Does VRIO sound like the name of a new car or a mobile phone? Well, it stands for ‘valuable-rare-imitable-organisation,' a framework to evaluate whether or not a strategy is likely to be a source of sustained competitive advantage.
A strategy is valuable when it increases a firm's revenues or reduces its costs, explain Jay B. Barney and Trish Gorman Clifford in ‘ What I Didn't Learn in Business School: How strategy works in the real world ' ( Harvard ). Providing value to customers above and beyond what competitors offer is usually the most obvious way to increase the firm's business, they add.
“Eliminating waste from operations or changing the firm's business model to make it more efficient is the quickest way to cost reduction, although location decisions, improvements in quality, and other strategic choices contribute to both top-line and bottom-line value-add. Obviously, strategies that aren't valuable can't be a source of competitive advantage.”
The rarity question is about the firm possessing unusual skills or other assets needed to execute a strategy, because valuable strategies, by themselves, are only sources of parity, the authors instruct. If many firms all have the ability to execute the same strategy, then that strategy will probably not be a source of advantage, they reason. “This doesn't mean that valuable, but common, strategies aren't important. Lots of firms have created economic value through valuable but common strategies. Firms shouldn't expect, however, to gain advantages from these strategies – they are only a source of competitive parity, the table stakes that a firm has to ante up to be able to compete.”
While valuable and rare strategies can be a source of very lucrative advantage, it is important to remember that the longevity of the advantage hinges on the third question – ‘How long will it take other firms to imitate this strategy?' Strategies that are hard to imitate — assuming they are also valuable and rare - are more likely to be a source of longer-lasting competitive advantages, write Barney and Clifford. “If, on the other hand, competitors can begin to imitate a firm's valuable and rare strategy as soon as it becomes public, then that strategy will create only temporary advantages.”
Imitation barriers
Among the many reasons behind the difficulty to imitate are patent protection, skills that took the firm many years to develop, trusting relationships among the firm's managers, or between the firm and its suppliers or customers. “Sometimes it can even be difficult for competing firms to describe exactly why a particular firm has an advantage. Obviously it is hard to imitate what you can't even describe!”
The final question focuses on ‘organisation' to check if it is organised to execute and protect its source of advantage. Though it may be tempting to think that finding answers to the first three questions completes the analysis, your B-school professors would have dinned into you that ‘organisation — things like a firm's reporting structure, management controls, and incentives - enables firms to realise the full potential of its strategies.'
Educative read, in a fable format.
Energy strategies
Ensuring reliable and stable flows from the Gulf region will be Asia's biggest challenge, notes Harsh V. Pant in ‘ The China Syndrome: Grappling with an uneasy relationship ' ( Harper ). He points out that the US' dependence on West Asia is much less than that of other major global economies, as only 17 per cent of its oil imports flows from the region, while China is estimated to be importing almost 70 per cent of its oil from the region by 2015.
A section titled ‘India's loss is China's gain' opens by acknowledging Indian concerns about Chinese influence across the globe, derived from the perceptions that it is losing out to China in the energy race. The Chinese have an upper hand over India in bidding, because they can clinch a deal at any cost, while Indian public sector companies need to ensure that the investment provides at least 12 per cent rate of return, explains Pant. The Chinese companies not only enjoy a headstart over their Indian rivals, but also have deeper pockets, he distinguishes.
“India is only a recent entrant in the global bidding process, because it was only in 2002 that the government deregulated the domestic oil sector. For China, buying foreign oil and gas fields for energy security has become a central mission, and the Chinese government has allowed its oil majors unprecedented freedom to achieve that goal.”
Bid race
For instance, the book mentions that Chinese oil companies have used all sorts of government aid, including non-oil commitments, transfer of missile technologies, the veto of UN sanctions against countries where China has oil interests, and even education and development aid, to lure energy-rich states.
Angola is an example of how India's loss is China's gain. Although the Indian government promised a $200 million rail line in Angola (over the $620 million for the oil blocks), the China National Petroleum Corporation (CNPC) managed to snatch it away, because the Chinese government offered a composite $2 billion in aid for a variety of projects in Angola, as a seventeen-year oil-backed loan, writes Pant, citing reports. Another example he gives is of China winning the bid for acquiring the assets of a Canadian oil firm, Encana Corporation, in Ecuador, after India decided to withdraw from the deal.
Need for cooperation
The author frets that even with regard to the much-touted China-India joint bid in Syria, the fact remains that the Syrian fields are not very desirable, with production falling from 3.9 lakh barrels a day in 1995 to about 1.77 lakh barrels per day in 2005. “There are enormous political risks in investing in a country such as Syria. China and India seem to have made a practical decision to work together so as to share the risk and to keep the cost of the acquisition down.”It is India that needs to cooperate with China, rather than the other way around, because it is difficult for India to win over China when they bid for assets, advises Pant. He wonders, however, what advantages China could derive from such cooperation, given that the Chinese are much larger participants in the global oil market.
On how the Indian government's energy strategy still lacks clarity, and how bureaucratic problems remain endemic, his example is of the last minute rejection by the government of ‘the ONGC's apparently winning bid for an up to $2 billion stake in a Nigerian oilfield, thereby damaging the credibility of Indian companies in the international market.'
The author is, therefore, of the view that in the long term, Chinese companies may see more gain in forming ventures with experienced majors such as BP, Royal Dutch Shell, and Exxon Mobil Corporation as compared to teaming with their Indian counterparts.
Cautionary discussion with key insights.
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