Question

Critically evaluate the VRIO framework.

Answer 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 development of this framework tool started in 1991 by Jay B Barney in his work ‘Firm Resources and Sustained Competitive Advantage’. In this book, he pinpointed four factors that contribute to a firm’s resources to become a source of sustained competitive advantage. Originally this framework was called VRIN. He improved VRIN framework in 1995 in this later work, ‘Looking Inside for Competitive Advantage’ and named it VRIO.

VRIO is an acronym for a four-question framework of value, rarity, imitability, and organization. These four components are typically approached in the style of a decision tree:

• Value: Do you offer a resource that adds value for customers? Are you able to exploit an opportunity or neutralize competition with an internal capability?This refers to the value of the resource used; how expensive is it, is it easily available, should it be purchased, rented, or leased? Should the resource be too expensive, it may be better to outsource it. It is, after all, about utilized opportunities and the value that a resource will ultimately generate for the company. Take the rental of a large office building, for example. If calculations show the rental fee to be too exorbitant and the purchase of a property would be cheaper in the long run, then it is a good idea to terminate the rental agreement and purchase the property using a loan.
  • No: You are at a competitive disadvantage and need to reassess your resources and capabilities to uncover value.
  • Yes: If value is established, move on in your VRIO analysis to rarity.

• Rarity:This concerns the rarity of the resource or its scarcity when it comes to purchasing. How rare or scarce is the resource? If the resource is valuable, but not scarce, the organisation may compare it to that of competitors. If it is a very expensive and scarce resource, then the company can use it to distinguish itself from its competitors. The rarer or scarcer a resource, the greater the competitive advantage. The company will then be able to use an absolutely unique product to keep the competition at bay. Take an exclusive fishing company, for example, which distinguishes itself by being one of the few suppliers of black caviar to high class seafood restaurants. Do you control scarce resources or capabilities? Do you own something that’s hard to find yet in demand?
  • No: You have value but lack rarity, putting your company in a position of competitive parity. Your resources are valuable but common, which makes competing in the marketplace more challenging (but not impossible). It’s recommended to go back one step and reassess.
  • Yes: With value and rarity identified, your next hurdle is imitability.

• Imitability: This concerns the degree of imitation when it comes to resources. To what extent is it possible to imitate the product, allowing competitors to produce similar products? When a resource is valuable and scarce and inexpensive to replicate, it will not provide a competitive advantage. On the other hand, should the resource be difficult to replicate, the competitive advantage will be significant. For example, where the aforementioned caviar be replaced with pink salmon eggs that are a lot cheaper, it is the taste of the end product that ultimately determines whether this is a good substitute. If restaurants decide against purchasing this alternative for lack of quality, then the competitive advantage is great when it comes to imitability.Is it expensive to duplicate your organization’s resource or capability? Is it difficult to find an equivalent substitute to compete with your offerings?
  • No: If your resource has value and rarity, but is affordable or easy to copy, you have a temporary competitive advantage. It will require considerable effort to stay ahead of competitors and differentiate your services—go back one step and reassess.
  • Yes: You offer something that’s valuable, rare, and hard to imitate—now the focus is on your organization.

• Organization: This concerns the arrangement of tasks and the ranking of all actions that are yet to be executed. It goes without saying that the creation of a product requires a lot of resources. These resources must be ordered, price agreements must be established, comparisons should be made, and assembly must take place. These are merely a few of the actions that require adequate organisation. The organisation of tasks involves multiple departments on a tactical level. At the same time, operational employees in the workplace must know exactly what is expected of them. Resources must be processed and used as efficiently as possible. A company should therefore always consider whether its internal administration is in order and whether structural elements are properly adapted to the processing of these particular resources. Is nothing going to waste?Does your company have organized management systems, processes, structures, and culture to capitalize on resources and capabilities?
  • No: Without the internal organization and support, it will be difficult to fully realize the potential of your valuable, rare, and costly-to-imitate resources. Your company will have a unused competitive advantage and will need to reassess how to attain the needed organization.
  • Yes: Your company has achieved the ultimate goal of sustained competitive advantage when it has successfully identified all four components of the VRIO framework.