Understanding and Using the VRIO Framework
No idea what we are talking about? You will find out soon.
But before that, let’s cover some basics.
Without a competitive advantage that sets your company apart and gives you an edge over your competitors in the market, you cannot expect to succeed.
Do you agree?
If you are a business owner who operates in a highly competitive industry, you will know all too well that this is the truth.
When a customer is confronted with a choice between you and other brands selling a particular product or service in your niche, they will ask the question, ‘How is this brand special?’
You need to make it evident to a potential consumer that your company will give them something no one else can and no one else will.
In other words, you will have to provide your customers value they can’t find anywhere else.
If you fail to do that, they will not hesitate for a second before switching to a brand that gives them just what they need. And that is a loss you cannot afford in these competitive times.
But don’t worry because we have got you covered.
In this blog post, we are going to talk about the VRIO Framework, a strategic analysis tool that lets you discover which of your company’s attributes and resources can contribute to building and maintaining a competitive advantage you won’t lose for a very long time.
But that is not all it does. It also lets you protect the assets so you are not at risk of losing them.
Want to learn more about the tool?
You’re in luck! Keep on reading because we are going to discuss it in detail.
The VRIO Framework Explained
How it All Started
Barney, J. B. is the genius behind this phenomenal tool.
It was first developed in 1991 when Barney discussed four qualities that should be present in a company’s resources if they are to contribute to building its sustainable competitive advantage.
Initially recognized by the name of VRIN, it later became VRIO when Barney introduced it in a later work in 1995.
This version had many improvements and became the go-to tool for companies determined to discover what their sustainable competitive edge could be.
How the Tool Works
The sophisticated framework uses four questions – steps, if you must – to identify which of a company’s attributes or resources can act an advantage over competitors.
It does this irrespective of the business model of the organization.
You must be wondering what the four questions are that are involved in the step-by-step process.
Do you recall the 4 components we mentioned at the beginning of this blog post? It is time to discuss each of them in more detail.
VRIO is an acronym that stands for Value, Rarity, Imitability, and Organization.
The bottom line of the VRIO analysis is that if a resource is valuable, rare, and hard or impossible to imitate and the company is organized to capture its value, then it can bring a sustainable competitive advantage to the company.
Don’t worry, we’re going to take you through the process step by step.
But before that:
What Exactly Are Resources?
In business, a resource is an asset, a quality, a skill set, organizational culture, a process or knowledge among many other things that the company can use to enhance its efficiency and operations and get ahead in the game.
Types of Resources
Resources can be categorized into many types, some of which include:
- Tangible or Intangible
- Physical, human or organizational
- And so on.
At the end of the day, each resource can be put to the test under the VRIO framework to determine its effectiveness in giving the organization an edge over others.
Conducting the VRIO Analysis
Step 1 – The Question of Value
The first question you need to answer is,
Does the resource or attribute add value for the customer?
Does it allow the company to make use of opportunities or protect it against different kinds of threats?
Does it have a net present value greater than 0 (i.e. will it contribute to a return on investment for the company)?
Here are the two possible answers and what they mean:
Yes, the resource is valuable – If it is determined that the resource does add value and benefits the company in more ways than one, you can move on to the next question or the next step in the process.
No, the resource does not add value – If you reach the conclusion that the resource is not valuable, you are at a competitive disadvantage.
This is a given – if the resource is not adding any sort of value to the company or for the customer, you are on the back foot as you have nothing of worth to give to your consumers.
Step 2 – The Question of Rarity
Next, we come to the question of whether the quality or resource that the company has is rare or not. Are you one of the only companies that possess it?
Yes, the resource is rare – If the resource is valuable and you are also one of the very few companies that has it, you can move on to the next step in the VRIO analysis.
No, the resource is common – If the resource adds value but is available to a large number of companies in your niche, you are in a position of competitive parity or conformity.
This means that while you do not have a competitive advantage over your rivals, you are also not worse off.
While this may be enough for you to stay afloat, you will not progress and will always be at risk of your competitors getting ahead and leaving you behind.
Step 3 – The Question of Imitability
How easy or difficult (or costly) is it to imitate or copy the attribute or resource in question?
Can other companies easily find a way to carry out a process you consider inimitable?
Can they find a substitute to a unique resource you possess and potentially leave you behind while making use of it?
Can they afford it?
Yes, the resource is imitable – If the resource or quality can be easily replicated or substituted with something of similar or greater value, you have succeeded in achieving what is called a temporary competitive advantage.
This means that your competitors can easily overtake you if they put their mind to attaining the resource (or a similar one) which you have but they don’t – yet.
No, the resource is not imitable – If for whatever reason the resource or quality cannot be easily replicated (it is expensive, it is hard to obtain or any other reasons) on top of being valuable and rare, you can now move on to the next step.
Step 4 – The Question of Organization
If you have reached this point in the analysis, it means that you have one or more valuable, rare, and inimitable resources or attributes that can help you gain a long-term competitive advantage.
But the question is, are you fully exploiting the resource or making use of it in a way that gives you maximum benefit?
Is your organization equipped to handle the resource and get the best out of it?
Is your company culture, your processes, and your management system such that you can capitalize on your resources to the best of your ability?
Yes – If you answered yes to these questions, you have achieved the ultimate goal – your company has a sustainable competitive advantage over all others in the niche.
Consequently, it will be very hard for a competitor to catch up with you, let alone leave you behind.
No – If you answered no, then it is time for some reflection. You need to realize that you have an unused competitive advantage.
You have all the raw materials you need to succeed but you are unable to get any benefit out of them because the culture of your company, the processes or other factors do not allow it.
Understanding VRIO with an Example – Starbucks
Starbucks has a very strong global presence – that is one of its greatest assets. This attribute is valuable, rare, and inimitable, and the company is organized to make use it. This gives Starbucks a sustainable competitive advantage over other brands in the niche.
Let’s look at another attribute – upscale and comfortable atmosphere.
This also checks out in the valuable and rare aspects and the franchise is well-equipped to exploit it but it is something that other companies can replicate with ease (some already have).
This, thus, gives Starbucks a temporary competitive advantage – they are ahead in the game until someone else comes along who checks out in ALL areas for this particular attribute.
The list goes on but you will hopefully understand, by now, how the VRIO tool works.
What Did the VRIO Framework Do for Me and What Now?
If you have carried out the VRIO analysis correctly, you will now know whether or not your company has a sustainable advantage that will keep you ahead in the game.
But that’s not all.
You will now also be fully aware of where you stand in terms of your resources.
In simpler words, you’ll know how many valuable assets you have, how many rare attributes, and how many costly-to-replicate resources.
You will also be more aware of whether the structures and practices within your organization allow you to fully make use of the resources you have.
What does this do?
First of all, you see the complete picture and become aware of your strong suits, as well as the areas in which you lack.
Secondly, because you are now more aware, you are in a better position to do something about the issues you have identified.
So, now what?
Here are some of the things you can do after you have analyzed your resources and whether or not you are equipped to exploit them.
Make Necessary Changes Based on the Newfound Information
Let’s look at this with an example:
Let’s say you have found that you possess a few resources that are valuable, rare, and hard to replicate or substitute.
However, the processes in your company are inefficient or the culture is toxic and you aren’t able to tap into the potential of these resources.
If that is the case, it may be time to make some operational changes so that you can make full use of the attributes that are otherwise going to waste.
Let’s consider another situation:
You have everything going for you with regards to a particular resource except for the fact that it is easy to replicate.
Take corrective measures and modify it such that it becomes next to impossible for your competitors to get their hands on.
A very simple way to look at this is introducing a secret ingredient into a recipe that enhances the flavor so much that it is hard for others to match.
These are just two examples. You can figure out the need of the hour in the context of your own analysis, take measures to fix the situation, and gain the competitive edge you deserve.
Recognize What You Have and Protect the Resources
If you have resources that are highly valuable, you need to make sure you sustain them. Make sure they are always available to you.
Similarly, if your organizational culture and practices encourage the maximum potential of your resources to be explored, work hard on maintaining them.
Better yet, work on improving them even further so that you can reap the maximum benefit.
Repeat the VRIO Analysis and Review on a Regular Basis
You may have conducted the analysis, figured out potential weak areas and taken corrective measures but your work is not done yet.
The value of resources changes with time – what was once invaluable can become dispensable before you know it.
What only you have today, everyone can have tomorrow.
The skill set of your competitors may also change, allowing them to find a suitable substitute for a resource you thought could not be replicated or replaced.
These factors and many others will mean that the competitors you once had an advantage over will now have the ability to leave you behind.
But you can prevent that from happening by staying on top of your game and analyzing your resources every once in a while.
In this way, you will remain aware of where you stand with regards to the other industry players at all times.
The resources and attributes of your company have a huge role to play in whether your organization has a sustainable competitive advantage.
Make use of the VRIO framework to analyze your resources and build and maintain a long-term competitive edge that will keep you ahead in the game.
Because after all, isn’t that what we are all striving to achieve?