The VRIO Framework or VRIO Model is part of the Resource-Based View (RBV), which is a perspective that examines the link between a company’s internal characteristics and its performance. RBV is therefore complementary to the Industrial Organization (I/O) perspectives that look more at external factors such as competitiveness in order to determine performance and profit potential (e.g. Porter’s Five Forces). The supporters of RBV argue that organizations should look inside the company to find the sources of competitive advantage instead of looking at the competitive environment. The key concepts within this view are therefore Firm Resources and Sustainable Competitive Advantage. Firm resources can be defined as ‘all assets, capabilities, organizational processes, firm attributes, information and knowledge controlled by a firm that enables it to improve its efficiency and effectiveness’. Resources are often classified into categories such as tangible (e.g. equipment, machinery, land, buildings and cash) and intangible (e.g. trademarks, brand reputation, patents and licenses) or physical, human and organizational resources. In order for companies to transform these resources into sustainable competitive advantage, resources must have four attributes that can be summarized into the VRIO framework. Show
Valuable (VRIO)First and foremost resources must be valuable. According to the RBV, resources are seen as valuable when they enable a firm to implement strategies that improve a firm’s efficiency and effectiveness by exploiting opportunities or by mitigating threats. Another way to assess whether a resource or investment is valuable is by looking at its Net Present Value (NPV), meaning that the costs invested in the resource should be lower than the expected future cash flows discounted back in time. If non of the resources possessed by a firm are considered valuable, the focal firm is likely to have a competitive disadvantage. VRIO Framework Video Tutorial Rare (VRIO)Secondly, resources must be rare. Resources that can only be acquired by one or few companies are considered to be rare. If a certain valuable resource is possessed by a large amount of players in the industry, each of the players has a capability to exploit the resource in the same way, thereby implementing a common strategy that gives non of the players a competitive advantage. Such a situation is indicated as competitive parity or competitive equality. In case a company does possess a large amount of resources that are valuable and rare, it is likely to have at least temporary competitive advantage. Inimitable (VRIO)Although valuable and rare resources may help companies to engage in strategies that other firms cannot pursue since the other firms lack the relevant resources, it is no guarantee for long-term competitive advantage. It may give the focal company a first-mover advantage but competitors will probably try to imitate these resources. Another criteria that resources should meet is therefore that they should be hard and costly to imitate or substitute. According to the RBV, resources can be imperfectly imitable due to a combination of three reasons:
If a company’s resources are both valuable, rare and inimitable due to the reasons mentioned above, the focal company has a high potential to gain a competitive advantage that is sustainable over time. There is however one more important criteria that needs to be present within the company. Organization-wide supported (VRIO)The resources themself do not create any advantage for a company if the company is not organized in way to adequately exploit these resources and capture the value from them. The focal company therefore needs the capability to assemble and coordinate resources effectively. Examples of these organizational components include a company’s formal reporting structure, strategic planning and budgeting systems, management control systems and compensation policies. Without the correct organization to acquire, use and monitor the resources involved, even companies with valuable, rare and imperfectly imitable resources will not be able to create a sustainable competitive advantage. When all four resource attributes are present, a company is safe to assume it has a distinctive competence that can be used as source of sustainable competitive advantage. Below is a diagrom that sums up the four VRIO attributes and the resulting advantages the company has in different situations. VRIN FrameworkNote that the VRIO framework is a follow-up of the VRIN framework (Valuable, Rare, Hard to Imitate, Non-substitutable). The creator of the VRIN and VRIO framework, Jay Barney, combined the I and N into one attribute and added the O as extra criteria. Inimitability in the VRIO framework therefore means that resources are hard to imitate because competitors cannot duplicate and/or substitute them. It is recommended to combine this framework with Porter’s Value Chain Analysis in order to create a more complete overview of the strengths and weaknesses of the organization’s internal factors. Further reading:
What makes your organization special? How close are your competitors to overtaking you? Too many companies can’t answer questions like these and simply believe hard work will guarantee success. The VRIO framework is a strategic planning tool designed to help organizations uncover and protect the resources and capabilities that give them a long-term competitive advantage. Note that we’re not simply talking about a list of your strengths, which are things you do well but are not necessarily unique to your organization. Nor are we talking about advantages that are fleeting. Sustainable competitive advantages are those that competitors can’t easily duplicate in the foreseeable future; they are also a crucial element of business success. Whether you have one or many sustainable competitive advantages, a VRIO analysis will help you identify and leverage them as part of your strategic plan. In this article, we’ll outline what a VRIO analysis entails, share a VRIO framework example, and explain what to do with your VRIO insights after the exercise is complete. What is the VRIO framework, and how does it uncover “sustainable competitive advantage”?VRIO is an acronym for a four-question framework focusing on value, rarity, imitability, and organization, the criteria used to evaluate an organization’s resources and capabilities. You can use a decision tree to help map the outcomes of your probe, depending on whether you deem a resource as having met the criteria or not. Looking for a VRIO decision tree template? Download our free strategic planning templates to help you get started with VRIO and other strategic planning approaches.Before you get started, make a list of your resources and capabilities. These may be tangible or intangible items and may consist of material, financial, or human resources, such as patents, machinery, people skills, cost advantages, or anything else. Intangible resources tend to be the source of most sustainable competitive advantages, but that’s not always the case. To apply the VRIO framework, evaluate each item on this list through the following four lenses:
Your company has achieved the ultimate goal of sustained competitive advantage when it has successfully identified all four components of the VRIO framework. Click To Tweet Ready to tackle strategic planning for your organization? Use these free templates to jump start your planning process.A Real-life VRIO Example: GoogleThere’s no doubt that Google is one of the most powerful companies in the world, and its success arguably stems from a sustained competitive advantage in human capital management. If we were to break down Google’s VRIO framework from the HR perspective, it might look something like this:
Having a VRIO framework in place allowed Google to take a completely different approach to human capital management and make decisions using massive amounts of objective data. For example, Google’s People Operations team set out to identify which characteristics make a great manager. The data used to determine this included surveys, performance evaluations, and great-manager nominations. Google also conducted double-blind interviews with the company's highest- and lowest-rated managers. By determining what qualifies as a great manager, Google strengthens its internal team and the foundation of its sustained competitive advantage. (Source: Strategic Management Insight, “VRIO Framework.”) What are some benefits and limitations of the VRIO framework?Few organizations take the time to delve into their core competencies to determine what makes them unique. In our view, it’s a worthwhile exercise because:
While the VRIO framework is useful for understanding your competitive position and providing strategic insights, it also has some limitations:
What do you do with the resulting VRIO insights?It’s important to conduct a VRIO analysis in the early stages of strategy planning, before making your strategic plan. In particular, this exercise will inform your vision statement, which is a forward-thinking proclamation of where your company wants to be in the future. The differentiators and advantages you identify through VRIO will help determine how to approach the marketplace and inform strategic decisions that shape the fate of your company. So, think about how you can best exploit your VRIO resources to provide the most value to your customer, and use those ideas to formulate a precise vision statement. The VRIO framework can also inform your SWOT analysis. Whatever competitive advantages you uncover should be included in the “Strengths” section of your SWOT analysis. Even some resources that don’t pass the full VRIO test may still be considered strengths (for instance, if something is VRO—valuable and rare, and your organization can capitalize on it); however, don’t identify a resource or capability as a sustainable competitive advantage unless it meets all the criteria—that’s where your uniqueness lies. On the flip side, if an existing resource isn’t yet a sustainable competitive advantage and you would like to change that, you could identify it as a “weakness” or an area that needs improvement. The VRIO framework and SWOT analysis are important parts of the strategy development phase. Once you’ve developed your strategic plan, you’ll then need to take specific actions to make it come to fruition. Many organizations use a strategic framework (like the Balanced Scorecard) to help transform their strategy ideas into an actionable plan and strategy software (like ClearPoint) to break those ideas into manageable goals they can then organize and track. Need help getting started with the VRIO framework?If you’re ready to take on strategic planning but don’t know where to start, download our booklet of strategic planning templates. It includes eight of the most popular strategic planning approaches—including the VRIO framework and SWOT analysis—and will help set you up for success. In the meantime, if you have any questions about strategy planning—or how ClearPoint performance management software can help—please reach out!
The VRIO Framework is used to evaluate an organization’s resources and capabilities. The VRIO framework looks at value, rarity, imitability, and organization.
The VRIO frameworks allows your organization to understand your competitive advantage, and elevate it. As well, it’s a simple, effective, and comprehensive review that only serves to strengthen your business.
While the VRIO framework brings many benefits, it also has its drawbacks. This frameworks relies on subjective judgement, can be time-consuming, and does not take into consideration external analysis of your company.
The VRIO framework became popular thanks to Jay B Barney in 1991.
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