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VRIOFrom Wikipedia, the free encyclopedia

The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a firm. The basic strategic

process that any firm goes through begins with a vision statement, and continues on through objectives, internal &

external analysis, strategic choices (both business-level and corporate-level), and strategic implementation. The firm

will hope that this process results in a competitive advantage in the marketplace they operate in. VRIO falls into th

internal analysis step of these procedures, but is used as a framework in evaluating just about all resources andcapabilities of a firm, regardless of what phase of the strategic model it falls under. VRIO is an acronym for the fou

question framework you ask about a resource or capability to determine its competitive potential: the question of

Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of

Organization (ability to exploit the resource or capability).

The Question of Value:"Is the firm able to exploit an opportunity or neutralize an external threat with the

resource/capability?"

The Question of Rarity:"Is control of the resource/capability in the hands of a relative few?"

The Question of Imitability:"Is it difficult to imitate, and will there be significant cost disadvantage to a

firm trying to obtain, develop, or duplicate the resource/capability?"

The Question of Organization:"Is the firm organized, ready, and able to exploit the resource/capability?

Question of ValueThe basic question asked by the V in the VRIO framework for internal analysis is Is this

resource or capability valuable to the focal firm? In this case, the definition of value is whether or not the resource

or capability works to exploit an opportunity or mitigate a threat in the marketplace. If it does do one of those two

things, it can be considered a strength of the company. However if it does not work to exploit an opportunity or

mitigate a threat, it is a weakness. Occasionally, some resources or capabilities could be considered strengths in

one industry and weaknesses in a different one. (Strategic Management Journal, 5, pp. 171-180. Barney, J.B.

(1991)). Six common examples of opportunities firms could attempt to exploit are technological change,

demographic change, cultural change, economic climate, specific international events, and legal and politicalconditions. Furthermore, five threats that a resource or capability could mitigate are the threat of buyers, threat of

suppliers, threat of entry, threat of rivalry, and threat of substitutes.

Generally, this exploitation of opportunity or mitigation of threat will result in one of two more outcomes: an increa

in revenues or a decrease in costs (or both).

A great way to identify possibly valuable resources or capabilities is by looking into the companys value chain. In

the value chain, a business develops its products and services step-by-step, with each function along the way

adding some sort of value to the product or service. The choices a firm makes regarding its value chain (including

how to operate, and which steps to operate in) is closely tied to the firms resources and capabilities, thereforemaking it a valuable tool in identifying value in resources and capabilities. If some asset that your company has

allows you to operate more effectively in a certain portion of the value chain, chances are that resource will be

considered valuable by the VRIO framework.

Question of RarityHaving rarity in a firm can lead to competitive advantage. Rarity is when a firm has a valuable

resource or capability that is absolutely unique among a set of current and potential competitors. How to determine

if your resource is rare and creates competitive advantage? A firms resources and capabilities must be both short

in supply and persist over time to be a source of sustained competitive advantage. If both elements (short supply

and persistence over time) arent met, then the resources and capabilities a firm has cant be a sustained
http://en.wikipedia.org/wiki/Organizationhttp://en.wikipedia.org/wiki/Imitationhttp://en.wikipedia.org/wiki/Value_(economics)http://en.wikipedia.org/wiki/Acronymhttp://en.wikipedia.org/wiki/Organizationhttp://en.wikipedia.org/wiki/Imitationhttp://en.wiktionary.org/wiki/Rarehttp://en.wikipedia.org/wiki/Value_(economics)http://en.wikipedia.org/wiki/Acronym


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competitive advantage. If a resource is not rare, then perfect competition dynamics are likely to be observed.

Example of Rarity - A janitor who defines his/her job as helping the firm make and sell better products instead of

ust referring to their job as simply cleaning up facilities is quite unusual. Most individuals would agree that this firm

has a source of competitive advantage over other firms in their industry because their objectives and strategies are

transparent throughout the entire firm; unlike many other firms where only top tier management is the only group th

believes in their objectives and strategies (Barney & Hesterly, 2011).

Question of ImitabilityThe primary question of imitability asked in the VRIO framework in internal analysis is

that Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared tofirms that already possess it? Firms with valuable and rare resources, which are hard to imitate by other firms, can

gain the first-mover advantages in the market and can hence gain competitive advantage.

A firm can either exploit an external opportunity or neutralize an external threat by using its rare and valuable

resources. In this case, the firm can gain competitive advantage. When the firms competitors discover this

competitive advantage, they may respond in two ways. First, they can choose to ignore the profit gaining by the

competitive advantage and continue to operate in their old ways. Second, they can choose to analyze and duplicat

the competitive strategy of its rival. If there is no cost or little cost in obtaining this rare and valuable resource, the

fellow firms can imitate the competitive advantage in order to gain competitive parity (firms that create the same

economic value as their rivals experience competitive parity). However, sometimes it is hard for other firms to getaccess to the resources and imitate the innovative companys strategy. As a result, the innovative companies that

implement its strategies based on costly-to-imitate and valuable resources can gain long-term competitive

advantage, which ensures a companys sustained success (Hill & Jones, 1998). Hence, to sustain the competitive

advantage, it is not sufficient for a firm's resources and capabilities to be valuable and rare - they should also be

inimitable.

Forms of imitation

In most cases, imitation appears in two ways, direct duplication or substitution. After observing other firms

competitive advantage, a firm can directly imitate the resource possessed by the innovative firm. If the cost to

imitate is high, the competitive advantage will be sustained. If not, the competitive advantage will be temporary.Otherwise, an imitating firm can attempt to use a substitute in order to gain similar competitive advantage of the

innovative firm.

Cost of imitation

Cost of imitation is usually high in order to gain a competitive advantage due to the following reasons: unique

historical conditions, causal ambiguity, social complexity, patents.

Unique Historical Conditions: an innovative firm gains low-cost access to rare resources in a particular time and

space.

Causal Ambiguity: an imitating firm cannot tell the factors that lead to the competitive advantage of an innovative

firm.

Social Complexity: when the resources involved in gaining competitive advantage is based on interpersonalrelationship, culture and other social background.

Patents: a source of long-term competitive advantage certificated by authority in a few industries such as

pharmaceuticals (Barney & Hesterly, 2011).

Question of OrganizationOnce you have realized the value, rarity and imitability of your companys resources

and capabilities, the next step is to organize your company in a way to exploit these resources. If done successfully

our company can enjoy a period of sustained competitive advantage. There are many components to this questio

of organization. They include, but are not limited to, the companys formal reporting structure, management contro

systems and compensation policies. Formal reporting structures are simply a description of who in the firm reports


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to whom. Management control systems include both formal and informal means to make sure that managers

decisions align with a firms strategies. Formal control systems can consist of budgeting and reporting activities that

keep top management informed of decisions made by employees lower down in the firm. Informal controls can

include a companys culture and encouraging employees to monitor each other. Firms incentivize their employees t

behave a desired way through compensation policies. These policies can include bonuses, stocks or salary

increases but can also include non-monetary incentives such as additional vacation days or a larger office. These

components of organization are known at complementary capabilities and resources because alone they do not

provide much value. However, in combination with a firms other resources and capabilities, it can result in

sustained competitive advantage. Without the correct organization, even firms with valuable, rare and costly to

imitate resources and capabilities can suffer competitive disadvantage (Barney & Hesterly, 2011).

Valuable? Rare? Costly to imitate? Exploited by the organization? Competitive implication

No Competitive disadvantage

Yes No Competitive parity

Yes Yes No Temporary competitive advantage

Yes Yes Yes No Unexploited competitive advantage

Yes Yes Yes Yes Sustained competitive advantage

See also

SWOT analysis

Management

Strategic management

Strategic planning

System dynamics

References

Barney, Jay B and Hesterly, William S. Strategic Management and Competitive Advantage: Concepts. 2005

Pearson Education, Inc., Upper Saddle River, New Jersey, 07458.

Strategic Management Journal, 5, pp. 171-180. Barney, J.B. (1991). Firm resources and sustained competitive

advantage. Journal of Management, 19, pp. 99-120.

Hill, C.W.L., and G.R. Jones (1998). Strategic Management Theory: An Integrated Approach, 4th. Boston:Houghton Mifflin.

Barney, J. B., & Hesterly, W. S. (2010). VRIO Framework. In Strategic Management and Competitive

Advantage (pp. 68-86). New Jersey: Pearson.

External links

http://falcon.jmu.edu/~gallagsr/WDFPD-Internal.pdf

http://www.ecofine.com/strategy/RBV%20of%20the%20firm.htm
http://www.ecofine.com/strategy/RBV%20of%20the%20firm.htmhttp://falcon.jmu.edu/~gallagsr/WDFPD-Internal.pdfhttp://en.wikipedia.org/wiki/System_dynamicshttp://en.wikipedia.org/wiki/Strategic_planninghttp://en.wikipedia.org/wiki/Strategic_managementhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/SWOT_analysis


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