What are the hardest resources and capabilities to imitate?

Resources that are imperfectly imitable are valuable and have the potential to create a critical product or service advantage or a cost advantage over a firm's competitors.38 Firms with valuable and rare resources, which are hard to imitate by other firms, can gain first-mover advantages within their industry.39 Intel, for example, has enjoyed a first-mover advantage more than once because of its rare fast R&D cycle time capability that brought SRAM and DRAM integrated circuit technology, and brought microprocessors to market well ahead of the competition. The product could be imitated, but it was much more difficult to replicate the R&D cycle time capability.

A firm can either exploit a market opportunity or neutralize an external threat by using its rare and valuable resources. When competitors identify a resource-based competitive advantage, they may respond in two ways: First, they may choose to ignore it and continue to operate as usual and focus more on competitive pricing. Alternatively, they may choose to analyze (reverse engineer) and imitate (copy) the competitive resources of its rival in order to reach competitive parity.40 However, sometimes it is difficult for other firms to get access to or to imitate those resources. As a result, innovative companies that implement strategies based on difficult-to-imitate and nonsubstitutable resources can gain long-term competitive advantage.41

In most cases imitation appears in two ways: direct duplication or substitution. Direct duplication has been a problem for Apple across their entire value chain. Apple's extraordinary popularity has led to considerable counterfeiting or copying of their prototypes, products, know-how, trade secrets, service model, and even store concepts.42 Apple's products are predominantly contract manufactured in China. Additionally, the rising Chinese middle class makes the company's products very popular with local consumers. The strong interest of this consumer group to show off with high-status consumer goods further spurs the activities of counterfeiters.

Apple sells its products globally through company-owned retail stores, online, and through value-added resellers. By the last quarter of 2010 they had 233 retail stores in the United States and 84 internationally—including two in Beijing and two in Shanghai with a third on the way.43 In September 2011, they opened their first retail store in Hong Kong. The Apple retail store, a critical differentiator of the Apple experience, is being knocked off in China. By late 2010 fake Apple stores outnumbered real ones and recently bloggers reported five new fake stores in Kunming, a southwestern Chinese city with a population of more than 6.4 million. The fake stores had Apple's iconic look, logo, store layout, and employee apparel. Telltale signs identified the fakes—including the words "store," or in one case "Apple store"—beside the white Apple logo in the window, something Apple never does. According to some reports, staff members in these fake stores believed they were working for Apple.

Chinese authorities acknowledged these fake stores and in the process identified 22 fake Apple stores in total. Consequently, these stores were prohibited from using Apple trademarks and symbols. However, only two stores were closed, whereas the others simply changed their store names but retained the Apple retail look and service model. It should come as no surprise that almost all of the products sold in these fake Apple stores are knockoffs, mostly sourced from Hong Kong.44 This problem has not stopped at China's borders. Apple seized unauthorized iPod, iPhone, and iPad knockoff accessories bearing the Apple logo for sale in the Chinatown section of Queens, New York.45 Although Apple's is a dramatic case, almost all innovation-driven firms face equally significant IP violation exposure in China and other locations around the world.

The cost of imitation is usually high for the following reasons: unique historical conditions, patents, social complexity, and casual ambiguity. Unique historical conditions often create distinct resources and efficiency advantages for the incubator firm or first mover. Incubators are often advantaged by better access to rare resources and economies of scale. In addition, competitive advantage is frequently embedded in social structures and interpersonal relationship and unique culture characteristics, which create social complexity as a barrier to imitation. Casual ambiguity makes it difficult for imitating firm to identify the specific critical competitive advantage-creating factor of incubator firms. The would-be copycat simply cannot figure out what the target firm does or how they do it. Patents are legal barriers, which in a law enforcement-efficient environment are almost impossible to overcome.46 Once a firm has realized the value, rarity, and low levels of inimitability of resources and capabilities, the next step is to organize the company in a way to exploit these resources efficiently. If done right, the firm can enjoy a period of sustained competitive advantage.

Organized to be Exploited

There are many components to the resources-organizing process. They include, but are not limited to, the company's formal reporting structure, management control systems, and compensation policies.47 Reporting and control structures are both formal and informal and should be aimed at aligning managerial conduct with a firm's strategies.48 Resources-organizing capabilities are often referred to as complementary because alone they do not provide much value.49 However, in combination with a firm's other resources and capabilities these complementary capabilities can result in sustained competitive advantage. Without organizing capabilities even firms with valuable, rare, and costly to imitate resources can suffer competitive disadvantages.

Applying the VRINO Framework

The VRINO framework can be used to evaluate the profit-generating potential of a firm's resources and capabilities. The easiest way of applying the VRINO framework is to go through each characteristic sequentially in order to assess the competitive and economic implications of the firm's resources, individually and in combination, with all its other resources and capabilities. If a resource is not valuable the company may consider abandoning the resource because it may tie up capital or other management time, which would create inefficiencies. Value here does not refer to the actual price of the resource but to the value-creating notion relative to the market. Often firms think they need to provide certain services or complementarities to customers that historically were important for business but over time lost their value-creating function.

Next, if the resource is valuable but not rare it merely establishes competitive parity. A competitive parity means that the company is no better or worse off than its competitors. Third, if a resource or capability is valuable and rare, but not costly to imitate, a firm has achieved a competitive advantage and will temporarily achieve above-normal economic returns. Often certain management practices show this characteristic. However, because the resource or capability is not costly to imitate, other companies will soon copy the resource or capability. Finally, the best-case scenario would be if a resource is valuable, rare, difficult to imitate, and costly to organize. This resource would then become a source of a sustained competitive advantage. The O in the VRINO framework is of critical importance, because no matter how valuable, rare, or costly to imitate a resource is, if it is not organized to be exploited then it will most likely become a competitive disadvantage and end up hurting the firm financially.50