The VRIO Framework

Amie Kusumawardhani
 Barney & Hesterly (2006)

 the VRIO (Value, Rare, Inimitability,

Organized) framework as a good tool to
examine the internal environment of a firm

 VRIO stands for four questions one must ask

about a resource or capability to determine
its competitive potential
 Four Questions (1)

 The Question of Value: Does a resource enable a

firm to exploit an environmental opportunity,
and/or neutralize an environmental threat?

 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?]
 Four Questions (2)

 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?]

 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?”
 Types of Resources should be evaluated
(Types of resources lead to a competitive
advantage)

1) Tangible resources
2) Intangible resources
3) Organizational capabilities
 Tangible Resources
 Firm’s cash and cash equivalents
Financial  Firm’s capacity to raise equity
 Firm’s borrowing capacity

 Modern plant and facilities

Physical  Favorable manufacturing locations
 State-of-the-art machinery and equipment

 Trade secrets
Technological  Innovative production processes
 Patents, copyrights, trademarks

 Effective strategic planning process

Organizational  Excellent evaluation and control systems
 Intangible Resources
 Experience and capabilities of employees
Human  Trust
 Managerial skills
 Firm-specific practices and procedures
Innovation and  Technical and scientific skills
Creativity  Innovation capacities
 Brand name
 Reputation with customers for quality
Reputation 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  Innovativeness or products

service and services
 Excellent product  Ability to hire, motivate, and
development capabilities retain human capital
 Summary of VRIO, Competitive
Implications & Economic Implications
Valuable? Rare? Costly to Organized Competitive Economic
Imitate? Properly? Implications Implications

No     No Disadvantage Below Normal

Yes No   Parity Normal

(equality)

Above Normal
Temporary (at least for
Yes Yes No   Advantage some amount of
time)

Yes Yes Yes Yes Sustained Above Normal

Advantage
 Summary of VRIO, Competitive Implications &
Economic Implications
Resources/ Valuable? Rare? Costly to Organized Competitive Economic
Skills Imitate? Properly? Implication Implications

A
No  No  No No Disadvantage Below
Normal
B
Parity
Yes No No  No (equality) Normal

C
Above
Normal
Yes Yes No  No Temporary (at least for
Advantage some
amount of
time)

D
Yes Yes Yes Yes Sustained Above
Advantage Normal
 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.
Competitive Advantage and Sustainable
Competitive Advantage

 When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage
over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.

 A competitive advantage exists when the firm is able to deliver

the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its
customers and superior profits for itself.
 Resource-based View

 A resource-based view emphasizes that a firm utilizes

its resources and capabilities to create a competitive
advantage that ultimately results in superior value
creation

 To develop a competitive advantage, the firm must

have resources and capabilities that are superior to
those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was
doing and any advantage quickly would disappear.
A Model of Competitive Advantage

Resources

Distinctive Cost Advantage Value

Competencies or Differentiation Creation
Advantage

Capabilities
 Resources

are the firm-specific assets useful for creating a cost or

differentiation advantage and that few competitors can
acquire easily.
Examples :
 Patents and trademarks
 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity
 Capabilities

 refer to the firm's ability to utilize its resources effectively. An

example of a capability is the ability to bring a product to market
faster than competitors. Such capabilities are embedded in the
routines of the organization and are not easily documented as
procedures and thus are difficult for competitors to replicate

 The firm's resources and capabilities together form its distinctive

competencies. These competencies enable innovation,
efficiency, quality, and customer responsiveness, all of which can
be leveraged to create a cost advantage or a differentiation
advantage.