Using the VRIN model to evaluate web platforms

Introduction

In this article, I discuss how the classic VRIN model can be used to evaluate modern web platforms.

What is the VRIN model?

It’s one of the most cited models of the resource-based view of the firm. Essentially, it describes how a firm can achieve sustainable competitive advantage through resources that fulfill certain criteria.

These criteria for resources that provide a sustainable competitive advantage are:

  • valuable
  • rare
  • imperfectly imitable
  • non-substitutable

By gaining access to this type of resources, a firm can create a lasting competitive advantage. Note that this framework takes one perspective to strategy, i.e. the resource-based view. Alternative ones are e.g. Porter’s five forces and power-based frameworks, among many others.

The “resource” in resource-based view can be defined as some form of input which can be transformed into tangible or intangible output that provides utility or value in the market. In a competitive setting, a firm competes with its resources against other players; what resources it has and how it uses them are key variables in determining the competitive outcome, i.e. success or failure in the market.

How it applies to web platforms?

In each business environment, there are certain resources that are particularly important. An orange juice factory, for example, requires different resources to be successful than a consulting business (the former needs a good supply of oranges, and the latter bright consultants; both rely on good customer relationships, though).

So, what kind of resources are relevant for online platforms?

I first give a general overview of the VRIN dimensions in online context. This is done by comparing online environment with offline environment.

Value:

The term ‘value’ is tricky because of its definition: if we define it as something useful, we easily end up in a tautology (circular argument): a resource is valuable because it is useful for some party.

  • critical for offline: yes (but which resources?)
  • critical for online: yes (but which resources?)

The specific resources for online platforms are discussed later on.

Rarity:

One of the key preoccupations in economic theory is scarcity: raw materials are scarce and firms need to compete over their exploitation.

  • critical for offline: yes
  • critical for online: no

Offline industries are characterized by rivalry – once oil is consumed, it cannot be reused. Knowledge products on the web, on the other hand, are described as non-rivalry products: if one consumer downloads an MP3 song, that does not remove the ability for another consumer to download as well (but if a consumer buys a snickers bar, there is one less for others to buy). Scarcity is usually associated to startups so that they are forced to innovate due to liability of smallness.

Imitability:

This deals with how well the business idea can be copied.

  • critical for offline: yes
  • critical for online: no

in “traditional” industries, such as manufacturing, patents and copyrights (IPR) are important. They protect firms against infringement and plagiarism. without them, every innovation could be easily copied which would quickly erode any competitive advantage. Intellectual property rights therefore enable the protection of “innovations” against imitation.

Imitation is less of a concern online. In most cases, the web technologies are public knowledge (e.g., open source). Even large players contribute to public domain. Therefore, rather than being something that competitors could not imitate, the emphasis on competition between web platforms tends to be on acquiring users rather than patents. (There are also other sources of resource advantage we’ll discuss later on.)

Substitutability:

The difference between imitation and substitution is that in the former you are being copied whereas in the latter your product is being replaced by another solution. For example, Evernote can be replaced by paper and pen.

  • critical for offline: yes (depends on the case though)
  • not so critical for offline: yes (see the example of Evernote)

However, I would argue the source of resource advantage comes from something else than immunity of subsitution: after all, there are tens of search-engines and hundreds of social networks but still the giants overcome them.

‘Why’ is the question we’re going to examine next.

Important resources for online platforms

Here’s what I think is important:

  1. knowledge
  2. storage/server capacity
  3. users
  4. content
  5. complementors
  6. algorithms
  7. company culture
  8. financing
  9. HQ location

Knowledge means holding the “smartest workers” – this is obviously a highly important resource. As Steve Jobs said, they’re not hiring smart people to tell them what to do, but so that the smart workers could tell Apple what to do.

  • valuable: yes
  • rare: no (comes in abundance)
  • imperfectly imitable: no
  • non-substitutable: yes

Storage/server capacity is crucial for web firms. The more users they have, the more important this resource is in order to provide a reliable user experience.

  • valuable: yes
  • rare: no
  • imperfectly imitable: no
  • non-substitutable: yes

Users are crucial given that the platform condition of critical mass is achieved. Critical mass is closely associated with network effects, meaning that the more there are users, the more valuable the platform is.

  • valuable: yes
  • rare: no
  • imperfectly imitable: no
  • non-substitutable: yes

Content is important as well — content is a complement to content platforms, whereas users are complements of social platforms (for more on this typology, see my dissertation).

  • valuable: yes
  • rare: no
  • imperfectly imitable: no
  • non-substitutable: yes

Complementors are antecedents to getting users or content – they are third parties that provide extensions to the core platform, and therefore add its usefulness to the users.

  • valuable: yes
  • rare: no (depends)
  • imperfectly imitable: yes
  • non-substitutable: no (can be replaced by in-house activities)

Algorithms are proprietary solutions platforms use to solve matching problems.

  • valuable: yes
  • rare: no (depends)
  • imperfectly imitable: no
  • non-substitutable: yes

Company culture is a resource which can be turned into an efficient deployment machine.

  • valuable: yes
  • rare: yes
  • imperfectly imitable: yes
  • non-substitutable: yes

A great company culture may be hard to imitate because its creation requires tacit knowledge.

Financing is an antecedent to acquiring other resources, such as the best team and storage capacity (although it’s not self-evident that money leads to functional a team, as examples in the web industry demonstrate).

  • valuable: yes
  • rare: no (for good businesses)
  • imperfectly imitable: no
  • non-substitutable: no (bootstrapping)

Finally, location is important because can provide an access to a network of partner companies, high-quality employees and investors (think Silicon valley) that, again, are linked to the successful use of other resources.

  • valuable: yes
  • rare: no
  • imperfectly imitable: no
  • non-substitutable: no

A location is not a rare asset because it’s always possible to find an office space in a given city; similarly, you can follow where your competitors go.

Conclusions

What can be learned from this analysis?

First, the “value” in the VRIN framework is self-evident and not very useful in finding out differences between resources, UNLESS the list of resources is really wide and not industry-specific. That would be case when exploring the ; here, the list creation was

My list highlights intangible resources as a source of competitive advantage for web platforms. Based on this analysis, company culture is a resource the most compatible with the VRIN criteria.

Although it was argued that substitutability is less of a concern in online than offline, the risk of disruption touches equally well the dominant web platforms. Their large user base protects them against incremental innovations, but not against disruptive innovations. However, just as the concept of “value” has tautological nature, disruption is the same – disruptive innovation is disruptive because it has disrupted an industry – and this can only be stated in hindsight.

Of course, the best executives in the world have seen disruption beforehand, e.g. Schibstedt and digital transformation of publishing, but most companies, even big ones like Nokia have failed to do so.

How to go deeper

Let’s take a look at the three big: Google, Facebook and eBay. Each one is a platform: Google combines searchers with websites (or, alternatively, advertisers with publisher websites (AdSense); or even more alternatively, advertisers with searchers (AdWords)), Facebook matches users to one another (one-sided platform) and advertisers with users (two-sided platform). eBay as an exchange platform matches buyers and sellers.

It would be useful to assess how well each of them score in the above resources and how the resources are understood in these companies.

I’m into digital marketing, startups, platforms. Download my dissertation on startup dilemmas: http://goo.gl/QRc11f