VRIO Framework ( valuable, rare, imperfectly imitable, non-substituta... http://nichiera.blogspot.com/2016/03/vrio-framework-valuable-rare.ht...

VRIO Framework ( valuable,

4th March 2016
rare, imperfectly imitable, non-
substitutable)
Source: https://www.strategicmanagementinsight.com/tools/vrio.html
[https://www.strategicmanagementinsight.com/tools/vrio.html]

Definition

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.

Understanding the tool

In order to understand the sources of competitive advantage firms
are using many tools to analyze their external (Porter’s 5 Forces
[https://www.strategicmanagementinsight.com/tools/porters-five-
forces.html] , PEST analysis
[https://www.strategicmanagementinsight.com/tools/pest-pestel-
analysis.html] ) and internal (Value Chain analysis
[https://www.strategicmanagementinsight.com/tools/value-chain-
analysis.html] , BCG Matrix
[https://www.strategicmanagementinsight.com/tools/bcg-matrix-growth-
share.html] ) environments. One of such tools that analyze firm’s
internal resources is VRIO analysis. The tool was originally
developed by Barney, J. B. (1991) in his work ‘Firm Resources and
Sustained Competitive Advantage’, where the author identified four
attributes that firm’s resources must possess in order to become a
source of sustained competitive advantage
[https://www.strategicmanagementinsight.com/topics/competitive-
advantage.html] . According to him, the resources must be valuable,
rare, imperfectly imitable and non-substitutable. His original
framework was called VRIN. In 1995, in his later work ‘Looking
Inside for Competitive Advantage’ Barney has introduced VRIO
framework, which was the improvement of VRIN model. VRIO
analysis stands for four questions that ask if a resource is:
valuable? rare? costly to imitate? And is a firm organized to
capture the value of the resources? A resource or capability that
meets all four requirements can bring sustained competitive
advantage for the company.

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Adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

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Valuable
The first question of the framework asks if a resource adds value
by enabling a firm to exploit opportunities or defend against threats.
If the answer is yes, then a resource is considered valuable.
Resources are also valuable if they help organizations to increase
the perceived customer value. This is done by increasing
differentiation or/and decreasing the price of the product. The
resources that cannot meet this condition, lead to competitive
disadvantage. It is important to continually review the value of the
resources because constantly changing internal or external
conditions can make them less valuable or useless at all.

Rare
Resources that can only be acquired by one or very few companies
are considered rare. Rare and valuable resources grant temporary
competitive advantage. On the other hand, the situation when more
than few companies have the same resource or uses the capability
in the similar way, leads to competitive parity. This is because firms
can use identical resources to implement the same strategies and
no organization can achieve superior performance.

Even though competitive parity is not the desired position, a firm

should not neglect the resources that are valuable but common.
Losing valuable resources and capabilities would hurt an
organization because they are essential for staying in the market.

Costly to Imitate
A resource is costly to imitate if other organizations that doesn’t
have it can’t imitate, buy or substitute it at a reasonable price.
Imitation can occur in two ways: by directly imitating (duplicating)

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the resource or providing the comparable product/service

(substituting).

A firm that has valuable, rare and costly to imitate resources can
(but not necessarily will) achieve sustained competitive advantage.
Barney has identified three reasons why resources can be hard to
imitate:

Historical conditions. Resources that were developed due to

historical events or over a long period usually are costly to
imitate.
Causal ambiguity. Companies can’t identify the particular
resources that are the cause of competitive advantage.
Social Complexity. The resources and capabilities that are
based on company’s culture or interpersonal relationships.

Organized to Capture Value

The resources itself do not confer any advantage for a company if
it’s not organized to capture the value from them. A firm must
organize its management systems, processes, policies,
organizational structure and culture to be able to fully realize the
potential of its valuable, rare and costly to imitate resources and
capabilities. Only then the companies can achieve sustained
competitive advantage.

Using the tool

Step 1. Identify valuable, rare and costly to imitate resources

There are two types of resources: tangible and intangible. Tangible

assets are physical things like land, buildings and machinery.
Companies can easily by them in the market so tangible assets are
rarely the source of competitive advantage. On the other hand,
intangible assets, such as brand reputation, trademarks,
intellectual property, unique training system or unique way of
performing tasks, can’t be acquired so easily and offer the benefits
of sustained competitive advantage. Therefore, to find valuable,
rare and costly to imitate resources, you should first look at
company’s intangible assets.

Finding valuable resources:

An easy way to identify such resources is to look at the value chain

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and SWOT analyses. Value chain analysis identifies the most

valuable activities, which are the source of cost or differentiation
advantage. By looking into the analysis, you can easily find the
valuable resources or capabilities. In addition, SWOT analysis
recognizes the strengths of the company that are used to exploit
opportunities or defend against threats (which is exactly what a
valuable resource does). If you still struggle finding valuable
resources, you can identify them by asking the following questions:

Which activities lower the cost of production without

decreasing perceived customer value?
Which activities increase product or service differentiation and
perceived customer value?
Have your company won an award or been recognized as the
best in something? (most innovative, best employer, highest
customer retention or best exporter)
Do you have an access to scarce raw materials or hard to get
in distribution channels?
Do you have special relationship with your suppliers? Such as
tightly integrated order and distribution system powered by
unique software?
Do you have employees with unique skills and capabilities?
Do you have brand reputation for quality, innovation, customer
service?
Do you do perform any tasks better than your competitors do?
(Benchmarking is useful here)
Does your company hold any other strengths compared to
rivals?

Finding rare resources:

How many other companies own a resource or can perform

capability in the same way in your industry?
Can a resource be easily bought in the market by rivals?
Can competitors obtain the resource or capability in the near
future?

Finding costly to imitate resources:

Do other companies can easily duplicate a resource?

Can competitors easily develop a substitute resource?
Do patents protect it?
Is a resource or capability socially complex?

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Is it hard to identify the particular processes, tasks, or other

factors that form the resource?

Step 2. Find out if your company is organized to exploit these

resources

Following questions might be helpful:

Does your company has an effective strategic management

process [https://www.strategicmanagementinsight.com/topics
/strategic-planning-process.html] in organization?
Are there effective motivation and reward systems in place?
Does your company’s culture reward innovative ideas?
Is an organizational structure designed to use a resource?
Are there excellent management and control systems?

Step 3. Protect the resources

When you identified a resource or capability that has all 4 VRIO

attributes, you should protect it using all possible means. After all, it
is the source of your sustained competitive advantage. The first
thing you should do is to make the top management aware of such
resource and suggest how it can be used to lower the costs or to
differentiate the products and services. Then you should think of
ideas how to make it more costly to imitate. If other companies
won’t be able to imitate a resource at reasonable prices, it will stay
rare for much longer.

Step 4. Constantly review VRIO resources and capabilities

The value of the resources changes over time and they must be
reviewed constantly to find out if they are as valuable as they once
were. Competitors are also keen to achieve the same competitive
advantages so they’ll be keen to replicate the resources, which
means that they will no longer be rare. Often, new VRIO resources
or capabilities are developed inside an organization and by
identifying them you can protect you sources of competitive
advantage more easily.

VRIO example
Google’s capability evaluated using VRIO framework

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Google's VRIO capability

Excellent employee management

Valuable? Rare? Costly to Imitate? Is a company organized to exploit it?

Yes Yes Yes

Result: sustained competitive advantage

Google’s ability to manage their people effectively is a source of

both differentiation and cost advantages. Unlike other companies,
which rely on trust and relationship in people management, Google
uses data about its employees to manage them. This capability
allows making correct (data based) decisions about which people
to hire and the best way to use their skills. As a result, Google is
able to hire innovative employees that are also very productive ($1
million in revenue per employee). Besides being valuable, it is also
a rare capability because no other company uses data based
employee management so extensively. Is it costly to imitate? It is
costly to imitate, at least, in the near future. First, companies
should build the highly sophisticated software, which is both costly
and hard to do. Second, HR managers should be trained to make
data based decisions and forget their old management methods. Is
Google organized to capture value from this capability? Certainly, it
has trained HR managers that know how to use the data and
manage people accordingly. It also has the needed IT skills to
collect and manage the data about its employees.

Sources
1. Barney, J. B. (1995). Looking Inside for Competitive
Advantage. Academy of Management Executive, Vol. 9, Issue
4, pp. 49-61
2. Rothaermel, F. T. (2012). Strategic Management: Concepts
and Cases. McGraw-Hill/Irwin, p. 91
3. Sullivan, J. at ere.net (2013). How Google Became the #3
Most Valuable Firm by Using People Analytics to Reinvent HR.
Available at:http://www.ere.net/2013/02/25/how-google-
became-the-3-most-valuable-firm-by-using-people-analytics-to-
reinvent-hr/ [http://www.ere.net/2013/02/25/how-google-became-

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the-3-most-valuable-firm-by-using-people-analytics-to-reinvent-hr/]

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Posted 4th March 2016 by GIORGI LOBJANIDZE

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