Many Business firms and Entrepreneurs Hustle to grow their business and strive to be more competitive in the marketplace.
Those firms adopt various tools, and frameworks like VRIO Framework as a part of their strategic scheme.
If your company plans to execute these tools for development strategy, then you should start with a Vision statement. And continue with objectives, internal and external analysis of the organization.
Here in this article, we are going to see one such strategic tool called VRIO framework and how to do it in detail.
What is VRIO Framework?
VRIO framework is a strategic tool used to analyze the firm’s resources and capabilities to achieve a competitive advantage.
Four factors of this framework that forms the acronym VRIO
Value – Rarity – Imitability – Organization
VRIO framework Analysis comes into the category of internal analysis of an organization. These factors check whether the available resources of the company is potential to gain a competitive advantage.
History and Background
VRIO framework was first developed in 1991, by J.B Barney in his work ‘Firm Resources and Sustained Competitive Advantage’.
In this book, the author identified four important factors as a firm’s resources. That helps to determine the sustained competitive advantage.
The original name of this Framework is VRIN. In 1995, the author developed this tool in his later work ‘Looking Inside for Competitive Advantage’, and introduced it as VRIO.
Question of Value
Are the resource and capabilities Valuable to the firm?
The Value in the VRIO framework checks whether the available resources and capability is valuable to exploit an opportunity and defend the threats
If the firm’s resources are efficient to meet such challenges and solves the problem, then it is considered as Strength.
The resources are also considered to be valuable if they help the firms to grow perceived customer value.
At the same time if these resources fail to exploit any problem in the organization, then it is considered as Weakness.
Business firms need to check whether these resources are valuable. Because the conditions are dynamic and the changes that occur can make the resources less valuable.
Some of the Opportunities that a Firm could exploit are:
- Technological change
- Climate change
- Economic change
- Demographic change
- Cultural change
- Legal conditions
(Applicable to both country-specific and international level)
Some of the Threats that a Firm’s resource could mitigate are:
- New Entry threat
- Buyers threat
- Suppliers threat
- Substitute threat
- Rivalry threat
Question of Rarity
What does it mean if the Firm gets unique resources and capabilities?
It is called Rarity when the firm stands out as different. In terms of valuable resources and capabilities, the company should be unique among the competitors.
Checking this question of Rarity for a firm leads to gain a competitive advantage over other firms.
Check, whether the resources and capabilities persist over a long time and short in supply.
Only a few companies would be able to apply the resources and capabilities that are unique. Because it is very hard for all the companies to be different and rare.
In reality, most of the companies have similar resources, which leads them to competitive parity.
It is an important need for your company to avoid this parity and to be rare and superior to any of the competitors.
And also, should be careful in eliminating the resources and capabilities which are not unique. Because you cannot avoid the resources which are valuable to your company.
Question of Imitability
The next important and essential aspect to check in this VRIO framework after Value and Rarity is that Imitability.
Imitability – What is it
If the Business firm has more valuable and rare resources, then the competitor firms find it difficult to imitate those resources. Thus it gains a competitive advantage.
If your resources are highly valuable with a more competitive advantage, then it would cost high for the competitors to imitate.
So, if the competitors find it hard to imitate, they have two options to follow. Either they may leave from the competition or try to duplicate the rival firms.
There are three reasons, why the resources and capabilities are hard to imitate? they are
- Historical Conditions: Resources and capabilities that are developed based on historical events are difficult to imitate. Because it exists for a long period of time.
- Casual Ambiguity: Firms can’t identify the factors that lead to a competitive advantage.
- Social Complexity: Some of the resources and capabilities are based on the culture and interpersonal relationship of the organization.
Question of Organization
After analyzing the Value, Rarity, and Imitability of resources, the next step is to organize the firm to exploit these resources.
It would be incomplete for a business firm if they fail to organize its structure, compensation policies, and management control system.
The formal reporting structure describes that who reports to whom.
- The management control system ensures that the manager’s decision aligns with the firm’s strategies, by both formal and informal means. The formal control system includes reporting activities from low-level employees to top-level management. The informal control system includes culture in the company and monitoring the employees by themselves.
- Compensation policies are the incentives to the employees, which include bonuses, salary increments, and vacation days.
Combine these components with the resources and capabilities. And check with the potential challenges. This will definitely ensure the firm to gain a sustained competitive advantage
How to Apply the VRIO Framework
VRIO analysis is a compliment to the PESTEL Analysis. It assesses the Macro environment, while the VRIO framework is used to analyze the internal aspects of an organization
Analyzing the internal factors in this VRIO framework would also help in the Strategic Management of an organization.
This involves managing the internal resources by formulating a strategy to achieve the objectives of the firm.
Applying the VRIO Framework in Business model
To start with this VRIO Framework, first, you will need to define the resources. The resources are:
- Financial resources like money, bond, shares, etc…
- Human resources that involve employees at all levels with appropriate Skill and Knowledge.
- Material resources include raw materials, machinery, tools, office equipment, supplies, and intermediate products.
- Non-material resources such as values, rules, norms, and information, etc…
After defining all the resources, consider all these resources to categorize by checking with four elements VRIO tool.
Categorizing the resources with the four conditions will help you to understand them clearly. It tells about where your company stands and get a clear idea of whether it will lead your firm to gain sustained competitive advantage.
Let us see how to check the resources with the four elements.
- If the resource is not valuable, then it should be outsourced because it gives no value to the firm.
- If the resource is valuable but not rare, then the company is in competitive conformity, which means the company is still able to compete with others.
- But, when the resource is valuable, rare but not expensive to imitate, then the firm gets a temporary competitive advantage. Since it is temporary other firms try to imitate it in the future, which leads the firm to lose the competitive advantage.
- If the resource is valuable, rare, and expensive to imitate, but if the firm is not able to organize the whole system, then the resource will be expensive for the firm to gain a competitive advantage.
Finally, if the firm can organize the company and change the temporary competitive advantage, then it will become a permanent competitive advantage. This would sustain for a long time.
VRIO framework is a simple and efficient tool to practice. Thus it will gain a competitive advantage, and also it can be used with other Strategy tools.
Let us know if we missed out on anything in this article what is VRIO framework and How to do it? Share your thoughts in the comment section.