VRIO framework

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Explain VIRO framework

Your former college roommate calls you and asks to borrow $10,000 so the he can open a pizza restaurant in his hometown. He acknowledges that there is a high degree of direct competition in this market, that the cost of entry is low, and that there are numerous substitutes for pizza, but he believes that his pizza restaurant will have some sustained competitive advantages. For example, he is going to have sawdust on his floor, a variety of imported beers, and a late-night delivery service. Would you like to lend your friend the money? What are the risks in lending him the money? (In terms of VRIO criteria)
Length: 2 pages (Font size 12; 1.5 space)

Strategic Management

VRIO framework is a useful tool for analyzing the business’ resources and the capacity to find out if they can be a source of a competitive advantage that can be sustained.  The tool was originally developed by Barney J.B. (1991) while working for his project “Firm Resources and Sustained Competitive Advantage.” He identified four attributes that must be possessed by business resources to become a source of a sustainable competitive advantage. The resources must be rare, valuable, non-substitutable, and imperfectly imitable. These criteria will be useful in deciding whether it will be advisable to lend my friend the money by identifying whether the associated benefits outdo the risks involved in lending the money.

Valuable

Lending my friend the $10000 will add value by enabling the pizza restaurant business in his hometown exploit opportunities and defend its threats. The additional capital will enable the business to ensure that there is always sawdust on the floor and can guarantee a stable supply of imported beers to its customers. The business will also be in a position to hire an extra staff who will work on night shifts in late night deliveries. This will help the business increase the perceived customer value by enabling the business offer its services at competitive prices. However failing to increase price differentiation or decrease the prize of the products and services being rendered by the business will lead to competitive disadvantage. However, the business proprietor has not elaborated on how the additional capital will help in decreasing the price of the products or how the business will continually review possible changes in the internal and external conditions which might lender the loan less valuable.

Rare

It will also be advisable to identify whether other businesses are likely to copy the same trend by borrowing equivalent capital and adopting the same service value addition. If the resource can be acquired by the competing business, which is possible, a loan of $10000 is not rare and therefore, the resource will only offer a temporary competitive advantage. Competitive parity is also possible in the current environment since other businesses may have the same capability or resource that might enable those implements the same strategies. Under this consideration, it will be risky to lend.

Costly to imitate

Given that the most likely alternative for the other businesses is to run to banks and other financial lending organizations for a loan, it is likely that hefty interest rates will be a guarantee. My friend will, therefore, have an added advantage since it is less liable to repay the loan with any interest. By paying the principle amount only, the resource becomes costly to be imitated by the competitors.

Organized to capture value

The money rendered in this case is organized to capture value by enabling the offer business services at extra hours and have additional products such as the imported beer brands. However, the business proprietor should describe how the business is going to organize its management culture and structure to fully attain the potential of its valuable, costly to imitate capabilities and resources

Conclusion

Using the VRIO framework, it will, therefore, be advisable to lend the friend the money given that the resource will be costly for other businesses to imitate, will add value to the business by giving it an additional competitive advantage, and the business proprietor has organized the resource to capture value for the business. However, the associated risks include the fact that the resource is not rare since the competing businesses can acquire loans from other sources and imitate the new strategies, therefore, render the resource temporarily useful.

Reference

Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17, 99-12, I(17), 99-112.

 

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