VRIO Framework Guide on Creating Sustainable Competitive Advantages
If you are running an organization or a business, or just thinking about starting it, you must be focusing on your strengths and defining that one thing that will differentiate you from others and help you take the leading position in your industry.
Fortunately or unfortunately – depends on the perspective, each organization in the world is doing the exact same thing and looking for ways to use its resources in the best possible way and create a competitive advantage.
It’s no surprise that many scientists, professors, and researchers devoted themselves to creating the most efficient tools, which can be used in analyzing organization, with the aim of finding the one key resource that will help the company sustain an advantage and therefore stay at the top.
There are many frameworks, matrixes, tools, sheets, etc. that can be used for achieving this. For some of them, you must have heard – the Ansoff Matrix, the Stakeholder Theory, Maslow’s Hierarchy, and the Balanced Scoreboard and so on, but the one we will be focusing on now is the VRIO framework.
What is VRIO framework, why it is so beneficial, how it is used and what should be your next step if you want to apply it to your organization, is exactly what we will be covering in this article.
Get your pen and paper and start taking the notes!
WHAT IS THE VRIO FRAMEWORK?
The VRIO strategic framework is an internal analysis tool, which helps organizations categorize their resources regarding the certain traits outlined in the framework.
This categorization and further analysis allow the organizations to identify their key resources, or in other words – their competitive advantages.
If you were wondering why VRIO, you should know that there are four dimensions or traits that build up the framework.
First letters of those dimensions form the acronym VRIO:
Before we go into the details with each of these traits, we’ll talk more about the tool itself. The VRIO strategic framework was created in 1991, by the famous Jay B Barney.
The interesting fact is that originally, this framework was called the VRIN strategic framework, with N meaning non-substitutable.
This has changed later, as scientists have discovered that the risk of a resource being imitated can be measured under the third trait – Inimitable, which led to N being replaced with O, as an organized to capture the valued.
Not to rush anything but we are certain you are looking forward to getting to the bottom point of this tool so we will highlight only once more how efficient it is.
Not only that it is simple to understand, it is also quite easy to use, and if used correctly (which is no science), it can provide an enormous value to the company or organization.
Therefore, the VRIO framework became and stayed number one choice for many when it comes to analyzing the internal environment.
THE 4 DIMENSIONS OF THE VRIO FRAMEWORK
As mentioned above, the VRIO strategic framework consists of 4 dimensions – valuable, rare, inimitable and organized.
The first dimension of the framework states the question of whether the resource adds the value to the company by enabling it to seize the opportunities or defend against the possible threats.
It is important to mention that the resources are also valuable if they, by any means, help the organization increase the perceived customer value. It is usually achieved by increasing the differentiation of the product, especially if it goes together with lowering the price of it.
If you get a “Yes” as an answer to the questions mentioned above, you should consider this resource as a valuable one.
On the other hand, if the answer is “No”, you should be aware that this resource will lead your organization to a competitive disadvantage.
Whichever result you get, you should bear one thing in mind – you are doing business in a dynamic environment where both market and technology change rapidly, which means that you need to do the analysis often in order to review the value of your resources.
It has happened many times throughout history in each industry, that the companies lose their competitive advantage due to not reviewing the value of their resources and keeping them up to date with the external factors.
How to know if your resources are rare? It is quite simple – rare resources are those that can only be acquired by one or very few organizations.
All you have to do is ask yourself – Can this resource be easily acquired by some other company? If the answer is “No”, it means that you’ve got yourself a rare resource.
When analyzing further, it is important to mention that if the resource is both valuable and rare, it will grant your organization a temporary competitive advantage.
On the other hand, if you are in a situation where another or even more than one organization or company uses the same resource in a similar way, you will find your organization to be in a competitive parity.
This is a result of the fact that companies use the same resources to implement identical strategies, which leads to a situation where no organization can achieve a superior position in the industry.
Even if your company or organization finds itself currently in the competitive parity, that doesn’t mean that you should completely neglect the resources that are valuable to you.
On the contrary, it means that you should keep them – as they are essential for staying in the market, and focus on finding new solutions and creating a unique strategy for penetrating the market.
Inimitable or costly to imitate is the third dimension of the VRIO strategic framework. It reflects the possibility of the resource to be imitated or substituted by other companies or organizations.
When saying imitating, we are referring to various options: buying the resource or a substitute for the resource at a reasonable price or directly duplicating it.
If the answer to the question “Can my resources be imitated?” is “No”, it means that your resource is inimitable, at least for now.
If your resource is valuable, rare and costly to imitate, it has a high tendency to achieve a sustained competitive advantage.
If you were wondering what makes any resource inimitable, Barney has the answer to that question. Barney explains that there are three reasons why any resource can be hard to imitate:
i. Historical Conditions
This category refers to all of the resources that have been created throughout history due to some historical event that happened, and that cannot be repeated today again.
In this category, you will also find all resources that take much time to form, meaning you can plan on using them only if you have a long-term strategy you are certain your successors will continue implementing.
ii. Causal Ambiguity
This reason depends more on your competition than you, as it represents the inability to identify the key resource that enables a company to have a competitive advantage.
The only thing you can do in the situation where this is the reason you have a competitive advantage is to focus on finding the way to keep your key resource a secret from your companies while making sure your customers are able to recognize it.
iii. Social Complexity
This is the most internal category that can exist. This refers to the most important resource any company or organization can have – people.
You will grant yourself a chance to get a sustained competitive advantage if you have good interpersonal relationships and a healthy culture focused on growth and improvement.
This is the hardest resource to get but also almost impossible to imitate.
Organized or organized to capture the value is the fourth and final dimension of the VRIO strategic framework.
If you’re still not certain why this should be a special dimension, consider the fact that no resource, no matter how valuable, rare or inimitable can bring the advantage to the company if it is not organized to capture the value.
This means that any company or organization that really wants to create a sustainable competitive advantage should focus on organizing the management systems, policies, processes, organizational culture, and structure in order to be fully capable to achieve and realize the potential of its resources that are valuable, rare and inimitable.
Only if this change happens in the company, the company will be able to achieve a sustainable competitive advantage.
If you realize that you do possess valuable, rare and imitable resources after you finish the VRIO analysis, think about the capacity of your company and its main focus.
If you find that the focus wasn’t on these key resources, you need to reorganize.
In order to use the resources maximally, you need to gather the entire organization around the same idea and same focus.
Think about your management systems, processes, and structure, and determine your starting point for change management.
HOW TO USE THE VRIO STRATEGIC FRAMEWORK
Now that you know that is VRIO strategic framework, understand its dimensions and know why it is so valuable, it is time you learn how to use it to improve the overall performance of your company.
We’ll go step by step until we cover each point in details.
1. Get to Know Your Resources
The first step is to do an internal analysis and understand your current state. It is crucial to identify your valuable, rare and inimitable resources.
Before starting the analysis, you should be aware that there are two general types of resources – tangible and intangible.
Tangible resources are all physical things such as land, buildings, and machinery.
Just by mentioning them, you can assume that they are easily bought in the market and rarely the reason a company is having a sustainable competitive advantage.
But if you look at the intangible resources, such as trademarks, intellectual property, organizational culture, unique way of getting the job done and so on, you will notice that these things are not that easy to acquire, and therefore in almost every case, they make the source of the sustainable competitive advantage.
Taking everything into consideration, you should start by analyzing your intangible resources.
i. Identifying Valuable Resources
For identifying valuable resources it is useful to use other methods and analysis, such as the Value chain and the SWOT analysis.
The reason that these methods are useful is the fact that they give you the exact information regarding the most valuable activities in your process, as well as the strengths of your company that help it seize the opportunities and avoid possible threats.
Taking everything into consideration, using these additional methods can be multi-beneficial, as you will get a clear insight into the valuable activities and capabilities, as well as the most important strengths that are essential for you.
After checking the additional methods, you can go even further into the analysis and ask yourself these questions:
- Does my company have any strength that my competition doesn’t?
- Is there anything in the process my company does better than my rivals?
- Did my company win an award (or been nominated) in any category relevant to the business?
- What is the one thing we do that helps us different from others and increase perceived customer value?
- Are there any activities that lower the cost production while maintaining the perceived customer value?
- Is my company’s brand recognized as innovative and customer oriented?
- Are my employees special in any way?
- Do we acquire regularly raw materials that are not easy to get?
- Is there a unique relationship with our suppliers or customers?
All these questions should help you identify your valuable resources in the end.
ii. Identifying Rare Resources
In order to identify your rare resources, you have to ask yourself some of the following questions:
- Can my resources be easily acquired in the market by the competitors?
- Can my resources be acquired by the competitors in any near future?
- How many rivals that own a resource similar to mine there are in my industry?
Identifying rare resources shouldn’t be too hard, as that is probably something that helps you differentiate yourself from others, which is usually well known to both – you and your rivals.
iii. Identifying Inimitable Resources
Its inimitable resources that help you get a chance of winning the sustainable competitive advantage and bringing your company at the top of your industry.
In order to identify these resources, you should go through these questions:
- Is my resource protected by a patent?
- Is my resource easily duplicated by other companies?
- Is my resource easily substituted for a reasonable price by other companies?
- Is my resource socially complex?
- Is it difficult for my rivals to identify the exact processes, tasks, or other components that form the resource?
After going through these questions, you should be able to claim your inimitable resources, which makes you ready for the second step.
2. Check How Organized Your Company Is
Now that you are completely aware of the strengths of your company, the most valuable, rare and inimitable resources, it is time to get a clear picture of the usage of those resources.
In order to realize that, you may ask yourself these questions:
- Is the structure in my organization organized in a way to maximize the use of the resource?
- Are there effective management processes in my organization?
- Do I have effective rewards and recognition system for my employees?
- Do I reward innovative ideas coming from my employees?
- Are there suitable management and quality control systems in my company?
We advise you to take time and think about all these things.
There are many companies in the world that have all the needed resources, but still fail to use them properly, which leads them to failure.
Once you realize where your potential lays, you have to shift the entire organization towards it, in order to completely fulfill it.
3. Keep Your Key Resources Only for Yourself
Once you organize your company in a way that it uses maximally the potential it has, you will become the target of all of your competitors.
That means, that all of them will be trying to find what’s that special thing that you have that gives you a sustainable competitive advantage, and that leaves you with only one task: protect your resources.
For starters, get the entire management aware of the key resource and its importance.
That’s a good starting point for you to brainstorm together the ways you could lower the costs and focus on the thing that differentiates you from your rivals.
There are even some companies that build on strategies to perceive their resources, finding a way to mask their key contributor.
The main for you should be to eliminate any possibility for other companies to imitate what you have and you’ll be good, as long as what you do is what the world needs.
4. Keep VRIO Resources Up to Date
This is very important! Remember, you might have a sustainable competitive advantage, but it will last only as long as it is up to date! You have to constantly review your internal strengths in order to maintain the leading place in your industry.
It is a well-known fact that the value of each resource in the world changes throughout time, especially nowadays, when we are living in a dynamic environment full of constant changes in technology and market in general.
Therefore, keeping your resources up to date and reviewing them constantly must be one of your top priorities.
And no matter how hard you try to keep your resources only for yourself, eventually some of your competitors will find a way to get to them.
This means that you will no longer have those resources as key ones, and you’ll have to find the new ones.
If you want to increase your protection, you can go with the strategy of developing the key resources internally (inside the company), which will make it harder for your competitors to imitate you.
However, this doesn’t mean you shouldn’t review your resources if they are internal.
On the contrary, it is crucial to review them constantly if you want to grant your company a long term success.
HOW TO START USING THE VRIO FRAMEWORK
Now that you know all of the steps, all you have to do is start.
Experience shows that the most effective and efficient way to apply this framework is through using tables for resources’ categorization.
You should create a table containing 5 columns, and the number of rows should be equal to the number of different resources your company possesses.
After creating a table, name the columns in the following order: Resources, Value, Rare, Imitation, Organization, Competitive advantage.
Fill out the rows with all your resources and grade each resource depending on how valuable, rare, costly to imitate and organized to capture the value they are.
This way of categorization will give you a clear picture of your resources and the best potential you have. After this, you will be able to reorganize your company and focus on sustainable competitive advantage.
If you wish to learn more about the tables, you can check the example of Starbucks and Dunkin Donuts and their way of applying the VRIO strategic framework.
After getting all the details regarding each aspect of VRIO strategic framework, you should by now be able to understand the concept of this methodology and have the first step planned out in your mind.
When you take everything into consideration, it is not difficult at all to learn how to apply this to your company, and once you do apply it, the benefits are more than rewarding.
You will be able to understand your company’s strengths better and realize what is the key resource that differentiates you from the others.
Once you have all of this, all you need to do is to put into work and make things happen. If you want to create a sustainable competitive advantage, the VRIO framework will guide your way.
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