Internal Analysis Vrio
Internal Analysis 1 Why does firm performance differ?
Updated: 30 Aug. 2006 ©Scott Gallagher 2004
Internal Analysis
Earlier we explained differences in firm performance as being a function of their external environment. However, this is only part of the story. Obviously, each firm has some unique aspects. Internal analysis is an attempt to explain how and why these internal differences explain differences in firm performance.
Resources and Capabilities.
Economics generally models firms as generic black boxes that transform inputs into outputs in an efficient manner. Edith Penrose (1950) is generally credited with being the first person to model firms as unique bundles of resources. Some individuals like to make distinctions between resources, what companies have, versus capabilities, things companies can do. A classic example might be my personal computer. As a resource it is more powerful than the original computer on the Space Shuttle, however, I could not land the Space
Shuttle with it. So in this case I have a superior resource but an inferior capability.
Resources and capabilities can take many different forms. Literally anything an organization possesses can be considered a resource. Examples include financial resources, plants, equipment, technology, reputation, brands, and organizational expertise. In short there is no potential constraint on what can be considered a firm's resources or capabilities.
VRIO Analysis
Given that almost anything a firm possesses can be considered a resource or capability how should you attempt to narrow down the ones that explain why firm performance differs? In order to lead to a sustainable competitive advantage a resource or capability should be Valuable, Rare,
Inimitable (including non-substitutable), and Organized. This VRIO framework is the foundation for internal analysis.
If you ask a business person why their firm does well while others do poorly, a common answer is likely to be "our people." But this is really not
Updated: 30 Aug. 2006 ©Scott Gallagher 2004
Internal Analysis
Earlier we explained differences in firm performance as being a function of their external environment. However, this is only part of the story. Obviously, each firm has some unique aspects. Internal analysis is an attempt to explain how and why these internal differences explain differences in firm performance.
Resources and Capabilities.
Economics generally models firms as generic black boxes that transform inputs into outputs in an efficient manner. Edith Penrose (1950) is generally credited with being the first person to model firms as unique bundles of resources. Some individuals like to make distinctions between resources, what companies have, versus capabilities, things companies can do. A classic example might be my personal computer. As a resource it is more powerful than the original computer on the Space Shuttle, however, I could not land the Space
Shuttle with it. So in this case I have a superior resource but an inferior capability.
Resources and capabilities can take many different forms. Literally anything an organization possesses can be considered a resource. Examples include financial resources, plants, equipment, technology, reputation, brands, and organizational expertise. In short there is no potential constraint on what can be considered a firm's resources or capabilities.
VRIO Analysis
Given that almost anything a firm possesses can be considered a resource or capability how should you attempt to narrow down the ones that explain why firm performance differs? In order to lead to a sustainable competitive advantage a resource or capability should be Valuable, Rare,
Inimitable (including non-substitutable), and Organized. This VRIO framework is the foundation for internal analysis.
If you ask a business person why their firm does well while others do poorly, a common answer is likely to be "our people." But this is really not