firms face a cost disadvantage in imitating these resources and capabilities, firms with these special abilities can obtain a sustained competitive advantage.” – Highlighted 2015 Dec17

p.53: “Duplication occurs when an imitating firm builds the same kinds of resources as the firm it is imitating. If one firm has a competitive advantage because of its research and development skills, then a duplicating firm will try to imitate that resource by developing its own research and development skills. In addition, firms may be able to substitute some resources for other resources. If these substitute resources have the same strategic implications and are no more costly to develop, then imitation through substitution will lead to competitive parity in the long run.” – Highlighted 2015 Dec17

p.53: “While there are numerous reasons why some of these internal attributes of firms may be costly to imitate, most of these reasons can be grouped into three categories: the importance of history in creating firm resources; the importance of numerous ”small decisions“ in developing, nurturing, and exploiting resources; and the importance of socially complex resources.” – Highlighted 2015 Dec17

p.53: The Importance of History (as a subset of imitability)

p.53: “As firms evolve, they pick up skills, abilities, and resources that are unique to them, reflecting their particular path through history. These resources and capabilities reflect the unique personalities, experiences, and relationships that exist in only a single firm.” – Highlighted 2015 Dec17

p.54: The Importance of Numerous Small Decisions (as a subset of imitability)

p.54: “…more and more frequently, a firm’s competitive advantage seems to depend on numerous ”small decisions“ through which a firm’s resources and capabilities are developed and exploited.” – Highlighted 2015 Dec17

p.55: The Importance of Socially Complex Resources (as a subset of imitability)

p.55: “…socially complex resources and capabilities—organizational phenomena like reputation, trust, friendship, teamwork and culture—while not patentable, are much more difficult to imitate.” – Highlighted 2015 Dec17

p.55: “In general, when a firm’s resources and capabilities are valuable, rare, and socially complex, those resources are likely to be sources of sustained competitive advantage.” – Highlighted 2015 Dec17

Within these quotes you can see the basis for a focus on organisational learning and making tacit processes within an organisation as explicit as possible and for setting the conditions for repeatability. Later work by Hamel, especially his book Leading the Revolution, drills down into these issues as important reasons for competitive advantage. Once a firm gains a relative advantage against rivals and enjoys cost advantages, then they can continue to reinvest back into these sources of advantage, continuing to widen the gap.

Strategists have to continually scan the environment, though, for shifts that might render these rare resources – especially the ones that form tacit organisational routines – no longer valuable. Analogue processes that can be supplanted by digital technologies may mean that intricate organisational reporting systems are too slow, or potentially are no longer needed. Many small decisions that add up to an advantage in a particular environmental domain may prove to be a hinderance if the environment shifts suddenly and the firm needs to react. Embedded philosophies and decision heuristics that were once valuable can now become a burden.

p.56: The Question of Organization

p.56: “Is a firm organized to exploit the full competitive potential of its resources and capabilities?” – Highlighted 2015 Dec17

This includes having the right people in the right places doing the right things. Strategists have to take an active role in helping others to understand how their day-to-day activities are linked to the overall success of the organisation. Developing and maintaining a constant feedback loop that allows the organisation to become aware of any changes in the operating context of the firm can help significantly by allowing the firm to sense and adjust to changes in the operating environment. Firms that can make these adjustments effectively and more quickly than competitors are likely to sustain competitive advantage.