VRIO Framework EXPLAINED | B2U | Business To You

in this video let's zoom in on organizational resources and capabilities because when these resources are valuable rare hard to imitate and organization-wide supported you have found the true source of sustained competitive advantage today we're going to talk about the freo framework my name is lars and welcome to a new episode of business to you [Music] most of the earlier research studies on organizations were based on economic principles and industry dynamics making them quite externally oriented proponents of these outside-in perspectives believe that top managers should take their external environment as the starting point when determining their strategy however some authors argued that these external factors did not explain long-term company performance well enough they started looking at the internal organization instead or more specifically they started looking at firm resources the resource-based view was born one of these inside out thinkers and the creator of the freo framework is jay barney he developed the resource-based view into a full-fledged theory and published a well-known article about the notion of resources in 1991 in which he also introduced us to the frio concept before moving on to the framework let's take a step back first and try to understand what resources really are even though there is no generally accepted definition of resources barney defined firm resources as all assets capabilities organizational processes firm attributes information and knowledge controlled by a firm that enables it to improve its efficiency and effectiveness resources are often classified into the categories tangible resources such as equipment machinery inventory vehicles land buildings and cash and intangible resources such as trademarks copyrights brand reputation patents licenses organizational culture and know-how or you could classify them into physical capital human capital and organizational capital for companies to transform these firm resources into a sustained competitive advantage resources must have four qualities or requirements that can be summarized into the frio framework firm resources have to be valuable rare inimitable and non-substitutable and yes i am aware that these letters do not add up to vrio that is because the vrio framework was initially called the vrin framework years after publishing his article in 1991 barney combined inimitable and non-substitutable into one letter and added the o for organization instead let's go through each letter one by one valuable first and foremost resources have to be valuable as a matter of fact in order for firm attributes to be labeled with the term resources they must be valuable in the first place so technically resources are always valuable to be considered resources if you know what i mean resources are valuable when they enable a firm to implement strategies that improve a firm's efficiency and effectiveness by exploiting opportunities or by mitigating threats that will either lead to an increase in revenue or a decrease in costs it is even possible to quantify this with the aid of the net present value method imagine you come across a more efficient production machine for your product to purchase the machine you will have to make an investment of 1 million dollars however the machine can save up to 200k in costs every year during its lifetime of 10 years the npv formula can help you calculate the value of the investment by discounting the value of the future cost savings of 200k back to the present time using a discount rate in this example if you use a discount rate of 5 percent the future cash flows are worth about 1.5 million today which makes the net present value about half a million after adjusting for the initial investment of one million dollars any resource or investment with an npv outcome that is higher than zero is supposed to add value to a firm and can therefore be considered a valuable resource calculating the npv might sound complicated but there are useful npv calculator tools on the internet to help you out i put a link in the description rare the second question is are the resources you are using rare resources that can only be acquired by one or few companies are considered to be rare if a certain valuable resource is possessed by a large amount of players in the industry each of the players has the ability to exploit the resource in the same way thereby implementing a common strategy that gives none of the players a competitive advantage so going back to the previous example of the more efficient production machine if all your competitors are using the exact same machine you can all utilize the cost advantage from the machine in the same way and nobody gains a competitive advantage rareness is therefore really important inimitable although valuable and rare resources may help companies to engage in strategies that other firms cannot pursue since the other firms lack the relevant resources it is no guarantee for long-term competitive advantage it may give the focal company a first mover advantage but competitors will probably try to imitate these resources through duplication or substitution they might for example try to build their own efficient production machine or look to purchase a somewhat similar production machine from a different supplier another quality that resources should therefore have is that they should be hard and costly to imitate or substitute like mentioned earlier this quality is a combination of both inemitability and non-substitutability while there are many reasons why resources can be hard and costly to imitate most of the reasons can be grouped into three categories unique historical conditions causal ambiguity and social complexity starting with the first one very often the ability to acquire and exploit certain resources depends upon their place in time and space which means that once a particular unique time in history has passed firms that do not have these time dependent resources cannot obtain them anymore imagine that a certain company bought an empty piece of land along a river for a decent price many decades ago and built a huge production plant on it throughout the years the area attracted more and more interesting businesses and it became a central hub of driving companies with a great logistical network around it due to historical conditions the initial piece of land turned out to be much more valuable location than initially anticipated competitors that would like to move there as well will quickly notice that there is no room anymore and land prices are sky high the location itself has become an inimitable physical resource secondly causal ambiguity exists when the link between the resources controlled by the focal company and the company's sustained competitive advantage is not fully understood by both rival firms and the focal company itself this last part is very important because if internal workers are aware of the secret resources that lead to a sustained competitive advantage rivals might try to hire away these knowledgeable workers from the vocal company in order to reveal the causal links at first it might seem a bit odd that companies themselves do not fully understand the source of their sustained competitive advantage but given the fact that resources as a combined whole can be very complex and interdependent it is not unlikely that companies struggle with this and yet it is this exact struggle that allow resources to be inimitable and then we have social complexity whereas physical resources such as computers robots and machines are relatively simple to duplicate by competitors through reverse engineering assuming they are not paid and protected socially complex resources such as the reputation among suppliers and customers teamwork and friendship between employees and organizational culture are not so easy to imitate complex social phenomena are the result of years of slowly building up trust with all parties involved and cannot simply be acquired by rivals overnight these intangible resources are therefore hard and costly to imitate as well organization even if a company possesses resources that are valuable rare and inimitable it will not automatically lead to a sustained competitive advantage to fully realize this potential a company must also be organized to exploit its resources in such a way that true value is being captured from the resources for example if you have a highly skilled workforce that is both valuable rare and hard to imitate but not the appropriate division of labor and a fair compensation policy these workers might not function to their full potential and true value is not being captured organizational factors such as formal reporting structures compensation policies and management control systems surrounding the resources are therefore crucial as well now that we are aware of the four qualities that resources should have we can look at the framework as a whole as can be seen next to me the first question that we should ask about our resources is are they valuable if the answer is no you should really start to worry about the company's right to exist in such a situation we say the company is in a serious competitive disadvantage but if the answer is yes we move on to the question of rarity are the resources rare if the answer to that question is no meaning that multiple players in the industry can utilize the same resource in a similar way the situation is indicated as competitive parity in which none of the players has a competitive advantage over others if the answer is yes however we start to reach a more favorable situation if our focal company possesses resources that are valuable and rare but not inemitable at least we have a temporary competitive advantage competitors are likely to find ways to duplicate or substitute our resources as time passes by let's now assume our resources are inimitable and we can move on to the last question the question of organization because as mentioned earlier it can be very much the case that you have valuable rare and hard to imitate resources in-house but not the appropriate organization in place to utilize them in an effective way or perhaps you're not even aware of them if that is the case there is an unused competitive advantage that is why it is so important to use this framework from time to time and think critically about your resources in order to really understand where internal strength is coming from and what might need to be optimized to use resources more effectively because if we can answer the last question with yes we reach true sustained competitive advantage that rivals can only dream of if you like business related stuff feel free to subscribe to not miss out on any of our future videos more business frameworks that work well with the frio framework like for example the value chain analysis will follow soon on this channel and if you cannot wait for that perhaps you could already have a look at articles on our website business2u.com thanks for watching and don't forget alone we are smart together we are brilliant see you next time

Channel: Business To You

Views: 53,013

Rating: 4.9380803 out of 5

Keywords: VRIO, VRIO Framework, VRIO Model, Resource Based View, RBV, Jay Barney, Internal Organization, Resources, Sustained Competitive Advantage, B2U, Business To You, Valuable, Rare, Inimitable, Organization, Strategy, Business, Tutorial

Id: SD8XJw_qeNI

Length: 14min 5sec (845 seconds)

Published: Sun Jul 26 2020