Business Strategy

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Business Strategy Notes VRIO Framework1 The VRIO Framework and the Resource-Based View2 In the last three weeks we have looked at how firms can get a competitive advantage. Today we focus primarily on the sustainability of a firm’s competitive advantage. That is, what determines whether a firm’s competitive advantage will be short-lived or whether it will endure a long time? We will consider this question within Barney’s VRIO framework (outlined below) within the resource-based view. Under the resourced-based view, a firm’s competitive advantage is based on the resources and capabilities it has.

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Categories of Resources and Capabilities Financial Resources - Virtually all firms require some capital. Firms vary in how much capital they have, and how much they can raise. Firms with limited financial resources face limitations on what projects they can undertake. Physical Resources - For the purposes of our categorization the term “physical resources” is broad, capturing items such as: o physical assets (buildings, equipment, etc.), o geographic location, and o computer hardware and software. - Consider UPEI’s physical assets. Which of its physical assets are most important to UPEI’s competitive advantage? - One of Wal-Mart’s most important resources is the location of its stores. Wal-Mart started out by setting up large stores in small rural towns – towns that are large enough for one large store but too small for a second store. Wal-Mart earns its most attractive profits in towns where it faces little competition. Human Resources - “Human resources” refers to the benefits that the firm’s employees bring to the firm. - Here we mean employees at all levels, including the CEO. - The term “benefits” refers to anything that the individual contributes towards the firm, whether it is knowledge, people-skills, relationships, etc. - Many CEOs and presidents (e.g. UPEI’s Wade MacLauchlan) contend that one of their most important jobs is attracting and hiring great people.

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By Don Wagner, UPEI, February 12, 2007. The material in this section is heavily based on Jay B. Barney and William S. Hesterly, Strategic Management and Competitive Advantage (Upper Saddle River, NJ: Pearson Prentice-Hall, 2006), chapter 3.

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Organizational Resources - While “human resources” refers to the abilities of individuals, “organizational resources” refers to the ability of a group of people. - The term refers to the organization’s ability to get things done. - Suppose Company A and Company B are equal in the quality of their human resources, yet company A beats company B in: o the quality of the products it introduces, o the speed at which it introduces new products, o the friendliness of its customer service, or o the efficiency at which its employees work. Possible reasons that Company A outperforms Company B include: o better organizational structure, o better decision making methods, o better coordinating systems, o a more cooperative culture, o a more competitive culture, and/or o informal relationships within the company. What is the VRIO Framework? Barney’s VRIO framework considers the competitive implications of a resource with the following questions: o Is the resource or capability Valuable? o o Is the resource or capability Rare? Is the resource or capability costly to Imitate?

o Is the resource or capability one that exploited by the Organization? The competitive implications are as listed in the chart below. Is a resource or capability … Costly to Exploited by Valuable? Rare? Imitate? Organization Competitive implications No --No Competitive disadvantage Yes No -Competitive parity Yes Yes No Temporary competitive advantage Yes Yes Yes Yes Sustained competitive advantage

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Below we address what is meant by each of these questions.

Is the Resource or Capability VALUABLE? “Does the resource or capability enable the organization to exploit an opportunity or neutralize a threat?”

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