VRIO Framework Explained - SM Insight

VRIO framework is the tool used to analyze firm's internal resources and capabilities to find out if they can be a source of sustained ... SkiptocontentDefinitionVRIOframeworkisthetoolusedtoanalyzefirm’sinternalresourcesandcapabilitiestofindoutiftheycanbeasourceofsustainedcompetitiveadvantage.TermVRIOcomesfromthewordsvalue,rarity,imitabilityandorganization.UnderstandingthetoolInordertounderstandthesourcesofcompetitiveadvantagefirmsareusingmanytoolstoanalyzetheirexternal(Porter’s5Forces,PESTanalysis)andinternal(ValueChainanalysis,BCGMatrix)environments.Oneofsuchtoolsthatanalyzefirm’sinternalresourcesisVRIOanalysis.ThetoolwasoriginallydevelopedbyBarney,J.B.(1991)inhiswork‘FirmResourcesandSustainedCompetitiveAdvantage’,wheretheauthoridentifiedfourattributesthatfirm’sresourcesmustpossessinordertobecomeasourceofsustainedcompetitiveadvantage.Accordingtohim,theresourcesmustbevaluable,rare,imperfectlyimitableandnon-substitutable.HisoriginalframeworkwascalledVRIN.In1995,inhislaterwork‘LookingInsideforCompetitiveAdvantage’BarneyhasintroducedVRIOframework,whichwastheimprovementofVRINmodel.VRIOanalysisstandsforfourquestionsthataskifaresourceis:valuable?rare?costlytoimitate?Andisafirmorganizedtocapturethevalueoftheresources?Aresourceorcapabilitythatmeetsallfourrequirementscanbringsustainedcompetitiveadvantageforthecompany.AdoptedfromRothaermel’s(2013)‘StrategicManagement’,p.91ValuableThefirstquestionoftheframeworkasksifaresourceaddsvaluebyenablingafirmtoexploitopportunitiesordefendagainstthreats.Iftheanswerisyes,thenaresourceisconsideredvaluable.Resourcesarealsovaluableiftheyhelporganizationstoincreasetheperceivedcustomervalue.Thisisdonebyincreasingdifferentiationor/anddecreasingthepriceoftheproduct.Theresourcesthatcannotmeetthiscondition,leadtocompetitivedisadvantage.Itisimportanttocontinuallyreviewthevalueoftheresourcesbecauseconstantlychanginginternalorexternalconditionscanmakethemlessvaluableoruselessatall.RareResourcesthatcanonlybeacquiredbyoneorveryfewcompaniesareconsideredrare.Rareandvaluableresourcesgranttemporarycompetitiveadvantage.Ontheotherhand,thesituationwhenmorethanfewcompanieshavethesameresourceorusesthecapabilityinthesimilarway,leadstocompetitiveparity.Thisisbecausefirmscanuseidenticalresourcestoimplementthesamestrategiesandnoorganizationcanachievesuperiorperformance.Eventhoughcompetitiveparityisnotthedesiredposition,afirmshouldnotneglecttheresourcesthatarevaluablebutcommon.Losingvaluableresourcesandcapabilitieswouldhurtanorganizationbecausetheyareessentialforstayinginthemarket.CostlytoImitateAresourceiscostlytoimitateifotherorganizationsthatdoesn’thaveitcan’timitate,buyorsubstituteitatareasonableprice.Imitationcanoccurintwoways:bydirectlyimitating(duplicating)theresourceorprovidingthecomparableproduct/service(substituting).Afirmthathasvaluable,rareandcostlytoimitateresourcescan(butnotnecessarilywill)achievesustainedcompetitiveadvantage.Barneyhasidentifiedthreereasonswhyresourcescanbehardtoimitate:Historicalconditions.Resourcesthatweredevelopedduetohistoricaleventsoroveralongperiodusuallyarecostlytoimitate.Causalambiguity.Companiescan’tidentifytheparticularresourcesthatarethecauseofcompetitiveadvantage.SocialComplexity.Theresourcesandcapabilitiesthatarebasedoncompany’scultureorinterpersonalrelationships.OrganizedtoCaptureValueTheresourcesitselfdonotconferanyadvantageforacompanyifit’snotorganizedtocapturethevaluefromthem.Afirmmustorganizeitsmanagementsystems,processes,policies,organizationalstructureandculturetobeabletofullyrealizethepotentialofitsvaluable,rareandcostlytoimitateresourcesandcapabilities.Onlythenthecompaniescanachievesustainedcompetitiveadvantage.UsingthetoolStep1.Identifyvaluable,rareandcostlytoimitateresourcesTherearetwotypesofresources:tangibleandintangible.Tangibleassetsarephysicalthingslikeland,buildingsandmachinery.Companiescaneasilybytheminthemarketsotangibleassetsarerarelythesourceofcompetitiveadvantage.Ontheotherhand,intangibleassets,suchasbrandreputation,trademarks,intellectualproperty,uniquetrainingsystemoruniquewayofperformingtasks,can’tbeacquiredsoeasilyandofferthebenefitsofsustainedcompetitiveadvantage.Therefore,tofindvaluable,rareandcostlytoimitateresources,youshouldfirstlookatcompany’sintangibleassets.Findingvaluableresources:AneasywaytoidentifysuchresourcesistolookatthevaluechainandSWOTanalyses.Valuechainanalysisidentifiesthemostvaluableactivities,whicharethesourceofcostordifferentiationadvantage.Bylookingintotheanalysis,youcaneasilyfindthevaluableresourcesorcapabilities.Inaddition,SWOTanalysisrecognizesthestrengthsofthecompanythatareusedtoexploitopportunitiesordefendagainstthreats(whichisexactlywhatavaluableresourcedoes).Ifyoustillstrugglefindingvaluableresources,youcanidentifythembyaskingthefollowingquestions:Whichactivitieslowerthecostofproductionwithoutdecreasingperceivedcustomervalue?Whichactivitiesincreaseproductorservicedifferentiationandperceivedcustomervalue?Haveyourcompanywonanawardorbeenrecognizedasthebestinsomething?(mostinnovative,bestemployer,highestcustomerretentionorbestexporter)Doyouhaveanaccesstoscarcerawmaterialsorhardtogetindistributionchannels?Doyouhavespecialrelationshipwithyoursuppliers?Suchastightlyintegratedorderanddistributionsystempoweredbyuniquesoftware?Doyouhaveemployeeswithuniqueskillsandcapabilities?Doyouhavebrandreputationforquality,innovation,customerservice?Doyoudoperformanytasksbetterthanyourcompetitorsdo?(Benchmarkingisusefulhere)Doesyourcompanyholdanyotherstrengthscomparedtorivals?Findingrareresources:Howmanyothercompaniesownaresourceorcanperformcapabilityinthesamewayinyourindustry?Canaresourcebeeasilyboughtinthemarketbyrivals?Cancompetitorsobtaintheresourceorcapabilityinthenearfuture?Findingcostlytoimitateresources:Doothercompaniescaneasilyduplicatearesource?Cancompetitorseasilydevelopasubstituteresource?Dopatentsprotectit?Isaresourceorcapabilitysociallycomplex?Isithardtoidentifytheparticularprocesses,tasks,orotherfactorsthatformtheresource?Step2.FindoutifyourcompanyisorganizedtoexploittheseresourcesFollowingquestionsmightbehelpful:Doesyourcompanyhasaneffectivestrategicmanagementprocessinorganization?Arethereeffectivemotivationandrewardsystemsinplace?Doesyourcompany’sculturerewardinnovativeideas?Isanorganizationalstructuredesignedtousearesource?Arethereexcellentmanagementandcontrolsystems?Step3.ProtecttheresourcesWhenyouidentifiedaresourceorcapabilitythathasall4VRIOattributes,youshouldprotectitusingallpossiblemeans.Afterall,itisthesourceofyoursustainedcompetitiveadvantage.Thefirstthingyoushoulddoistomakethetopmanagementawareofsuchresourceandsuggesthowitcanbeusedtolowerthecostsortodifferentiatetheproductsandservices.Thenyoushouldthinkofideashowtomakeitmorecostlytoimitate.Ifothercompanieswon’tbeabletoimitatearesourceatreasonableprices,itwillstayrareformuchlonger.Step4.ConstantlyreviewVRIOresourcesandcapabilitiesThevalueoftheresourceschangesovertimeandtheymustbereviewedconstantlytofindoutiftheyareasvaluableastheyoncewere.Competitorsarealsokeentoachievethesamecompetitiveadvantagessothey’llbekeentoreplicatetheresources,whichmeansthattheywillnolongerberare.Often,newVRIOresourcesorcapabilitiesaredevelopedinsideanorganizationandbyidentifyingthemyoucanprotectyousourcesofcompetitiveadvantagemoreeasily.VRIOexampleGoogle’scapabilityevaluatedusingVRIOframeworkGoogle’sVRIOcapabilityExcellentemployeemanagementValuable?Rare?CostlytoImitate?Isacompanyorganizedtoexploitit?YesYesYesYesResult:sustainedcompetitiveadvantageGoogle’sabilitytomanagetheirpeopleeffectivelyisasourceofbothdifferentiationandcostadvantages.Unlikeothercompanies,whichrelyontrustandrelationshipinpeoplemanagement,Googleusesdataaboutitsemployeestomanagethem.Thiscapabilityallowsmakingcorrect(databased)decisionsaboutwhichpeopletohireandthebestwaytousetheirskills.Asaresult,Googleisabletohireinnovativeemployeesthatarealsoveryproductive($1millioninrevenueperemployee).Besidesbeingvaluable,itisalsoararecapabilitybecausenoothercompanyusesdatabasedemployeemanagementsoextensively.Isitcostlytoimitate?Itiscostlytoimitate,atleast,inthenearfuture.First,companiesshouldbuildthehighlysophisticatedsoftware,whichisbothcostlyandhardtodo.Second,HRmanagersshouldbetrainedtomakedatabaseddecisionsandforgettheiroldmanagementmethods.IsGoogleorganizedtocapturevaluefromthiscapability?Certainly,ithastrainedHRmanagersthatknowhowtousethedataandmanagepeopleaccordingly.ItalsohastheneededITskillstocollectandmanagethedataaboutitsemployees.TherearemanymorebusinessesthathaveVRIOresourcesorcapabilities,includingmanyofthecompaniesweanalyzedusingswotanalysis.SourcesBarney,J.B.(1995).LookingInsideforCompetitiveAdvantage.AcademyofManagementExecutive,Vol.9,Issue4,pp.49-61Rothaermel,F.T.(2012).StrategicManagement:ConceptsandCases.McGraw-Hill/Irwin,p.911thoughton“VRIOFrameworkExplained”VeryhelpfulformeandsomedifferencestosomeotherUniversities/Collegesnoted,asicansee,becausemywifeisalsostudyonManagementatanotherUniversityandshedidn´theardforexampleabouttheVRIOanalysis.ReplyLeaveaCommentCancelreplyCommentNameEmailSavemynameandemailinthisbrowserforthenexttimeIcomment.ΔSearchSearchFacebookTwitterPopularArticles:ValueChainAnalysisGuideMcKinsey7SModelGuideResource-BasedViewGuidetoValueChainAnalysisVRIOFrameworkExplainedGuidetoResource-BasedViewGuidetoMcKinsey7SModel