V.R.I.O. Analysis

A FRAMEWORK FOR ANALYSIS : VRIO

• Resource-based analysis of the firm determines which resources and capabilities result in which strengths or weaknesses

• Strategies are to be implemented which exploit (or build) strengths and avoid (or eliminate) weaknesses

• What constitutes a strength or weakness is partially a function of the external environment

• Framework for analysis: VRIO - resources and capabilities should be

o Valuable

o Rare

o Inimitable

o Organization can effectively exploit them

VALUE of resources and capabilities

• A VALUABLE resource or capability (or a combination thereof) must

o Contribute to fulfillment of customer's needs

o At a price the consumer is willing to pay, which is determined by

 Customer preferences

 Available alternatives (including substitute products)

 Supply of related or supplementary goods

• Thus, value is partially a function of external environment (product market, demand forces)

• Changes in consumer tastes, industry structure, technology, etc. can result in changed value

• Resources of different firms can be valuable in different ways (e.g., Timex versus Rolex)

• Value = Lowered costs or increased revenues or both

SCARCITY of resources and capabilities

• Resources and capabilities must be in short supply to create competitive advantage (and go beyond competitive parity)

• What would happen if this were not the case?

• An analysis of the firm's resources and capabilities must include critical assessment whether they are unusual when compared to those of competitors

• How rare does a resource have to be in order to have potential for generating a competitive advantage?

• Example of a rare resource: Wal-Mart's point-of-purchase inventory control system

• To be a source of sustained competitive advantage the rarity of the resource must persist over time

INIMITABILITY of resources dans capabilities

• Requirement for sustained competitive advantage

• Ease of imitation depends on

o Cost asymmetries ("Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?")

o Capabilities of competitors

• Sources of cost asymmetries / cost disadvantages fall into two categories :

o Impediments to imitation : Impede rivals from duplicating critical resources and capabilities

o Early-mover advantages : Set in motion a dynamic that increases the magnitude of that advantage relative to other firms over time

Impediments to imitation :

o Legal restrictions on imitation :

 Patents, copyrights, trademarks

 Governmental control over entry into markets (licensing, certification, quotas on operating rights)

o Superior access to inputs or to customers

o Market size and scale economies

o Intangible barriers to imitation

 Causal ambiguity

 Dependence on historical circumstances

 Other path dependencies

 Social complexity

Degrees of resource and capability imitability

Source: C. Montgomery, "Resources: The essence of Corporate Advantage", Harvard Business School Case N1-792-064.

• Cannot be imitated : Patents, unique