VRIO Analysis Overview
Like most organizations, we're always striving to find a competitive advantage that propels us in front of our competitors. But, even when you create a competitive advantage, oversaturated markets and technological advancements mean it's never long before competitors are able to replicate your competitive advantage.
A sustained competitive advantage is the holy grail, and the VRIO framework might just be our map.
One of many strategic frameworks, the VRIO framework is a tool for identifying the competitive advantages of an organization (if they have any).
In this article, we explain
- What is the VRIO Framework
- VRIO Framework Example
- How to use VRIO Analysis to create a sustained competitive advantage
There are countless strategy frameworks out there, and we have already covered a few key frameworks which we think are extremely flexible and battle-tested over the years:
- The Ansoff Matrix Helps Organizations To Grow
- The Benefits of Applying The Stakeholder Theory
- Maslow's Hierarchy As a Business Framework
- Unlocking the Power of the Balanced Scorecard
- Value Disciplines Model & Your Competitive Advantage
- McKinsey's Three Horizons of Growth Can Help You to Innovate
What is the VRIO Framework?
The VRIO framework is an internal analysis tool, used by organizations to categorize their resources based on whether they hold certain traits outlined in the framework.
This categorization then allows organizations to identify the company resources that are competitive advantages.
There are four dimensions that make up the VRIO Model:
We'll go into more detail about each of the dimensions in a moment. First, we would like to explain why the VRIO analysis is such a popular tool. Jay B Barney conceived the VRIO analysis in 1991.
Though we should mention, Barney originally conceptualized the framework as VRIN, the last dimension in the framework was refined over the years and the N in VRIN became an O.
The framework is simple to understand, easy to use, and can provide enormous value for organizations looking to stay ahead of competitors. This has made the tool an obvious choice for many companies looking to analyze their internal environment.
The premise of identifying a firm's resource as a competitive advantage is whether it passes through the dimensions of the framework.
The VRIO Framework Explained
When a resource is valuable, it's providing the organization with some sort of benefit. However, a resource that is valuable and doesn't fit into any of the other dimensions of the framework, is not a competitive advantage. An organization can only achieve competitive parity with a resource that is valuable and neither rare nor hard to imitate.
A resource that is uncommon and not possessed by most organizations is rare. When a resource is both valuable and rare, you have a resource that gives you a competitive advantage.
The competitive advantage achieved from a resource that is both valuable and rare is usually short lived though. Competitors will quickly realize and can imitate the resource without too much trouble. Therefore it's only a temporary competitive advantage.
Hard to Imitate
Resources are hard to imitate if they are extremely expensive for another organization to acquire them. A resource may also be hard for an organization to imitate if it's protected by legal means, such as patents or trademarks.
Resources are considered a competitive advantage if they're valuable, rare, and hard to imitate. However, organizations that aren't organized to fully take advantage of the resource, may mean the resource is an unused competitive advantage.
Organized to Capture Value
An organization's resource is organized to capture value only if it is supported by the processes, structure, and culture of the company. A resource that is valuable, rare, hard to imitate, and organized to capture value is a long-term competitive advantage.
A resource can not confer any advantage for a company if it’s not organized to capture the value. Only a firm that is capable to exploit valuable, rare, and imitable resources can achieve sustained competitive advantage.
VRIO Analysis Example
To use the framework, you'll need to first define your resources. Resources may be tangible or intangible in nature and generally fall into one of the following categories:
Financial Resources such as money, shares, bonds, and debentures. Human resources such as the skills of your people and the knowledge of your people. Material resources such as raw materials, facilities, machinery, and equipment. Non-material resources such as patents, brand names, and intellectual property.
Once you've defined all your resources, take each resource through the VRIO framework and categorize each based on the traits it holds. Categorize resources into one of the following groups: competitive parity, temporary competitive advantage, unused competitive advantage, or long-term competitive advantage. The framework below should help you visualize the process.
Once you've categorized your resources into the four categories, you should have a good understanding of where your competitive advantages lie, and whether they'll be short or long-term advantages.
Analyzing Your Resources
With your resources categorized through the VRIO framework, you can now start to analyze each.
- Are there any competitive implications?
- Is there a potential for improvement in certain resources?
The aim is to find the resources that have the potential to move from their current category into a higher one. For example, an organization may have a resource that is valuable and rare, such as a certain invention they created.
They deem their invention a Temporary Competitive Advantage as per the VRIO analysis. The organization comes to this conclusion because they decide it wouldn't be difficult or expensive for a competitor to imitate the invention if they wanted to.
Upon analysis, the organization sees an opportunity to move their Temporary Competitive Advantage to a higher category.
After some analysis, they come to the conclusion that if they can obtain a patent for their invention, the resource would then become very difficult for competitors to imitate. The resource would then enter a higher category, as it is valuable, rare, and hard to imitate.
The process of analyzing your internal environment is extremely important in the strategic planning process. While this post has only focused on the VRIO framework, there are many other internal analysis tools that can be used by organizations to assist them when strategic planning.
We should also mention that an external analysis is just as crucial in the strategic planning process.
How to use VRIO Analysis to create a sustained competitive advantage
As previously mentioned, a resource that is a competitive advantage is not a guarantee of value provided to the organization, the resource may be unused by the organization, or it may be only a temporary advantage.
What organizations really need to create is a sustainable competitive advantage. However, creating this is much easier said than done. So now that we've categorized our resources and analyzed those with potential, where to next?
The category that usually poses the biggest potential for improvement is the Unused Competitive Advantage Category.
The resources are already competitive advantages, they only lack the organization required to fully utilize them and gain value from them. This is where your strategic plan comes into play. As mentioned, resources in the Unused Competitive Advantage category don't have the support, processes, and culture in place to completely utilize their value.
Developing a strategic plan that takes these unused competitive advantages into account and works to support these resources through strategic management will allow companies to transform their resources into sustained competitive advantages.
A strategic plan will align the processes, people, and structure needed to support these resources and turn them into sustainable competitive advantages.
By no means is this an easy or quick solution. Developing a good strategic plan that exploits your unused competitive advantages is only the beginning, the organization then needs to manage and track the strategy to ensure its successful execution.
Luckily, we've already created articles that will help you on your next part of the journey, creating your strategic plan: How to Write a Strategic Plan: The Cascade Model.
Hopefully, this post has given you a better understanding of the value the VRIO Framework can bring to organizations. If you're interested in better identifying your organization's competitive advantage, make sure to try our Free VRIO Template!