Applying The VRIO Framework

The VRIO Framework: An Overview
Barney and Hesterly (2006), describe the VRIO framework as a good tool to examine the internal environment of a firm. They state that VRIO stands for four questions one must ask about a resource or capability to determine its competitive potential: 1. The Question of Value: Does a resource enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat? 2. The Question of Rarity: Is a resource currently controlled by only a small number of competing firms? [are the resources used to make the products/services or the products/services themselves rare?] 3. The Question of Imitability: do firms without a resource face a cost disadvantage in obtaining or developing it? [is what a firm is doing difficult to imitate?] 4. The Question of Organization: Are a firms other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources? What types of resources should we evaluate (e.g., what types of resources lead to a competitive advantage)? 1) tangible resources, 2) intangible resources, 3) organizational capabilities. Tangible Resources Firms cash and cash equivalents Firms capacity to raise equity Financial Firms borrowing capacity Modern plant and facilities Favorable manufacturing locations Physical State-of-the-art machinery and equipment Trade secrets Innovative production processes Technological Patents, copyrights, trademarks Effective strategic planning process Organizational Excellent evaluation and control systems Intangible Resources Experience and capabilities of employees Trust Human Managerial skills Firm-specific practices and procedures Technical and scientific skills Innovation and Creativity Innovation capacities Brand name Reputation with customers for quality and reliability Reputation Reputation with suppliers for fairness, non-zero-sum relationships Organizational Capabilities Firm competences or skills the firm employs to transfer inputs to outputs Capacity to combine tangible and intangible resources, using firm processes to attain desired end.

Examples
Outstanding customer service Excellent product development capabilities
1
Innovativeness or products and services Ability to hire, motivate, and retain human capital
Note that the material presented in this handout are adapted from J.B. Barney, Firm resources and sustained competitive advantage, Journal of Management 17 (1991), p. 101; R.M. Grand, Comtemporary Strategy Analysis (Cambridge, England: Blackwell Business, 1991), pp. 100-102; M.A. Hitt, R.D. Ireland, and R.E. Hoskisson, Strategic Management: Competitiveness and Globalization, 4th ed. (Cincinnati, OH: South-Western College Publishing, 2001); G.G. Dess, G.T. Lumpkin, M.L. Taylor, A.A. Thompson, and A.J. Strickland III, Strategic Management (Boston, McGraw Hill, 2004) pp. 141-148.

Applying the VRIO framework. According to the VRIO framework, a supportive answer to each questions relative to the firm being analyzed would indicate that the firm can sustain a competitive advantage. Below is an example of how to apply the VRIO framework and the likely outcome for the firm under varying circumstances. Applying the VRIO Frameworkthe value and rarity of a firms resources If a firms resources are: Not valuable Valuable, but not rare Valuable and rare The firm can expect: Competitive Disadvantage Competitive parity (equality) Competitive advantage (At least temporarily)
Then, if there are high costs of imitation, the firm may enjoy a period of sustained competitive advantage. Costs of imitation increase due to some combination of the following: 1) Unique Historical Conditions (path dependence; first mover advantages), 2) Causal Ambiguity (links between resources and advantage foggy), 3) Social Complexity (social relationships not replicable), 4) Patents (double-edged sword since period of protection eventually runs out). Applying the VRIO Framework, integrating the notion of Inimitability If a firms resources are: Valuable, rare, but not costly to imitate Valuable, rare, and costly to imitate The firm can expect: Temporary competitive advantage Sustained competitive advantage (if organized properly)
Organized properly deals with the firms structure and control (governance mechanismscompensation, reporting structures, management controls, relationships, etc). These must be aligned so as to give people ability and incentive to exploit the firms resources. Summary of VRIO, Competitive Implications, and Economic Implications Valuable? No Yes Yes Yes No Yes Yes No Yes Yes Rare? Costly to Imitate? Organized Properly? No Competitive Implications Disadvantage Parity Temporary Advantage Sustained Advantage Economic Implications Below Normal Normal Above Normal (at least for some amount of time) Above Normal

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The VRIO Framework: An Overview

The VRIO Framework: An Overview

The VRIO Framework: An Overview

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