VRIO framework is an internal tool of analysis in the context of business management VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential: the question ofValue, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability).
This is resource-based analysis of the firm determines which resources and capabilities result in which strengths or weaknesses in which strategies are to be implemented which exploit (or build) strengths and avoid (or eliminate) weaknesses. Also it explains what constitutes a strength or weakness is partially a function of the external environment .
  • The Question of Value: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?" or “Does a resource enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat?”
  • The Question of Rarity : "Is control of the resource/capability in the hands of a relative few?" or Is a resource currently controlled by only a small number of competing firms? [are the resources used to make the products/services or the products/services themselves rare?]
  • The Question of Imitability : "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?" or “do firms without a resource face a cost disadvantage in obtaining or developing it? is what a firm is doing difficult to imitate?”
  • The Question of Organisation :"Is the firm organized, ready, and able to exploit the resource/capability?" or “Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?”

Resources

A resource is an asset, skill, competency or knowledge controlled by the corporation, it is a strength if it provides competitiveadvantagee.g. patents, brand name, economies of scale, idea-driven, standardised mass production

The type of resources which can lead to competitive advantage are
1) Tangible resources,
2)Intangible resources
3) organizational capabilities.

Tangible Resources
Financial
  • Firm’s cash and cash equivalents
  • Firm’s capacity to raise equity
  • Firm’s borrowing capacity
Physical
  • Modern plant and facilities
  • Favorable manufacturing locations
  • State-of-the-art machinery and equipment
Technological
  • Trade secrets
  • Innovative production processes
  • Patents, copyrights, trademarks
Organizational
  • Effective strategic planning process
  • Excellent evaluation and control systems
Intangible Resources
Human
  • Experience and capabilities of employees
  • Trust
  • Managerial skills
  • Firm-specific practices and procedures
Innovation and Creativity
  • Technical and scientific skills
  • Innovation capacities
Reputation
  • Brand name
  • Reputation with customers for quality and reliability
  • Reputation with suppliers for fairness, non-zero-sum relationships
Organizational Capabilities
  • Firm competences or skills the firm employs to transfer inputs to outputs
  • Capacity to combine tangible and intangible resources, using firm processes to attain desired end.
Examples
  • Outstanding customer service
  • Excellent product development capabilities
  • Innovativeness or products and services
  • Ability to hire, motivate, and retain human capital




Chart showing Tangible resources,Intangible resources and Organizational capabilities.

VRIO STEPS
  1. Identify firms resources
  2. Combine firms strength into specific capabilities
  3. Appraise- profit potential, sustainable competitiveadvantage, ability to convert it to a profitableproposition
  4. Select strategy firms resources& capabilityrelative to external opportunity
  5. Identify resource gaps and invest in upgradingweaknesses



Table of VRIO Frameork derived from Barney, 1997

Rare?
Costly toImitate ?
Exploitable by theOrganization?
Competitive implications
Economic performance
Strengths or Weaknesses
No
-
-
No
Competitive Disadvantage
Below normal
Weakness
Yes
No
-
to
Competitive Parity
Normal
Strength
Yes
Yes
No
Temporary competitive advantage
Above normal
Strength and distinctive competence
Yes
Yes
Yes
Yes
Sustained competitive advantage
Above normal
Strength and sustainable distinctive competence


References

The essence of Corporate Advantage, C. Montgomery, Harvard Business School, Case N1-792-064.
**Gaining and Soustaining Competitive Advantage**, Jay. B. Barney, Addison-Wesley, 1997
Competing on Capabilities: The New Rules of Corporate Strategy, G. Stalk, P.Evans, L.E.Shulman ,**Harvard Business School**, March-April 1992
The Core Competence of the Corporation, C.K Prahalad and G. Hamel, , **Harvard Business School**, May-June 1990
**Dynamic Capabilities and Strategic Management**, D.J. Teece, G. Pisano, A. Shuen, , SMJ,1997
**Strategic Management**, Raphael Amit, Professor at Wharton University of Pennsylvania, US
**Contemporary Strategic Analysis**, Robert M. Grant, 3th edition, Blackwell, 1998
Barney, Jay B and Hesterly, William S. Strategic Management and Competitive Advantage: Concepts. 2005 Pearson Education, Inc., Upper Saddle River, New Jersey, 07458.
http://www.scribd.com/doc/51725664/5/VRIO-FRAMEWORK
Barney and Hesterly (2006), describe the VRIO framework as a good tool to examine the internal environment of a firm.