Sunday, July 19, 2015

Internal Analysis Using the VRIO Framework

How will an organization know if it possesses sustainable competitive advantage to compete and succeed in its industry? One way to answer this question is to look at its resources and capabilities and analyze these using a structured resource-based approach called the VRIO analysis. This method is used to analyze whether an organization’s resource is valuable, rare, imitable, and whether the organization is taking advantage of this resource. An organization’s resources, as defined in this framework, are the assets and capabilities that enable the organization to implement strategies that improve its efficiency and effectiveness.[1]

VRIO is the acronym from the first letters of the dimensions - value, rareness, imitability, and organization. So, the first question that has to be answered is whether a resource is valuable. It is considered valuable if it can increase market share, achieve cost advantages, or both. Otherwise, it is not a source of competitive advantage. Once a resource is deemed valuable, the next question is whether it is rare or that it is not available to all competitors. If it is valuable but not rare, meaning competitors possess the same resources, the organization has no inherent advantage in this resource. The resource must also be difficult or costly for competitors to imitate or acquire. This dimension is called imitability, which can result in a sustained competitive advantage only if the organization can take advantage of it. Organization is where the resource is supported by any provisions in the company and that it can be used properly. Otherwise, the resource or capability is of little use. Thus, a resource that is valuable, rare, costly to imitate, and the company is organized to capture its value can be a source of sustainable competitive advantage for an organization.

Using the VRIO framework, we can analyze Southwest Airlines’ human resources capability, which is considered a source of the company’s competitive advantage. [2] First, it is valuable because it is a source of the company’s cost advantages. An example of the remarkable productivity of its workforce is the 15-minute turnaround time, which is better than the industry average of 35 minutes. It achieves this feat with fewer people compared to its competition. Operational efficiencies such as this contributes to its cost advantage. Second, Southwest Airline’s very productive, dedicated and happy workforce is uncommon in its industry. Aside from being valuable and rare, its human resources capabilities cannot be imitated easily by its competitors. United Airlines, whose culture is the exact opposite of Southwest, was plagued by unhappy employees. Continental’s CEO allegedly have people-skill problems. Lastly, Southwest is organized to capture the value of this capability. Its management is extremely selective in its recruiting and focused on hiring people with the right fit and attitude. Its employees are supported by a culture of mutual respect and care where employees are treated like family. The result of this excellent human resource capability is that it is a source of Southwest Airlines’ competitive advantage that it can sustain over time. 

[1] Barney, J. "Firm Resources and Sustained Competitive Advantage." Journal of Management 17.1 (1991): 99-120. Web. 16 July 2015.
[2] O'Reilly, Charles, and Jeffrey Pfeffer. "Southwest Airlines (A)." Stanford Graduate School of Business (1995): n. pag. Web. 16 July 2015.

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