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capabilities in order to explain the advantages of applying a conceptual model that articulates the VRIO framework, initially developed by Barney (1991) ...
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Rita Geraldes NA, Portugal Renato Lopes da Costa PHD, Portugal João Geraldes PHD, Portugal Access to this paper is restricted to registered delegates of the EURAM 2019 (European Academy of Management) Conference. ISSN 2466-7498 and ISBN 978-2-9602195-1-
1. Introduction During the 1980s, the principal concern of theorists in what regarded strategic management was linked to the analysis of the external environment. The main goal of managers was focused on the manipulation of the markets so as to obtain competitive advantage which allowed companies to position themselves through leadership. However, over the years, with the technology’ advancement, with the ever-changing industries and with an ever continuingly-increasing reduction in the time-frame of competitive advantage, a resource-based view (RBV) has been gaining its own space regarding strategic formulation; not only because the returns provided by the resources give the possibility to be above the opportunity costs themselves, but also due to the inexistence of flows that may detract from an assertive decision-making due to the inconsistency in reflecting the demand-side (Wills- Johnson, 2008). The strategy emphasis of the supply-side, allow us to focus on strategic formulation on a more stable basis based on the analysis of the company’s internal resources and capabilities, not being conditioned by the failure of macroeconomic policies, preferring instead to guide companies in order to improve their industrial production, to acquire equipment and to qualify and train their human resources, providing a unique character that is difficult to imitate. This is the essence of school based on resources (Penrose, 1959; Prahalad and Hamel, 1990; Teece et al. , 1997; António, 2006, Teece, 2007; Barney and Hesterly, 201 2 ). According to this perspective, the distinct competencies of a company are based on the resources and capabilities that can be expressed as tangible assets (distribution systems,
economies of scale, factories, lands, raw materials, equipment, indebtedness, capacity to manage internal funds), intangible assets (patents, technological know-how, technical know- how, reputation, brand image) and human assets (including all the potential development of human resources, “know-how”, motivation, commitment).(Barney, 1991; Barney and Hesterly, 2010 ; Barney and Hesterly, 2012) It can then be said that a company is a bundle of resources (which are the company assets), skills (what we know how to do well), and capabilities (what we know how to do using our resources and capabilities), meaning that the competitive advantage will have to be translated into something rare, inimitable, non-substitutable and dynamic. This idea of statisticism within the competitive advantage concept from the 1980s was replaced by something that cannot stop over time, otherwise it will be emphasized into something temporary (Lopes da Costa and António, 2017) The resource-based theory is therefore anchored in a classical dimension that has enabled itself to assert as dominant in the strategic area in the last 30 years. In this field, the objective of a company is mainly to obtain or organize resources that are superior to those of its competitors (Lopes da Costa and António, 2017). It is quite usual to find in the literature some terminological confusion regarding the resources concept, nuclear competence, capability or asset, even though during the needed systematic analysis, we are essentially portraying the same, being that the capabilities are materialized in what the organization produces and results from the joint work of several groups of resources (António, 2006; Lopes da Costa and António, 2017). On another hand, both the theory and the capabilities development focus on various organizational aspects, such as, R&D, speed of
The article is subdivided into six parts and the first part is referent to the theoretical exploitation of the RBV dematerialized in the creation of the VRIO model as presented below.
2. VRIO Framework The resource-based theory is based on two fundamental assumptions: resources and capabilities that can be controlled by the company, considering that some of these are linked to the heterogenous nature of the different type of resources and capabilities that companies can hold; others refer to the immobility aspect and to its enduring character, in this case against the costs that companies will have to bear to develop or obtain something similar. It can be said that a company that has valuable resources and capabilities that are difficult to imitate in view of the costs involved in developing or obtaining something similar holds tangible and intangible assets that guarantee them a sustainable competitive advantage (Lopes da Costa and António, 2017). In order to analyze the different resources and capabilities that a company holds, as well as the potential of each of these to generate competitive advantage, the used tool is the VRIO Framework. This tool should be applied using a set of four questions about the resources and capabilities that determine the competitive advantage potential of each of these in terms of: Value, Rarity, Inimitability and Organization (Barney, 1991; Barney, 1995; Barney, 1997; Barney and Zajac, 1994; Barney and Wright, 1998; Barney, 2001; Barney and Hesterly, 20 10 ; Barney and Hesterly, 2012). Understanding the value of resources and capabilities of companies is the first important consideration to realize in order to figure out the inherent strengths and weaknesses. To gauge
the value of a particular resource or capability we need to answer the following question: “Does the resource or capability allow a company to explore an opportunity or counteract an external threat?” Whenever the answer is yes, we are facing a valuable resource (or capability), and this factor can be considered as a company’s strength that will allow the improvement of its competitive position. Otherwise, the resource (or capability) is not valuable. Besides, the answer to this question may also be linked to the concept of dynamic capabilities namely the sensing category defined by Teece (2007) which is strongly related to the notion of market- focused learning and implies the identification, development, co-development and assessment of technological opportunities in relationship to the customer needs (Shu-Mei and Pei-Shan, 2012). Nevertheless, we must bear in mind that in some cases the full answer to this question requires detailed operational information that may not be readily available. In these cases, there is a relatively easy way to identify the impact of a company’s resources and capabilities on its opportunities and threats by examining the impact of its usage in terms of revenues and costs – which will be manifested, in the limit, in an increase of revenues or a decrease of costs. This reasoning leads us to the seizing category (Teece, 2007) which captures how companies mobilize resources in order to address the needs and opportunities and capture its value. In what regards the rarity question, a firm will have a competitive advantage when is implementing a value-creating strategy that is not simultaneously implemented by a large number of other firms, otherwise the firm will face a parity situation. This brings us to the rarity question: “How many competing companies already have these valuable resources and capabilities?”. (Barney, 1995, 52) That is, a valuable resource (or capability) should be rare in order to generate potential competitive advantage for the company. Nonetheless, it is possible, however, that a small number of companies within a given industry have a valuable resource or capability and gain competitive advantage if this small number of companies, that owns the
(this due to the fact that the full future value of the resource or capability is not yet clear defined) and the acquisition or development of this resource or capability by third parties will be very difficult to achieve due to the costs that they will have to bear in order to achieve it. This situation results from the fact that the costs of acquiring duplicate resources and substitutes increase as their total value becomes known in market terms. The second reason is related to the fact that imitative companies may not understand the relationship between the resources and capabilities controlled by their competitors. Often, in this area, even corporate managers do not realize properly the value of the resources and capabilities that they have created, and which are currently one of their sources of competitive advantage. The practices and activities that have been created throughout its time are for these individuals so basic that they do not have the exact perception of their value. This is one of the reasons why they do not understand the relationship between resources and capabilities and the subsequent source of competitive advantage of their competitor, being to this extent very difficult to understand what resources and capabilities should be imitated. It is important, however, to identify and evaluate which of these resources and capabilities, alone or in combination, are effectively a source of competitive advantage, because even though managers may think that all the inherent characteristics of social complexity may be important for success of their companies, not all of them allow a competitive advantage to be held, being important to test cause-effect relationships in order to clearly identify which of these are generating this competitive advantage (Lopes da Costa and António, 2017). Moreover, it is important to frequently keep this social complexity as a source of competitive advantage resulting from the combination of various resources and capabilities. In this case, complex networks of relationship between individuals, groups, and technology can be a
powerful source of competitive advantage. The attempt to imitate, in this case, can lead to a consequent competitive disadvantage since this capability allows the company that holds it to respond almost immediately to this imitation, which places the copycat in a difficult situation. Whenever the sources of competitive advantage are widely diffused among people, locations and processes, these processes will be difficult to imitate. The third reason why a company’s resources and capabilities can be difficult to imitate is related to social complexity. When competitive advantages are linked to social complex phenomena, the ability of other firms to imitate them diminishes (Barney, 1991; Barney, 1995; Barney, 1997; Barney and Zajac, 1994; Barney and Wright, 1998; Barney, 2001). The fourth reason responsible for the difficulty to imitate a company’s resources and capabilities is related to the patents’ phenomenon, which in the case of pharmaceutical and chemical industry is particularly prominent since those companies prevent other companies from marketing the same products until the patent’s expiration date (Barney, 1991; Barney, 1995; Barney, 1997; Barney and Zajac, 1994; Barney and Wright, 1998; Barney, 2001). As we have previously noted, a company’s potential to hold a competitive advantage depends on the value, rarity and imitability of its resources and capabilities; however, so that this potential can be effectively leveraged, the enterprise must be organized in order to properly exploit those same resources and capabilities. The organizational question in the VRIO model is based on the following: “Is the company organized to exploit to the maximum the competitive potential of its resources and capabilities?”
the ideological differential between the homogeneity and the perfect resource mobility of Porter’s theory and the heterogeneity and imperfect mobility of RBV]; it is believed that none of these elements compromise the contribution that the theory has brought to strategic thinking (Acedo et al., 2006; Newbert, 2007; Armstrong and Shimizu, 2007; Lockett et al. , 2009). According to Przyczynski and Bitencourt (2011) and taking into consideration more than 50 papers reviewed on RBV, about half illustrate the advances in the theory over the last 30 years, highlighting the emergence throughout this time of theoretical extensions to RBV guided by the inclusion of parameters such as performance, superior profit, advantages, value, capacity, reputation, competition, decision, heterogeneity, purchasing power, organizational identity, administrative cognition, sense-making, synergy and knowledge. Considering the same authors, thirty percent of the same analyzed portfolio begins to cover other relevant areas and sub-areas such as strategic alliances, organizational governance, social capital, information systems (IS), knowledge management, industrial organizations (IO), human resources (HR), economics, psychology, entrepreneurship, marketing, “e- commerce”, “outsourcing” and even non-profit organizations. As a result of this analysis, a set of critiques have been discussed by several authors about the support pillars of RBV (in a general perspective) and about the exponentiality of the competitive advantage appropriation resulting from the application of the VRIO model (in a more specific perspective); moreover, three of which could not be challenged or contested by Barney due to the lack of theorization and additional empirical studies to support his defense. One of the criticisms is that the VRIO model does not explore the relationship between the different economic theories and the RBV. Lockett and Thompson (2001) were the main
protagonists of this critique, creating a deep look at the RBV’s relationship with economic theories (such as Transaction-Cost Theory and Agency Theory) explaining that the economy and the VRIO model itself in an optic of applicability, neglecting the interactions between the RBV and the “governance” (council composition, monitoring systems) suggesting that the external and internal mechanisms of “governance” should be considered as relevant resources for companies, both in terms of the agency cost’s implications, but mainly in the affectations of these factors in terms of the individual performance of the organizations. Under this reasoning, we suggest the inclusion of superior governance as a complementary concept to the model in order to understand if the company relies on a model of governance that is based on the monitoring of its resources and capabilities and that emphasizes an association between the associates (working together) and the policies and processes so that company’s shareholders and stakeholders expectations are met. Another of these criticisms is related to the exploration of the dynamic relations of resources and capabilities. It is understood that, theoretically, the approaches contemplate the resource dynamics argument, as in Collis and Montgomery (1995), which present the dynamic interaction between the three fundamental market forces (scarcity, appropriability and search) in order to determine the value of a resource or capability. But RBV remains to be determined in regard to its relationship with organizational strategy and performance in order to transform it into a dynamic (rather than static) theory based on the analysis of the dynamism of capabilities and resources. In an attempt to bridge this reference gap, Cardeal and António (2012) suggested that the "O" of the VRIO model can be transformed into the identification of dynamic resource’s packages in favor of the desired competitive advantage. Even though, in this assumption,
dynamic assumptions of the RBV mechanism to create competitive advantage. Under this line of thought, the last factor that the authors suggest adding to the model are the organizational values whose creation and constitution is dependent on the company’s resources and capabilities since afterwards goals, objectives and indicators developed are directly associated with them. In short, the theoretical and empirical development of RBV has been analyzed in numerous studies that revise it, and approach it as a theory capable of explaining organizational performance differences based on a movement mechanism characteristic of the XXI century (António, 2006; Lopes da Costa and António, 2017). As per the suggestions added above, we believe that some of the criticisms that the RBV theory has been receiving should be considered as motivating factors for the operational model adjustments developed by Barney, promoting the necessary mechanisms for the construction of a more solid model in order to determine the sustainability of the competitive advantage of any organization. In alignment with the inputs provided above, we suggest the development of a more solid model by the inclusion of the following three factors: organizational values, dynamic capabilities and superior governance. Therefore, the third, fourth and fifth parts of the article refer to the approach in order to achieve the articulation between the VRIO model and the three additional parameters.
4. Organizational Values Tamayo and Borges (2001) point out that organizations face three fundamental requirements: the need to reconcile individual and collective interests, the establishment of a structure that guarantees the achievement of the organization's goals and objectives and the relationship between the organization and the physical and social environment. According to these authors, organizational values are an exact guide to the satisfaction of these needs, as they are the adequate response to concrete problems from successful solutions in the past. These ideas had already been defended by Connor and Becker (1975) many years before, because, according to these authors, when conceptualizing values as principles or beliefs, hierarchically organized, related to desirable organizational behaviors or goals, that guide the life of the organization and/or serve individual and collective interests, we can in fact explain many of the business phenomena and provide adequate responses to concrete problems. In this way we can assume that values are part of a dialectic of maintenance and transformation of human behaviors through permanent socialization and learning, being therefore a key factor when modeling behaviors according to their interests (Schein, 2010). Tamayo and Gondim (1996) argue that organizational values have three basic aspects: (a) cognitive – represent cognitive responses to organizational problems, (b) motivational - express fundamental interests and goals and, (c) hierarchical organization - represent preferences for certain behaviors, goals or strategies in detriment of others.
themselves as the lubricant for the constitution/creation of the company’s values. Afterwards goals, objectives and respective performance indicators are created, which will then be associated with them, allowing the company to be controlled in an intelligent way, both globally and individually. The strategic formulation created on this assumption aims to achieve greater comfort, information, security and alignment (including with it, its vision and mission), which will allow the company to focus on a more stable basis to control its resources and capabilities and out of all its business structure, having the resources and capabilities as the heart of the model.
5. Dynamic Capabilities According to most of the contemporary approaches, surviving and thriving in conditions of change includes developing "dynamic capabilities" to create, extend and modify the ways of the internal structure of the organization’s life. However, it is important to emphasize that the search for change and innovation and the search for opportunities to create a change (which can assume different typologies: organizational, technological or strategic) creates tensions, since both situations are directly linked to the organizational routines and the consequent constraints they validate (Teece et al., 1997; Døving and Gooderham, 2008). If innovation is conditioned by the routines of the organization and if these routines incorporate individuals' abilities, then we can affirm that the innovation process is strongly linked to the competencies and capabilities that are present within it. In this way the competences are now recognized as strategic assets with a high level of specificity since they strongly condition the degree of organization's dynamics competitiveness, meaning that the resulting knowledge must
be considered as one of the most important (intangible) assets significant in the context of the company (Zahra et al., 2006; Di Stefano et al., 2010). In an ever-changing environment, the question is how organizations can and should renew their capabilities in order to react to the market’s competitive dynamics, being in this field of analysis, the dynamic capabilities, a crucial response to face this market competitiveness. It should be understood basically that "dynamic capability" is the ability of an organization to purposefully create, extend or modify its base of resources (Cavusgil et al., 2007; Wu, 2010). It is important, however, to distinguish clearly the difference between operational and dynamic capability. If the former is circumscribed to actions that are raised by internal challenges in a purely technical intention and are intended to promote significant changes in a short space of time which difficult a priori to generate a sustainable competitive advantage (Lecocq et al. , 2013); the latter are motivated by the need to adapt to external and environmental challenges and seek a set of activities on a continuously and modifiable basis to improve the company's status quo. Moreover, despite the unequivocal similarity that the concept may have with “routine” – which is a behavior that is learned, highly patterned and founded in part in tacit knowledge (Winter, 2003); dynamic capabilities are distinguished from these since they are related to a specific purpose (Prieto et al., 2009; Barreto, 2010) and are the organizational and strategic routines by which firms and managers achieve new resources configurations (Eisenhardt and Martin, 2000). In an integrated way and considering what has been said above, we can thus understand dynamic capabilities as something that seeks to perform in a reliable and repeatable way a set of intentional activities with specific purposes, and these can be learned and exercised both on a group and individual level. Under the same reasoning, their conceptions will always be
