Organizational Culture Can It Be a Source of Sustained Competitive Advantage

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Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?Author(s): Jay B. Barney

Source: The Academy of Management Review, Vol. 11, No. 3 (Jul., 1986), pp. 656-665Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/258317.

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Organizational Culture:Can It Be a Source ofSustained Competitive Advantage?

JAYB. BARNEYUniversity of California, Los AngelesThree attributes that a firm's culture must have to generate sustainedcompetitive advantages are isolated. Previous findings suggest thatthe cultures of some firms have these attributes; thus, these culturesare a source of such advantages. The normative implications of theanalysis are discussed. Firms that do not have the required culturescannot engage in activities that will modify their cultures and gener-ate sustained superior financial performance because their modifiedcultures typically will be neither rare nor imperfectly imitable. Firmsthat have cultures with the required attributes can obtain sustainedsuperior financial performance from their cultures.

Recent attempts to explain the sustained supe-rior financial performance of firms like IBM,Hewlett-Packard, Proctor and Gamble, and Mc-Donald's have focused on the managerial val-ues and beliefs embodied in these firms' organi-zational cultures ( Corporate Culture, 1980;Deal& Kennedy, 1982; Peters & Waterman, 1982;Tichy, 1983). These explanations suggest thatfirms with sustained superior financial perfor-mance typically are characterized by a strongset of core managerial values that define the

ways they conduct business. It is these core val-ues (about how to treat employees, customers,suppliers, and others) that foster innovativenessand flexibility in firms; when they are linked withmanagement control, they are thought to lead tosustained superior financial performance.Many of these explanations have a strong nor-mative orientation. Firms with strong cultures arepointed out as examples of excellent manage-ment (Peters & Waterman, 1982); mechanismsformodifying the cultures of other firmsto approxi-mate closely the cultures of successful firms havebeen widely discussed and applied ( CorporateCulture, 1980;Tichy, 1983;Quinn, 1980). Theseefforts are seen not only as ways of improvingemployee morale or quality of work life, but alsoas vital for improving a firm's financial perfor-mance. Recall that Peters and Waterman (1982)chose firms for their sample that not only had anexcellent reputation for management, but alsowere superior financial performers over the lasttwo decades (Peters & Waterman, 1982, pp.22-23).

Major funding for this research was provided by the Officeof Naval Research, by the US-Japan Friendship Commission,and by the Mellon Foundation. Additional support was pro-vided by the IBMCorporation; the General Electric Founda-tion; the Westinghouse Electric Corporation; Amp, Inc.; andthe Alcoa Foundation. Discussions with William G. Ouchi,William McKelvey, Richard Rumelt, Alan Wilkins, StanOrnstein, Maggi Phillips, Connie Gersick and the Organiza-tional Economics Seminar at UCLA have been invaluable inthe development of this work.Correspondence should be addressed to Jay B. Barney,Graduate School of Management, University of California,Los Angeles, CA 90024.

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This paper examines the relationship betweenorganizational culture and sustained superiorfinancial performance. The conditions underwhich a firm's culture can be a source of sus-tained competitive advantage, and thus by im-plication, a source of sustained superior finan-cial performance are examined (Hirshleifer,1980).Itis concluded that, under a relatively nar-row set of conditions, a firm's culture can be thesource of such sustained advantages. However,arguments suggest that the normative implica-tions of studies on organizational cultures arelimited significantly. While some firms may obtainsustained superior financial performance fromtheir organizational cultures, firms without suchcultures cannot expect to engage in managerialactivities which will develop cultures that, in turn,will generate such performance. Thus, the nor-mative implications of studies on organizationalcultures are limited to describing how firmsenjoying sustained superior financial perfor-mance can maintain their success, and how lesssuccessful firms can obtain average, or normal,performance. Studies of cultures cannot be usedto describe how less successful firms, by modify-ing their cultures, can come to enjoy sustainedsuperior performance.First, some of the key concepts used in thisanalysis are defined. Second, the attributes thata firm's culture must have in order to be a sourceof sustained superior performance are discussed.Third, the organizational cultures of at least somefirms are examined to see if they meet thesecriteria. Finally, whether or not firms that do notcurrently have organizational cultures that are asource of this level of performance can engagein managerial actions to develop such culturesis considered.

Culture and PerformanceFew concepts in organizational theory haveas many different and competing definitions asorganizational culture. Smircich (1983), forexample, has cited five classes of such defini-tions in her review of the literature on organiza-tional cultures. Rather than attempt to resolve

these numerous and subtle definitional conflicts,a definition that is consistent with most of theresearch about organizational culture and afirm's performance is used here (e.g., Deal &Kennedy, 1982;Peters &Waterman, 1982).In thiswork, organizational culture typically is definedas a complex set of values, beliefs, assumptions,and symbols that define the way in which a firmconducts its business. In this sense, culture haspervasive effects on a firm because a firm's cul-ture not only defines who its relevant employees,customers, suppliers, and competitors are, but italso defines how a firm will interact with thesekey actors (Louis, 1983).This conception of organi-zational culture blurs classical distinctions be-tween an organization's culture and its structureand strategy (Tichy, 1983) because these attri-butes of a firm are direct manifestations of cul-tural assumptions about what business a firm isin and how it conducts that business.While there is little consensus concerning thedefinition of organizational culture, there isbroader agreement about sustained superiorfinancial performance. In microeconomics, thefinancial performance of firms is divided intothree categories: normal performance, superiorperformance, and below normal performance.Normal economic performance is that rate ofreturn on a firm's investments just large enoughto keep a firm's assets engaged in their currentactivities (Hirshleifer, 1980). Using language fromorganization theory (McKelvey, 1982), a normalreturn is a return just large enough to ensure afirm's survival. Technically, a normal return isthe expected rate of return of a firm in perfectlycompetitive markets (Copeland &Weston, 1979).Superior financial performance is a rate of returngreater than a normal return and indicates thata firm is prospering. Below normal financial per-formance is a rate of return insufficient to keep afirm's assets engaged in their current activities.Firms that obtain this level of return for a rela-tively long period of time typically do not survive(McKelvey, 1982).Superior financial performance can be eithertemporary or sustained. Temporary superior per-

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may provide. The culture-driven success of onefirm creates an incentive for other firms to mod-ify their cultures to duplicate that success. If theculture is perfectly imitable, it cannot give anyone firm a sustained competitive advantage andthe margin reducing dynamics discussed earlierare likely to emerge. Thus, for example, if thecultural attributes isolated by Peters and Water-man (1982) are, in fact, easily transferable, as issuggested on the cover of the paperback editionof their book, then these cultural attributes can-not be a source of sustained competitive advan-tage, and their existence in a firm cannot be anexplanation of sustained superior financial per-formance.A firm that has a valuable, rare, and imper-fectly imitable culture enjoys a sustained com-petitive advantage that reflects that culture. Sucha firm will enjoy the positive economic conse-quences of its culture. Relatively few other firmswill be able to obtain these same benefits, andthose firms that currently do not enjoy them can-not engage in activities that will make it possibleto obtain them. However, the overall financialperformance of a firm with such advantages canbe reduced to normal, or even below normallevels, ifa firm fails to manage other strategicallyrelevant functions successfully (Peters & Water-man, 1982). These other functions might includeboth the financial and analytical characteristicsof a firm's business. In addition, while a firmwith a valuable, rare, and imperfectly imitableculture can obtain sustained superior financialperformance, other attributes of a firm, including,perhaps, unique geographical advantages andluck, also can lead to such performance (Barney,1985a).This analysis does not imply that firms cur-rently enjoying culturally-based advantages willalways enjoy these advantages, because a valu-able culture today could, in different economicor competitive conditions, become an economicliability. Moreover, because other attributes of afirm also can generate sustained above normalperformance, it is possible that several firms inan industry all can obtain sustained superior

financial performance based on different com-petitive advantages (Lippman & Rumelt, 1982).However, it will not be possible for a large num-ber of firms to obtain such performance on thebasis of a single type of organizational culture.Economic Profit fromOrganizational Culture

If a firm's culture, in order to be the source ofsustained competitive advantages, must be valu-able, rare, and imperfectly imitable, then thepossibility that organizational cultures with thesecharacteristics exist must be evaluated. Previ-ous research on organizational cultures suggeststhat at least some cultures of some firms havethese characteristics, and thus can be a sourceof sustained competitive advantage. This re-search also suggests that not all firms have cul-tures with these three attributes (Martin,Feldman,Hatch, & Sitkin, 1983; Tichy, 1983), and thusorganizational culture is not a source of competi-tive advantage for all firms.The Economic Value of Culture

Much of the literature on organizational cul-ture and the performance of a firm can be inter-preted as suggesting that culture can have sig-nificant positive economic value for a firm.Certainorganizational cultures apparently enable firmsto do and be things for employees, customers,suppliers, and others that could not be done, orcould not be done as well, by firms without thesecultures (Deal & Kennedy, 1982; Ouchi, 1981).Many of these activities have shown a positiveeconomic impact on firms.Peters and Waterman (1982) give perhaps thebroadest description of the economic value ofcertain organizational cultures. Each of theireight characteristics of an excellent companyreflects strong values and beliefs in organiza-tional cultures. Thus, for example, firms that aresimultaneously loosely- and tightly-coupledtypically have an organizational culture with astrong set of core values [one of which encour-ages creativity and innovativeness (Peters &

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Waterman, 1982, p. 319)]. Firms without such aculture may attempt to develop the attributes ofa tight-loose system, but such attempts gener-ally are not as successful because the culture ofthe organization neither supports nor values suchbehavior. In a similar vein, firms that are suc-cessful at obtaining productivity through theirpeople generally have an organizational culturethat supports and values the worth of the em-ployee. Firms without such a supportive culturegenerally do not succeed in maximizing theirproductivity through their people. Firms that stayclose to their customers typically are obsessedwith customer service and satisfaction. Thisobsession, once again, reflects some of the corevalues of an organization's culture.Each of these cultural traits can result in posi-tive economic gains for firms. Both Peters andWaterman (1982) and Porter (1980) note thatstaying close to one's customer can result intimely market information, joint product develop-ment activities, and intense brand loyalties.These benefits result in high sales and increasedmargins, and thus have a direct positive finan-cial impact on a firm. Innovativeness, productiv-ity through people, and the other cultural factorscited by Peters and Waterman (1982) also havepositive economic consequences.Simply because the cultures of certain firmsenable them to engage in activities with positiveeconomic impact does not imply that all organi-zational cultures have such effects. Indeed, im-plicit in much of the organization cultures litera-ture is the notion that an organization's culturecan significantly reduce a firm's effectiveness,disabling the firm from perceiving all its competi-tive/operational options and preventing it fromchoosing options consistent with competitive/operational necessities (Crozier, 1964; Porter,1980;Riley, 1983; Tichy, 1983).Valuable and Rare Cultures

That a firm's culture may enable it to behavein ways with positive economic impact does notnecessarily imply that a firm can obtain sustain-

able competitive advantages from its culture. Inaddition, these cultural attributes must be rare.The frequency with which valuable organiza-tional cultures occur among firms is ultimatelyan empirical question. Previous research hasindicated that some organizational cultures, farfrom being rare, are likely to be quite commonamong any given set of firms (DiMaggio &Powell,1983;Spender, 1983). Indeed, some have arguedthat although cultures may appear to be uniqueor specific to a given firm, they sometimes actu-ally reflect an underlying commonality andfunction, and thus are not rare at all (Martin etal., 1983).Despite these findings, it must be admitted thatsome organizational cultures might exist in a rel-atively small number of firms, and thus hold thepotential for generating sustained superior finan-cial performance. Numerous authors have notedthat firms are idiosyncratic social inventions,reflecting the unique personalities and experi-ences of those who work there (Barley, 1983;Polanyi, 1958). Firms are also historically bound,partially reflecting the unique circumstances oftheir founding (Pettigrew, 1979; Selznick, 1957),the unique personalities of their founders (Schein,1983; Zucker, 1977), and the unique circum-stances of their growth (Chamberlin, 1933;Clark,1970, 1972). Often, these unique experiences of afirm are reflected in a firm's culture. Rare experi-ences can lead to a rare culture. Ifthese culturesare also valuable, then they hold the potentialfor generating sustained competitive advan-tages.The assertion that the unique personalities andhistory of a firm can lead to rare cultures is con-sistent with the contingency view of culture dis-cussed by Smircich (1983). However, this doesnot necessarily imply that the cultures of thesefirms will be unique as well (Martin et al., 1983).Different organizational experiences may leadto similar cultural outcomes. Even among firmswith unique histories, cultures may not be rare,and thus without potential for generating sus-tained superior financial performance.

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The Imitability of CultureFor a firm's culture to be a source of sustainedcompetitive advantage, it must not only be valu-able and rare, it also must be imperfectly imita-ble. Without imperfect imitability, any competi-

tive advantage that a valuable and rare culturemight give will create strong incentives for imita-tion.There is significant evidence which suggeststhat valuable and rare organizational culturesoften may be very difficult, if not impossible, toimitate. First, it may not be possible for individu-als observing a culture (let alone those experi-encing a culture) to describe what about a parti-cular organization's culture adds value to a firm(Lippman & Rumelt, 1982). Values, symbols,beliefs, and the like are notoriously difficult todescribe and categorize (Barley, 1983;Gregory,1983). Moreover, the relationship between thesehighly subjective organizational characteristicsand a firm's competitive advantages also defiesrigorous description and inspection. The valu-able and rare aspects of an organization's cul-ture often become part of the unspoken, unper-ceived common sense of the firm. Many haveargued that culture is a powerful force in explain-ing the behavior of individuals and groups withinorganizations precisely because it is unspokenand taken for granted (Berger &Luckman, 1967;Goffman, 1959; Polanyi, 1958). If those attempt-ing to observe a culture to imitate it cannotdescribe what is valuable, those aspects of thatculture cannot be consciously imitated [althoughfirms might accidentally successfully imitate aculture they cannot describe (Lippman & Rumelt,1982;McKelvey, 1982)].Even if valuable and rare organizational cul-tures can be described by potential imitators, asis apparently sometimes possible (e.g., Ouchi,1981;Peters & Waterman, 1982), it still may notbe possible to imitate these cultures. The charac-teristics of organizational culture that may makeit rare may also make it difficult to imitate. Valu-able organizational cultures may be intrinsicallybound up with a firm's unique history and heri-

tage-and history defies easy imitation. This con-ception of culture is explored in Clark's (1970,1972) notion of an organizational saga, that is,the embodiment of the values, symbols, andbeliefs of a firm as expressed through its uniquehistory. Selznick (1957), Stinchcombe (1965), andZucker (1977) observed that the constellation ofpersistent symbols, beliefs, and values that char-acterize a firm's culture at least partially reflectthe unique early history of the firm, includingthe pattern-setting influence of company found-ers. A firm with a history significantly differentfrom that of a firm whose culture it would like toimitate may find an unbridgeable barrier toimitation. If this firm's culture is also valuableand rare, then it may enjoy a sustainable com-petitive advantage.Finally, even if the economically relevantaspects of a firm's culture can be described, andeven if they are not historically specific in char-acter, conscious and successful cultural imita-tion still may be imperfect. The components oforganizational culture (including values, sym-bols, and beliefs) are as difficult to purposefullychange as they are to describe (Smircich, 1983).The existence of multiple, possibly contradictorycultures within the same firm makes the man-agement of culture all the more problematic(Gregory, 1983). Indeed, the data show thatattempts to modify such subtle and interdepen-dent aspects of organizations through organiza-tional development methods have met with mixedresults at best (Porras &Berg, 1978a,1978b).Whilenumerous authors have described ways in whichan organization's culture can be managed (Peters,1978;Quinn, 1980;Tichy, 1983), it must be admit-ted that at least some organizational culturesresist planned change. If a potential imitator can-not manage the change of its own culture toapproximate the culture of a firmwith a culturally-based strategic advantage, then the latter maybe safe from imitation and its strategic advan-tage may be sustained.It has been argued that the cultures of somefirms may be immune from planned imitation. Ifthese cultures are valuable and rare, then they

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can be a source of sustained strategic advantage.This is not to suggest that a firm's culture staysthe same since it certainly does evolve over time(Zucker, 1977; Selznick, 1957). This also does notsuggest that all attributes of all organizationalcultures are imperfectly imitable. Rather, previ-ous findings indicate that some organizationalcultures may be valuable, rare, and imperfectlyimitable, and thus the source of sustained supe-rior financial performance.

Normative Implications ofCulture ResearchFirms Without Valuable Cultures

For firms without valuable cultures, the nor-mative implications of these analyses are some-what limiting. Such firms cannot expect to obtaineven temporary competitive advantages on thebasis of their organizational culture. However,because a firm's culture can have such a signifi-cant impact on the ways a firm conducts itsbusiness, these firms often are forced to engagein activities that modify their culture to include atleast some economically valuable attributes.Thus, a firm facing a competitive environmentthat requires low-cost production strategies witha culture that does not emphasize managerialefficiency often will engage in actions to try todevelop the value of efficiency among its manag-ers.Suppose, through significant managerial ef-forts expended over time, a firm is able to mod-ify its culture. Could this modified culture, then,be a source of sustained competitive advantage?Given our previous analysis, this seems unlikelyfor at least two reasons. First, if this firm is imitat-ing the valuable culture of a competing firm,then even if this firm is successful at modifyingits culture, that modified culture will only enableit to do the things that the firm it is imitatingalready does. Such successful imitation does notgive a firm a competitive advantage, sustainedor otherwise, in the area of organizational cul-ture. Rather, it suggests that the valuable cul-

ture in question is less rare than it was beforeimitation, which in turn implies the likely devel-opment of the competitive dynamics suggestedpreviously [i.e., reduced margins due to com-petitive entry (Hirshleifer, 1980)]. Thus, the bestreturn that a firm can expect from imitating thevaluable culture of a competing firm is an ap-proximately normal return.

The second reason is that if one firm can con-sciously manage its culture to modify it to en-hance its value, then other firms also are likelyto modify their cultures in this manner. Returnsto culture modifications depend not only onimproving the economic value of a firm'sculture,but also on the ability of other firms to makemodifications in their cultures that result in sim-ilar cultures. If a large number of firms can suc-cessfully manage this change, then these cul-ture changes will not result in any one firmenjoying a culture-based competitive advantage.But, if only a few firms are able to modify theircultures appropriately, then these firms can enjoya sustainable competitive advantage.There are at least two reasons why modifyinga firm's culture in this manner might be possiblefor only a small number of firms. On the onehand, firms that are able to successfully modifythe economic value of their cultures may enjoy asuperior understanding of the skills necessary toaccomplish this change. That is, they may havesuperior culture management skills. Such skills,if they are understood by only a few firms (i.e., ifthey are rare) and if those firms that do not havethese skills cannot obtain them (i.e., if they areimperfectly imitable), can enable some firms tomake culture changes while other firms cannot.On the other hand, some organizational cul-tures may be more susceptible to change thanothers. Young and small firms, for example, oftenhave more flexible organizational cultures thanolder and larger firms (Tichy, 1983). If thesechangeable cultures are characteristic of only asmall number of competing firms (i.e., rare), andif firms without changeable cultures cannotdevelop change-facilitating attributes (i.e., thesechangeable cultures are imperfectly imitable),

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then firms with these types of cultures can obtainsustainable advantages. However, if a largenumber of competing firms have equally flexiblecultures, or if firms without such cultures canengage in activities to increase the changeabil-ity of their cultures, then these cultural traits can-not be a source of sustained competitive ad-vantage.There is a paradox central to this discussion.For an organization's culture to be the source ofsustained superior performance, it must be valu-able, rare, and imperfectly imitable. To obtainsustained superior performance from modifyingits culture, a firmmust have either valuable, rare,and imperfectly imitable culture managementskills, or it must have a valuable, that is, flexible,rare, and imperfectly imitable culture. Firmseither have these attributes, in which case theyendow a firm with sustained superior perfor-mance, or they do not have them. If they do nothave these attributes, but are successful in acquir-ing them, then these attributes are not imper-fectly imitable, and thus cannot be the source ofsustained superior performance. If it was possi-ble to tell a large number of firms how to modifytheir cultures to include economically valuableattributes, then culture would cease to give anyone firm a competitive advantage, and couldnot be the source of sustained superior perfor-mance. Thus, the normative implications of cul-ture research are limited to assisting firms thatalready possess valuable, rare, and imperfectlyimitable cultures and culture management skillsin recognizing and nurturing these organiza-tional characteristics to obtain sustained abovenormal performance. Such research, and theconsulting it implies, cannot be used to help firmswithout valuable, rare, or imperfectly imitablecultures or culture management skills to obtainsuch performance, for such efforts are, in princi-ple, imitable.Firms with Valuable Cultures

From our brief review of findings on organiza-tional culture, at least some firms have valuable,rare, and imperfectly imitable cultures. For such

firms, the normative implications of our argu-ments are clear. These firms should attempt tounderstand what it is about their cultures thatgives them competitive advantages, and then tonurture and develop these cultural attributes,thereby increasing the likelihood that their com-petitive advantage will not be dissipated throughmismanagement (Lenz, 1980; Stevenson, 1976).

From another point of view, the injunction thatfirms should study their culture to nurture itsstrengths is a reaffirmation of the now popularnotion that firms should stick to their knitting(Peters & Waterman, 1982). The analysis sug-gests that this recommendation only applies tothose firms that have valuable, rare, and imper-fectly imitable cultures. For firms without valu-able cultures, sticking to what they know bestcannot generate even normal economic returns.Such activities will jeopardize a firm's survival.Even if firms have valuable cultures, if those cul-tures are not rare or imperfectly imitable, theycannot be expected to lead to sustained superiorperformance. Only if a firm's culture is valuable,rare, and imperfectly imitable will sticking toone's knitting generate sustained superior finan-cial performance.

ConclusionA firm's culture can be a source of sustainable

competitive advantage if that culture is valuable,rare, and imperfectly imitable. The sustainedsuperior performance of firms like IBM, Hewlett-Packard, Proctor and Gamble, and McDonald'smay be, at least partly, a reflection of theirorganizational cultures (Peters & Waterman,1982).Firms with valuable, rare, and imperfectlyimitable cultures should nurture these cultures.Firms without valuable, rare, or imperfectly imi-table cultures cannot expect their cultures to bethe source of sustained competitive advantages.Nor can such firms expect that efforts to changetheir cultures, though they may successfullyincorporate new valuable attributes, will gener-ate sustained superior performance. For suchefforts are typically imitable, and thus, at best,only the source of temporary superior perfor-

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mance. These firms must look elsewhere if theyare to find ways to generate expected sustainedsuperior financial performance.The analysis presented here has importantimplications for current debates concerning theability to manage a firm's culture to improve fi-nancial performance (Smircich, 1983; Tichy,1983). This reasoning suggests that if firms canmodify their cultures to improve their financialperformance, then such modifications can, in thelong run, only generate normal economic returns.For if one firm is able to modify its culture, then itis likely that others can as well. In this case, theadvantages associated with this culture areimitable, and thus only a source of normal eco-nomic performance. Only when it is not possibleto manage a firm's culture in a planned waydoes that culture have the potential of generat-ing expected sustained superior financial perfor-mance. Thus, those who argue that culture issimply another in a series of manipulatable toolsavailable to managers for the implementation of

business strategies (Schwartz & Davis, 1981;Tichy, 1983) deny the possibility that culture canbe a source of sustained superior performance,while those who argue that culture is not readilymanipulatable (Smircich, 1983) uphold the possi-bility that culture can be a source of sustainedsuperior financial performance for some firms.A firm's culture is one of several attributes thatdifferentiate firms one from another (Alchian,1950; Alchian & Demsetz, 1972). It is in these sus-tainable differences between firms that explana-tions of sustained superior financial performancemust be sought (Chamberlin, 1933). As Demsetz(1973, p. 2) once observed, it is often not easy todescribe what it is about some firms that makesthem more successful than others. Preciselybecause an organization's culture is hard todescribe; because the common sense of manag-ers is taken for granted; and because even if theculture can be described, it is difficult to change;a firm's culture can hold promise for sustainedsuperior financial performance for some firms.

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Jay B. Barney is Assistant Professor of Management inthe Graduate School of Management, University ofCalifornia, Los Angeles.

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Organizational Culture Can It Be a Source of Sustained Competitive Advantage

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