VRIO Analysis.pptx

Business

1. 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 . The VRIO framework is  an internal analysis that helps businesses identify the advantages and resources that give them a competitive edge

2. 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.  .

3. 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

4. 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.

5. Valuable A resource or capability is said to be valuable if it allows the firm to exploit opportunities or negate threats in the environment. If a resource does not allow a firm to minimize threats or exploit opportunities, it does not enhance the competitive position of the firm.

6. Rare A resource is rare simply if it is not widely possessed by other competitors. Of all of the VRIO criteria this is probably the easiest to judge. For example, Coke’s brand name is valuable but most of Coke’s competitors (Pepsi, 7Up, RC) also have widely recognized brand names, 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.

7. Inimitable  A resource is inimitable and non-substitutable if it is difficult for another firm to acquire it or to substitute something else in its place. A valuable and rare resource or capability will grant a competitive advantage as long as other firms do not gain subsequent possession of the resource or a close substitute. If a resource is valuable and rare and responsible for a market leader competitive advantage, it is likely that competitors lacking the resource or capability will do all that they can to obtain the resource or capability themselves.

8. Organization The fourth and final VRIO criterion that determines whether a resource or capability is the source of competitive advantage recognizes that mere possession or control is necessary but not sufficient to gain an advantage. The firm must likewise have the organizational capability to exploit the resources. 

9. Example of a Core Competency (VRIO ) The company now known as RTW Retailwinds has began implementing celebrity brands, including Kate Hudson,  which is now part of their core competency as they continue to expand. The Kate Hudson line of products as well as any future celebrity brands are all valuable, rare and imitable within the same quality standards and can be difficult for other retailers to copy through the same celebrity partners. RTW is one of the largest omni -channel retailers for women and will only continue to grow.

10. Using the tool Step 1. Identify valuable, rare and costly to imitate 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.

11. If you still struggle finding valuable resources, you can identify them by asking the following questions : W hich 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 ?

12. 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 ?

13. 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?

14. 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 ?

15. Step 3. Protect the resources 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.

16. Step 4. Constantly review VRIO resources and capabilities  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.