The VRIO Framework: Evaluating Competitive Resources …

1 71340 Grant, R., Butler, B., Orr, S., & Murray, P. (2014). Contemporary strategic management (pp. 174 177). Milton, Australia: Wiley. John Wiley & SonsReading VRIO framework : Evaluating Competitive Resources and CapabilitiesThe VRIO framework - Evaluating Competitive Resources and capabilities As discussed earlier in this chapte r, som e of a company's heterogeneous Resources and capabilities hold the potential for sustained Competitive advantages. As Barney68 suggests, to have this potential: a firm resource must have four attributes: a) it must be valuable, in the sense that it exploits opportunities and/or neutralises th reats in a firm's environment, b) it must be rare a mo ng a firm's current and potential competition, c) it must be imperfectly imi-table, and d) it must be able to b e explo ited by a firm's organisational processes. These attributes of company Resources can be thought of as indicators of how heterogeneous and immobile a firm's Resources are, and thus how useful these Resources a re for gen-erating sustained Competitive advantages.

2 These attributes have been further developed into a framework -the value, ra rity, imitability and organisation (VRJO) framework -that can be applied in assessing the po tential of a broad range of company Resources to b e sources of sustained Competitive advantage . These a nalyses not only specify the theoreti ca l conditions unde r which sus-tained Competitive advantage might exist, they also suggest specific empi rical questions that need to be addressed before the relationships between a particular company resource 0 PART 2 THE TOOLS OF STRATEGY ANALYSIS and s usta ined compe t itive advantage ca n be understood. A descriptio n of the four com -pon ents of the VRJO framework follows. 1. The qu est io n o f value: Do a firm's Resources and ca pa bilities enable the compa ny to res-pond to e nvironmental threats or oppo rtunities? Th e traditio na l stre ngths, weaknesses, oppo rtunities and threats (SWOT) mod el suggests that compa ni es can improve their pe r-fo rma nce o nl y if th e ir strategies explo it o pportunities o r neu tralise threats.

3 Compa nies might h ave other ch a racteristics that can serve as sources of compe titive advantage ( rarity, inimitability and o rganisatio n al a b ilities/processes) but these cha racteristics become valuabl e Resources o nly whe n they explo it oppo rtunities o r neutralise threats in the com-pa ny environment69 A compa ny must have valu abl e Resources in orde r to create econo mic value and increase the willingness o f custo m ers to pay, d ecrease its costs, o r both. 2. Th e questio n o f rarity: ls a resource curre ntly controlled by o nl y a sm all number o f competing compa ni es? Valuable Resources of a compa ny that a re also possessed by la rge numbe r of competitors canno t serve as a source of Competitive ad vantage. Each o f th ese companies h as the cap a bility of expl o iting that resource in the same way and imple-m enting a commo n s trategy which would n o t allow o n e compa ny to create a com -petitive ad In o rde r to imple m ent som e stra tegies, compa ni es need to form bundles o f Resources a n d these bund les h ave to b e valua ble to en able compa nies to create a Competitive advantage .

4 Compa nies must st ill m aintain valu able but commo n Resources . Th ese he lp compa ni es to su rvive w h en they a re explo ited to create competi-tive parity, a conditio n under w hich n o one compa ny is abl e to create a compe titive advantage . According to Po rte r/1 compa nies in crease their pro ba bility o f econo mic sur-vival unde r conditions of Competitive parity. Th e qu estio n of how ra re a valuable com -pa ny resource sh o uld be in o rde r to serve as a source o f a Competitive advantage does n o t have a commo n a nswer. Barney and Clark72 assert that as the numbe r of firms that possess a particular valuab le resource (or a bundle of valuable Resources ) i s less than th e number of firms needed to generate perfect com-petition dynamics in an industry, tha t resource has the potential of generating a Competitive advantage . 3. Th e questi o n o f imitability: Do companies without a resource face a cost disadvantage in obtaining or developing it?

5 Compa n ies with va lua ble and ra re Resources can e njoy a firs t mover advantage , acting as innovato rs b ecause the ir Resources allow the m to con-ceive and engage in st rategies that othe r compa ni es could n ot conceive no r implem ent due to the lack of relevant Resources . O n the othe r hand, valua ble and ra re Resources h elp compa nies to susta in their Competitive advantage o nly if competitors canno t obta in th ese Resources by direct duplicatio n o r substitutio n B It depends on how diffi-cult o r costly it is to imitate the compa ny's Resources , which can be attributed to the following three ma in reasons: (a ) Unique historical conditions d etermined the path a compa ny followed to arrive at its curre nt situatio n, and the compa ny's lo ng-term pe rfo rma nce. Barn ey and Clark suggest tha t unique hi storical conditio ns can lead to a susta ined compe titive ad vantage in at least the following two ways7 4: First, it may be that a particular firm is the first in an industry to recognize and exploit an opportunity, and being first gives the firm a first-mover advantage .

6 Second, when events early in the evolution of a process have significant effects on subseque nt events, path depe ndence allows a firm to gain a Competitive advantage in the current period based on the acquisition and development of Resources in earlier periods. unique historical conditions: circumstances that determined the path a company followed to arrive at its current situation and the company's long-term performance CHAPTER 5 ANALY SING Resources A N D CAPABILITIES 0 causal ambiguity: the situation in which the link between the Resources controlled by the company and its Competitive advantage is unclear or not understood social complexity: the degree to which sociocultural forces are organised (b) There is causal ambiguity in the link between the Resources con trolled by the company and its Competitive advantage . This link is either no t understood or not unde rstood clearly. The ma in situatio ns in which managers m ay no t fully unde r-stand their sources of Competitive advantage include: w he n the Resources and cap abilities a re invisible ( relatio nships with custo m ers and/or suppliers, and o rganisatio nal culture); whe n ma nagers are unable to evaluate which Resources and capabilities o r their combina tio ns create a Competitive advantage ; and wh en the Resources and capabilities a re complex netwo rks of relationships between individuals, groups and techno logy.

7 This last source o f compet itive advantage is referred to as interconnectedness of asset stocks and asset m ass In general, whe n sources o f Competitive advantage a re widely spread across processes o f the compa ny, locatio ns and people, these sources are difficult to understand and costly to imitate. (c) Social complexity of a company's Resources means that it is beyond the company's ability to syste mati cally ma nage and influence these Resources . A wid e variety of Resources may be socially complex, fo r example, the interperson al rela tio nships among m an agers in a compa ny/6 a compa ny's culture,77 and its reputati o n a mo ng custo mers and suppliers. Ofte n it is clear how these socially complex relatio n s ad d value to the company and there little or no causal ambiguity about the link between these Resources and Competitive a dvantage. At the same time, such understanding does no t necessarily lead compani es w ithout these socially complex Resources to th e process o f the ir creatio n.

8 4. The questi o n o f organisation: Are a firm's other policies and p rocedures o rganised to su p-po rt the expl o itati o n o f its valuable, ra re and costly-to-imitate Resources ? Valuable, rare and inimitable Resources can serve as a source o f Competitive advantage if the company is organised to explo it the po tential offered by these Resources . O rganisati o na l processes assist companies in building and sustaining Competitive advantage . The following com-po nents allow companies to explo it the full Competitive potential o f the ir Resources and capabilities : their forma l r ep o rting structure, explicit management control systems and reward po licies. These compo nents are often referred to as complem entary Resources and capa bilities as they have limited ability to generate Competitive advantage in iso-lation. It is in combinatio n w ith other Resources and capabilities th ey ca n enable a firm to realise its full po tentia l for Competitive Bringing these questions of value, rarity, imitability and o rganisati o n together provid es a single framewo rk to understand the return po tentia l associated with explo iting any of a compa ny's Resources and capabilities.

9 This fram ework is summarised in ta ble TABLE The VRIO framework Is a resource or capability .. I costly to exploited by valuable? rare? imitate? organisation? Competitive implications Economic performance No --No Competitive Below normal disadvantage Yes No -- Competitive parity Normal Yes Yes No -Temporary Competitive Above normal advantage Yes Yes Yes Yes Sustained Competitive Above normal advantage 0 PART 2 THE TOOLS OF STRATEGY ANALYSIS Th e RBV asserts that the individual Resources cap abilities of compa ni es provide a stro nger bas is for strategy develo pment than industry an alysis. The m ain argument fo r this view is that it w ill identify th ose Resources and ca p abilities tha t a re outstanding and thus have the po tential for susta inable Competitive advantage . CHAPTER 5 ANALYSING Resources AND CAPA BILITIES 0