Vrio
Encyclopedia
The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a firm. The basic strategic process that any firm goes through begins with a vision statement, and continues on through objectives, internal & external analysis, strategic choices (both business-level and corporate-level), and strategic implementation. The firm will hope that this process results in a competitive advantage in the marketplace they operate in. VRIO falls into the internal analysis step of these procedures, but is used as a framework in evaluating just about all resources and capabilities of a firm, regardless of what phase of the strategic model it falls under. VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability).
Question of Value
The basic question asked by the V in the VRIO framework for internal analysis is “Is this resource or capability valuable to the focal firm?” In this case, the definition of value is whether or not the resource or capability works to exploit an opportunity or mitigate a threat in the marketplace. If it does do one of those two things, it can be considered a strength of the company. However if it does not work to exploit an opportunity or mitigate a threat, it is a weakness. Occasionally, some resources or capabilities could be considered strengths in one industry and weaknesses in a different one. (Strategic Management Journal, 5, pp. 171-180. Barnety, J.B. (1991)). Six common examples of opportunities firms could attempt to exploit are technological change, demographic change, cultural change, economic climate, specific international events, and legal and political conditions. Furthermore, five threats that a resource or capability could mitigate are the threat of buyers, threat of suppliers, threat of entry, threat of rivalry, and threat of substitutes.
Generally, this exploitation of opportunity or mitigation of threat will result in one of two more outcomes: an increase in revenues or a decrease in costs (or both).
A great way to identify possibly valuable resources or capabilities is by looking into the company’s value chain. In the value chain, a business develops its products and services step-by-step, with each function along the way adding some sort of value to the product or service. The choices a firm makes regarding its value chain (including how to operate, and which steps to operate in) is closely tied to the firms resources and capabilities, therefore making it a valuable tool in identifying value in resources and capabilities. If some asset that your company has allows you to operate more effectively in a certain portion of the value chain, chances are that resource will be considered valuable by the VRIO framework.
Question of Rarity
Having rarity in a firm can lead to competitive advantage. Rarity is when a firm has a valuable resource or capability that is absolutely unique among a set of current and potential competitors.
How to determine if your resource is rare and creates competitive advantage?
A firm’s resources and capabilities must be both short in supply and persist over time to be a source of sustained competitive advantage. If both elements (short supply and persistence over time) aren’t met, then the resources and capabilities a firm has can’t be a sustained competitive advantage. If a resource is not rare, then perfect competition dynamics are likely to be observed.
Example of Rarity - A janitor who defines his/her job as helping the firm make and sell better products instead of just referring to their job as simply cleaning up facilities is quite usual. Most individuals would agree that this firm has a source of competitive advantage over other firms in their industry because their objectives and strategies are transparent throughout the entire firm; unlike many other firms where only top tier management is the only group that believes in their objectives and strategies (Barney & Hesterly, 2011).
Question of Imitability
The primary question of “imitability” asked in the VRIO framework in internal analysis is that “ Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?” Firms with valuable and rare resources, which are hard to imitate by other firms, can gain the first-mover advantages in the market and can hence gain competitive advantage.
A firm can either exploit an external opportunity or neutralize an external threat by using its rare and valuable resources. In this case, the firm can gain competitive advantage. When the firm’s competitors discover this competitive advantage, they may respond in two ways. First, they can choose to ignore the profit gaining by the competitive advantage and continue to operate in their old ways. Second, they can choose to analyze and duplicate the competitive strategy of its rival. If there is no cost or little cost in obtaining this rare and valuable resource, the fellow firms can imitate the competitive advantage in order to gain competitive parity (firms that create the same economic value as their rivals experience competitive parity). However, sometimes it is hard for other firms to get access to the resources and imitate the innovative company’s strategy. As a result, the innovative companies that implement its strategies based on costly-to-imitate and valuable resources can gain long-term competitive advantage, which ensures a company’s sustained success (Hill & Jones, 1998). Hence, to sustain the competitive advantage, it is not sufficient for a firm's resources and capabilities to be valuable and rare - they should also be inimitable.
Forms of imitation
In most cases, imitation appears in two ways, direct duplication or substitution. After observing other firms’ competitive advantage, a firm can directly imitate the resource possessed by the innovative firm. If the cost to imitate is high, the competitive advantage will be sustained. If not, the competitive advantage will be temporary. Otherwise, an imitating firm can attempt to use a substitute in order to gain similar competitive advantage of the innovative firm.
Cost of imitation
Cost of imitation is usually high in order to gain a competitive advantage due to the following reasons: unique historical conditions, casual ambiguity, social complexity, patents.
Unique Historical Conditions: an innovative firm gains low-cost access to rare resources in a particular time and space.
Casual Ambiguity: an imitating firm cannot tell the factors that lead to the competitive advantage of an innovative firm.
Social Complexity: when the resources involves in gaining competitive advantage is based on interpersonal relationship, culture and other social background.
Patents: a source of long-term competitive advantage certificated by authority in a few industries such as pharmaceuticals (Barney & Hesterly, 2011).
Question of Organization
Once you have realized the value, rarity and imitability of your company’s resources and capabilities, the next step is to organize your company in a way to exploit these resources. If done successfully, your company can enjoy a period of sustained competitive advantage. There are many components to this question of organization. They include, but are not limited to, the company’s formal reporting structure, management control systems and compensation policies. Formal reporting structures are simply a description of who in the firm reports to whom. Management control systems include both formal and informal means to make sure that managers’ decisions align with a firm’s strategies. Formal control systems can consist of budgeting and reporting activities that keep top management informed of decisions made by employee’s lower down in the firm. Informal controls can include a company’s culture and encouraging employees to monitor each other. Firms incentivize their employees to behave a desired way through compensation policies. These policies can include bonuses, stocks or salary increases but can also include non-monetary incentives such as additional vacation days or a larger office. These components of organization are known at complementary capabilities and resources because alone they do not provide much value. However, in combination with a firm’s other resources and capabilities, it can result in sustained competitive advantage. Without the correct organization, even firms with valuable, rare and costly to imitate resources and capabilities can suffer competitive disadvantage (Barney & Hesterly, 2011).
Applying the VRIO Framework
The VRIO framework can be used to assess the future success of a firm’s current resources and capabilities as well as assessing the success of potential changes to the firm. The easiest way of applying the VRIO framework is go through each question in order to assess the competitive implications and economic implications. Below is a chart that goes through the different possibilities and outcomes of applying the VRIO framework. First off, if the resource is not valuable the company should abandon the process or stop using the resource because it is hurting the firm. Next, if the resource is valuable, but not rare, then the company is not being hurt by the resource, and is at a competitive parity. A competitive parity just means that the company is no better or worse off than its competitors. This option would leave the company at a normal economic level. Third, if a resource is valuable and rare, but not costly to imitate, a firm has achieved a competitive advantage and will temporarily achieve above normal economic returns. However, because the resource is not costly to imitate, other companies will soon copy their processes and the resource will likely become a source of competitive parity. Finally, the best case scenario is if a resource is valuable, rare, and costly to organize. This resource has become a source of a sustained competitive advantage because other companies cannot easily copy the resource. The final letter O of the VRIO framework is also important. No matter how valuable, rare or costly to imitate the resource is, if the resource is not organized then it will most likely become a competitive disadvantage and end up hurting your firm (Barney & Hesterly, 2011).
- The Question of ValueValue (economics)An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?" - The Question of Rarity: "Is control of the resource/capability in the hands of a relative few?"
- The Question of ImitabilityImitationImitation is an advanced behavior whereby an individual observes and replicates another's. The word can be applied in many contexts, ranging from animal training to international politics.-Anthropology and social sciences:...
: "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?" - The Question of OrganizationOrganizationAn organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...
: "Is the firm organized, ready, and able to exploit the resource/capability?"
Question of Value
The basic question asked by the V in the VRIO framework for internal analysis is “Is this resource or capability valuable to the focal firm?” In this case, the definition of value is whether or not the resource or capability works to exploit an opportunity or mitigate a threat in the marketplace. If it does do one of those two things, it can be considered a strength of the company. However if it does not work to exploit an opportunity or mitigate a threat, it is a weakness. Occasionally, some resources or capabilities could be considered strengths in one industry and weaknesses in a different one. (Strategic Management Journal, 5, pp. 171-180. Barnety, J.B. (1991)). Six common examples of opportunities firms could attempt to exploit are technological change, demographic change, cultural change, economic climate, specific international events, and legal and political conditions. Furthermore, five threats that a resource or capability could mitigate are the threat of buyers, threat of suppliers, threat of entry, threat of rivalry, and threat of substitutes.
Generally, this exploitation of opportunity or mitigation of threat will result in one of two more outcomes: an increase in revenues or a decrease in costs (or both).
A great way to identify possibly valuable resources or capabilities is by looking into the company’s value chain. In the value chain, a business develops its products and services step-by-step, with each function along the way adding some sort of value to the product or service. The choices a firm makes regarding its value chain (including how to operate, and which steps to operate in) is closely tied to the firms resources and capabilities, therefore making it a valuable tool in identifying value in resources and capabilities. If some asset that your company has allows you to operate more effectively in a certain portion of the value chain, chances are that resource will be considered valuable by the VRIO framework.
Question of Rarity
Having rarity in a firm can lead to competitive advantage. Rarity is when a firm has a valuable resource or capability that is absolutely unique among a set of current and potential competitors.
How to determine if your resource is rare and creates competitive advantage?
A firm’s resources and capabilities must be both short in supply and persist over time to be a source of sustained competitive advantage. If both elements (short supply and persistence over time) aren’t met, then the resources and capabilities a firm has can’t be a sustained competitive advantage. If a resource is not rare, then perfect competition dynamics are likely to be observed.
Example of Rarity - A janitor who defines his/her job as helping the firm make and sell better products instead of just referring to their job as simply cleaning up facilities is quite usual. Most individuals would agree that this firm has a source of competitive advantage over other firms in their industry because their objectives and strategies are transparent throughout the entire firm; unlike many other firms where only top tier management is the only group that believes in their objectives and strategies (Barney & Hesterly, 2011).
Question of Imitability
The primary question of “imitability” asked in the VRIO framework in internal analysis is that “ Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?” Firms with valuable and rare resources, which are hard to imitate by other firms, can gain the first-mover advantages in the market and can hence gain competitive advantage.
A firm can either exploit an external opportunity or neutralize an external threat by using its rare and valuable resources. In this case, the firm can gain competitive advantage. When the firm’s competitors discover this competitive advantage, they may respond in two ways. First, they can choose to ignore the profit gaining by the competitive advantage and continue to operate in their old ways. Second, they can choose to analyze and duplicate the competitive strategy of its rival. If there is no cost or little cost in obtaining this rare and valuable resource, the fellow firms can imitate the competitive advantage in order to gain competitive parity (firms that create the same economic value as their rivals experience competitive parity). However, sometimes it is hard for other firms to get access to the resources and imitate the innovative company’s strategy. As a result, the innovative companies that implement its strategies based on costly-to-imitate and valuable resources can gain long-term competitive advantage, which ensures a company’s sustained success (Hill & Jones, 1998). Hence, to sustain the competitive advantage, it is not sufficient for a firm's resources and capabilities to be valuable and rare - they should also be inimitable.
Forms of imitation
In most cases, imitation appears in two ways, direct duplication or substitution. After observing other firms’ competitive advantage, a firm can directly imitate the resource possessed by the innovative firm. If the cost to imitate is high, the competitive advantage will be sustained. If not, the competitive advantage will be temporary. Otherwise, an imitating firm can attempt to use a substitute in order to gain similar competitive advantage of the innovative firm.
Cost of imitation
Cost of imitation is usually high in order to gain a competitive advantage due to the following reasons: unique historical conditions, casual ambiguity, social complexity, patents.
Unique Historical Conditions: an innovative firm gains low-cost access to rare resources in a particular time and space.
Casual Ambiguity: an imitating firm cannot tell the factors that lead to the competitive advantage of an innovative firm.
Social Complexity: when the resources involves in gaining competitive advantage is based on interpersonal relationship, culture and other social background.
Patents: a source of long-term competitive advantage certificated by authority in a few industries such as pharmaceuticals (Barney & Hesterly, 2011).
Question of Organization
Once you have realized the value, rarity and imitability of your company’s resources and capabilities, the next step is to organize your company in a way to exploit these resources. If done successfully, your company can enjoy a period of sustained competitive advantage. There are many components to this question of organization. They include, but are not limited to, the company’s formal reporting structure, management control systems and compensation policies. Formal reporting structures are simply a description of who in the firm reports to whom. Management control systems include both formal and informal means to make sure that managers’ decisions align with a firm’s strategies. Formal control systems can consist of budgeting and reporting activities that keep top management informed of decisions made by employee’s lower down in the firm. Informal controls can include a company’s culture and encouraging employees to monitor each other. Firms incentivize their employees to behave a desired way through compensation policies. These policies can include bonuses, stocks or salary increases but can also include non-monetary incentives such as additional vacation days or a larger office. These components of organization are known at complementary capabilities and resources because alone they do not provide much value. However, in combination with a firm’s other resources and capabilities, it can result in sustained competitive advantage. Without the correct organization, even firms with valuable, rare and costly to imitate resources and capabilities can suffer competitive disadvantage (Barney & Hesterly, 2011).
Applying the VRIO Framework
The VRIO framework can be used to assess the future success of a firm’s current resources and capabilities as well as assessing the success of potential changes to the firm. The easiest way of applying the VRIO framework is go through each question in order to assess the competitive implications and economic implications. Below is a chart that goes through the different possibilities and outcomes of applying the VRIO framework. First off, if the resource is not valuable the company should abandon the process or stop using the resource because it is hurting the firm. Next, if the resource is valuable, but not rare, then the company is not being hurt by the resource, and is at a competitive parity. A competitive parity just means that the company is no better or worse off than its competitors. This option would leave the company at a normal economic level. Third, if a resource is valuable and rare, but not costly to imitate, a firm has achieved a competitive advantage and will temporarily achieve above normal economic returns. However, because the resource is not costly to imitate, other companies will soon copy their processes and the resource will likely become a source of competitive parity. Finally, the best case scenario is if a resource is valuable, rare, and costly to organize. This resource has become a source of a sustained competitive advantage because other companies cannot easily copy the resource. The final letter O of the VRIO framework is also important. No matter how valuable, rare or costly to imitate the resource is, if the resource is not organized then it will most likely become a competitive disadvantage and end up hurting your firm (Barney & Hesterly, 2011).
| Valuable? | Rare? | Costly to imitate? | Exploited by the organization? | Competitive implication |
|---|---|---|---|---|
| No | Competitive disadvantage | |||
| Yes | No | Competitive parity | ||
| Yes | Yes | No | Temporary competitive advantage | |
| Yes | Yes | Yes | No | Unexploited competitive advantage |
| Yes | Yes | Yes | Yes | Sustained competitive advantage |
See also
- strategy dynamicsStrategy dynamicsThe word ‘dynamics’ appears frequently in discussions and writing about strategy, and is used in two distinct, though equally important senses.The dynamics of strategy and performance concerns the ‘content’ of strategy – initiatives, choices, policies and decisions adopted in an attempt to improve...
- SWOT AnalysisSWOT analysisSWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business venture...
- managementManagementManagement in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
- marketing strategies
- resource based view
- strategic innovation
- strategic managementStrategic managementStrategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
- strategic planningStrategic planningStrategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...
- system dynamicsSystem dynamicsSystem dynamics is an approach to understanding the behaviour of complex systems over time. It deals with internal feedback loops and time delays that affect the behaviour of the entire system. What makes using system dynamics different from other approaches to studying complex systems is the use...
External links
- http://falcon.jmu.edu/~gallagsr/WDFPD-Internal.pdf
- http://www.ecofine.com/strategy/RBV%20of%20the%20firm.htm