VRIO Framework

A question summarizing VRIO resource.

Definition
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 competitive advantage.

Understanding the tool

In order to understand the sources of competitive advantage firms are using many tools to
analyze their external (Porter’s 5 Forces, PEST analysis) and internal (Value Chain
analysis, BCG Matrix) environments. One of such tools that analyze firm’s internal resources
is VRIO analysis. The tool was originally developed by Barney, J. B. (1991) in his work
‘Firm Resources and Sustained Competitive Advantage’, where the author identified four
attributes that firm’s resources must possess in order to become a source of
sustained competitive advantage. According to him, the resources must be valuable, rare,
imperfectly imitable and non-substitutable. His original framework was called VRIN. In
1995, in his later work ‘Looking Inside for Competitive Advantage’ Barney has introduced
VRIO framework, which was the improvement of VRIN model. VRIO analysis stands for
four questions that ask if a resource is: valuable? rare? costly to imitate? And is a firm
organized to capture the value of the resources? A resource or capability that meets all four
requirements can bring sustained competitive advantage for the company.
Adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

Valuable
The first question of the framework asks if a resource adds value by enabling a firm to exploit
opportunities or defend against threats. If the answer is yes, then a resource is considered
valuable. Resources are also valuable if they help organizations to increase the perceived
customer value. This is done by increasing differentiation or/and decreasing the price of the
product. The resources that cannot meet this condition, lead to competitive disadvantage. It is
important to continually review the value of the resources because constantly changing
internal or external conditions can make them less valuable or useless at all.

Rare
Resources that can only be acquired by one or very few companies are considered rare. Rare
and valuable resources grant temporary competitive advantage. On the other hand, the
situation when more than few companies have the same resource or uses the capability in the
similar way, leads to competitive parity. This is because firms can use identical resources to
implement the same strategies and no organization can achieve superior performance.

Even though competitive parity is not the desired position, a firm should not neglect the
resources that are valuable but common. Losing valuable resources and capabilities would
hurt an organization because they are essential for staying in the market.

Costly to Imitate
A resource is costly to imitate if other organizations that doesn’t have it can’t imitate, buy or
substitute it at a reasonable price. Imitation can occur in two ways: by directly imitating
(duplicating) the resource or providing the comparable product/service (substituting).

A firm that has valuable, rare and costly to imitate resources can (but not necessarily will)
achieve sustained competitive advantage. Barney has identified three reasons why resources
can be hard to imitate:

 Historical conditions. Resources that were developed due to historical events or over a long
period usually are costly to imitate.
 Causal ambiguity. Companies can’t identify the particular resources that are the cause of
competitive advantage.
 Social Complexity. The resources and capabilities that are based on company’s culture or
interpersonal relationships.

Organized to Capture Value

The resources itself do not confer any advantage for a company if it’s not organized to
capture the value from them. A firm must organize its management systems, processes,
policies, organizational structure and culture to be able to fully realize the potential of its
valuable, rare and costly to imitate resources and capabilities. Only then the companies can
achieve sustained competitive advantage.

Using the tool

Step 1. Identify valuable, rare and costly to imitate resources

There are two types of resources: tangible and intangible. Tangible assets are physical things
like land, buildings and machinery. Companies can easily by them in the market so tangible
assets are rarely the source of competitive advantage. On the other hand, intangible assets,
such as brand reputation, trademarks, intellectual property, unique training system or unique
way of performing tasks, can’t be acquired so easily and offer the benefits of sustained
competitive advantage. Therefore, to find valuable, rare and costly to imitate resources, you
should first look at company’s intangible assets.

Finding valuable resources:

An easy way to identify such resources is to look at the value chain and SWOT analyses.
Value chain analysis identifies the most valuable activities, which are the source of cost or
differentiation advantage. By looking into the analysis, you can easily find the valuable
resources or capabilities. In addition, SWOT analysis recognizes the strengths of the
company that are used to exploit opportunities or defend against threats (which is exactly
what a valuable resource does). If you still struggle finding valuable resources, you can
identify them by asking the following questions:

 Which activities lower the cost of production without decreasing perceived customer value?
 Which activities increase product or service differentiation and perceived customer value?
 Have your company won an award or been recognized as the best in something? (most
innovative, best employer, highest customer retention or best exporter)
 Do you have an access to scarce raw materials or hard to get in distribution channels?
 Do you have special relationship with your suppliers? Such as tightly integrated order and
distribution system powered by unique software?
 Do you have employees with unique skills and capabilities?
 Do you have brand reputation for quality, innovation, customer service?
 Do you do perform any tasks better than your competitors do? (Benchmarking is useful
here)
 Does your company hold any other strengths compared to rivals?

Finding rare resources:

 How many other companies own a resource or can perform capability in the same way in
your industry?
 Can a resource be easily bought in the market by rivals?
 Can competitors obtain the resource or capability in the near future?

Finding costly to imitate resources:

 Do other companies can easily duplicate a resource?

 Can competitors easily develop a substitute resource?
 Do patents protect it?
 Is a resource or capability socially complex?
 Is it hard to identify the particular processes, tasks, or other factors that form the resource?

Step 2. Find out if your company is organized to exploit these resources

Following questions might be helpful:

 Does your company has an effective strategic management process in organization?

 Are there effective motivation and reward systems in place?
 Does your company’s culture reward innovative ideas?
 Is an organizational structure designed to use a resource?
 Are there excellent management and control systems?

Step 3. Protect the resources

When you identified a resource or capability that has all 4 VRIO attributes, you should
protect it using all possible means. After all, it is the source of your sustained competitive
advantage. The first thing you should do is to make the top management aware of such
resource and suggest how it can be used to lower the costs or to differentiate the products and
services. Then you should think of ideas how to make it more costly to imitate. If other
companies won’t be able to imitate a resource at reasonable prices, it will stay rare for much
longer.

Step 4. Constantly review VRIO resources and capabilities

The value of the resources changes over time and they must be reviewed constantly to find
out if they are as valuable as they once were. Competitors are also keen to achieve the same
competitive advantages so they’ll be keen to replicate the resources, which means that they
will no longer be rare. Often, new VRIO resources or capabilities are developed inside an
organization and by identifying them you can protect you sources of competitive advantage
more easily.

VRIO example
Google’s capability evaluated using VRIO framework

Google's VRIO capability

Excellent employee management

Valuable? Rare? Costly to Imitate? Is a company organized to exploit it?

Yes Yes Yes Yes

Result: sustained competitive advantage

Google’s ability to manage their people effectively is a source of both differentiation and cost
advantages. Unlike other companies, which rely on trust and relationship in people
management, Google uses data about its employees to manage them. This capability allows
making correct (data based) decisions about which people to hire and the best way to use
their skills. As a result, Google is able to hire innovative employees that are also very
productive ($1 million in revenue per employee). Besides being valuable, it is also a rare
capability because no other company uses data based employee management so extensively.
Is it costly to imitate? It is costly to imitate, at least, in the near future. First, companies
should build the highly sophisticated software, which is both costly and hard to do. Second,
HR managers should be trained to make data based decisions and forget their old
management methods. Is Google organized to capture value from this capability? Certainly, it
has trained HR managers that know how to use the data and manage people accordingly. It
also has the needed IT skills to collect and manage the data about its employees.

There are many more businesses that have VRIO resources or capabilities, including many of
the companies we analyzed using swot analysis.

Resource Based View

A question summarizing RBV approach.
Definition
The resource-based view (RBV)

is a model that sees resources as key to superior firm performance. If a resource exhibits
VRIO attributes, the resource enables the firm to gain and sustain competitive advantage.
[1]

What is a resource based view?

RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s,
after the major works published by Wernerfelt, B. (“The Resource-Based View of the Firm”),
Prahalad and Hamel (“The Core Competence of The Corporation”), Barney, J. (“Firm
resources and sustained competitive advantage”) and others. The supporters of this view
argue that organizations should look inside the company to find the sources of competitive
advantage instead of looking at competitive environment for it.

The following model explains RBV and emphasizes the key points of it.

According to RBV proponents, it is much more feasible to exploit external opportunities

using existing resources in a new way rather than trying to acquire new skills for each
different opportunity. In RBV model, resources are given the major role in helping
companies to achieve higher organizational performance. There are two types of resources:
tangible and intangible.

Tangible assets are physical things. Land, buildings, machinery, equipment and capital – all
these assets are tangible. Physical resources can easily be bought in the market so they confer
little advantage to the companies in the long run because rivals can soon acquire the identical
assets.

Intangible assets are everything else that has no physical presence but can still be owned by
the company. Brand reputation, trademarks, intellectual property are all intangible assets.
Unlike physical resources, brand reputation is built over a long time and is something that
other companies cannot buy from the market. Intangible resources usually stay within a
company and are the main source of sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and
immobile.

Heterogeneous. The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have the
same amount and mix of resources, they could not employ different strategies to outcompete
each other. What one company would do, the other could simply follow and no competitive
advantage could be achieved. This is the scenario of perfect competition, yet real world
markets are far from perfectly competitive and some companies, which are exposed to the
same external and competitive forces (same external conditions), are able to implement
different strategies and outperform each other. Therefore, RBV assumes that companies
achieve competitive advantage by using their different bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external
forces, can achieve different organizational performance due to the difference in resources.
Apple competes with Samsung in tablets and smartphones markets, where Apple sells its
products at much higher prices and, as a result, reaps higher profit margins. Why Samsung
does not follow the same strategy? Simply because Samsung does not have the same brand
reputation or is capable to design user-friendly products like Apple does. (heterogeneous
resources)

Immobile. The second assumption of RBV is that resources are not mobile and do not move
from company to company, at least in short-run. Due to this immobility, companies cannot
replicate rivals’ resources and implement the same strategies. Intangible resources, such as
brand equity, processes, knowledge or intellectual property are usually immobile.

VRIO framework
(Please visit our article on VRIO framework for more information.)

Although, having heterogeneous and immobile resources is critical in achieving competitive

advantage, it is not enough alone if the firm wants to sustain it. Barney (1991) has identified
VRIN framework that examines if resources are valuable, rare, costly to imitate and non-
substitutable. The resources and capabilities that answer yes to all the questions are the
sustained competitive advantages. The framework was later improved from VRIN to VRIO
by adding the following question: “Is a company organized to exploit these resources?”

VRIO framework adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

Question of Value. Resources are valuable if they help organizations to increase the value
offered to the customers. This is done by increasing differentiation or/and decreasing the
costs of the production. The resources that cannot meet this condition, lead to competitive
disadvantage.
Question of Rarity. Resources that can only be acquired by one or few companies are
considered rare. When more than few companies have the same resource or capability, it
results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least
temporary competitive advantage. However, the resource must also be costly to imitate or to
substitute for a rival, if a company wants to achieve sustained competitive advantage.

Question of Organization. The resources itself do not confer any advantage for a company
if it’s not organized to capture the value from them. Only the firm that is capable to exploit
the valuable, rare and imitable resources can achieve sustained competitive advantage.

Difference between resource-based and

industrial organization views
RBV holds that sustained competitive advantage can be achieved more easily by exploiting
internal rather than external factors as compared to industrial organization (I/O) view. While
this is correct to some degree, there isn’t definite answer to which approach to strategic
management is more important. The chart [1] below shows how industry, firm and other effects
explain firm’s performance. From ~30% to ~45% of superior organizational performance can
be explained by firm effects (resource based view) and ~20% by industry effects (I/O view).
This indicates that the best approach is to look into both external and internal factors and
combine both views to achieve and sustain competitive advantage.