VRIO Framework (Competitive Advantage, Competitive Parity & Competitive Disadvantage)
Internal environmental analysis is essentially a resource-based approach to organizational analysis. Scanning an organization is affected by both the external as well as internal environment. While, external analysis is important for identifying the threats the external opportunities and in environment, the analysis of internal environment is also important for identification of strengths and weaknesses of the organization. These internal factors play a pivotal role in deciding an organization's future direction.
Therefore, an internal analysis is crucial for ascertaining and improvising the organizational resources. That is why, analyzing the internal environment can also be viewed as a resource-based approach.
VRIO (Valuable, Rare, Inimitable resources and Organization) technique is used in order to analyze the internal resources and capabilities. This method was discovered by J.B. Barney to analyze the internal resources of an organization. He identified four attributes that a firm's resources should possess so that they can provide competitive advantage. The original attributes developed by Barney were Valuable, Rare, imperfectly Imitable and Non substitutable, which is why it was called as VRIN (Valuable, Rare, Imitable and Non-substitutable) framework. This framework was published in 'Firm Resources and Sustained Competitive Advantage'.
Later, in 1995, Barney refined his framework and named it as VRIO framework, where 'O' implied 'Organized to capture the value'. This improvement in model was published in 'Looking Inside for Competitive Advantage'. Barney believed that the resources that possess all four characteristics are the ultimate sources of competitive advantage. With the help of VRIO competitive framework the firms are able to develop the ways in which the organizational resources can be used as the competitive advantage. The four attributes mentioned above are described below :
1) Valuable :
Valuable resources are those resources that enhance the value of a firm by taking advantage of the opportunities in the environment and preventing the organization from the potential threats. A resource can also be considered as valuable if it increases the perceived value of a firm in the eyes of its customer. If the resources are not valuable, then they act as weaknesses for the firm.
Resources are called as strengths even if they not always lead to success over the competitors. A valuable resource helps the firm to achieve the competitive advantages such as quality, innovation, efficiency customer responsiveness, etc. If the resources of an organization are able to bring about these factors, the these me called valuable resources.
2) Rare :
Rare resources are those resources that are owned by single firm or few firms. When fewer are able to acquire the resources that are valuable and rare, they generate competitive advantage for them, Opposite to this situation, when many firms acquire same resources, then it develops the condition of competitive parity. The situation of competitive parity does not allow any firm to outperform the rival firms as the competitors possess similar resources and implement similar strategies Acquiring valuable and rare resources is very important for an organization. Although, competitive parity creates a situation where none of the firms win, but the common and widely acquired resources provide a way of survival to the firms in the market. A company should not ignore a resource that is valuable but not rare as these resources are also necessary for a company to create a secure market position.
3) Costly to Imitate :
A resource can be costly to imitate if the competitors of a company cannot copy it or imitate it at a cheaper price. This creates a significant challenge for the rival firms and acts a competitive advantage for the firm owning the resource. Imitating a resource can be done by following two basic approaches :
- Direct imitation of the resource, i e., duplication of resource.
- Implementation of a comparable substitute.
According to Barney, there can be three reasons due to which it is difficult to imitate a resource :
i) Historical Conditions :
These are the resources that have developed over time due to the historical situations or events. They are generally hard to imitate. It is impossible or quite expensive to generate the same historical situations again.
ii) Causal Ambiguity :
Sometimes, it becomes difficult for the strategists to identify the resources that are bringing competitive advantage to the firm.
iii) Social Complexity :
Some factors act as unique resources for the firm, as these actors are embedded in the culture and environment of the organization. This makes it difficult for other organizations to imitate.
4) Organized to Capture Valor :
Mere possession of a resource does not guarantee the success until it is organized in a way that facilitates the firm in extracting value. A resource is called organized resource if the firm can practically utilize it to achieve competitive advantage. A firm can achieve sustained competitive advantage by organizing its processes and functions making it valuable, rare and hard to imitate.
VRIO framework helps the firm to analyze its resources and the reasons due to which they act as the source of competitive disadvantage, competitive parity, competitive advantage and sustained competitive advantage. This as explained in Figure :
1) Competitive Disadvantage :
VRIO framework explains that the resources that do not provide value to the firm are the factors that would act as competitive disadvantages. These resources should be removed or disposed off.
2) Competitive Parity :
The resources that are used by few firms, i.e., they are not rare, create the situation of competitive parity. But the resources should not be removed, as they help in survival of the firm. Although, acquiring these resources does not helps the firm in succeeding over the competitors, but not possessing these resources can lead to significant competitive disadvantages.
3) Competitive Advantage :
The resources that are rare and valuable provide an opportunity for the firms to gain temporary competitive advantage. This competitive advantage is temporary in nature, because the resources are easy to imitate and provide a short span of time for the firms to enjoy the competitive advantage. As soon as the resources are imitated, it would provide competitive party.
4) Sustained Competitive Advantage :
At last, the resources that are valuable, rare, hard to imitate and organized provide sustained competitive advantage to the firm.
Value Chain Approach (Resource Analysis Technique)
Under the value chain approach or resource analysis, physical quantities are converted into monetary units. This analysis is carried out to measure the amount of resources that are used for the economic purpose and have been emerged from various probable actions. It is the responsibility of the resource analyst to analyze the economic cost as well as ensure that the resources and manpower used are necessary for the process and are required at that particular time period. Not only this, resource analysis is also used to determine the strengths and weaknesses of a company. This helps the company to develop strategies in order to improve its strengths and overcome its weaknesses.
Every business process is an integration of various allied activities starting from the inception of a product concept to sales and service relating to offering. At each step of this chain of activities, a value is added to the company's offering making it superior than previous stage. This chain of activities is called as "value chain". Value chain is a related set of activities which creates or adds value to the company. Basically, a company's value chain comprises of two major activities known as primary activities and requisite support activities. The primary activities are those activities which focus on creating value for its customers and requisite support activities assist and boost the performance of primary activities.
The fundamental objective of every company is to earn profit. This can be done by creating and delivering value to its customers over the original price of the product. In case of value chain, it incurs a profit-margin because the cost of company's activities related to value-creation is part of the total price which is borne by the buyer. The segregation of a company's operations into two major activities: primary and secondary, helps the company to highlight the major parts of the company's cost structure. Each activity that is part of the value chain increases the cost including assets to every individual activity. All this provides the total cost estimate and capital requirement. Mostly all activities are interlinked in a way that the performance of one activity affects the cost of performing other activities.
Porter introduced the concept of value chain analysis. It is a method which evaluates the capabilities and resources of the company and determines its strengths and weaknesses. Value chain analysis also helps to find out the activities which provide value addition to a product or service. The value of a product can be easily determined by the revenue it earned. In case, if the total cost of the given product is available, then the profit margin can be calculated by calculating the margin between the total revenue generated and total cost incurred. Hence, it can be deferred that the higher the difference between the organization's revenue and its costs, the higher is the value added.
If the company wants to raise the value delivered by the organization to its consumers, irrespective of the fact that they are end consumers or a channel partners, the company must know the degree of the value added by each activity and, moreover, how this value can be enhanced further by re-engineering the entire process of the value chain. Moreover, it is also highlighted that organizations can add value in co-operation with other stakeholders like suppliers, channel partners etc. This process is known as the value chain system and derives that an organization's own value chain interacts with the value chain of other organizations.
For example, a supplier's value chain, considered as upstream value, puts an impact on organization's performance. Similarly, an organization's offerings become element of a buyer's value chain, providing downstream value. The value created within the supply chain system depends on the fact that how an organization maintains the relation with other stakeholder firms. If it is managed efficiently, then it tends to be profitable for all stakeholders within the supply chain system and the organization will have a long term competitive advantage.
The value chain analysis involves identification of the activities and processes, followed by the firm and proves to he upright in meeting out the needs and demands of customers and those areas where the firm may have a potential edge over other industry players. Thus, it can be concluded that the internal factors of strategic importance should be linked with the value chain activities through proper identification of activities as potential sources of its strengths and weaknesses.
Identifying Value Chain Activities
There are broadly two categories of value chain activities (value chain approach in strategic management) as shown in figure :
Primary Activities
On the basis of technology orientation and strategic distinction, the primary activities can be categorized into five parts which are :
1) Inbound Logistics :
These activities are related with the purchasing, storage, and flow of inputs to the product including material handling. warehousing, inventory control and transportation.
2) Operations :
These activities convert inputs into final product, which involves activities like machining, assembly, packaging, equipment maintenance, testing and facility operation, etc.
3) Outbound Logistics :
These activities include movement of finished goods from point of production to ultimate customers. These types of activities include collection of goods, storage of finished goods, order processing, delivery operations, etc.
4) Marketing and Sales :
All activities related to advertising and public relation managing sales force, distribution channel management product pricing are considered as marketing and sales activities.
5) After Sales Service :
These activities are focused on providing support services for the maintenance of the product like installation, repair and, supply of spare parts, product adjustment, etc.
Secondary Activities
These are the support activities which provide the set-up for the smooth functioning of primary activities. Such activities are acknowledged on the basis of their technological and strategic uniqueness. The four categories of secondary activities are described below :
1) Procurement :
The activities related to the purchase of material or service input, equipment and machinery, etc. all come under the procurement activities.
2) Technology Development :
There is always a need for technology up-gradation as it is largely used in product designing and manufacturing process. Such activities which develop the technology should be executed to improve the value chain.
3) Human Resource Management :
Human resource management includes recruitment, training, development of manpower, all these activities formulate a distinctive set of support system which is involved in the value chain.
4) Firm Infrastructure :
These activities are quite different from primary and secondary support activities but are required essentially to provide the basic framework for the overall organisation. These activities include strategic planning, legal affairs, general management, finance, etc.