Distinctive resources and capabilities are important for sustainable competitive advantage and superior economic performance. VRIO model allows for their assessment. It stands for Value, Rarity, Inimitability and organisational support.
V- value of resources and capabilities
Value resources and capabilities are those that create value for the customer and the organisation. Through resources businesses want to take advantage of opportunities and minimise threats. This either through lowering the price or increasing the attractiveness of the product. It is important to understand customers and what they value. We need to consider which resources are particularly important to provide the value and which do not.
R- rarity
If resources are a value but common among competitors, they are unlikely to bring competitive advantage. Rare resources are those possessed uniquely by one organisation or by few others. Patented products give that advantage.
I- inimitability
Having valuable and rare resources may not be enough. The competitors must also find them difficult and costly to imitate or obtain. This often relates to particular activities, skills and people. For example, developing and deploying own IT system may be of advantage and costly to imitate. These often relate to activities, skills and knowledge inside and outside of the organisation.
Resources and capabilities can be difficult to obtain as they may be complex and involve interlinkages. Many activities may be linked to deliver customer value. Competitors will not be able easily to copy them. The inimitability may also include connections with external partners or customers.
Another reason onto why resources and capabilities may be difficult to imitate is that competitors find it difficult to establish the causes and effects underpinning the organisational advantage. There may be tactic knowledge rooted in the organisation's culture like spotting new trends of gathering feedback.
Capabilities become embedded in the organisation's culture and activities may be done in a particular way.
O- organisational support
A business must also be suitably arranged to support these capabilities including processes and systems. The formal and informal management system needs to support those capabilities. Some competitive advantage may be lost in the organisation if not captured correctly and to take the full advantage of their value. Company may have a patent but not suitable sales force to sell the product.
Organisational knowledge is organisation specific, collective intelligence accumulated through formal system and people's experience. Technologies may be important to capture those information. Explicit knowledge would generally transmitted through formal systems such as business manual or files of market research and intelligence. But experience and less formal tactics are also important.
The VRIO framework can help to analyse whether a business has capabilities and resources allowing to gain sustainable competitive advantage. This analysis can be done for different functions of an organisation or different sections of the value chain.
The value chain and value system
The value chain describes the categories and activities within an organisation which create product or service. Organisations are also part of a wider value system as the set or inter-organisational links and relationships that are necessary to create products.
Managers need to understand which activities and processes are especially important in creating the value. Primary activities and support activities are to be considered. The value chain can be used to understand the strategic position and understand the business capabilities.
To identify cost and value of activities we can conduct a following actions:
Identify set of value activities for example through value chain framework. We can then decide which activities are most significant in achieving a sustainable competitive advantage. It might be that R&D activities are critical or distribution networks.
Assess the relative importance of the activity costs internally. We can decide which activities are most important to the final product or service and which activities links are dependent on each other.
Assess the relative importance of the activity externally. We can compare the value of those activities with competitors.
Identify where and how the costs can be reduced. The balance of cost should be in line with strategic significance and whether costs can be reduced in some areas. Outsourcing decisions may be taken.
Costs can be analysed across the value chain as well as across the value system. We can also determine those activities that affect the price and assess where are the profit pools. Profit pools refer to different levels of profits available in different parts of the value system. We also need to consider who might be the most profitable partners in the value system and what kind of relationships are important to deliver sustainable competitive advantage.
Activity systems
Michael Porter have written about the importance of mapping activity system and show how this might be done. The starting point is to identify the 'higher order strategic themes' as these are the ways in which the organisation meets the critical success factors determining them in the industry. The next step is to identify clusters and activities that underpin each of these themes and how these do or do not fit together.
One such representation is shown in figure below.
We can see that at the heart of the example is the knowledge that was built over time. The rectangles represent the higher strategic themes. This company wants to work on the strategic level, provide strong incentives for top performers, utilise value driven recruitment, provide freedom with responsibility. From these, we can link it to the value chain: recruitment and human resources, learning, strategy management. There is also linkage to VRIO as we can determine the areas of competitive advantage. Through this exercise, we can also determine activities which are not required.
Benchmarking
Through benchmarking a business can determine how it compares with others. This can relate to the quality of products and services but also business capabilities. We can benchmark against few similar companies in the industry or best-in-class in the field. It can have an impact on the view on business resources and capabilities.
Improving resources and capabilities
Dynamic capabilities allow to adjust to changing environment and are directed towards the strategic change. Companies must continuously learn about new technologies and market to capture the opportunities. Then once the opportunity is sensed it must be seized.
Dynamic resources can help companies to sense and seize new opportunities. These could be research and development, marketing activities or quality analysis. Capabilities and resources can then be reconfigured through investment into technology, manufacturing or markets. We may need to discard some of the old resources and capabilities and acquire new ones. Sensing, seizing and reconfiguring can be a valuable exercise.
Dynamic capabilities can change ordinary capabilities. We can develop current resources and capabilities, building and recombining them and leveraging them.
This also applies to external capabilities as well as ceasing obsolete capabilities.
Business employees need to contribute to the competitive advantage thus training, development, awareness activities are crucial. People's behaviours underly the business strategic direction and the strategy is rooted in the individual's actions.
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