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Friday, April 17, 2009

VRIO Analysis: Competitive Advantage

Do you have a resource that is of competitive advantage? Meaning something that competitors cannot match.

VRIO Analysis is a good tool that helps us establish whether a resource is of competitive advantage or not.

V stands for valuable. First question to ask if the resource is valuable. If we own something that nobody wants then probability is that resource is not valuable.

R stands for rare. Rarity provides competitive advantage. Aircraft engine technology is example of rarity.

I stands for immitable. Only variability and rarity does not provide competitive advantage. A resource must be difficult to immitate otherwise competitors can easily immitate our resource and we will loose our competitive advantage. For example, in drug industry patents provide protection for few years but after that anyone can copy the drug formula and provide the same drug to the market.

O stands for organization. Suitable organization is needed to support a valuable, rare and difficult to immitate resource to ensure maximum benefit utilization of such resource.

Traditionally, in agriculture/manufacturing economies a piece of land was considered of competitive advantage. It is probably the easiest way to explain VRIO principle (Imagine the advantage of owning land on new york's 5th Avenue or London's Oxford Street).

However, in service oriented economies, organization structure can itself be of competitive advantage. For example, Virgin corporation has a customer centric organization structure that is valuable, rare and difficult to immitate. Hence is of competitive advantage in itself.

VRIO analysis brings us back to the notion of strategy being "Fit". That is having every component of the organization aligned to deliver its value proposition. The closer the organization's components fit to deliver value the higher organization's competitive advantage.

2 comments:

  1. Thanks a lot Harish. Your note helps me a lot. Btw, my name is Mustakin from Northern University Of Malaysia. Where are you from Bro?

    ReplyDelete