The Internal Environment

This text gives an example of the firm's value chain as an important tool for determining how it provides value to the customer through its operational functions. The VRIO analytical tool is meant to answer specific questions that the firm must address when evaluating the firm's offerings.

Using Resources and Capabilities to Build an Advantage over Rivals

Using VRIO

The analytical tool used to assess resources and capabilities is called VRIO. As usual, this is an acronym developed to remind managers of the questions to ask when evaluating their firms' resources and capabilities. The four questions of VRIO, which focus on value, rarity, imitation, and organization, are illustrated in Exhibit 8.9.

An illustration shows the VRIO process. The four questions of VRIO, focus on value, rarity, imitation, and organization.

Exhibit 8.9 VRIO, a Tool for Evaluating Firm Resources and Capabilities

If each question can be answered with a "yes," then the resource or capability being evaluated can be the source of a competitive advantage for the firm. An example will help you better understand the VRIO process.

Imagine that you are a top manager for Starbucks and you want to understand why you are able to be successful against rivals in the coffee industry. You make a list of some of Starbucks' resources and capabilities and use VRIO to determine which ones are key to your success. These are shown in Table 8.1.

Starbucks' Resources and Capabilities
Resources	Capabilities
Brand name	Making quality coffee drinks
Thousands of locations worldwide	Delivering excellent customer service
Cash	Training excellent staff
Loyal customers	Paying above-average wages
Well-trained employees	Retaining quality employees

Table 8.1

You look at your list and decide to pick a few of the entries to evaluate with VRIO (Table 8.2):

Evaluating Starbucks' VRIO
Resource/Capability	Is it valuable?	Is it rare?	Is it difficult to imitate?	Is Starbucks organized to capture its value?	Can it be a basis for competitive advantage?
Brand name	Yes	Yes	Yes	Yes	Yes
Delivering excellent customer service	Yes	Yes	Yes	Yes	Yes
Thousands of locations worldwide	Yes	No	No	Yes	No

Table 8.2

According to the evaluation above, Starbucks' brand helps it compete and succeed against rivals, as does its excellent customer service. However, simply having a lot of locations globally isn't enough to beat rivals - McDonald's and Subway also have thousands of worldwide locations, and both serve coffee. Starbucks succeeds against them because of their brand and customer service.