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The VRIO Framework

The document discusses the VRIO framework for evaluating a firm's resources and capabilities to determine if they provide a competitive advantage. It defines the four criteria - valuable, rare, costly to imitate, and organized properly. Resources that meet all four criteria can provide a sustained competitive advantage.

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Sekarini Adhiati
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56 views19 pages

The VRIO Framework

The document discusses the VRIO framework for evaluating a firm's resources and capabilities to determine if they provide a competitive advantage. It defines the four criteria - valuable, rare, costly to imitate, and organized properly. Resources that meet all four criteria can provide a sustained competitive advantage.

Uploaded by

Sekarini Adhiati
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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The VRIO Framework

Amie Kusumawardhani
Core Competencies

 When the four key criteria of resources and


capabilities are met, they become core
competencies
 Core competencies serve as a source of
competitive advantage
 Managerial competencies are especially
important
Criteria for Resources and Capabilities
That Become Core Competencies

Valuable Rare

Core
Competencies

Nonsubstitutable Costly to Imitate


How Resources and Capabilities
Provide Competitive Advantage
Valuabl Allow the firm to exploit opportunities or
e neutralize threats in its external environment

Rare Possessed by few, if any, current and potential


competitors

Costly to imitate When other firms cannot obtain them or must


obtain them at a much higher cost

Nonsubstitutable The firm is organized appropriately to obtain the


full benefits of the resources in order to realize a
competitive advantage
Barney & Hesterly (2006)

 the VRIO (Value, Rare, Inimitability,


Organized) framework as a good tool to
examine the internal environment of a firm

 VRIO stands for four questions one must ask


about a resource or capability to determine
its competitive potential
Four Questions (1)

 The Question of Value: Does a resource enable


a firm to exploit an environmental opportunity,
and/or neutralize an environmental threat?

 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?]
Four Questions (2)

 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?]

 The Question of Organization: Are a


firm’s other policies and procedures
organized to support the exploitation of its
valuable, rare, and costly-to-imitate
resources?”
Types of Resources should be evaluated
(Types of resources lead to a competitive
advantage)

1) Tangible resources
2) Intangible resources
3) Organizational capabilities
Tangible Resources
 Firm’s cash and cash equivalents
Financial  Firm’s capacity to raise equity
 Firm’s borrowing capacity

 Modern plant and facilities


Physical  Favorable manufacturing locations
 State-of-the-art machinery and equipment

 Trade secrets
Technological  Innovative production processes
 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

Innovation and  Technical and scientific skills


Creativity  Innovation capacities
 Brand name
 Reputation with customers for quality
Reputation and reliability
 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 
Innovativeness or products
service and services

Excellent product 
Ability to hire, motivate, and
development capabilities retain human capital
Summary of VRIO, Competitive
Implications & Economic Implications
Costly to Organize Competitive Economic
Valuable? Rare? d Implications
Imitate? Properly? Implications
No No No No Disadvantage Below Normal

Parity
Yes No No No (equality) Normal

Above Normal
Temporar (at least for
Yes Yes No No y some amount of
Advantage time)

Sustained
Yes Yes Yes Yes Advantag Above Normal
e
Summary of VRIO, Competitive Implications & Economic
Implications
Resources/ Valuable? Rare? Costly to Organize Competitive Economic
Skills Imitate? d Implication Implications
Properly?

A Below
No No No No Disadvantage Normal
B Parity
Yes No No No (equality) Normal

C
Above
Normal
Temporar (at least for
Yes Yes No No y some
Advantage amount of
time)

D Sustained Above
Yes Yes Yes Yes Advantage Normal
Organized properly

 deals with the firm’s structure and control


(governance mechanisms—compensation,
reporting structures, management controls,
relationships, etc).

 These must be aligned so as to give people


ability
and incentive to exploit the firm’s
resources.
Competitive Advantage and
Sustainable Competitive Advantage

 When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage
over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.

 A competitive advantage exists when the firm is able to deliver


the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its
customers and superior profits for itself.
Resource-based View

 A resource-based view emphasizes that a firm utilizes


its resources and capabilities to create a competitive
advantage that ultimately results in superior value
creation

 To develop a competitive advantage, the firm must


have resources and capabilities that are superior to
those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was
doing and any advantage quickly would disappear.
A Model of Competitive Advantage

Resources

Cost Advantage
Distinctive Value
Competencies or
Differentiation Creation
Advantage

Capabilities
Resources

are the firm-specific assets useful for creating a cost or


differentiation advantage and that few competitors can
acquire easily.
Examples :
 Patents and trademarks
 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity
Capabilities

 refer to the firm's ability to utilize its resources effectively. An


example of a capability is the ability to bring a product to market
faster than competitors. Such capabilities are embedded in the
routines of the organization and are not easily documented as
procedures and thus are difficult for competitors to replicate

 The firm's resources and capabilities together form its distinctive


competencies. These competencies enable innovation,
efficiency, quality, and customer responsiveness, all of which can
be leveraged to create a cost advantage or a differentiation
advantage.

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