GSM 6/16 Internal Analysis: VRIO Analysis

Resource Based-View (RBV) of the firm

Focus on firm’s internal resources as determinants of competitive advantage

Key assumptions: RBV views firm as a bundle of resources; RBV assumes

1. Resource heterogeneity: resources differ across firms

2. Resource immobility: some resources cannot be easily traded or imitated

Competitive advantage under RBV

A firm’s sustainable competitive advantage is derived from having VRIN resources/capabilities

How does a resource or capability lead to a sustained competitive advantage? VRIO Model

Valuable → Yes

→ No → Competitive disadvantage

Valuable if they can increase consumer’s willingness to pay (premium pricing)

Allows you to exploit new opportunities

Allows you to mitigate potential threat

Cost leadership, helps reduce the cost (economies of scale)

Rare → Yes

→ No → Competitive parity (on par with other competitors)

Rare if the capabilities are not possessed by many others (physical uniqueness)

Costly to Imitate → Yes

→ No → Temporary competitive advantage

Costly to imitate if there are barriers to imitation

Protect resources, capabilities, or competencies that underlie a firm’s competitive advantage

Path dependent: time (dis)economies

Causal ambiguity: time & complexity

Social complexity: social capital

Intellectual property (IP) protection

Direct imitation: even if some institutional protection caused by patents

Substitution: strategic equivalence → offline bookstores vs. Amazon, offline DVD rental services vs. Netflix

Organized to capture value → Yes → Sustained competitive advantage

→ No → Temporary competitive advantage

Organized to capture if the firm has an effective organizational structure and a coordinating system

Which resources might lead to sustained competitive advantage? How so? Use VRIO!!

• Skilled managers → Can they be hired away? Can they perform in new context?

• Effective management trainee program → May be difficult to imitate; embedded in the firm

• Technology leadership in key area → Can others catch up?

• Key patents on technology → Monopoly for X years

• A key brand name → Impossible to replicate (economies of scale a barrier)

• Secret formula for making the chocolate → “Know how”

• Owning the land that has the most fertile soil → Got there first!!

Durability of Core Competencies

Over time, the benefits of any value-creating strategy can be duplicated by competitors.

Sustainability of a competitive advantage is a function of:

• The rate of core competence obsolescence because of environmental changes

• The availability of substitutes for the core competence

• The imitability of the core competence

Core Competencies vs. Core Rigidity

All core competencies have the potential to become core rigidities - former core competencies that now generate inertia and stifle inovation

The challenge is:

• Exploitation of current core competencies

  • Identifying core competencies

  • Leveraging core competencies

  • Updating existing core competencies

• Exploration of new ones

  • Developing new core competencies

However, capabilities erode and need to reappraise, renew, & upgrade capabilities continuously

SWOT Analysis

Combines external and internal analysis

Purpose → proactive approach: leverage internal strengths to exploit external opportunities, passive approach: mitigate internal weaknesses and external threats

Strengths, Weaknesses, Opportunities, Threats

Strengths + Opportunities → How can the firm use its strengths to take advantage of opportunities?

Weaknesses + Opportunities → How can the firm overcome weaknesses that prevent the firm from taking advantage of opportunities?

Strengths + Threats → How can the firm use strengths to reduce the likelihood and impact of threats?

Weaknesses + Threats → How can the firm overcome weaknesses that will make threats a reality?