The VRIO Framework
Amie Kusumawardhani
Core Competencies
When the four key criteria of resources and
capabilities are met, they become core
competencies
Core competencies serve as a source of
competitive advantage
Managerial competencies are especially important
Criteria for Resources and Capabilities
That Become Core Competencies
Valuable
Valuable Rare
Rare
Core
Core
Competencies
Competencies
Nonsubstitutable
Nonsubstitutable Costly
Costlyto
toImitate
Imitate
How Resources and Capabilities Provide
Competitive Advantage
Valuable Allow the firm to exploit opportunities or
neutralize threats in its external environment
Rare Possessed by few, if any, current and potential
competitors
Costly to imitate When other firms cannot obtain them or must
obtain them at a much higher cost
Nonsubstitutable The firm is organized appropriately to obtain the
full benefits of the resources in order to realize a
competitive advantage
Barney & Hesterly (2006)
the VRIO (Value, Rare, Inimitability,
Organized) framework as a good tool to
examine the internal environment of a firm
VRIO stands for four questions one must ask
about a resource or capability to determine
its competitive potential
Four Questions (1)
The Question of Value: Does a resource enable a
firm to exploit an environmental opportunity,
and/or neutralize an environmental threat?
The Question of Rarity: Is a resource currently
controlled by only a small number of competing
firms? [are the resources used to make the
products/services or the products/services
themselves rare?]
Four Questions (2)
The Question of Imitability: do firms without a
resource face a cost disadvantage in obtaining or
developing it? [is what a firm is doing difficult to
imitate?]
The Question of Organization: Are a firm’s
other policies and procedures organized to
support the exploitation of its valuable, rare,
and costly-to-imitate resources?”
Types of Resources should be evaluated
(Types of resources lead to a competitive
advantage)
1) Tangible resources
2) Intangible resources
3) Organizational capabilities
Tangible Resources
Firm’s cash and cash equivalents
Financial Firm’s capacity to raise equity
Firm’s borrowing capacity
Modern plant and facilities
Physical Favorable manufacturing locations
State-of-the-art machinery and equipment
Trade secrets
Technological Innovative production processes
Patents, copyrights, trademarks
Effective strategic planning process
Organizational Excellent evaluation and control systems
Intangible Resources
Experience and capabilities of employees
Human Trust
Managerial skills
Firm-specific practices and procedures
Innovation and Technical and scientific skills
Creativity Innovation capacities
Brand name
Reputation with customers for quality
Reputation and reliability
Reputation with suppliers for fairness,
non-zero-sum relationships
Organizational Capabilities
Firm competences or skills the firm employs to transfer
inputs to outputs
Capacity to combine tangible and intangible resources, using
firm processes to attain desired end
Examples
Outstanding customer Innovativeness or products
service and services
Excellent product Ability to hire, motivate, and
development capabilities retain human capital
Summary of VRIO, Competitive
Implications & Economic Implications
Valuable? Rare? Costly to Organized Competitive Economic
Imitate? Properly? Implications Implications
No No No No Disadvantage Below Normal
Yes No No No Parity Normal
(equality)
Above Normal
Temporary (at least for
Yes Yes No No Advantage some amount of
time)
Yes Yes Yes Yes Sustained Above Normal
Advantage
Summary of VRIO, Competitive Implications &
Economic Implications
Resources/ Valuable? Rare? Costly to Organized Competitiv Economic
Skills Imitate? Properly? e Implication
Implication s
A
No No No No Disadvanta Below
ge Normal
B
Parity
Yes No No No (equality) Normal
C
Above
Normal
Yes Yes No No Temporary (at least
Advantage for some
amount of
time)
D
Yes Yes Yes Yes Sustained Above
Advantage Normal
Organized properly
deals with the firm’s structure and control
(governance mechanisms—compensation,
reporting structures, management controls,
relationships, etc).
These must be aligned so as to give people ability
and incentive to exploit the firm’s resources.
Competitive Advantage and Sustainable
Competitive Advantage
When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage
over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.
A competitive advantage exists when the firm is able to deliver
the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its
customers and superior profits for itself.
Resource-based View
A resource-based view emphasizes that a firm utilizes
its resources and capabilities to create a competitive
advantage that ultimately results in superior value
creation
To develop a competitive advantage, the firm must
have resources and capabilities that are superior to
those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was
doing and any advantage quickly would disappear.
A Model of Competitive Advantage
Resources
Distinctive Cost Advantage Value
Competencies or Differentiation Creation
Advantage
Capabilities
Resources
are the firm-specific assets useful for creating a cost or
differentiation advantage and that few competitors can
acquire easily.
Examples :
Patents and trademarks
Proprietary know-how
Installed customer base
Reputation of the firm
Brand equity
Capabilities
refer to the firm's ability to utilize its resources effectively. An
example of a capability is the ability to bring a product to market
faster than competitors. Such capabilities are embedded in the
routines of the organization and are not easily documented as
procedures and thus are difficult for competitors to replicate
The firm's resources and capabilities together form its distinctive
competencies. These competencies enable innovation,
efficiency, quality, and customer responsiveness, all of which can
be leveraged to create a cost advantage or a differentiation
advantage.
