12619561_VRIO Practice Paper Revised Deformatted

8/13/2019 12619561_VRIO Practice Paper Revised Deformatted

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Integrating resource-based theory in a practice-relevant form

Dr Paul Knott

College of Business and Economics, University of Canterbury,

Private Bag 4800, Christchurch, New ealand

Email: [email protected]

Abstract

Purpose: The paper addresses the limited development of techniques to analyze firms

internal sources of competitive performance. !t seeks to enhance the contribution of the

"idely diffused #$!% &value'rarity'imitability'or(anization) model to practical strate(y

makin(.

Design/methodology/approach: The paper dra"s on the resource based literature to

assemble an inte(rated set of steps that evaluate a firm s resources and competence.

Findings: The paper proposes an e*panded version of the #$!% model that represents

resource and competence as a conditional outcome from attributes and asymmetries present inthe firm. !t sho"s ho" the conditions convert asymmetries bet"een "eaknesses+ missed

opportunities+ ri(idities and resources.

Research implications: ,y synthesisin( resource'based theory in a practice'relevant form+

the paper delineates a concrete set of practices that relate to firms dynamic capability to

mana(e resources and competence.

Practical implications: The paper details an approach to resource and competence analysis

that leads directly to decisions about ho" a firm can mana(e the resources in question. The

model (ives a central role to the conditions under "hich a firm s attributes (ive rise to a

resource or competence+ and hence su((ests active mana(ement of these conditions.

Originality/value: The paper presents resource'based theory in a form that focuses on the

doin( of strate(y+ in contrast to the traditional focus of this literature.

Key ords: #$!% analysis+ resource'based vie"+ strate(y as practice+ strate(y tool+ dynamic

capability.
mailto:[email protected]:[email protected]


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Paper type: -onceptual paper

Introduction

%ne of the critical tasks in strate(ic analysis is for mana(ers to understand the relationship

bet"een the resources they control and the performance of the firm. trate(y courses reflect

this by (ivin( prominent place to techniques and theories that attempt to structure this

analysis. Prominent amon(st these is the resource'based vie" of the firm &/ernerfelt+ 0123+

,arney+ 0110). 4rom the resource'based literature+ the #$!% &value'rarity'imitability'

or(anization) technique &,arney+ 5665) has become the most "idely advocated method for

assessin( a particular firm s resources. !n common "ith other strate(y tools+ this technique

ori(inated in theory development &,arney+ 0110) and not initially as a tool for practical

application. ubsequent development as a means of understandin( a firm s resources &,arney+

5665) has helped #$!% to diffuse "idely+ but it is not clear that this has fully addressed the

perceived imbalance in techniques available for the resource and market aspects of strate(ic

analysis &/ernerfelt+ 0117).

This paper considers resource analysis from the perspective of the doin( of strate(y+ or

strate(y'as'practice+ centred on ho" mana(ers undertake strate(y activity &/hittin(ton+

0118). !n this perspective+ strate(y tools such as #$!% analysis represent one of the

influences mana(ers can dra" on "hen carryin( out strate(y'makin( episodes &/hittin(ton+

5668). 9sually+ mana(ers use tools only as a (uide or as a startin( point for an activity. %ften

they use only parts of tools+ and adapt them to suit their local needs & arzabko"ski and

/ilson+ 5668). urveys of mana(ers sho" that core competencies remain popular as a

concept &$i(by and ,ilodeau+ 566;). !t is less clear that firms use associated analysis

techniques such as #$!%. Teachin( e*perience su((ests that this technique has practical

limitations in its e*istin( form+ includin( inadequate translation of theoretical concepts into

application (uidelines+ and insufficiently developed links bet"een analysis and action.

!n response to these limitations+ this paper develops an e*panded version of #$!% that

includes a more comprehensive set of analysis steps and emphasises active mana(ement of

the conditions under "hich firm attributes become resources or competence. The paper first

brin(s to(ether the aspects of resource'based theory that relate to resource and competence

analysis. 4ollo"in( this+ it evaluates e*istin( forms of analysis available for practical use. The

core of the paper outlines steps in applyin( a more fully developed analysis based on #$!%+

and sho"s ho" the analysis links to intervention to nurture the firm s resources and

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competence.


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important class of resource that analysis usin( the resource base vie" must cover.

-ompetence is usually distinctive to each firm and not separable from the firm+ as it evolves

"ith the firm s development &Dierick* and -ool+ 0121


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566;). This model su((ests that competitive advanta(e can only be achieved by a firm that

has superior performance in one or more of the buildin( blocks efficiency+ quality+

innovation and customer responsiveness. The model is helpful in classroom case analysis as it

provides a simple "ay of linkin( internal attributes "ith customers and competitors.

=o"ever+ it is not "idely diffused and is let do"n by a lack of ti(ht definitions for each block.

The only "idely kno"n analysis technique that directly applies the resource'based vie" of the

firm is the #$!% technique representin( the empirical indicators of usefulness of a resource

for (eneratin( sustained advanta(e &,arney+ 0110+ 5665). This+ if applied fully by a user "ith

a (ood understandin( of the resource'based vie"+ is effective at helpin( mana(ers evaluate

e*istin( sources of sustained+ or temporary+ competitive advanta(e. =o"ever+ in its present

form it has important limitations from an application perspective. The evaluation processoften surfaces a back"ards'lookin( e*planation of e*istin( performance and does not

adequately reinforce the role of mana(ement in nurturin( future performance. This is

especially true for intan(ible resources embedded in the firm+ "hich are inherently hard to

manipulate &Priem and ,utler+ 5660). #$!% lacks clear semantic lo(ic to account for

characteristics that impede certain activities in the firm at the same time as enhancin( others

&Feonard',arton+ 0115 AcEvily and -hakravarthy+ 5665). E*istin( theory addresses these

issues+ but e*istin( analysis techniques do not.

!n summary+ e*istin( techniques are stron( in respect of component breakdo"n+ but "eak in

respect of evaluatin( intan(ible or systemic resources. T"o crucial needs that they serve

poorly are presentin( internal resources in a competitive conte*t and inte(ratin( analysis "ith

intervention. 4ortunately+ resource based theory has the potential to address these needs. The

sections belo" sho" ho" the theory can (enerate a more comprehensive version of #$!%

that overcomes the limitations in currently available techniques.

Developing VRIO as a practical tool

This section responds to the limitations of current analysis techniques by e*pandin( the #$!%

model and developin( (uidance in the use of this e*panded model as a practical tool. 4i(ure 0

e*pands on the flo"chart used to evaluate a resource usin( the #$!% criteria. -ritically+ it

emphasises the role and impact of internal and e*ternal conditions on "hether firm attributes

become firm resources+ and hence emphasises the benefit of mana(in( these conditions

actively. The sections that follo" e*plain more fully the e*panded and additional steps

outlined in 4i(ure 0.

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Firm attributeor Asymmetry

V aluable?Resource or Competence

R are? Competitiveadvantage

Costly to I mitate? SustainedcompetitiveadvantageFirm O rganised

to exploit?

External conditions

Internal conditions

Expanded conditions for a resource or competence

VRIO resource evaluation flowchart

Competitiveparity

Y

N

Temporarycompetitive

advantage

Y

N

Missed

opportunity

Rigidity

Y

Y

N

N

After resource evaluation

Evaluate interaction between firm attributes. Manage internal and external conditions acting on firm attributes.

Before resource evaluation

Select firm attributes (candidate resources) to evaluate.

Competitive dynamics

4i(ure 0: E*panded #$!% resource evaluation flo"chart

!electing candidate resources to test

This task is a critical determinant of the quality of #$!%'based analysis+ but is often

problematic because of the variety of firm attributes that can constitute resources. -ommon

errors include selectin( product or service attributes+ or adopted strate(ies of the firm+ instead

of resources. !t is equally limitin( to perform resource analysis at a level of a((re(ation that is

too hi(h &overly va(ue+ and hard to intervene constructively) or too lo" &missin( key

systemic qualities).

,arney &5665) uses the value chain to derive resources to evaluate usin( #$!%. This

approach shares the merits and limitations of the value chain itself. !t is effective for

evaluatin( individual activities on a freestandin( basis+ but not suited to brin(in( out systemic

qualities across the firm+ such as an unusual culture. Taken on its o"n+ this approach is also

susceptible to producin( back"ards lookin( description+ since it focuses on the details of a

le(acy activity system.

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4i(ure 0 uses the terms firm attribute &,arney+ 0110) and asymmetry &Ailler+ Eisenstat and

4oote+ 5665) for the candidate resources that #$!% evaluates. The term asymmetry

emphasises distinctive characteristics that are (enerally present in firms+ but may be

unreco(nised and hence not harnessed to create value. 4or e*ample+ Ailler et al &5665)

describe ho" -itibank realised that its net"ork of international banks had unused potential to

service multinational firms. 9sin( these terms separates more clearly the process of

identifyin( firm attributes from the process of assessin( "hether they are valuable and hence

constitute resources. The most useful firm attributes to assess are distinctive+ endurin(

qualities embedded in the history of the firm that have persisted over time and throu(h

chan(e. These embody the qualities of path dependence &Penrose+ 0171) and social

comple*ity &-ollis+ 0110 ,arney+ 5665) from the resource'based literature+ and hence are

more likely to form the basis of sustained advanta(e for the firm.


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e*ternal value+ resource analysis becomes an internally focused audit that has little bearin( on

competitive performance.

The #$!% model incorporates e*ternal assessment of value by the criterion of "hether a

resource enables a firm to choose or implement a strate(y that e*ploits an opportunity orneutralizes a threat &,arney+ 5665). 4i(ure 0 (oes further than this by emphasisin( this

e*ternal assessment of value as one of the conditions that determine "hether a firm attribute

or asymmetry represents a resource. !n doin( so+ it e*plicitly sho"s that e*ternal conditions

can make the critical difference bet"een a resource or competence and a ri(idity or "eakness

of the firm. The same set of firm attributes may lead to competitive advanta(e under some

conditions and disadvanta(e in others &Feonard',arton+ 0115 /est and De-astro+ 5660).

!n addition+ there are three key respects in "hich ,arney s &5665) criterion for value needsclarification. The first is that the firm s resources are only valuable if they lead to superior

efficiency+ customer'perceived value+ innovation or customer responsiveness &=ill et al"+

566;). This in turn represents performance relative to competitors+ the assessment of "hich

,arney s &5665) specification of value does not sufficiently force. The second key point is

that the analysis must define value only as that "hich the firm captures in market e*chan(e

&,o"man and


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capability in the firm or could render a resource inoperative or dysfunctional. 4or e*ample+

the performance potential represented by a firm s tradition of e*cellence in customer'facin(

activities may be masked or unmasked by chan(es in the effectiveness of its office facilities.

!nternal conditions+ such as the office facilities mentioned above+ are distinct from the type offirm attributes that the analysis evaluates. The key differences are that they are readily

susceptible to chan(e+ that they have not evolved "ith the firm s development+ that they are

not distinctive+ and that they typically e*ist for limited times.

%nalysis of com&etitive dynamics

=avin( determined "hether a firm attribute is a resource or competence for the firm+ the ne*t

steps in 4i(ure 0 assess the de(ree to "hich the resource or competence (ives the firm

sustained competitive advanta(e.


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combinations of resources and competence "ill be more costly to imitate enhances this effect

by producin( a more sustained performance advanta(e.

< common form of complementary interaction bet"een attributes combines a resource "ith a

competence that e*ploits+ maintains and enhances the resource. 4or e*ample+ o"nership of a

brand "ill be more valuable if the firm has the ability to maintain and enhance the value of

the brand. -onversely+ it "ill be less valuable if the firm lacks this ability. !n other cases+

resources in a firm may clash+ for e*ample creative traditions "ith systematic operations.

'anaging conditions to nurture resources and com&etence

The above steps in the e*panded evaluation process+ lookin( at the impact of internal and

e*ternal conditions on a firm attribute+ hi(hli(ht that these conditions radically alter theoutcome. This final step in the e*panded application of #$!% considers the dynamic

evolution of these conditions and the distinct responses called for by the four types of

outcome. These responses "ould help create+ maintain or enhance resources or competence

based on a (iven attribute of the firm. They build on and replace those outlined by ,arney

&5665) "ithin the e*istin( #$!% frame"ork.

Is the firm Organised to e p!oit it"( nternal conditions)

Is it Va!uab!ein current

External conditions?

NO YE

YE

NO

Resource orCompetence

Rigidity

Missedopportunity

#ea$ness

4i(ure 5: %utcome from a firm attribute accordin( to conditions

4i(ure 5 represents the possible outcomes from an attribute of the firm by dra"in( on the

above criteria for assessin( internal and e*ternal conditions. The top ri(ht quadrant hi(hli(hts

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that an e*istin( resource or competence depends on the continuation of suitable conditions.

-han(in( e*ternal conditions+ such as disruptive technolo(ies+ may render obsolete sources of

competitive advanta(e that are other"ise po"erful. !nternal conditions may chan(e "hen a

firm attempts to apply e*istin( resources to ne" opportunities+ as recommended by =amel

and Prahalad &0113). !n some cases+ this "ill undermine the e*istin( resource or competence+

for e*ample by re'assi(nin( people to a less conducive environment.

The bottom ri(ht quadrant represents an attribute of the firm that it has or(anised to e*ploit+

but "hich in the prevailin( e*ternal conditions is not demonstrably valuable. This

corresponds to "hat Feonard',arton &0115) referred to as ri(idity: functionin( "ithin the

firm+ but not matched "ith e*ternal needs and likely (eneratin( no &or even ne(ative) value.

Fe(acy technolo(ical capabilities are prone to fallin( in this cate(ory. !f the firm can re'deploy this attribute to a ne" market or application &ne" e*ternal conditions)+ it can chan(e

the outcome to a valuable resource or competence. !f not+ the firm should chan(e the internal

conditions so that they no lon(er e*ploit or support the attribute.

!f a firm possesses an attribute that it could use to (enerate value by e*ploitin( an opportunity

or neutralisin( a threat+ but currently it does not+ this represents a missed opportunity. ,y

mana(in( the internal conditions to e*ploit the attribute+ the firm could (enerate a value'

creatin( resource or competence. The application presented belo" illustrates this by sho"in(ho" an improved product pipeline and better market a"areness allo"ed commercial value to

be realised from the e*istin( scientific and product development skills.

/here a firm possesses an attribute that in current conditions does not have the potential to

create value+ and the firm has not or(anised to e*ploit it+ this attribute represents a "eakness

in the firm. Gon'valuable patents or outdated and unused kno"led(e assets "ould fall into

this cate(ory. The situation corresponds "ith "hat ,arney &5665) recommends for a non'

valuable resource. !t is rational that the firm does not e*ploit such attributes+ becausee*ploitin( them "ould not (enerate value.

!ample application of the e!panded model

Taken to(ether+ the steps summarised in 4i(ure 0 and outlined above represent a more

complete form of resource and competence analysis than e*istin( e*positions of the #$!%

technique. This section provides a simplified "orked e*ample of the e*panded model. The

application considers the specialty chemicals product division of a ma or firm studied by the

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author. 4i(ure C applies the e*panded model to an e*ample attribute of the firm+ and the

para(raphs belo" e*plain its lo(ic.

Strongfunctiona!

traditions

!on"traditional competition#rocess"driven customers

%rofitab!especia!istindustria!

chemica!N%&capabi!ity

R arecombination Competitive

advantage

Costly toI mitate

combination SustainedcompetitiveadvantageManaged product pipeline!ew mar$et awareness

External conditions

Internal conditions

Expanded conditions for a resource or competence

VRIO resource evaluation flowchart

Y Y

Y

Y

After resource evaluation

nternal conditions% maintain balance between functional traditions& product pipeline& and mar$et integration External conditions% extend t'e activity to new product areas& expecting evolving competition

Before resource evaluation

Firm attributes% researc' and ot'er functional traditions embedded in t'e business

Competitive dynamics

4i(ure C: E*panded #$!% model applied to industrial chemicals case

!elect candidate resources( The application first selects the firm s research orientation and

associated functional traditions as the candidate resources to test. These are "orthy of

evaluatin( because they represent "ell'established+ distinctive+ historical characteristics of the

firm. They are systemic qualities+ but are not va(ue as they can readily be associated "ith

specific mana(ers and activities. The firm possesses additional attributes that are "orthy ofevaluatin(+ includin( intellectual property resources. < complete analysis "ould repeat the

evaluation process described belo" for these other attributes.

#ntegrate e$ternal assessment of value( The division supplied key inputs to process'driven

industrial customers for "hom "asta(e rates "ere an important cost driver. !t also faced

emer(in( competition from less technolo(y'intensive firms based in lo"er cost countries. The

firm s response to this e*ternal threat and opportunity had been to use its stron( functional

traditions to (enerate a ran(e of products that si(nificantly reduced "asta(e rates for itscustomers.


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improved sales and mar(ins+ thou(h the firm "ould also need to take account of product

development costs.

#ntegrate assessment of internal conditions( The functional traditions alone "ould not have

(enerated these profitable products. The traditions did not include a close relationship "iththe supplied industry or the close understandin( needed to see and e*ploit the value'creatin(

opportunity. This had come via the appointment of technically and commercially e*perienced

individuals from this industry. !n addition+ the recent creation of a systematically mana(ed

product pipeline had been critical to inte(ratin( the traditional functions sufficiently that they

could efficiently develop and launch the ne" products.

%naly)e com&etitive dynamics( 9nder current e*ternal and internal conditions+ the firm s

functional traditions form the basis of a profitable ne" product development capability+despite the hi(h cost of these functions. This capability is some"hat rare+ particularly as the

ne"er competitors do not possess the functional traditions on "hich it based. The fact that

multiple specialist functions are involved makes it more comple* and costly for other firms to

create the required level of e*pertise.


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competence. This links the analysis directly "ith active mana(ement of these conditions+ and

discoura(es users from (eneratin( a static picture that may be rooted in the past. This

represents a different emphasis than the more "idespread portrayal of firm resources and

competence as a fi*ed endo"ment set by historical antecedents.

The e*panded model emphasises the value criterion as a question of fit "ith e*ternal

conditions+ and hence su((ests that value is susceptible to chan(e "ith conditions. 4or

internal conditions in the firm+ it encoura(es a more creative vie" than the simple choice of

"hether or not to e*ploit a resource. !t sho"s ho" different conditions actin( on a firm s

attributes can convert them bet"een "eaknesses+ missed opportunities+ ri(idities and

resources. The e*panded model further emphasises purposeful and for"ard'lookin( analysis

by sho"in( ho" mana(ers can evaluate the rarity and imitability criteria in #$!% byconsiderin( the impact of industry competitive dynamics.

,ecause none of the above is helpful unless the analyst has made (ood choices of firm

attribute to evaluate+ the e*panded model also includes this selection process as an e*plicit

step+ and provides ne" (uidance.

Research implications

This paper contributes principally to t"o research themes. ,y synthesisin( resource'basedtheory in a practice'relevant form+ it delineates a concrete set of practices that relate to the

dynamic capability to mana(e resources and competence. This contributes to the dynamic

capability literature+ "hich so far has not substantially detailed the content of the different

types of dynamic capability &$e(nHr+ 5662). 4irms could dra" upon the practices this paper

outlines to establish their o"n routines to mana(e their resources and competence. 4rom a

strate(y'as'practice perspective+ the paper contributes by presentin( resource'based theory in

a form that focuses on the doin( of strate(y+ in contrast to the traditional focus of the

resource'based literature on determinants of firm performance. 4rom the same perspective+

the ne*t step "ould be to research ho"+ if at all+ mana(ers currently undertake formal analysis

of their firms resources and competence. The enhanced and e*tended #$!% analysis

proposed in this paper could then be tested usin( action research involvin( mana(ers in

implementin( the steps it recommends.

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References

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'anagement + #ol. 0; Go. 0+ pp. 11'056.

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,arney+ .,. and =esterly+ /. . &5668)+ !trategic 'anagement and Com&etitive %dvantage(

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,lack+ . trate(ic resources: traits+ confi(urations and paths tosustainable competitive advanta(e?+ !trategic 'anagement *ournal + #ol. 07 Go. 5 & pecial

!ssue+ ummer)+ pp. 0C0'032.

,o"man+ -. and #alue creation versus value capture: to"ards a

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0'07.

,o"man+ -. and !dentifyin( valuable resources?+ Euro&ean

'anagement *ournal + #ol. 57 Go. 3+ pp. C56'C51.

,ruma(im+ < hierarchy of corporate resources?. !n: P. hrivastava+


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12619561_VRIO Practice Paper Revised Deformatted

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Transcript of 12619561_VRIO Practice Paper Revised Deformatted