VRIO Analysis

VRIO Analysis
Given that almost anything a firm possesses can be considered a resource or capability how should you attempt to narrow down the ones that explain why firm performance differs? In order to lead to a sustainable competitive advantage a resource or capability should be Valuable, Rare, Inimitable (including non-substitutable), and Organized. This VRIO framework is the foundation for internal analysis. If you ask a business person why their firm does well while others do poorly, a common answer is likely to be "our people." But this is really not an answer, it may be the start of an answer, but you need to probe deeper, what is it about "our people" that are especially valuable? Why don't competitors have similar people? Can't competitors hire our people away? Or is it that there something special about the organization that brings out the best in people? These kinds of questions form the basis of VRIO and get to the heart of why some resources help firms more than others. Valuable. A resource is valuable if it helps the organization meet an external threat or exploit an opportunity. While it may not help the firm outperform its competitors, it can still be labeled a strength. One good way to think about valuable resources is to ask how they help the company. Common competitive foundations (a.k.a. the generic building blocks) for firms are efficiency, quality, customer responsiveness, and innovation. If a resource helps bring about any one of these four things then it is valuable. Efficiency is simply the amount of output for any unit of input, and is probably the most obvious way a firm can obtain an advantage. If a firm is a more efficient producer of goods or services than its competitors then it has an advantage. Innovation is devising new products or services (product innovation) or new ways of producing/delivering goods or services (process innovation). Product innovation is of direct benefit to the organization because an organization can have at least a temporary monopoly on the new product. Process innovation generally influences efficiency rather than having a direct effect. Quality is the idea that the good does what it is designed for exceptionally well. Customer Responsiveness is simply meeting the needs of the customer exceptionally well. It is probably the broadest of the three because it can encompass things like merchandise returns, hours of availability, etc A resource that isn't even valuable, e.g. tarnished brand name, is best labeled a weakness. Rare. A resource is rare simply if it is not widely possessed by other competitors. Of the criteria this is probably the easiest to judge. For example, Coke's brand name is valuable but most of Coke's competitors (Pepsi, 7 Up, RC) also have widely recognized brand names as well, making it not that rare. Of course, Coke s brand may be the most recognized, but that makes it more valuable not more rare in this case. Inimitable. A resource is inimitable and nonsubstitutable if it is difficult for another firm to acquire it or a substitute something else in its place. This is probably the toughest criteria to examine because given enough time and money almost ANY resource can be imitated. Even patents only last 17 years and can be invented around in even less time. Therefore, one way to think about this is to compare how long you think it will take for competitors to imitate or substitute something else for that resource and compare it to the useful life of the product. Another way to help determine if a resource is inimitable is why/how it came about. Inimitable
resources are often a result of historical, ambiguous, or socially complex causes. For example, the U.S. Army paid for Coke to build bottling plants around the world during World War II. This is an example of history creating an inimitable asset. Generally, intangible (also called tacit) resources or capabilities, like corporate culture or reputation, are very hard to imitate and therefore inimitable. Organized. A resource is organized if the firm is able to actually use it. Generally, organization is frequently neglected by strategy because it often deals with the inner workings of firm management. The good news is that rarely are firms not organized to exploit their valuable resources. However, if you analysis does turn up a valuable, rare, and inimitable resource that the firm is not taking advantage of, then this should probably be your number one recommendation! Many scholars refer to core competencies. A core competency is simply a resource that is VRIO. While VRIO resources are the best, they are quite rare and it is not uncommon for successful firms to simply be combinations of a large number of VR_O or even V_ _ O resources and capabilities. Recall that even a V _ _ O resource can be considered a strength under a traditional SWOT analysis. Finally remember that VRIO analysis is done on each individual resource not on the firm as a whole.

VRIO Analysis

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