VRIO Framework

Introduction

VRIO Framework is a good tool to examine the internal environment analysis of the company[1].
"VRIO" stand for:
  • Value (the question of value)
  • Rarity (the question of rarity)
  • Imitability (the question of imitability)
  • Organization (the question of organization)

The company/firm need to ask themselves about the resources or capability to determine its competitive potential. VRIO is a mechanism that integrate two existing theoretical frameworks: the positioning perspective and the resource-based view. It is the primary tool for accomplishing internal analysis.

Value

The "V" in "VRIO" is basically referring to whether the firm/company resources and capability enable them to exploit an environment/external opportunity, and/or neutralize an external threat. This means that if the resources are very valuable, then it can be considered as strength to the firm/company, otherwise it will be the firm/company weaknesses. In the case study of Anheuser-Bush and Miller Brewing[2] , being an American beer, the strength of the company in United States is consider valuable, whereas it is less valuable when the beer is being introduces to European countries. Thus this give the firm/company (Miller Brewing) an understanding of its products values in the European countries and come out with a different business strategy/approach to promotes it products.

The value of these resources and capabilities will generally manifest itself in either higher revenues or lower costs or both, once the firm/company start to exploit opportunity or neutralize threats. Firm/company can use Value-Chain Analysis as a way to identify it valuable resources and capabilities. Same industries may or may not have the same business activities, thus its value-chain activities that the firm/company engage in, may end up developing different sets of resources and capabilities. To understand a firm/company value-chain, one can use "The Generic Value Chain developed by McKinsey and Company" or "The Generic Value Chain developed by Michael Porter" to evaluate its value-chain activities.

Rarity

The "R" in "VRIO" is referring to value of the firm/company resources and capabilities which is rare, meaning that the resources or capabilities is currently being 'controlled' by a small group of competing firms. If the number of competing firm already possess particular valuable resources and capabilities, then the resources is unlikely to be a source of competitive advantage for any of them. How rare a valuable resource or capability to have the potential for generating a competitive advantage varies from situation to situation.

If the resources or capabilities of a firm/company is very unique, then the firm/company will have the competitive advantage over its competitors.

Imitability

The "I" in "VRIO" is referring to how costly for the firm/company that do not have or possess the particular valuable resources and capabilities will face a cost disadvantage in obtaining or developing them, comparing to firms/companies that already have such resources, in which will give them a sustained competitive advantage. If the competitors have no cost disadvantage in acquiring or developing the needed resources, then this imitative approach will generate competitive parity in the industry.

Generally, the imitation can occurs in two ways:
  • Direct duplication or imitation: Firm/company will directly imitate the resources possessed by the firm/company with a competitive advantage. In the case of ESPN's "X-Games" vs NBC's "Gravity Games" is an example of direct imitation of resources. If the cost of imitation is too high, then the firm/company that possess these resources and capabilities may obtain a sustained competitive advantage. If the cost of imitation is not too high, then the competitive advantage will be temporary or short-lived.
  • Substitution: if the substitution resources exist and if the imitating firm do not face a cost disadvantage in obtaining them, then the competitive advantage will be temporary. If these resources have no substitutes or cost of acquiring is greater or costlier than obtaining the original resources, then competitive advantages can be sustained.

Organization

The "O" in "VRIO" is referring to how the firm/company organized to exploit the full competitive potential of its resources and capabilities, in which in order to fully realizing the competitive advantage, the organization need to have appropriate organization structure, management controls and compensation policies.
  • A firm/company formal reporting structure is a description of who in the organization report to whom.
  • Management controls systems include a range of formal and informal mechanisms to ensure the managers are behaving in ways consistent with a firm's strategies.
    • Formal management controls: Firm budgeting and reporting activities that keep people higher up in a firm organization chart informed about the action taken by the people lower in the organization chart.
    • Information management controls: Firm culture and willingness of employees to monitor each others' behaviour.
  • Compensation policies are the ways that firms pays employees. Such policies create incentives for employees to behave in certain ways.


VRIO.JPG
Figure1: VRIO Framework


Applying VRIO Framework

As the figure 1 above, the firm/organization 1st need to understand its resources and capability, whether the resources of the firm/company is valuable (external condition). If the resources and capability is not valuable then is will be rigidity to the firm/company else it will be a resources or competence for them to gain advantage.

The firm/organization is organized to exploited the opportunity (internal condition) from its resources and capability. If the firm/company is not ready or organized, then the firm/company will miss the opportunity to strive in the industry.

The firm/company resources and capability is it rare, if it very rare then the firm/company will have a competitive advantage, but if the rarity is not tat significant, then the firm/company resources and capability is more towards competitive parity.

Cost to imitate by other competitors is it too high and difficult to be achieve by the competitors, if it is hard or not easy to imitate by the competitor or its required high cost to derives, then it will be a sustained competitive advantage for the firm/company that possesses the resources and capabilities. If the cost to imitate is low, then it will be a temporary competitive advantage.

Benefits of the VRIO Framework

VRIO creates a decision-making framework for students to use in analyzing case and business situation. It enables students to better analyze business cases and situation - the goal of the course.
  1. ^ Barney, J. and Hesterly, W., 2008, Strategic Management and Competitive Advantage: Concepts and Cases, Second Edition, Pearson Education International, USA.
  2. ^ Barney, J., (2001) cited in Barney, J. and Hesterly, W., 2008, Strategic Management and Competitive Advantage: Concepts and Cases, Second Edition, Pearson Education International, USA