S1

Good morning. For today, we will be talking about how to determine competitive potential using the
VRIO Framework.

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We can recall that there are three theoretical frameworks which seeks to explain where value comes
from at the business level. These are the I/O Model or Industrial Organization Model, the Contingency Theories
and the Resource-Based View. For this chapter we will be focusing on the Resource-Based View model.

Recall that a resource-based view model means that the competitive advantage of a firm is based on
the premise that the firm’s unique resources drives the strategy formulation. In this theoretical framework,
organizations look inside the company to find the sources of competitive advantage instead of looking at
competitive environment for it.

S4.
In 1984, Birger Wernerfelt came up with the resource-based view (RBV). According to Wernerfelt’s
theory, a business is a bundle of resources. Businesses differ depending on what these resources are and how
they are combined with one another. Resources include but are not limited to processes, capabilities, assets,
attributes, information and knowledge. Together, they allow businesses execute their relevant activities.
However, not all resources of a business are equally and strategically relevant. Certain resources give the
business a competitive advantage and these resources are said to have the VRIN characteristics. VRIN stands
for Value, Rarity, Imitability and Non-sustainability.

It was Jay Barney, an American professor in strategic management, who, in 1991, evolved the VRIN
framework to VRIO, giving us a complete framework. The change of the last letter of the acronym refers to the
so-called question of "organization", which is the ability to exploit the resource or capability. Barney realized
that the business must also be ready and able to utilize the resource to capitalize on its value. A resource that
meets each of these four criteria can bring about competitive advantage to the business.

S5.
VRIO Framework is a four-question framework that seeks to understand how a particular resource of a
firm can potentially be of strategic value, and whether this value is short term or long-term in nature. As what I
have mentioned earlier, this is a framework that is based on the Resource-Based View. VRIO stands for Value,
Rarity, Imitability and Organization. The VRIO framework is great for the evaluation of a company’s resources. It
complements the PESTLE analysis method, which is mostly used by marketers to analyse and monitor the
macro-environmental factors that have an impact on an organization. Business analysts can use VRIO to
accurately assess the internal resources of a business, its competitive advantage potential, and the possibilities
of improvement of its resources within relevant business areas.

I will be reporting the first two component of the VRIO Framework which is the Value and Rarity.

S6.
Value. The first question of the framework asks if a resource adds value by enabling a firm to exploit
opportunities or defend against threats. If the answer is yes, then a resource is considered valuable. Resources
are also valuable if they help organizations to increase the perceived customer value. This is done by increasing
differentiation or/and decreasing the price of the product. The resources that cannot meet this condition, lead
to competitive disadvantage. It is important to continually review the value of the resources because
constantly changing internal or external conditions can make them less valuable or useless at all.

S7.
The question lies whether or not the resource is valuable or not, if the answer is no, it leads to
competitive advantage A competitive disadvantage is an unfavorable circumstance or condition that causes
a firm to underperform in an industry. If the answer is yes, it will lead us to the next component of the framework,
which is the question of rarity.
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Rarity.