Thursday, June 11, 2015

How do you Leverage VRIO Framework in Strategy Planning

 The organizational weighting varies considerably with company size and complexity.

VRIO framework is the tool used to analyze firm’s internal resources and capabilities to find out if they can be a source of sustained competitive advantage. VRIO is an acronym from the first letters of the names of the dimensions: (
  • Value - How expensive is the resource and how easy is it to obtain on the market 
  • Rareness - How rare or limited is the resource? 
  • Imitability - How difficult is it to imitate the resource? 
  • Organization, respectively arrangement - Is the resource supported by any existing arrangements and can the organization use it properly?
Businesses primarily use VRIO as a framework for determining the competitive potential of a resource or capability; you would give equal weighting to all the four components for a balanced evaluation. The intent is to determine a sustainable competitive advantage. The resource doesn't matter nearly so much as how it's used. That is why VRIO Framework deals with capabilities. Barney posits that all four conditions--value, rarity, Imitability, and organizational alignment--must be present in order for the capability to create 'sustained competitive advantage.'

Only when all four elements of VRIO are present does a longer-term advantage occur. The presence of 'V', 'R', and 'I' confers a temporary advantage with above-normal profits that are likewise temporary. How long will the advantage conferred by a capability that passes all four components of VRIO? There is substantial multicollinearity among Valuable, Rare, and Inimitable. Any capability which is not rare will rather quickly lose much of its value, as will one which can reasonably be imitated. However, imitability can be impeded by other strategic decisions made by a company or a business.

There is substantial multicollinearity among Valuable, Rare, and Inimitable. A new entrant does not have to consider the implications of previous decisions while an established competitor does. Collectively, these three elements -Value, Rareness, and Imitability ask whether the competitive advantage is conceptually possible. "O" captures the organization's ability to implement. If you don't have a pretty strong "yes" to both, competitive advantage is not likely to be realized for any length of time. Also, your weighting of "O" may be lower because your focal industry segment tends to be more heavily weighted with smaller, less complex organizations. Consider the possibility that two hurdles (VRI, O) might work a lot better than a single one.

The organizational weighting varies considerably with company size and complexity. If all weights have to add up to 1.0, then a different "O" weighting will lead to different weightings for "VRI." Because each factor is clearly not a 0/1 thing, a weighting of the factors may be needed if you want to speak of forecasting one resource as being a more or less potentially powerful source of competitive advantage than another. Firms have lots of stuff that have no real V in this sense. A temporary advantage comes with a bit if rarity is high, until copied or substituted. Longer term advantage comes if the rare valuable resource is quite difficult or expensive to imitate. But all that said, organizations seem to then have to capture so much, all the organizational and managerial capabilities, plus implementation and systems development.

On the measurement side, successful factor weightings can and certainly should be derived. Just because the factors are not orthogonal, and may even be to some extent subsets of each other, does not mean that important patterns do not exist. At the most successful firms, a pattern of importance among the factors may very well exist. Knowing this would help inform the strategy, but the strategy theory should be refined and tested and further refined, and not just left to heuristics. Perhaps intervening "what if" variables can probably be sorted out that impact the importance of factors, such as the industry complexity, the pace of innovation, legal environment, 5-forces factors, organizational size and so forth.

A good strategy is based on the application of scientific, economic, socio-cultural and practical (technical/ non-technical) knowledge in order to design processes and solutions to resolve and transform situations and complexities in opportunities and success. The variety of strategy frameworks or theories are just the tools to do strategy management more scientifically, but this approach is never going to reach the goals if you don't consider the art part to add innovation, motivation, passion and a lot of courage.


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