1Barney 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:
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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 firm’s 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.
Reputation with customers for quality 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 service
Excellent product development capabilities
Innovativeness or products and services
Ability to hire, motivate, and retain human capital
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 Framework—the value and rarity of a firm’s resources If a firm’s resources are:
The firm can expect:
Valuable, but not rare
Competitive parity (equality)
Valuable and rare
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 firm’s resources are:
The firm can expect:
Valuable, rare, but not costly to imitate
Temporary competitive advantage
Valuable, rare, and costly to imitate
Sustained competitive advantage (if organized properly)
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.
Summary of VRIO, Competitive Implications, and Economic Implications Valuable?