VRIO

The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a
firm. The basic strategic process that any firm goes through begins with a vision
statement, and continues on through objectives, internal & external analysis, strategic
choices (both business-level and corporate-level), and strategic implementation. The
firm will hope that this process results in a competitive advantage in the marketplace
they operate in. VRIO falls into the internal analysis step of these procedures, but is
used as a framework in evaluating just about all resources and capabilities of a firm,
regardless of what phase of the strategic model it falls under. VRIO is an acronym for
the four question framework you ask about a resource or capability to determine its
competitive potential: the question of Value, the question of Rarity, the question of
Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit
the resource or capability).
The Question of Value: "Is the firm able to exploit an opportunity or neutralize
an external threat with the resource/capability?"
The Question of Rarity: "Is control of the resource/capability in the hands of a
relative few?"
The Question of Imitability: "Is it difficult to imitate, and will there be significant
cost disadvantage to a firm trying to obtain, develop, or duplicate the
resource/capability?"
The Question of Organization: "Is the firm organized, ready, and able to exploit
the resource/capability?"
Question of Value The basic question asked by the V in the VRIO framework for
internal analysis is Is this resource or capability valuable to the focal firm? In this case,
the definition of value is whether or not the resource or capability works to exploit an
opportunity or mitigate a threat in the marketplace. If it does do one of those two things,
it can be considered a strength of the company. However if it does not work to exploit an
opportunity or mitigate a threat, it is a weakness. Occasionally, some resources or
capabilities could be considered strengths in one industry and weaknesses in a different
one. (Strategic Management Journal, 5, pp. 171-180. Barnety, J.B. (1991)). Six common
examples of opportunities firms could attempt to exploit are technological change,
demographic change, cultural change, economic climate, specific international events,
and legal and political conditions. Furthermore, five threats that a resource or capability
could mitigate are the threat of buyers, threat of suppliers, threat of entry, threat of
rivalry, and threat of substitutes.
Generally, this exploitation of opportunity or mitigation of threat will result in one of two
more outcomes: an increase in revenues or a decrease in costs (or both).
A great way to identify possibly valuable resources or capabilities is by looking into the
companys value chain. In the value chain, a business develops its products and
services step-by-step, with each function along the way adding some sort of value to the
product or service. The choices a firm makes regarding its value chain (including how to
operate, and which steps to operate in) is closely tied to the firms resources and
capabilities, therefore making it a valuable tool in identifying value in resources and
capabilities. If some asset that your company allows you to operate more effectively in a

certain portion of the value chain, chances are that resource will be considered valuable
by the VRIO framework.
Question of Rarity Having rarity in a firm can lead to competitive advantage. Rarity is
when a firm has a valuable resource or capability that is absolutely unique among a set
of current and potential competitors. How to determine if your resource is rare and
creates competitive advantage? A firms resources and capabilities must be both short
in supply and persist over time to be a source of sustained competitive advantage. If
both elements (short supply and persistence over time) arent met, then the resources
and capabilities a firm has cant be a sustained competitive advantage. If a resource is
not rare, then perfect competition dynamics are likely to be observed. Example of Rarity
- A janitor who defines his/her job as helping the firm make and sell better products
instead of just referring to their job as simply cleaning up facilities is quite unusual. Most
individuals would agree that this firm has a source of competitive advantage over other
firms in their industry because their objectives and strategies are transparent throughout
the entire firm; unlike many other firms where only top tier management is the only
group that believes in their objectives and strategies (Barney & Hesterly, 2011).
Question of Imitability The primary question of imitability asked in the VRIO
framework in internal analysis is that Do firms without a resource or capability face a
cost disadvantage in obtaining or developing it compared to firms that already possess
it? Firms with valuable and rare resources, which are hard to imitate by other firms, can
gain the first-mover advantages in the market and can hence gain competitive
advantage.
A firm can either exploit an external opportunity or neutralize an external threat by using
its rare and valuable resources. In this case, the firm can gain competitive advantage.
When the firms competitors discover this competitive advantage, they may respond in
two ways. First, they can choose to ignore the profit gaining by the competitive
advantage and continue to operate in their old ways. Second, they can choose to
analyze and duplicate the competitive strategy of its rival. If there is no cost or little cost
in obtaining this rare and valuable resource, the fellow firms can imitate the competitive
advantage in order to gain competitive parity (firms that create the same economic
value as their rivals experience competitive parity). However, sometimes it is hard for
other firms to get access to the resources and imitate the innovative companys
strategy. As a result, the innovative companies that implement their strategies based on
costly-to-imitate and valuable resources can gain long-term competitive advantage,
which ensures a companys sustained success (Hill & Jones, 1998). Hence, to sustain
the competitive advantage, it is not sufficient for a firm's resources and capabilities to be
valuable and rare - they should also be inimitable.
Forms of imitation.I
n most cases, imitation appears in two ways, direct duplication or substitution. After
observing other firms competitive advantage, a firm can directly imitate the resource
possessed by the innovative firm. If the cost to imitate is high, the competitive
advantage will be sustained. If not, the competitive advantage will be temporary.
Otherwise, an imitating firm can attempt to use a substitute in order to gain similar
competitive advantage of the innovative firm.
Cost of imitation

Cost of imitation is usually high in order to gain a competitive advantage due to the
followingreasons:uniquehistoricalconditions,casualambiguity,socialcomplexity,patents.
Unique Historical Conditions: an innovative firm gains low-cost access to rare
resources in a particular time and space.
Casual Ambiguity: an imitating firm cannot tell the factors that lead to the competitive
advantage of an innovative firm.
Social Complexity: when the resource involved in gaining competitive advantage is
based on interpersonal relationship, culture and other social background.
Patents: a source of long-term competitive advantage certificated by authority in a few
industries such as pharmaceuticals (Barney & Hesterly, 2011).
Question of Organization Once you have realized the value, rarity and imitability of
your companys resources and capabilities, the next step is to organize your company in
a way to exploit these resources. If done successfully, your company can enjoy a period
of sustained competitive advantage. There are many components to this question of
organization. They include, but are not limited to, the companys formal reporting
structure, management control systems and compensation policies. Formal reporting
structures are simply a description of who in the firm reports to whom. Management
control systems include both formal and informal means to make sure that managers
decisions align with a firms strategies. Formal control systems can consist of budgeting
and reporting activities that keep top management informed of decisions made by
employees lower down in the firm. Informal controls can include a companys culture
and encouraging employees to monitor each other. Firms incentivize their employees to
behave a desired way through compensation policies. These policies can include
bonuses, stocks or salary increases but can also include non-monetary incentives such
as additional vacation days or a larger office. These components of organization are
known at complementary capabilities and resources because alone they do not provide
much value. However, in combination with a firms other resources and capabilities, it
can result in sustained competitive advantage. Without the correct organization, even
firms with valuable, rare and costly to imitate resources and capabilities can suffer
competitive disadvantage (Barney & Hesterly, 2011).
Applying the VRIO Framework The VRIO framework can be used to assess the future
success of a firms current resources and capabilities as well as assessing the success
of potential changes to the firm. The easiest way of applying the VRIO framework is go
through each question in order to assess the competitive implications and economic
implications. Below is a chart that goes through the different possibilities and outcomes
of applying the VRIO framework. First off, if the resource is not valuable the company
should abandon the process or stop using the resource because it is hurting the firm.
Next, if the resource is valuable, but not rare, then the company is not being hurt by the
resource, and is at a competitive parity. A competitive parity just means that the
company is no better or worse off than its competitors. This option would leave the
company at a normal economic level. Third, if a resource is valuable and rare, but not
costly to imitate, a firm has achieved a competitive advantage and will temporarily
achieve above normal economic returns. However, because the resource is not costly to
imitate, other companies will soon copy their processes and the resource will likely
become a source of competitive parity. Finally, the best case scenario is if a resource is
valuable, rare, and costly to organize. This resource has become a source of a

sustained competitive advantage because other companies cannot easily copy the
resource. The final letter O of the VRIO framework is also important. No matter how
valuable, rare or costly to imitate the resource is, if the resource is not organized then it
will most likely become a competitive disadvantage and end up hurting your firm
(Barney & Hesterly, 2011).