A framework for resource-based analysis: VRIO

The relationship between resource heterogeneity and immobility; value, rarity, imitability, and organization; and sustained competitive advantage is summarized in Figure 3.2. This has been developed into a frame- work that can be applied in analyzing the potential of a broad range of firm resources to be sources of sustained competitive advantage. These analyses not only specify the theoretical conditions under which sus- tained competitive advantage might exist, they also suggest specific empir- ical questions that need to be addressed before the relationship between a particular firm resource and sustained competitive advantage can be understood.

The VRIO framework expresses the four key parameters for resource- based analysis as a series of questions about the business activities of the firm:

Figure 3.2. The relationship between resource heterogeneity and immobility, value, rareness, imperfect imitability, and organization, and sustained compet- itive advantage

  1. The question of Value: Do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?
  2. The question of Rarity: Is a resource currently controlled by only a small number of competing firms?
  3. The question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it?
  4. The question of Organization: Are a firm’s other policies and proce- dures organized to support the exploitation of its valuable, rare, and costly to imitate resources?

Bringing these questions of value, rarity, imitability, and organization together provides a single framework to understand the return potential associated with exploiting any of a firm’s resources or capabilities. This framework is summarized in Table 3.1.

If a resource or capability controlled by a firm is not valuable, then that resource will not enable a firm to choose or implement strategies that exploit environmental opportunities or neutralize threats. Organizing to exploit this resource will increase a firm’s costs or decrease its revenues. These types of resources are weaknesses. Firms will either have to fix these weaknesses or avoid using them when choosing and implementing strate-gies. If firms do exploit these kinds of resources or capabilities, they can expect to put themselves at a competitive disadvantage compared to firms that either do not possess these nonvaluable resources or do not use them in conceiving and implementing strategies.

Table 3.1. The VRIO framework

If a resource or capability is valuable but not rare, exploiting this resource in conceiving and implementing strategies will generate compet- itive parity. Exploiting these valuable but not rare resources will generally not create competitive advantages for a firm, but failure to exploit them can put a firm at a competitive disadvantage. In this sense, valuable-but- not-rare resources can be thought of as organizational strengths.

If a resource or capability is valuable and rare but not costly to imitate, exploiting this resource will generate a temporary competitive advantage for a firm. A firm that exploits this kind of resource is, in an important sense, gaining a first-mover advantage, because it is the first firm that is able to exploit a particular resource. However, once competing firms observe this competitive advantage, they will be able to acquire or develop the resources needed to implement this strategy through direct duplica- tion or substitution at no cost disadvantage compared to the first-moving firm. Over time, any competitive advantage that the first mover obtained would be competed away as other firms imitate the resources needed to compete. However, between the time a firm gains a competitive advantage by exploiting a valuable and rare but imitable resource or capability and the time that competitive advantage is competed away through imita- tion, the first-moving firm can earn above-normal economic performance. Consequently, this type of resource or capability can be thought of as an organizational strength and distinctive competence.

If a resource or capability is valuable, rare, and costly to imitate, exploit- ing this resource will generate a sustained competitive advantage. In this case, competing firms face a significant cost disadvantage in directly dupli- cating a successful firm’s resources and capabilities and no easy to duplicate substitutes for these resources exist. As suggested earlier in this chapter, this disadvantage may reflect the unique history of the successful firm, causal ambiguity about which resources to imitate, or the socially complex nature of these resources and capabilities. In any case, attempts to compete away the advantages of firms that exploit these resources will not generate competitive advantages for imitating firms. Even if these firms were able to acquire or develop the resources or capabilities in question, the very high costs of doing so would put them at a competitive disadvantage compared to the firm that already possessed the valuable, rare, and costly to imi- tate resources. These kinds of resources and capabilities are organizational strengths and sustainable distinctive competencies.

The question of organization operates as an adjustment factor in the VRIO framework. For example, if a firm has a valuable, rare, and costly to imitate resource and capability but fails to organize itself to take full advan- tage of this resource, some of its potential competitive advantage could be lost (as in the Xerox example). Extremely poor organization, in this case, could actually lead a firm that has the potential for competitive advantage to obtain only competitive parity or even competitive disadvantages.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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