After reading this section, students should be able to …
- Understand VIRO Analysis
|Difficult to Imitate?
|Temporary Competitive Advantage
|Sustained Competitive Advantage
Given that almost anything a firm possesses can be considered a resource or capability, how should you attempt to narrow down the ones that are core competencies, and explain why firm performance differs? To lead to a sustainable competitive advantage, a resource or capability should be valuable, rare, inimitable (there are no substitutes), and possessed by the organization despite it being costly to imitate in terms of time or money or both. This VRIO framework is the foundation for internal analysis. (Wernerfelt, B. 1984); (Barney, J. B. 1991). VRIO is an acronym for valuable, rare, inimitable, and organization (as in owned by the organization).
If you ask managers why their firms do well while others do poorly, a common answer is likely to be “our people.” But this is really not a complete answer. It may be the start of an answer, but you need to probe more deeply—what is it about “our people” that is especially valuable? Why don’t competitors have similar people? Why haven’t competitors hired our people away? Or is it that there is something special about the organization that brings out the best in people? These kinds of questions form the basis of VRIO and get to the heart of why some resources help firms more than others.
Moreover, your ability to identify whether an organization has VRIO resources will also likely explain their competitive position. In the figure, you can see that a firm’s performance relative to industry peers is likely to vary according to the level to which resources, capabilities, and ultimately core competences satisfy VRIO criteria. The four criteria are explored next.
A resource or capability is said to be valuable if it allows the firm to exploit opportunities or negate threats in the environment. If a resource does not allow a firm to minimize threats or exploit opportunities, it does not enhance the competitive position of the firm. In fact, some scholars suggest that owning resources that do not meet the VRIO test of value actually puts the firm at a competitive disadvantage. (Barney, J. B. 1991).
Example 8.4 Creating Value
Union Pacific’s extensive network of rail-line property and equipment in the Gulf Coast of the United States is valuable because it allows the company to provide a cost-effective way to transport chemicals. Because the Gulf Coast is the gateway for the majority of chemical production in the United States, the rail network allows the firm to exploit a market opportunity. Delta’s control of the majority of gates at the Cincinnati / Northern Kentucky International Airport (CVG) gives it a significant advantage in many markets. Travelers worldwide have rated CVG one of the best airports for service and convenience 10 years running. The possession of this resource allows Delta to minimize the threat of competition in this city. Delta controls air travel in this desirable hub city, which means that this asset (resource) has significant value.
Earn credit, add your own example!
A resource is rare simply if it is not widely possessed by other competitors. Of all of the VRIO criteria this is probably the easiest to judge. For example, Coke’s brand name is valuable but most of Coke’s competitors (Pepsi, 7Up, RC) also have widely recognized brand names, making it not that rare. Of course, Coke’s brand may be the most recognized, but that makes it more valuable, not more rare, in this case.
A firm that possesses valuable resources that are not rare is not in a position of advantage relative to competitors. Rather, valuable resources that are commonly held by many competitors simply allow firms to be at par with competitors. However, when a firm maintains possession of valuable resources that are rare in the industry they are in a position of competitive advantage over firms that do not possess the resource. They may be able to exploit opportunities or negate threats in ways that those lacking the resource will not be able to do. Delta’s virtual control of air traffic through Cincinnati gives it a valuable and rare resource in that market.
How rare do the resources need to be for a firm to have a competitive advantage? In practice, this is a difficult question to answer unequivocally. At the two extremes (i.e., one firm possesses the resource or all firms possess it), the concept is intuitive. If only one firm possesses the resource, it has significant advantage over all other competitors. However, meeting the condition of rarity does not always require exclusive ownership. When only a few firms possess the resource, they will have an advantage over the remaining competitors. For instance, Toyota and Honda both have the capabilities to build cars of high quality at relatively low cost. (Dyer, J. H., Kale, P., & Singh, H. 2004). Their products regularly beat rival firms’ products in both short-term and long-term quality ratings. (Dyer, J. H., & Hatch, N. 2004). Thus, the criterion of rarity requires that the resource not be widely possessed in the industry. It also suggests that the more exclusive a firm’s access to a particularly valuable resource, the greater the benefit for having it.
Example 8.5 Rare Resource
In the race to be first with 5G technology competitors are scrambling to win bids in a new wireless high-band spectrum. The Federal Communications Commission in April 2019 announced its third and largest auction for fifth generation networks that promise a major speed increase for downloading data over cellular networks. The White House considers service in rural areas and security for 5G to be essential to keep the country competitive for billions of Internet of Things (IoT) devices like autonomous cars and industrial sensors. In recent months the U.S. and China have imposed tariffs against each other and with no American companies manufacturing the main switch networks, the new network will rely on European companies Nokia and Ericsson.
Source: New York Times, Trump Announces 5G Plan as White House Weighs Banning Huawei, Zeqing Liu, 2019Sp
An inimitable (the opposite of imitable) resource is difficult to imitate or to create ready substitutes for. A resource is inimitable and non-substitutable if it is difficult for another firm to acquire it or to substitute something else in its place. A valuable and rare resource or capability will grant a competitive advantage as long as other firms do not gain subsequent possession of the resource or a close substitute. If a resource is valuable and rare and responsible for a market leader competitive advantage, it is likely that competitors lacking the resource or capability will do all that they can to obtain the resource or capability themselves. This leads us to the third criterion—inimitability. The concept of imitation includes any form of acquiring the lacking resource or substituting a similar resource that provides equivalent benefits. The criterion important to be addressed is whether competitors face a cost disadvantage in acquiring or substituting the resource that is lacking. There are numerous ways that firms may acquire resources or capabilities that they lack.
Example 8.6 Inimitable
A tablet computer has been around for years but it wasn’t until the iPad when the market finally took off. Apple has designed something that is hard to imitate successfully and this can be proven by the number of knockoffs and imitation products of the iPod, iPad and MacBook that have failed to gain a large portion of market share.
Source: Christopher S Penn, What Is Your Business Core Competency?, 2018Fa
As strategy researcher Scott Gallagher notes:
This is probably the toughest criterion to examine because given enough time and money almost any resource can be imitated. Even patents only last 17 years and can be invented around in even less time. Therefore, one way to think about this is to compare how long you think it will take for competitors to imitate or substitute something else for that resource and compare it to the useful life of the product. Another way to help determine if a resource is inimitable is why/how it came about. Inimitable resources are often a result of historical, ambiguous, or socially complex causes. For example, the U.S. Army paid for Coke to build bottling plants around the world during World War II. This is an example of history creating an inimitable asset. Generally, intangible (also called tacit) resources or capabilities, like corporate culture or reputation, are very hard to imitate and therefore inimitable. (WDFPD-Internal 2009)
The fourth and final VRIO criterion that determines whether a resource or capability is the source of competitive advantage recognizes that mere possession or control is necessary but not sufficient to gain an advantage. The firm must likewise have the organizational capability to exploit the resources. Think of it in terms of whether the organization owns the capability. Alternatively, think of organization ownership in terms of how much it would cost to copy the capability in terms of time or money or both.
Example 8.7 Organization
A critical part of Apple’s success is their organizational structure. They take advantage of a hierarchical organizational structure, which is a traditional structure seen in many organizations. The three main characteristics of this structure are spoke-and-wheel hierarchy, product-based divisions, and a weak functional matrix. While this gives them strong organizational control, it also limits organizational flexibility, and is something other corporations should consider when choosing an organizational structure.
Source: Seeking Alpha, Approach Resources: Hindered By High Fixed Costs, 2018Fa
The question of organization is broad and encompasses many facets of a firm but essentially means that the firm is able to capture any value that the resource or capability might generate. Organization, essentially the same form as that taken in the P-O-L-C framework, spans such firm characteristics as control systems, reporting relationships, compensation policies, and management interface with both customers and value-adding functions in the firm.
A valuable but widely held resource only leads to competitive parity for a firm if they also possess the capabilities to exploit the resource. Likewise, a firm that possesses a valuable and rare resource will not gain a competitive advantage unless it can actually put that resource to effective use.
Many firms have valuable and rare resources that they fail to exploit (the question of imitation is not relevant until the firm exploits valuable and rare resources). For instance, for many years Novell had a significant competitive advantage in computer networking based on its core NetWare product. In high-technology industries, remaining at the top requires continuous innovation. Novell’s decline during the mid- to late 1990s led many to speculate that Novell was unable to innovate in the face of changing markets and technology. However, shortly after new CEO Eric Schmidt arrived from Sun Microsystems to attempt to turnaround the firm, he arrived at a different conclusion. Schmidt commented: “I walk down Novell hallways and marvel at the incredible potential of innovation here. But, Novell has had a difficult time in the past turning innovation into products in the marketplace.” ( Margaret Haddox 2003). He later commented to a few key executives that it appeared the company was suffering from “organizational constipation.” (Saylor.org) Novell appeared to still have innovative resources and capabilities, but they lacked the organizational capability (e.g., product development and marketing) to get those new products to market in a timely manner.
Example 8.8 Example of a Core Competency (VRIO)
The company now known as RTW Retailwinds has began implementing celebrity brands, including Kate Hudson, which is now part of their core competency as they continue to expand. The Kate Hudson line of products as well as any future celebrity brands are all valuable, rare and imitable within the same quality standards and can be difficult for other retailers to copy through the same celebrity partners. RTW is one of the largest omni-channel retailers for women and will only continue to grow.
Source: Dayton Daily News, Women’s clothing retailer with local presence moving forward with name change, Ariadna Archibald, 2018Fa
8.2.5 SWOT and VRIO
As you already know, many scholars refer to core competencies. A core competency is simply a resource, capability, or bundle of resources and capabilities that is VRIO. While VRIO resources are the best, they are quite rare, and it is not uncommon for successful firms to simply be combinations of a large number of VR _ O or even V _ _ O resources and capabilities. Recall that even a V _ _ O resource can be considered a strength under a traditional SWOT analysis.
VRIO analysis is at the core of the resource-based view of the firm. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171–180. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 19, 99–120.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120.
Dyer, J. H., Kale, P., & Singh, H. (2004, July–August). When to ally and when to acquire. Harvard Business Review, 109–115.
Dyer, J. H., & Hatch, N. (2004). Using Supplier Networks to Learn Faster. Sloan Management Review, 45(3), 57–63.
Retrieved January 30, 2009, from http://falcon.jmu.edu/~gallagsr/WDFPD-Internal.pdf.
Personal communication by Saylor.org with Margaret Haddox. (2003). Novell Corporate Librarian.
Personal communication by Saylor.org with former executives.
Section 8.2 VRIO Analysis is edited and adapted from the chapter ‘VRIO Analysis’ appearing in the textbook, ‘Strategic Management’ Copyright © 2020 by John Morris and is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.