Critical Analysis of Corporate Culture and Corporate Social Responsibility as Sources of Global Competitive Advantage in the Airline Industry

Bachelor Thesis , 2015 , 76 Pages , Grade: 1,5

Business economics - Business Management, Corporate Governance

Since globalization started companies have been looking for ways to compete successfully on a global scale. Trends in the global environment, such as worldwide sourcing models requiring the management of cultural differences, as well as rapid communication and technology innovation, are still challenging for many industries.

The airline industry being itself a reason for an increasingly borderless world also faces these global trends and fierce competition. Numerous factors have caused a downward trend of profits in this industry. The first factor has been the deregulation process. Under regulation airlines could not compete on price. Therefore, differentiation was only possible by customer service or on-board entertainment. With the start of de-regulation most customers could not find much difference between the offerings of major airlines and became indifferent about which airline to choose.

Airline tickets started to become a kind of commodity goods. So, although deregulation was thought to lead to lower entry barriers, decreasing concentration and competitive prices, practice turned out to be different: expansion and alliance strategies of leading airlines have increased concentration. Besides liberalization, other factors have been the economic slowdown in many countries, terrorism, and rising costs for fuel, labour, maintenance, and security. Also rising customer expectations e.g. regarding convenience, entertainment, innovation, and value for money require the airline industry to change dynamically. Moreover, airlines face demands for CSR and sustainable travel, including pollution control and reduction of noise and CO2 emissions.

Competition from low-cost carriers also gains in importance since their share of global capacity increased to more than 25 % in 2013. So, even if demand for air transportation has grown by an average of 9 % per year since 1960, and global airline revenues reached a new high of US$708 billion in 2013, airlines need to find ways to stand global competition as their environment, as well as economic and social frameworks potentially endanger profits and economic survival.

Table of Contents

Table of Contents

List of Abbreviations and Symbols

List of Figures

List of Tables

1 Introduction
1.1 Terminology
1.2 Problem Statement and Objectives
1.3 Course of Investigation

2 Theoretical Foundation
2.1 Competitive Strategy
2.1.1 Generic Strategies
2.1.2 Competitive Advantage
2.2 Resource-based View
2.2.1 History and Underlying Assumptions
2.2.2 VRIO Model
2.2.2.1 Concept Development
2.2.2.2 Question of Value and Rarity
2.2.2.3 Question of Imitability and Organization
2.2.2.4 Resources and Competitive Advantage
2.3 Corporate Culture
2.4 CSR
2.4.1 History
2.4.2 Pyramid of CSR
2.5 Critical Appraisal

3 Practical Implementation in the Airline Industry
3.1 Strategy
3.1.1 Strategic Purpose
3.1.2 SWOT Internal and External Analysis
3.1.2.1 Strategic Implications
3.1.2.2 Strengths
3.1.2.3 Weaknesses
3.1.2.4 Opportunities
3.1.2.5 Threats
3.2 Corporate Culture
3.2.1 Cultural Values and Aspects
3.2.2 Source of Competitive Advantage
3.3 CSR
3.3.1 Initiatives and Dimensions
3.3.2 Source of Competitive Advantage
3.4 Critical Appraisal

4 Critical Analysis and Recommendation
4.1 Effects of Corporate Culture
4.2 Management of Corporate Culture
4.3 Effects of CSR
4.3.1 Image and Reputation
4.3.2 Stakeholder Management
4.3.3 Financial Performance
4.4 Management of CSR

5 Conclusion and Prospects

Reference List

List of Abbreviations and Symbols

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List of Figures

Figure 1: Strategy as the Link between Firm and Environment

Figure 2: Generic Strategies

Figure 3: Models of Competitive Advantage

Figure 4: Links between Resources and Competitive Advantage

Figure 5: VRIO Model

Figure 6: Requirements of Resources for Sustainable Competitive Advantage

Figure 7: Levels of Corporate Culture

Figure 8: Pyramid of Corporate Social Responsibility

Figure 9: Strategic Management Process

Figure 10: Recommendations for Sustainable Competitive Advantage

Figure 11: Corporate Social Responsibility and Competitiveness

List of Tables

Table 1: Features of Generic Strategies

Table 2: VRIO Questions and Competitive Consequences

Table 3: Corporate Social Responsibility and Stakeholders

Table 4: Corporate Social Responsibility and Financial Performance

1 Introduction

1.1 Terminology

Basic terms are defined first in order to introduce the topic of this thesis before analysing it in more detail.

Corporate Culture: The term corporate culture (CC) is often used in literature and corporations but rarely defined in a clear manner. As a concept of anthropology and sociology it explains how individuals are bound into collectives (cp. Fiol, 1991, p. 194). CC can be seen as a “collection of beliefs, expectations, and values learned and shared by a corporation’s members and transmitted from one generation of employees to another” (Schein, 1999, p. 12). More precisely, companies are not only run by explicit rules but even more implicitly. The way business is done is expressed in management style, behaviour towards colleagues and customers, common language and rituals, self-perception, and obligatory norms and values (cp. Karmasin & Karmasin, 1997, p. 159; Luthans, 2005, pp. 110–111). So, CC is closely linked to the concepts of corporate identity, corporate behaviour, corporate design, corporate communication, and corporate philosophy. Companies are regarded as organizations and social systems which use culture as an instrument of strategic management to ensure efficiency and stability of the system and cooperation of members (cp. Karmasin & Karmasin, 1997, pp. 160–161). Researchers often use the term organizational culture because the idea refers to organizational theory. In this thesis, organizational culture and CC are used as synonyms.

Corporate Social Responsibility: Literature does not suggest an universal definition of corporate social responsibility (CSR) (cp. Belu & Manescu, 2013, p. 2751; Boulouta & Pitelis, 2014, p. 350). Nevertheless, CSR is widely regarded as firms’ responsibility to include environmental, social, and governance aspects in business models which go beyond legal minimum requirements (cp. Belu & Manescu, 2013, p. 2751). The notion of CSR is often mixed with the terms ethics, corporate citizenship, or sustainability. Therefore, the scope of CSR is defined in contrast to other concepts in the following. While ethics covers the behaviour of people in organizations, CSR deals with the impact of business on society (cp. Fischer, 2004, p. 392). So, ethics is one part of CSR. Corporate citizenship can be viewed as a component of CSR, balancing the external perspective of philanthropy and the internal perspective of companies’ self-interest for reputation and long-term profits (cp. Carroll, 1991, p. 42). In a broader perspective, corporate citizenship is also used as a synonym for CSR, but then causing scepticism about both concepts as temporary business fashion (cp. Matten & Crane, 2005, pp. 168–169). Sustainability is included as an element of CSR in this thesis.

In an economic and management context, CSR is regarded as a “multidimensional concept” (Belu & Manescu, 2013, p. 2752), “proactive strategic choice” (Perrault & Rieflin, 2014, p. 52), “strategic tool ... to differentiate the firm from the view of the customer” (Kiessling, Isaksson, & Yasar, 2015), and a “multi-quantifiable tool to represent responsible business activities, with direct links to annual accounting reports and performance indicators” (Hack, Kenyon, & Wood, 2014, p. 46). Including objectives of CSR at macro-level, the World Business Council for Sustainable Development has defined CSR comprehensively as “a continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large” (Holme & Watts, 2000, p.8). Further concepts and theories of CSR follow in chapter 2.4.

Global competitive advantage: For many years strategic researchers and managers have been trying to understand sources of competitive advantage (CA) (cp. Barney, 1995, p.49). Porter (1985) established a widely-used theory describing competitive strategies and advantages. Companies have a CA over rivals when their profitability is persistently higher than the average profitability of others in the same industry, or when they have the potential to do so (cp. Grant, 2010, p. 211; Porter, 1985, p. 1). This thesis deals with global CA because the airline industry used as example for analysis has a global scope, thus global competitors, and needs to find a global competitive edge. In order to establish a CA, companies need to find out what they can do better than and distinguishes them from competition (cp. Grant, 2010, p. 125). Frameworks and strategies to identify and develop global CA are shown in the course of this thesis.

Airline industry: As part of the service sector, airlines are important players in the tourism and transportation industry and operate in a highly competitive environment (cp. Chang, Chen, Hsu, & Hu, 2015, p. 7763). In this thesis, the focus lies on passenger carriers; cargo and space travel are excluded from the view. Both premium and low-cost carriers are considered as part of the airline industry. The industry is regarded as global with no regional focus of analysis. Customers are leisure and business travellers, main suppliers are Boeing and Airbus. As industry structure drives competition and profitability, and as the airline industry is characterized by intense competitive forces, it is hard for airlines to earn attractive returns on investment (cp. Porter, 2008, p. 80).

1.2 Problem Statement and Objectives

Since globalization started companies have been looking for ways to compete successfully on a global scale. Trends in the global environment, such as worldwide sourcing models requiring the management of cultural differences, as well as rapid communication and technology innovation, are still challenging for many industries (cp. Yip, 2003, pp.1–3). The airline industry being itself a reason for an increasingly borderless world also faces these global trends and fierce competition. Numerous factors have caused a downward trend of profits in this industry. The first factor has been the deregulation process. Under regulation airlines could not compete on price. Therefore, differentiation was only possible by customer service or on-board entertainment. With the start of deregulation most customers could not find much difference between the offerings of major airlines and became indifferent about which airline to choose. Airline tickets started to become a kind of commodity goods. So, although deregulation was thought to lead to lower entry barriers, decreasing concentration and competitive prices, practice turned out to be different: expansion and alliance strategies^[1] of leading airlines have increased concentration (cp. Grant, 2010, p. 82). Besides liberalization, other factors have been the economic slowdown in many countries, terrorism, and rising costs for fuel, labour, maintenance, and security (cp. Domanico, 2007, p. 203). Also rising customer expectations e.g. regarding convenience, entertainment, innovation, and value for money require the airline industry to change dynamically (cp. PwC, 2014, p. 8). Moreover, airlines face demands for CSR and sustainable travel, including pollution control and reduction of noise and CO2 emissions (cp. Chang et al., 2015, p. 7762; Lynes & Dredge, 2006, p. 129). Competition from low-cost carriers also gains in importance since their share of global capacity increased to more than 25 % in 2013 (cp. PwC, 2014, p. 3). So, even if demand for air transportation has grown by an average of 9 % per year since 1960, and global airline revenues reached a new high of US$708 billion in 2013, airlines need to find ways to stand global competition as their environment, as well as economic and social frameworks potentially endanger profits and economic survival (cp. Lynes & Dredge, 2006, p.122; PwC, 2014, p. 2).

Given the general globalization trends and industry-specific developments, companies need to define a strategy which allows them to distinguish from competition and finally to outperform rivals. Therefore, a clear and distinctive CA must be detected and sustained. Strategy researchers have long started to look beyond industrial economics-based concepts of strategy by considering “soft” aspects of an organization like CC or CSR as sources of CA (cp. Barney, 1986; Chan, Shaffer, & Snape, 2004; Petrick, Scherer, Brodzinski, Quinn, & Ainina, 1999; Porter & Kramer, 2006; Prahalad & Hamel, 1990; Stroh & Caligiuri, 1998; Woodruff, 1997).

Especially the topic of social responsibility of businesses has been critically discussed in managerial and scientific literature, even before the financial and environmental crises of the past few years (cp. K. Mueller, Hattrup, Spiess, & Lin-Hi, 2012, p. 1186). The increasing interest in CSR and sustainability is also visible in the growing number of firms’ CSR or sustainability reports. In 2013, 71% of the 100 largest companies by revenue in 41 countries participated in sustainability reporting (cp. KPMG, 2013, p. 11). The percentage of companies including CSR information in annual financial reports was 51% in 2012, up from 9% in 2008; so this kind of reporting seems to have become “standard global practice” (ibid.). Because of their significant environmental and social impacts, airlines are observed critically by the public and scholars regarding CSR strategies (cp. Chang et al., 2015, p. 7763). So, also in the transport sector CSR and sustainability reporting has grown from 39% in 2008 to 69% in 2013 (cp. KPMG, 2013, p. 27).

So, due to the increasing pressure of competition in global markets, companies try to implement strategies including a CA. In this context, notions of CC and CSR are increasingly considered in literature and business practice. Moreover, analysing sources of CA becomes more important because firms need to satisfy claims of numerous stakeholders (cp. Dobson, 1990, p. 481). These tend to be conflicting but one common interest of all stakeholders is the firm’s survival which requires profits in the long-run. Hence, in order to survive in the competitive environment and to ensure economic performance, companies have to find and defend their CA. Recently, more and more firms have therefore put effort into building and sustaining CC or CSR (cp. Barcelos et al., 2015, p. 429; Martínez, Pérez, & Rodríguez del Bosque, 2014, p. 48). This effort is costly in terms of time, money, and opportunity costs. Companies caring for their CC or investing in CSR initiatives could use this time and money for core business activities instead. Thus, caring for CC and CSR seems to increase costs at first view. The question arises whether this effort is worth making. Moreover, it is questionable whether and how CC and CSR can become a CA.

The objective of this thesis is to verify CC and CSR as sources of global CA. In greater detail, it should be investigated how these aspects can turn into a CA. Therefore, this thesis aims to analyse what needs to be considered to successfully manage CC and CSR activities. Chances and risks and their impact on businesses are evaluated and recommendations for management given. In this context, it is also identified whether special characteristics need to be taken into account for the global airline industry.

1.3 Course of Investigation

This thesis starts with an introduction on the topic in question by giving an overview of the terminology used, the current situation and a definition of the problem. Then, the theoretical background provides a basis for analysis. Theories of competitive strategy and resource-based models are used. Porter’s generic strategies and concepts of CA are chosen because these seem to be the most prevalent approaches to the topic of this thesis. Further, they might form a basis for creating a general understanding of companies’ strategic decisions. Strategy formulation and strategic competitiveness can either be examined from the market-based view or the resource-based view. As this thesis aims to analyse CC and CSR as potential sources of global CA, the resource-based view is taken. Cultural aspects and attitudes towards extended business responsibilities are heterogeneous and not mobile across firms, and thus cannot reflect the assumptions of the market-based view. Finally, theoretical aspects of CC and CSR, as well as a critical appraisal of theories and models complete chapter two.

In order to put these general theories into practice, chapter three looks into the implementation of CA with regard to CC and CSR in the airline industry. This industry is chosen for analysis because it is one of the most competitive sectors worldwide, highly volatile, and so dependent on a distinctive CA. As airlines’ success is built on and relies on trust and security, concepts of CC and CSR fit in this area. In this context, Emirates airline is used as a concrete example for analysis because it can be viewed as a best practice airline. Compared to European and US airlines, Middle East Gulf carriers like Emirates are currently changing industry structures and standards. They have grown rapidly, gained market shares, and due to high investments in modern fleets and new airports have become internationally known for higher standards of service. In greater detail, Emirates’ strategy is examined and insight provided into the airline’s CC and CSR initiatives. These are taken as a basis for analysing the potential of generating a global CA in practice.

In chapter four the effects of CC and CSR are critically discussed and implications for practice derived. For these purposes, general academic findings, mostly from scientific journals, are used and compared. So, this thesis is based on literature analysis. Literature and references are managed by the program Mendeley. Instead of separately describing the economic, social, and legal framework of the topic in question, respective details are integrated in the correspondent parts of this work (see chapters 1.2, 3.1.2.5, 3.3.1). Moreover, in order to enable the critical analysis of economic rationales for engaging in CSR and CC, several criteria are developed. These comprise internal outcomes concerning employee engagement and performance, external outcomes regarding image, reputation, and stakeholder relations, as well as corporate financial performance (see chapters 4.1, 4.3). Finally, the thesis closes with a conclusion and future prospects.

2 Theoretical Foundation

2.1 Competitive Strategy

2.1.1 Generic Strategies

In order to understand competitive strategies, the term strategy itself needs to be examined first. Strategies link a firm with its external environment. A firm is characterized by its goals and values, resources and capabilities, and organizational structure and systems. Political, economic, social, and technological factors affecting a firm’s decisions and performance shape the external environment. The core of the environment is the firm’s industry comprising relationships with customers, competitors, and suppliers (cp. Grant, 2010, p. 12).

The Industry Environment

Figure 1: Strategy as the Link between Firm and Environment (cp. Grant, 2010, p. 12)

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The following figure visualizes the concept of strategy as the link between company and external environment.

Business strategies define the way a firm uses its resources in the environment in order to achieve long-term goals (cp. Grant, 2010, p. 12). They can be viewed as a company’s “theory about how to gain competitive advantage” (Barney & Hesterly, 2012, p. 22).

In general, the choice of competitive strategy depends on industry attractiveness (“Five Forces”) and competitive position (“Generic Strategies”). Porter’s model of generic strategies covers the main strategic options of a company: performing primary and secondary value chain activities either at a lower cost or in a way that leads to differentiation. In order to achieve superior performance in an industry there are three generic strategies: cost leadership, differentiation, and focus (cp. Bharadwaj, Varadarajan, & Fahy, 1993, p.84; Porter, 1985, pp. 11–12).

The figure below gives an overview of strategic options.

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Figure 2: Generic Strategies (based on Porter, 1985, p. 12)

With a cost leadership strategy, companies serve a broad scope and aim to become the low-cost producer in the respective industry by providing standard, no-frills products or services. When choosing a differentiation strategy, companies offer unique benefits to buyers and so can demand premium prices which exceed the cost of providing the differentiation. It is not about striving for uniqueness for the sake of being different. It rather requires the understanding of customers and one’s own and the competitors’ offerings as the differentiation must create value for customers, i.e. better satisfy customers’ needs or reduce customers’ costs. Hence, the differentiation must be generated from the buyers’ perspective to convince them of the superiority of the product or service compared to competitors to justify premium prices. A focus strategy applies to a narrow competitive scope within an industry by targeting a segment or group of segments only. This can be done either as cost focus or differentiation focus; both ways companies exclusively address their target segments. A non-recommended strategic option is “stuck in the middle”, meaning engaging in every generic strategy but failing to achieve any of them. There, companies cannot gain a CA and generally perform below-average (cp. Grant, 2010, pp.222–223; Porter, 1985, pp. 12–17).

More detailed features of both cost leadership and differentiation strategy can be found in the following table.

Table 1: Features of Generic Strategies (based on Grant, 2010, p. 223)

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2.1.2 Competitive Advantage

As generic strategy itself does not lead to above-average performance, the purpose of competitive strategy is to attain a sustainable competitive advantage (SCA) and so improving the company’s long-term superior performance (cp. Bharadwaj et al., 1993, p.83). CA can be seen as “the ability of the firm to outperform rivals on the primary performance goal: profitability” (Grant, 2010, p. 211). Barney (1991) uses a different definition, stating that a firm has a CA “when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors” (Barney, 1991, p. 102). Regarding the notion of SCA, authors are in agreement. Sustainability is realized when the CA resists competitive behaviour and industry changes, i.e. when competitors are unable to imitate or duplicate the benefits of successful strategies (cp. Barney, 1991, p. 102; Grant, 2010, pp. 224–225; Porter, 1985, p. 20).

Generally, a company’s competitiveness and the markets in which it competes need to be examined and combined with the value it intends to provide customers with, e.g. low cost or extensive customer service (cp. Bartmess & Cerny, 1993, p. 90). A firm can make use of the value chain analysis to identify the business activities which can bring an advantage over rivals in delivering this value (cp. Porter, 1985, pp. 36–39). But identifying and building CA can also require “creativity and luck and is therefore difficult to analyse systematically” (Grant, 2010, p. 224). The next chapter comprises a comprehensive model which allows this systematic analysis of CA.

2.2 Resource-based View

2.2.1 History and Underlying Assumptions

Research on sources of CA has concentrated either on an outside-in-perspective, describing opportunities and threats as environmental conditions leading to above-average performance (cp. Porter, 1985); or used an inside-out-perspective by analysing a firm’s resources as strengths and weaknesses (cp. Barney, 1991; Penrose, 1959; Wernerfelt, 1984). These contrary views are summarized in the figure below.

Figure 3: Models of Competitive Advantage (based on Barney, 1991, p. 100)

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Penrose (1959) provided the foundations for the resource-based view (RBV) by introducing the idea of looking at firms as a collection of resources which are used for the production of goods and services, profit making, and firm expansion (cp. Penrose, 1959). The first strategy researcher who further developed this understanding was Wernerfelt. He gave the RBV its name by presenting the notion of analysing a firm from the resource rather than product side (cp. Wernerfelt, 1984). This concept was subsequently refined by Barney who is viewed as the leading author about the RBV theory today.^[2]

So, dating back to the 1980s the RBV is not a new theory. But the analysis of resources and capabilities as sources of SCA can still help to explain why some firms consistently outperform others (cp. Barney, 2001, p. 649). The terms (organizational) resource and capability need to be defined first. Resources are all input factors (tangible and intangible, human and nonhuman) into the production process of goods and services which are owned or controlled by a firm (cp. Lado & Wilson, 1994, p. 701). These include all assets, organizational processes, attributes, information, knowledge, etc. which might enable a firm to find and implement strategies improving its efficiency and effectiveness (cp. Barney, 1991, p. 101). Organizational resources comprise a company’s history, relationships, trust, and organizational culture (cp. Barney, 1995, p. 50). Organizational capabilities represent “a firm’s capacity to deploy resources for a desired end result” (Grant, 2010, p. 131). Literature uses the terms capability and core competence synonymously. Thus, core competencies are capabilities which are essential for a company’s strategy and performance (cp. Prahalad & Hamel, 1990). In order to analyse sources of CA, the capability must be viewed relatively to other firms (cp. Grant, 2010, p. 131). All in all, a company needs to formulate and design a strategy which makes the most effective use of resources and organizational capabilities, considers industry key success factors^[3] and finally leads to CA (cp. Grant, 1991, p. 129). These links are shown in the figure below.

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Figure 4: Links between Resources and Competitive Advantage (based on Grant, 2010, p. 127)

Basic assumptions of the RBV are that unique resources and capabilities direct a firm’s strategy and are primary sources of profit and SCA (cp. Grant, 1991, p. 116; Lado & Wilson, 1994, p. 702; Newbert, 2007, p. 123). The RBV also assumes resource heterogeneity and resource immobility (cp. Barney, 1991, p. 101). Resource heterogeneity means that different companies hold and control different bundles of resources and capabilities, also if the industry is the same (cp. Barney & Hesterly, 2012, p. 85; Barney, 1991, p.101). These differences form the basis of CA because one firm may be more advanced in performing a business activity or process than its competitors. Resource immobility implies that resources and capabilities are not perfectly mobile across firms and so, heterogeneity can be long-lasting as it might be too costly for competitors to generate or purchase these resources (cp. Barney & Hesterly, 2012, p. 85; Barney, 1991, p. 101; Newbert, 2007, p.123). The implications of these fundamental assumptions are reflected in the following model.

2.2.2 VRIO Model

2.2.2.1 Concept Development

The RBV understands organizations as bundles of resources and capabilities and identifies several requirements for the analysis of resources to be potential sources of SCA. In context of the VRIO model, resources and capabilities are mentioned as one notion in literature. So, in this thesis only the term resources is used for simplification but standing for both. Barney (1986) first developed a model comprising three conditions resources must meet to be sources of SCA. Using the example of organizational culture as such a resource, it must be valuable (add financial value to the firm), rare (have attributes not common to a large number of other firms), and imperfectly imitable (firms without this resource cannot easily obtain it and imitation would lead to disadvantages) (cp. Barney, 1986, p. 658). Barney (1991) later added a fourth condition, namely non-substitutability meaning there cannot be strategically comparable substitutes for the resource (cp. Barney, 1991, pp. 105–106).

By combining the attributes of imperfectly imitable and non-substitutable resources and adding the condition of organization, i.e. the firm is organized to capture the value of the resource, Barney (1995) finalized the VRIO model (cp. Barney, 1995, p. 50). As a tool for analysing resources’ potential for CA and identifying a firm’s internal strengths and weaknesses, the acronym VRIO stands for four questions: the question of Value, the question of Rarity, the question of Imitability, and the question of Organization (cp. Barney & Hesterly, 2012, pp. 86–87; Barney, 1995, p. 50). These questions, embedded in the model’s underlying assumptions and outcome are visualized below.

Figure 5: VRIO Model (based on Barney, 1991, p. 112)

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2.2.2.2 Question of Value and Rarity

The question of value is whether resources add value to the company by enabling it to exploit environmental opportunities and/or neutralize environmental threats. If resources are valuable, they increase organizational efficiency and effectiveness and can be considered strengths; if not they are weaknesses. Resources are not valuable in a vacuum but need to improve a company’s position in its competitive environment. In this way, resources can be strengths in one market and weaknesses in another. Hence, the analysis of internal resources is combined with the analysis of environmental opportunities and threats. In order to find valuable resources, the firm’s value chain needs to be examined. The ability of resources to exploit or neutralize external conditions becomes visible in the firm’s revenues and costs. But resources do not necessarily stay valuable forever. Changes in the competitive environment such as customer tastes, industry structure, or technology innovation require a continuous review of the resources’ value (cp. Barney & Hesterly, 2012, pp. 87–90; Barney, 1995, pp. 50–52).

The question of rarity concerns the number of present or potential competitors already having particular valuable resources. If this number is high, these resources cannot be sources of CA for any firm. Thus, valuable but common resources can only be sources of competitive parity. If a resource is owned and controlled by only a small number of competitors, it might at least be a source of temporary CA. Valuable and rare resources enable firms to consider strategies other firms cannot since they lack these specific resources. So, these firms might be regarded as strategic innovators and could take first-mover advantages^[4]. But, even if a company needs to have valuable and rare resources to gain CA, valuable but common resources are of importance as well. These kind of resources may be necessary to ensure the economic survival of the firm (cp. Barney & Hesterly, 2012, pp. 93–94; Barney, 1995, p. 52; Bharadwaj et al., 1993, p. 84).

2.2.2.3 Question of Imitability and Organization

The question of imitability is whether firms without valuable and rare resources cannot obtain them or face a cost disadvantage in acquiring or developing them compared to firms already possessing these. Such kinds of resources are imperfectly imitable and can be sources of SCA. Generally, imitation can occur either by direct duplication or by substitution. Direct duplication means that imitating firms build the same resource as the company holding a CA. Substitution happens when competitors can replace the costly to imitate resource by a strategically comparable resource. If imitating firms can duplicate or substitute resources at a reasonable price, CA for others will be temporary. But if imitation is too costly, companies holding valuable and rare resources can gain SCA out of them. There are four reasons why resources may be hard and costly to imitate: unique historical conditions, causal ambiguity, social complexity, and patents. First, history can be important when building and developing resources as every company has its unique past. Resources reflecting distinctive personalities, experiences, and relationships are hard to imitate for others. Also first-mover advantages might generate unique historical conditions because firms can then often access low-priced resources. Second, causal ambiguity might hinder imitation because competitors may not be able to identify the particular resource which brings CA, or the relationship between both. If there are numerous possibilities why a company holds a CA, or if it is built on complex interrelated resources, imitating firms will fail to duplicate these resources. Furthermore, such resources may be so much taken for granted in everyday business that even managers of the company holding the CA are not aware of them, or cannot explain the links between resources and benefits. Causally ambiguous resources can be organizational culture, teamwork, and relationships with customers, suppliers, or among employees. Third, social complexity makes resources hard and costly to imitate. In contrast to physical resources which can easily be bought or duplicated, socially complex resources involving interpersonal relationships, reputation, trust, teamwork, and culture are more difficult and costly to imitate. Although it might be transparent how these resources generate CA for a company - i.e. there is little causal ambiguity - firms without these resources cannot simply create the necessary attributes, or find low-cost substitutes. Imitating firms either do not have the ability to copy socially complex resources, or this would place them at a cost disadvantage as it would be more expensive than naturally developed resources. Finally, the last reason for resources being hard or costly to imitate is patents. Such licences or exclusive rights can be sources of SCA in some industries, such as pharmaceuticals or chemicals (cp. Barney & Hesterly, 2012, pp. 95–98; Barney, 1995, pp. 53–55; Dierickx & Cool, 1989, pp. 1505–1506).

The last question which must be asked to analyse resources’ potential for SCA is the question of organization. Whether a firm is organized to exploit the full competitive potential of its valuable, rare, and imperfectly imitable resources finally decides on SCA. Policies and procedures need to be organized properly, such as formal reporting structure, formal and informal management control systems, and compensation policies. These can hardly create CA on their own but when combined with other resources, SCA is generated. Thus, these elements are so-called complementary resources (cp. Barney & Hesterly, 2012, p. 99; Barney, 1995, p. 56).

2.2.2.4 Resources and Competitive Advantage

The VRIO model brings together four questions in order to analyse the potential of a company’s resources for CA. Resources’ attributes and the resulting effects on competitiveness are stated in the following table.

Table 2: VRIO Questions and Competitive Consequences (based on Barney & Hesterly, 2012, p. 102)

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To sum up, different resources have different return potential. If resources are not valuable, they will not positively affect environmental conditions. Firms making efforts to nevertheless use these resources for implementing strategy will place themselves at competitive disadvantage by increased costs or decreased revenues. If resources are valuable but not rare, companies exploiting these will reach competitive parity only. Despite the fact that these resources cannot create CA, they still need to be handled by firms. Otherwise, firms will be at competitive disadvantage. If resources are valuable and rare but not imperfectly imitable, they will lead to temporary CA. Companies exploiting these can make use of first-mover advantages. Valuable, rare, and costly to imitate resources will finally create SCA, if companies are organized to capture the value. So, mismanaged organizations might lose resources’ potential and could result in competitive parity or competitive disadvantage (cp. Barney & Hesterly, 2012, pp. 101–103).

Grant (2010) further differentiates the characteristics of resources needed in order to enable a company to outperform rivals. In order to provide the potential to establish CA, resources must meet the criteria of scarcity and relevance to key success factors in the respective industry. For becoming a source of SCA, resources must fulfil durability, imperfect transferability, and imperfect replicability (cp. Grant, 2010, pp. 135–137). To sum up, the figure below shows a comprehensive overview of attributes needed for resources to be sources of SCA.

Figure 6: Requirements of Resources for Sustainable Competitive Advantage (based on Grant, 2010, p. 136)

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2.3 Corporate Culture

Culture generally includes values, beliefs, attitudes, customs, traditions, symbols, and hidden meanings which are learned and shared by groups, transmitted from generation to generation, influence behaviour, and are often unconscious (cp. Kotter & Heskett, 1992; Schein, 1999). CC is the sum of an organization’s “soft” systems and consists of a complex set of values, beliefs, assumptions, expectations, and symbols which determine the way a firm runs its business (cp. Barney, 1986, p. 657; Bennigson, 1985, p. 31). Thereby, norms are generated which then guide the behaviour of an organization’s members and their interaction with stakeholders in daily activities (cp. Bookbinder, 1984, p. 47; Kotter & Heskett, 1992, p. 5). These shared philosophies and ideologies are mostly unspoken, unconscious, and taken for granted and so fill the gap between what is formally agreed and actually taking place (cp. Deshpandé & Parasuraman, 1986, p. 29). Influencing and forming corporate identity, CC also reflects the unique circumstances of a company’s founding and growth, as well as the unique personalities and values of founders; this implies that rare experiences can bring rare and valuable cultures (cp. Barney, 1986, p. 660).

In every company CC consists of clear vision and values guiding how employees work to achieve the organization’s mission and goals. The vision defines a desired future state; the mission specifies the environment in which the firm intends to operate and the customers it intends to serve, and so gives clarity about a company’s purpose and how it can make a difference to stakeholders (cp. Grant, 2010, p. 23; Volberda et al., 2011, pp. 22–23). Values are important concerns shared by most members of a group which tend to determine group behaviour and often persist over time, even if group membership changes (cp. Kotter & Heskett, 1992, p. 5). Moreover, values are at a deep and almost invisible level of an organization’s culture and hard to change, as even group members might not be aware of them. The more visible level of culture is shaped by norms and patterns of behaviour which are followed by members and less difficult to change than basic values (cp. Kotter & Heskett, 1992, p. 4). The following figure visualizes the interrelated levels of CC, differentiated in terms of visibility and resistance to change.

Figure 7: Levels of Corporate Culture (based on Kotter & Heskett, 1992, p. 5)

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Research of CC can be clustered in three groups. The first research of culture in a business context examines the relationship of CC and long-term economic performance. This “functionalist perspective” sees culture as a strategic asset which can be managed to positively influence the coordination and stability of an organization (cp. J. Mueller, 2012, p. 186). This perspective defines strong CC as leading to excellent performance through shared consistent values and norms among managers and employees, quick adoption of these by new employees, and through a defined mission statement enabling others to recognize a certain style or way of doing things in this company (cp. Kotter & Heskett, 1992, p. 15). Another perspective is the “metaphorical view” which examines ambiguous cultures consisting of profound and unconscious values that are hard to influence (cp. J. Mueller, 2012, p. 186). Finally, the “dynamic perspective” is a combination of the previous ones stating that cultural values bind people together to work towards a shared goal; so it regards companies as “complex, dynamic, and evolving cultural systems” (ibid.). To sum up, cultures can be persistent but are never static because crises or other challenges may create a necessity to do things differently and reassess company values (cp. Kotter & Heskett, 1992, p. 7).

2.4 CSR

2.4.1 History

The idea of social responsibility of corporations has a long history and varies in scope. The narrowest notion of CSR is given by Friedman (1970). This traditional view of responsibility includes an increase of profits only. Shareholder’s money should not be spent for general social issues as this would increase a firm’s cost, make it less efficient, and finally harm both company and society in the long-term. Social issues should be solved by private individuals or the state government only. Thus, “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, ... without deception or fraud” (Friedman, 1970).

But with increasing globalization this view does not hold anymore because governments cannot care for social issues alone, especially since some of these issues have been caused by business operations, too (cp. Scherer & Palazzo, 2012, p. 16). A more modern view of CSR is based on the assumptions of stakeholder theory. Companies and their managers do not only have obligations to shareholders, but also to stakeholders. Those are all groups or individuals having a claim on the firm because they can affect or are affected by the firm, and so benefit from or are impaired by corporate actions (cp. Freeman, 1984, p. 46). Like owners have a financial interest in the company and expect some kind of financial return because of their shares, so might employees, customers, suppliers, or the local community have different interests and claims. This perspective represents the “moral” or “normative imperative” of the pressure on businesses to engage in CSR (cp. Boulouta & Pitelis, 2014, p. 349; Hillenbrand, Money, & Ghobadian, 2013, p. 129).

In contrast, the “strategic” or “instrumental imperative” of CSR emphasizes the increasing competitiveness of companies taking CSR actions (cp. Boulouta & Pitelis, 2014, p.349; Hillenbrand et al., 2013, p. 129). Because the more firms act responsibly, the more they might generate positive images supporting their standing in customers’ minds and finally their CA (cp. McWilliams, Siegel, & Wright, 2006; Porter & Kramer, 2006; Russo & Fouts, 1997). Hence, in this regard both businesses and society can take advantage of CSR. So, CSR can be seen as “a complex and dynamic concept, continuously evolving, following and sometimes shaping changes in societal norms and societal expectations” (Boulouta & Pitelis, 2014, p. 351).

This complexity and broad scope of notions makes it hard to define CSR appropriately and form a basis for companies to act upon (cp. Hack et al., 2014, p. 51). During the past decades, the concept of CSR has evolved to a new understanding of the economic, social, and environmental role of business, apart from the traditional model of growth and profit maximisation (cp. Scherer & Palazzo, 2012, p. 37; Torugsa, O’Donohue, & Hecker, 2013, p. 383). Therefore, a comprehensive model of CSR is examined in the following which is the foundation for later analysis of CSR initiatives.

2.4.2 Pyramid of CSR

Carroll (1991) developed a widely accepted stakeholder-based concept of CSR by grouping business responsibilities in economic, legal, ethical, and discretionary/philanthropic which are prioritized in a pyramid (cp. Boulouta & Pitelis, 2014, p. 350; Carroll, 1991, p.40; Munilla & Miles, 2005, pp. 374–375). Carroll’s model of CSR is based on the opinion that companies have more responsibilities than merely making profits for shareholders. His understanding of CSR comprises operating a business in an economically profitable way which is at the same time obeying the law, ethical, and socially supportive (cp. Carroll & Shabana, 2010, pp. 85–89). This view is reflected in the four components of CSR which are not mutually exclusive. As their aims can be conflicting, problems might appear between economic and legal, economic and ethical, and economic and philanthropic responsibility. The figure below gives an overview about the pyramid of CSR with its four levels which are then further described.

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Figure 8: Pyramid of Corporate Social Responsibility (based on Carroll, 1991, p. 42)

Carroll lists the four responsibilities in order of priority. First, firms must make a profit to satisfy economic responsibilities. Therefore, the category of economic responsibility is the basis of CSR activities. Traditionally, businesses were operated in order to provide goods and services to society, and profits served as an incentive for entrepreneurship. Later on, the profit motive turned into a concept of profit maximisation. This first category of CSR expects companies to be highly competitive by operating as profitably and efficiently as possible. Thereby, earnings per share should be maximised. From this perspective, firms are successful when being constantly profitable (cp. Carroll, 1991, pp. 40–41).

In order to safeguard their existence, firms need to follow the laws, so fulfilling legal responsibilities. Thus, the second component demands from companies to adhere to the law given by the state. Their legal responsibility represents basic understandings of ethics by operating fair businesses and sticking to the rules of society. Together with economic responsibility, this level of CSR can be seen as the basic principle of the free-enterprise system. In order to meet their legal responsibility, companies need to act according to the expectations of government and law by obeying numerous federal, state, and local regulations. This means to produce goods and services which fulfil minimum legal requirements. This level of CSR defines firms as successful when meeting legal obligations (cp. Carroll, 1991, pp. 40–41).

Until this point Carroll agrees with Friedman’s traditional view of corporate responsibility which can be regarded as purely “reactive CSR” (Torugsa et al., 2013, p. 384). Companies then only care for minimum mandatory requirements. However, Carroll continues by stating that there are responsibilities beyond economic and legal ones. Having fulfilled the two basic responsibilities, firms should satisfy ethical responsibilities. So, the third level of CSR covers not only ethical norms regarding fairness and justice as demanded already by economic and legal responsibility. Ethical responsibility also seeks to fulfil societal expectations which are not yet regulated by law. These may be new values and norms with higher standards than given by law. The aim is to protect diverse stakeholders. Hence, businesses are expected to follow stakeholders’ understanding of ethical norms and standards. This is a challenging task as ethics are constantly under public debate. The ethical component is closely linked with legal responsibility because it creates a need for laws being adjusted, and demands from companies to exceed minimum legal requirements. So, ethically responsible companies “recognize that corporate integrity and ethical behavio[u]r go beyond mere compliance with laws and regulations” (Carroll, 1991, p.41). In order to meet society’s expectations of being moral or ethical, firms have to avoid that their objectives are achieved by ignoring ethical norms (cp. Carroll & Shabana, 2010, pp.90–92; Carroll, 1991, p. 41).

When ethical responsibilities are taken, firms can focus on philanthropic responsibilities. Thus, proactive corporate involvement in societal and environmental issues is the last category of CSR. Philanthropic responsibility covers the understanding of being a good corporate citizen by taking purely voluntary actions which society may not yet has decided to be important. This means supporting human welfare by contributing money, facilities, or time to the community and thereby increasing the quality of life. Companies should meet society’s philanthropic and charitable expectations by encouraging their employees to participate in voluntary actions in their community. In this context, even if society expects philanthropy, businesses are not regarded as unethical if they do not afford the preferred level. Metaphorically, “philanthropy is icing on the cake - or on the pyramid” (Carroll, 1991, p. 42). The difference to ethical responsibility is essential because a company is not socially responsible if it is only a good corporate citizen. Philanthropic responsibility can be seen as desired by society and community but rather voluntary and not as important as the previous components of CSR (cp. Carroll & Shabana, 2010, p. 96; Carroll, 1991, pp. 41–42).

The levels of ethical and philanthropic CSR can also be referred to as “proactive CSR” (Torugsa et al., 2013, p. 384). This means that firms actively engage in issues which may be clustered in economic, social, and environmental dimensions. The economic dimension of proactive CSR aims at economic growth and prosperity, and so at improving the standard of living through long-term economic performance. When acting as good citizens by focusing on their local workforce and community, companies proactively engage in the social dimension of CSR. The environmental dimension includes measures which prevent pollution and minimise ecological impacts along each product life cycle through innovation and eco-efficiency (cp. Torugsa et al., 2013, pp. 384–385).

2.5 Critical Appraisal

In analysing sources of global CA, competitive strategy must be chosen first. Generally, there are three generic strategies: cost leadership, differentiation, or focus cost/differentiation. The purpose of these strategies is to lead to above-average performance by attaining a SCA. Thereby, companies can differentiate themselves and outperform their rivals. By assuming that unique resources and capabilities direct a firm’s strategy, the RBV can help to analyse sources of SCA. In this context, the VRIO model provides four questions to examine resources’ potential for SCA: the question of value, the question of rarity, the question of imitability, and the question of organization. One of these valuable, rare, imperfectly imitable, and organized resources can be CC. As a complex organizational system of vision and values, CC guides behaviour in order to meet a company’s mission and goals. Furthermore, taking social responsibility can be an advantageous competence. The concept of CSR has gained increasing attention and demands companies to fulfil economic, social, and environmental roles, besides the traditional business objectives of growth and profit maximisation. Corporate responsibilities can be grouped in economic, legal, ethical, and philanthropic and so be prioritised in required, expected, and desired business behaviour.

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^[1] A strategic alliance means that two or more companies combine resources outside the market to perform a particular task. In the airline industry, alliance strategies result in fleet rationalization and the expansion of networks to foreign countries. Thereby, airlines can provide customers with greater convenience such as access to connecting services (cp. Gagnepain & Marín, 2010, p. 252).

^[2] Barney’s article “Firm Resources and Sustained Competitive Advantage” from 1991 is widely viewed as the first formalization of the resource-based literature into a comprehensive and hence empirically testable theoretical framework (cp. Newbert, 2007, p. 123).

^[3] Key success factors are essential aspects for companies to compete in an industry. For airlines these can be price, safety, or quality of service regarding punctuality and personnel.

^[4] A first mover is the first company taking a certain strategic position or competitive action in its industry and so gaining access to resources that followers cannot match. First-mover advantages are cost advantages over followers due to greater experience and learning effects, the ability to initially build and defend a CA enabling the company to invest in the extension and upgrade of its resources and improve its market position, and reputation effects which cannot be initially matched by followers (cp. Grant, 2010, p. 219).

• College: University of applied sciences, Düsseldorf
• Grade: 1,5
• Author: Lisa Guhl (Author)
• Publication Year: 2015
• Pages: 76
• Catalog Number: V342719
• ISBN (eBook): 9783668334793
• ISBN (Book): 9783668334809
• Language: English
• Tags: Strategic Management, Strategic Marketing, Corporate Culture, Corporate Social Responsibility, Airline Industry, Competitive Advantage