VRIO Analysis Framework
The main focus area of VRIO analysis is the internal resources and capabilities of an organisation.
What is the VRIO framework?
The VRIO framework is a tool to help you understand the elements of your business that give you a long-term competitive advantage. It might be resources or capabilities, partnerships or products, whatever gives or is going to give you an advantage can be framed within the VRIO framework.
Understanding the VRIO framework
The VRIO framework is an acronym for value, rarity, imitability, and organization. Each of these four components is traditionally approached in the style of a decision tree.
Following is the VRIO framework broken down into its constituent parts, with some important questions that may be asked:
Valuable
The first criterion or question to ask is:
“Is this resource valuable?”
A resource is considered valuable if it helps a business implement strategies that increase effectiveness or improve efficiency.
Alternatively, you could use Net Present Value (NPV) when assessing internal resources and capabilities.
This formula essentially determines whether the amount invested in “X” resource is lower than the expected future cash flows discounted back in time.
It should come as no surprise to you that if a business is doing (or using) something that provides no value to customers, it puts them at a competitive disadvantage.
However, should you deem a resource to be valuable, it moves on to the next stage of VRIO analysis – rarity.
Rare
The second question to ask when analyzing a resource or capability is:
“How easy is it for competitors to obtain this exact same resource?”
Rare resources can give companies a significant edge over the competition. They’re able to deploy them and implement value-creating strategies not available to competitors.
On the other hand, if a resource isn’t deemed rare or is easily obtainable, it brings a state of competitive parity.
An example of this would be Coca-Cola’s brand power.
Yes, it’s definitely valuable. People love and recognize the Coca-Cola brand the world over.
However, it’s not a rarity. Some of its key competitors such as Pepsi and Red Bull also enjoy the benefits of powerful brands.
If a resource is both valuable and something of a rarity, then it passes to the third stage of VRIO analysis – imitability.
Inimitable
The third question to ask when analyzing a resource or capability is:
Will it be expensive/possible for competitors to imitate or replicate?
Now, while possessing resources that are both valuable and rare allows companies to engage in strategies competitors can neither conceive nor pursue, it doesn’t immediately lead to sustained competitive advantage.
This first-mover benefit could be short-lived…
If competitors can duplicate the resource or substitute it for something else, it leads to a temporary competitive advantage.
Certainly not a bad thing! But everything should be done
The good news is that if a business has valuable, rare, and induplicate resources, they possess all the right ingredients to achieve sustained competitive advantage.
Only one question remains in the VRIO Framework…
Organization
“Does your organization have the internal, structures, systems, and processes to exploit this advantage?”
Simply possessing the resources isn’t enough on its own to eke out a sustained competitive advantage. The business has to have the right processes in place to make it happen.
If not, the resource becomes an unused competitive advantage.
Examples of the VRIO framework in business
Google is perhaps the best example of the VRIO framework in action. Their data-driven employment management system is valuable and rare. Indeed, no other company uses this form of employee management so extensively. Because of the size of Google’s workforce, it will prove prohibitively expensive for most companies to imitate. Google also invests heavily in training for HR managers so that they can derive maximum value from their competitive advantage.
Unlike Google, Coca-Cola has managed to exploit a solid VRIO framework in what is a very competitive market. The organization’s value lies in its high brand equity, or the perceived value of a brand in the minds of consumers. Coca-Cola’s product is not rare, but its presence in consumer lives is always associated with positive memories.
This makes their appeal hard to imitate because they have spent decades and billions of dollars in advertising to earn this place in consumer’s lives. With a presence in 196 countries worldwide, it is easy to appreciate Coca-Cola’s competitive advantage.
How to use VRIO framework
Now that you understand each element of the VRIO acronym, let’s take a look at the VRIO framework in practice: How do you actually use VRIO analysis to identify and exploit competitive advantage?
There are three steps to the process: define, categorize, and analyze. We break down each in the section below.
Before diving into those steps, you’ll need a list of resources to evaluate. Gather a team of individuals from across your company and hold a brainstorming meeting. Together, you should be able to come up with a list of your company’s resources.
(Stuck? As you and your coworkers brainstorm company resources, you may want to use SWOT analysis. Fortunately, we’ve got a blog post on the subject to help you get started!)
With your list of resources in hand, you’re ready to dive into the VRIO process.
1. Define resources
Resources typically fall into one of four categories: financial, human, material, or non-material. Before applying the VRIO framework, you’ll want to determine which category each resource falls into.
To help with the process, we’ve explained each type of resource below:
Financial: Simply put, financial resources refer to capital—the money your company has at its disposal. (This capital doesn’t have to be cold, hard cash. It could be shares or bonds, for example.)
Human: Human resources are the resources your employees bring to your company—namely knowledge and skills.
Material: Material resources are the physical, tangible resources your company has. These might include facilities, equipment, and materials. (Note: Material resources tend to be the easiest to imitate. If a company has capital, they can simply purchase the necessary facilities and materials.)
Non-material: Non-material resources can be anything from intellectual property (such as patents) to brand recognition among customers.
2. Categorize resources
Now that you’ve defined your resources, it’s time to put each one through the VRIO framework. At the end of the process, you’ll have labeled each resource as competitive parity, temporary competitive advantage, unused competitive advantage, or long term competitive advantage.
Think of the VRIO as a series of questions to ask about each resource:
First, is it valuable? If yes, move on to the next question.
Is it rare? If you answered yes again, onto the next question. If you answered no, that resource gives your competitive parity, but no advantage.
So your resource is valuable and rare—but is it hard to imitate? If yes—you guessed it!—you can move on to the final question. If you answered no, the resource gives your company a temporary competitive advantage.
And finally, is your company organized to use that resource? If yes, that resource gives your company a long term competitive advantage. If you answered no, it can be categorized as an unused competitive advantage.
3. Analyze resources
You’ve defined and categorized your resources—now what? Those first two steps are pointless without analysis. You need to look at the results and turn the data into action.
Your goal is to identify resources that can be developed into a competitive advantage. In other words, which resources can be taken from their current category to a higher one?
The starting point should be obvious: Do you have any resources in the unused competitive advantage category? To turn those into long-term competitive advantages, all you have to do is organize your company to utilize them.
Easier said than done, right? The exact steps to turn an unused competitive advantage into a long-term advantage will change depending on the resource. But this much is always true: To use those resources, you’ll need to develop a business strategy that takes each into account.
This won’t happen overnight. Meet with stakeholders and teams across the company to build out an informed, realistic strategy to capture all of your resources.
The VRIO framework is a great tool for internal analysis—and internal analysis is a great place to start! But remember, the competition is out there: To really be competitive in your market, you’ll need to analyze their businesses as well. Enter SWOT analysis. After using VRIO analysis on your own company, try using SWOT analysis to see how you stack up against competitors!
What are the advantages of the VRIO framework?
There are a lot of advantages to the VRIO framework including:
It’s simple and effective as a resource review
When done well it can elevate a companies competitive positioning
It’s comprehensive while not being complicated
It’s very focused on internal analysis
What are the limitations of the VRIO framework?
As with every framework, VRIO has some limitations including:
It can be time consuming
It relies on a lot of subjective judgment
It’s focused solely on internal analysis so needs other frameworks
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