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chain in order, and at each activity, the product gains some value. A firm is effective
to the extent that the chain of activities gives the products more added value than the
sum of added values of all activities.
It is important not to mix the concept of the value chain with the costs

occurring throughout the activities. A diamond cutter can be used as an example of
the difference. The cutting activity may have a low cost, but the activity adds to much
of the value of the end product, since a rough diamond is significantly less valuable
than a cut, polished diamond. Research suggests a relationship between capabilities
developed in particular functional areas and the firm’s financial performance at both
the corporate and business-unit levels, [23] suggesting the need to develop capabilities
at both levels.
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 are core
competencies, and explain why firm performance differs? To lead to a sustainable
competitive advantage, a resource or capability should be valuable, rare, inimitable
(including nonsubstitutable), and organized. This VRIO framework is the foundation
for internal analysis. [24] VRIO is an acronym for valuable, rare, inimitable,
and organization.
If you ask managers why their firms do well while others do poorly, a common
answer is likely to be “our people.” But this is really not an answer. It may be the
start of an answer, but you need to probe more deeply—what is it about “our people”
that is especially valuable? Why don’t competitors have similar people? Can’t
competitors hire our people away? Or is it that there something special about the
organization that brings out the best in people? These kinds of questions form the
basis of VRIO and get to the heart of why some resources help firms more than
others.

Moreover, your ability to identify whether an organization has VRIO resources
will also likely explain their competitive position. In the figure, you can see that a

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