V.R.I.O. Analysis

Topics: Management, Strategic management, Network effect Pages: 5 (1238 words) Published: June 17, 2007
•Resource-based analysis of the firm determines which resources and capabilities result in which strengths or weaknesses •Strategies are to be implemented which exploit (or build) strengths and avoid (or eliminate) weaknesses •What constitutes a strength or weakness is partially a function of the external environment •Framework for analysis: VRIO - resources and capabilities should be o Valuable

o Rare
o Inimitable
o Organization can effectively exploit them
VALUE of resources and capabilities
•A VALUABLE resource or capability (or a combination thereof) must oContribute to fulfillment of customer's needs
oAt a price the consumer is willing to pay, which is determined by Customer preferences
Available alternatives (including substitute products) Supply of related or supplementary goods
•Thus, value is partially a function of external environment (product market, demand forces) •Changes in consumer tastes, industry structure, technology, etc. can result in changed value •Resources of different firms can be valuable in different ways (e.g., Timex versus Rolex) •Value = Lowered costs or increased revenues or both

SCARCITY of resources and capabilities
•Resources and capabilities must be in short supply to create competitive advantage (and go beyond competitive parity) •What would happen if this were not the case?
•An analysis of the firm's resources and capabilities must include critical assessment whether they are unusual when compared to those of competitors •How rare does a resource have to be in order to have potential for generating a competitive advantage? •Example of a rare resource: Wal-Mart's point-of-purchase inventory control system •To be a source of sustained competitive advantage the rarity of the resource must persist over time INIMITABILITY of resources dans capabilities

•Requirement for sustained competitive advantage
•Ease of imitation depends on
oCost asymmetries ("Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?") oCapabilities of competitors
•Sources of cost asymmetries / cost disadvantages fall into two categories : oImpediments to imitation : Impede rivals from duplicating critical resources and capabilities oEarly-mover advantages : Set in motion a dynamic that increases the magnitude of that advantage relative to other firms over time Impediments to imitation :

oLegal restrictions on imitation :
Patents, copyrights, trademarks
Governmental control over entry into markets (licensing, certification, quotas on operating rights) oSuperior access to inputs or to customers
oMarket size and scale economies
oIntangible barriers to imitation
Causal ambiguity
Dependence on historical circumstances
Other path dependencies
Social complexity
Degrees of resource and capability imitability
Source: C. Montgomery, "Resources: The essence of Corporate Advantage", Harvard Business School Case N1-792-064. • Cannot be imitated : Patents, unique assets, unique locations • Difficult to imitate : Brand loyalty, employee satisfaction, reputation for fairness • Can be imitated (but may not be) Capacity preemption, economies of scale • Easy to imitate : Cash, commodities

ORGANIZING to exploit competitive potential of resources and capabilities The following elements must be in place in order to effectively exploit the resource(s) and/or capability(s): o Structure

o Management and control systems
o Compensation policies
o Business processes
o Complementary resources and capabilities
• Examples :
o Caterpillar : Global formal reporting structure, global inventory systems o Wal-Mart: Inventory control system
o Xerox: Highly bureaucratic product development process - failed to exploit enormous opportunities (e.g., PC, mouse, windows-type...
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