VRIO Framework: What It Means and How to Use It

The VRIO framework is a tool to evaluate a company's internal resources and competencies to see if they may provide a source of long-term competitive advantage. The acronym VRIO stands for value, rarity, imitability, and organisation.

The VRIO analysis asks four questions to determine whether a resource is valuable, uncommon, or both:

• Valuable? 

• Rare? 

• Difficult to imitate? And,

• Is a company organised to capture the value of the resources?

A resource or capability that fits all four criteria might provide a company with a long-term competitive advantage.

The VRIO flowchart.

Valuable

The framework's first question is whether a resource creates value by allowing a company to exploit opportunities or defend against threats. If yes, then the resource is regarded as valuable. 

Resources are also important if they assist companies in improving the perceived value of their customers. This is accomplished through improving product differentiation or lowering the product's price. 

Resources that are unable to meet this requirement are at a competitive disadvantage. It's vital to keep an eye on the worth of resources as constantly changing internal and external circumstances might make them less valuable or even useless.

Rare

Resources that can only be obtained by one or a few companies are considered rare, and rare and valuable resources provide a competitive advantage for a limited time. 

In contrast, competitive parity occurs when many enterprises share a resource or use the capability in a similar way. This is because organisations can use the same resources to implement the same strategies, and no organisation can outperform others.

Even though competitive parity is not a desirable position, a company should not overlook valuable but common resources. Losing valuable resources and capabilities would be detrimental to an organisation's ability to compete in the market.

Difficult to Imitate

A resource is hard to imitate if other companies that do not have it cannot imitate, purchase or substitute it at a reasonable cost. 

A company that has resources that are rare, valuable and difficult to imitate can achieve sustained competitive advantage.

These are three reasons why resources can be difficult to imitate:

• Historical conditions: Resources created due to historical events or over a long period are usually difficult to imitate.

• Causal ambiguity: Companies cannot pinpoint the specific resources that contribute to their competitive edge.

• Social Complexity: The company's culture or interpersonal interactions determine the resources and capabilities.

Organised to Capture Value

If a company is not organised to capture the value from its resources, it will be at a disadvantage. 

To fully utilise the potential of its valuable, rare, and costly to imitate resources and capabilities, a company must organise its management systems, procedures, policies, organisational structure, and culture. Only then will businesses be able to maintain a competitive advantage.

How to use VRIO

Step 1: Identify resources that are precious, scarce, and difficult to imitate.

Tangible and intangible resources are the two types of resources. Land, buildings, and machinery are examples of tangible assets. Subce tangible assets are so easy to come by in the market, they are rarely a source of competitive advantage. 

In contrast, intangible assets, such as brand recognition, trademarks, intellectual property, a unique training system, or a distinctive style of completing activities, are more difficult to obtain but provide long-term competitive advantages. As a result, the first place to seek valuable, unusual, and difficult to imitate resources is the company's intangible assets.

Locating useful resources:

Examining the value chain and doing SWOT analysis are two simple ways to find such resources. The most valuable activities are identified through value chain analysis. 

You can find useful resources or capabilities by looking into the analysis. Furthermore, a SWOT analysis identifies the company's strengths that one can exploit to capitalise on chances or protect against threats. If you're still having trouble locating valuable resources, consider the following questions:

• Which activities reduce manufacturing costs without lowering perceived consumer value?

• Which activities increase product/services differentiation & perceived consumer value?

• Has your company ever received an award or been acknowledged as the best in a particular field? (most innovative, top employer, most loyal customers, or best exporter)

• Do you have access to hard-to-find raw materials or distribution channels?

• Do you have staff with special abilities and skills?

• Is your company known for its quality, innovation, and customer service?

• Do you excel at any tasks that your competitors don't?

• Do you have any other advantages over your competitors?

Locating rare resources:

• In your industry, how many other companies own a resource or have the capability to function in the same way?

• Is it possible for competitors to easily purchase a resource on the market?

• Is it likely that competitors will be able to access the resource or capacity in the near future?

Finding resources that are difficult to imitate: 

• Can other organisations readily reproduce a resource?

• Is it possible for competitors to quickly develop an alternative resource?

• Is it protected by patents?

• Is it possible for a resource or capability to be socially complex?

• Is it difficult to pinpoint the specific processes, tasks, or other factors that make up the resource?

Step 2: Determine whether your company is organised to exploit the resources.

The following questions may be useful:

• Is there an effective strategic management process in place at your company?

• Is there a structure in place to motivate and reward employees?

• Is your company's culture supportive of new ideas?

• Is an organisational structure designed to exploit a resource?

• Are there good management and control systems in place?

Step 3: Keep the resources safe.

When you find a resource or capability that possesses all four VRIO attributes, you should do everything you can to protect it. It is the source of your long-term competitive edge. 

You should first inform senior management about this resource and offer ways to use it to save costs or differentiate products and services.

Then it would be best if you considered ways to make it more difficult to imitate. If other companies cannot imitate a resource at a reasonable cost, it will remain scarce for a long time.

Step 4: Review VRIO's resources and capabilities regularly.

The value of resources fluctuates with time, so it's important to keep an eye on them to see if they're still as valuable as they were. Competitors will want to imitate the resources to gain the same competitive advantages, which implies they will no longer be scarce. 

Inside a business, new VRIO resources or skills are frequently produced, and by identifying them, you can easily preserve your sources of competitive advantage.

Example of VRIO

Google's VRIO Capability

Google's ability to successfully manage its workforce is a source of differentiation and cost savings. 

Unlike other organisations that manage their staff based on trust and relationships, Google manages its personnel using data. This feature enables them to make informed (data-driven) decisions regarding who to hire and how to effectively utilise their skills. 

Hence, Google is able to hire creative and productive individuals. It is also a unique skill because no other organisation employs data-driven staff management as extensively as they do. 

Is it difficult to imitate? It isn't easy to imitate, at least in the short term. To begin, businesses must develop very sophisticated software, which is costly and difficult to accomplish. Second, HR managers should be taught to make data-driven decisions rather than relying on outdated management techniques. 

Is Google structured in such a way that it can derive value from this capability? Yes. It has undoubtedly trained HR professionals who understand how to use data and manage people appropriately, and it also has the necessary IT expertise to collect and handle personnel data.

Source: Strategic Management Insight