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The Internal Analysis Tool The VRIO Framework Four Important Questions: Value Rarity Imitability Organization 16. The VRIO Framework If a firm has resources that are: valuable, rare, and costly to imitate, and the firm is organized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage. 17. The VRIO Framework Applying the Tool a resource or bundle of resources is subjected to each question to determine the competitive implication of the resource each question is considered in a comparative sense (competitive environment) 18. Applying the VRIO Framework The Question of Value in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levis reputation allows it to charge a premium for its Dockers pants) 19. Applying the VRIO Framework The Question of Rarity if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits) a resource must be rare enough that perfect competition has not set in thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarcelook at prices) 20. Applying the VRIO Framework Valuable and RareIf a firms resources are: The firm can expect: Not Valuable Competitive DisadvantageValuable, but Not Rare Competitive Parity Competitive Advantage Valuable and Rare (at least temporarily) 21. Applying the VRIO Framework The Question of Imitability the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource intangible resources are usually more costly to imitate than tangible resources (HarleyDavidsons styles may be easily imitated, but its reputation cannot) 22. Applying the VRIO Framework The Question of Imitability if there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage a sustained competitive advantage attempt to imitate it (Razor scooters were a big hit and others quickly imitated them) 23. Applying the VRIO Framework The Question of Imitability Costs of Imitation Unique Historical Conditions (Caterpillar) first mover advantages path dependence 24. Applying the VRIO Framework The Question of Imitability Costs of Imitation Causal Ambiguity (Southwest Airlines HR) causal links between resources and competitive advantage may not be understood bundles of resources fog these causal links

25. Applying the VRIO Framework The Question of Imitability Costs of Imitation Social Complexity (WordPerfect) the social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them 26. Applying the VRIO Framework The Question of Imitability Costs of Imitation Patents patents may be a two-edged sword offer a period of protection if the firm is able to defend its patent rights required disclosure may actually decrease the cost of imitation, and the timing 27. Applying the VRIO Framework Value, Rarity, & ImitabilityIf a firms resources are: The firm can expect: Valuable, Rare, but Temporary not Costly to Imitate Competitive Advantage Sustained Valuable, Rare, and Competitive Advantage Costly to Imitate (if Organized appropriately) 28. Applying the VRIO Framework The Question of Organization a firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firms resources examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resourcestaken together, they can help a firm achieve sustained competitive advantage (3M Company) 29. The VRIO Framework Costly to Exploited by CompetitiveValuable? Rare? Imitate? Organization? Implications No No Disadvantage Yes No Parity Temporary Yes Yes No Advantage Sustained Yes Yes Yes Yes Advantage 30. The VRIO Framework Costly to Exploited by Competitive EconomicValuable? Rare? Imitate? Organization? Implications Implications No No Disadvantage Below Normal Yes No Parity Normal Temporary Above Yes Yes No Advantage Normal Sustained Above Yes Yes Yes Yes Normal Advantage 31. Entrepreneurial and InternationalApplication of the VRIO Framework The Logic Remains the Same small firms and start-ups can apply the VRIO framework to their resources and capabilities competitive advantage vis-costs of imitation can be critical to small firm success 32. Entrepreneurial and InternationalApplication of the VRIO Framework The International Context Two Reasons for International Expansion: 1) to exploit current resource and capability advantages in a new market 2) to develop new resources and capabilities in a foreign market 33. Entrepreneurial and InternationalApplication of the VRIO Framework The International Context Critical Caveat: resources and capabilities that generate an advantage in one market may or may not generate an advantage in a new market Firms should re-apply the VRIO framework when entering new markets!! 34. Competitive Dynamics of Resource Imitation Competitive Dynamics: the strategic decisions and actions of firms in response to the strategic decisions and actions of other firms Firm Bs Possible Responses Firm A No Response (strategy decisions Change Tacticslead to competitive advantage) Change Strategy

35. Competitive Dynamics No Action Response (Rolex Casio) A firm may decide to take no action because: the other firm is serving a different market a response may hurt its own competitive advantage it does not have the resources and capabilities to mount an effective response it wants to reduce or manage rivalry in the market through tacit collusion 36. Competitive Dynamics Change Responses Tactics (Tide) Strategy (Monsanto) specific actions a fundamental change tweaking product in a firms theory characteristics may be necessary if usually imitated so current strategy quickly that there is becomes obsolete no advantage a mimetic change may a leap frog move achieve parity, but not may create advantage advantage 37. SWOT Components A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves A weakness is a limitation or deficiency in one or more of a firms resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs An opportunity is a major unfavorable situation in a firms environment A threat is a major unfavorable situation in a firms environment

VRIO Framework Helps Managers Recognize Sources of Competitive Advantage