Barney and Hesterly (2006 ), describe the VRIO structure as an excellent tool to take a look at the internal environment of a firm. They state that VRIO “represent 4 questions one should ask about a resource or capability to identify its competitive potential:
The Concern of Value: Does a resource allow a company to exploit an environmental opportunity, and/or neutralize an ecological hazard? The Concern of Rarity: Is a resource presently managed by just a little number of completing companies? [are the resources used to make the products/services or the products/services themselves uncommon?] The Question of Imitability: do firms without a resource face an expense drawback in acquiring or developing it? [is what a firm is doing challenging to imitate?] The Question of Company: Are a company’s other policies and treatments organized to support the exploitation of its important, uncommon, and costly-to-imitate resources?”
What types of resources should we evaluate (e.
g., what types of resources cause a competitive benefit)?
Applying the VRIO structure. According to the VRIO framework, an encouraging response to each concerns relative to the firm being analyzed would indicate that the company can sustain a competitive advantage.
Below is an example of how to apply the VRIO framework and the most likely outcome for the company under varying scenarios.
Applying the VRIO Framework—the value and rarity of a firm’s resources If a firm’s resources are:
Then, if there are high costs of imitation, the firm may enjoy a period of sustained competitive advantage. Costs of imitation increase due to some combination of the following: 1) Unique Historical Conditions (path dependence; first mover advantages), 2) Causal Ambiguity (links between resources and advantage foggy), 3) Social Complexity (social relationships not replicable), 4) Patents (double-edged sword since period of protection eventually runs out).
Applying the VRIO Framework, integrating the notion of Inimitability If a firm’s resources are:
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.
Summary of VRIO, Competitive Implications, and Economic Implications Valuable?