V.R.I.O. Analysis

A FRAMEWORK FOR ANALYSIS : VRIO

* Resource-based analysis of the firm determines which resources and capabilities result in which strengths or weaknesses

* Strategies are to be implemented which exploit (or build) strengths and avoid (or eliminate) weaknesses

* What constitutes a strength or weakness is partially a function of the external environment

* Framework for analysis: VRIO - resources and capabilities should be

o Valuable

o Rare

o Inimitable

o Organization can effectively exploit them

VALUE of resources and capabilities

* A VALUABLE resource or capability (or a combination thereof) must

o Contribute to fulfillment of customer's needs

o At a price the consumer is willing to pay, which is determined by

 Customer preferences

 Available alternatives (including substitute products)

 Supply of related or supplementary goods

* Thus, value is partially a function of external environment (product market, demand forces)

* Changes in consumer tastes, industry structure, technology, etc. can result in changed value

* Resources of different firms can be valuable in different ways (e.g., Timex versus Rolex)

* Value = Lowered costs or increased revenues or both

SCARCITY of resources and capabilities

* Resources and capabilities must be in short supply to create competitive advantage (and go beyond competitive parity)

* What would happen if this were not the case?

* An analysis of the firm's resources and capabilities must include critical assessment whether they are unusual when compared to those of competitors

* How rare does a resource have to be in order to have potential for generating a competitive advantage?

* Example of a rare resource: Wal-Mart's point-of-purchase inventory control system

* To be a source of sustained competitive advantage the rarity of the resource must persist over time

INIMITABILITY of resources dans capabilities

* Requirement for sustained competitive advantage

* Ease of imitation depends on

o Cost asymmetries ("Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?")

o Capabilities of competitors

* Sources of cost asymmetries / cost disadvantages fall into two categories :

o Impediments to imitation : Impede rivals from duplicating critical resources and capabilities

o Early-mover advantages : Set in motion a dynamic that increases the magnitude of that advantage relative to other firms over time

Impediments to imitation :

o Legal restrictions on imitation :

 Patents, copyrights, trademarks

 Governmental control over entry into markets (licensing, certification, quotas on operating rights)

o Superior access to inputs or to customers

o Market size and scale economies

o Intangible barriers to imitation

 Causal ambiguity

 Dependence on historical circumstances

 Other path dependencies

 Social complexity

Degrees of resource and capability imitability

Source: C. Montgomery, "Resources: The essence of Corporate Advantage", Harvard Business School Case N1-792-064.

* Cannot be imitated : Patents, unique assets, unique locations

* Difficult to imitate : Brand loyalty, employee satisfaction, reputation for fairness

* Can be imitated (but may not be) Capacity preemption, economies of scale

* Easy to imitate : Cash, commodities

ORGANIZING to exploit competitive potential of resources and capabilities

The following elements must be in place in order to effectively exploit the resource(s) and/or capability(s):

o Structure

o Management and control systems

o Compensation policies

o Business processes

o Complementary resources and capabilities

* Examples :

o Caterpillar : Global formal reporting structure, global inventory systems

o Wal-Mart: Inventory control system

o Xerox: Highly bureaucratic product development process - failed to exploit enormous opportunities (e.g., PC, mouse, windows-type software, laser printer, "paperless office", ethernet, etc.)

THE VRIO FRAMEWORK

Is a resource or a capability or a combination of resources & capabilities :

Valuable? Rare? Costly to Imitate ? Exploitable by the Organization? Competitive implications Economic performance Strengths or Weaknesses

No - - No Competitive Disadvantage Below normal Weakness

Yes No - to Competitive Parity Normal Strength

Yes Yes No Temporary competitive advantage Above normal Strength and distinctive competence