While a product or fantastic customer service can be seen as a competitive advantage, but so can your people. Find out how you can assess the strategic value of your teams using Barney's VRIO analysis.
You may have a successful business or a team that runs seamlessly - but do you understand why?
Do you know what it is that makes you stand out from the crowd, drives your profitability, or makes you a market leader?
Working this out doesn’t have to be left to guesswork - the VRIO framework can help.
The VRIO framework identifies the areas within a business that are most important for their competitive advantages so that they can take steps to protect and improve them.
This blog will explore how it works, why it’s so important, and how it can form a crucial part of your business strategy planning. Read on or click any of the below to find what you're looking for with our VRIO guide:
- What is the VRIO framework?
- What are the four components of the VRIO framework?
- VRIO advantages
- VRIO challenges
- How sustainable are competitive advantages?
- How can the VRIO framework be used in practice?
- Example VRIO analysis
What is the VRIO framework?
The VRIO framework, first developed by Jay Barney in 1991, is an analysis tool used to help organizations assess a firm's resources and capabilities.
It stands for:
The purpose of the VRIO framework is to identify the resources and capabilities that are unique and can provide a competitive advantage over others in the same industry.
It allows companies to identify what assets are most valuable to them and what actions need to be taken to effectively exploit these assets and ensure they remain competitive over time.
Additionally, this analysis helps businesses plan by predicting potential disruptions caused by external forces, such as changes in market conditions or technological advancements, so that they may adjust accordingly and minimize losses while maximizing rewards in any given situation.
Why is the VRIO framework important?
Using the framework to analyze resources and assets within a business can help you prioritize its critical differentiators in its overall strategy.
That may be by ensuring that those areas are given more funding or staff or by adopting risk management strategies to keep those differentiators safe from adverse events.
Additionally, the VRIO framework helps businesses plan by predicting potential disruptions caused by external forces, such as changes in market conditions or technological advancements.
By being prepared for these changes, businesses can adjust their strategies accordingly and minimize losses while maximizing rewards in any given situation.
Overall, it’s vital to understand what is most important to a business and make sound business decisions in the proper contexts.
What are the four components of the VRIO framework?
The framework comprises four components, which can vary substantially from business to business. Analyzing a resource across each can help you pinpoint where its true significance to the business lies.
The first hurdle for a resource to clear is whether or not it has value to the organization.
This doesn’t necessarily mean financial value: it can also refer to something that adds value to a customer’s experience or makes it possible to take full advantage of an opportunity within a particular industry.
Ultimately, any resource that isn’t valuable will not be a driver of competitive advantage.
The second component is a rarity.
Naturally, if a business has a particular resource or asset that many or even its competitors don’t, it finds itself at an advantage if it can use that resource to the best effect.
It’s worth mentioning that rarity isn’t always permanent unless the resource in question is only available in finite amounts. If competitors can obtain that resource for themselves in the future, then the rarity level is diminished.
Connected to rarity is inimitability: whether it’s possible and/or practical for other businesses or people to copy a resource or get their own.
This could be because there is only one of it in existence (the rights to a patented invention, for example), or because it’s too expensive for other businesses to obtain.
If a resource is inimitable, then the competitive advantage that it drives is permanent, as there is nothing that competitors can do to get hold of it in the future, even if they want to.
The final part of the framework relates to how that resource is used by the business and whether or not it’s organized enough to take full advantage of its potential.
A resource may have an intrinsic competitive advantage, but that could easily be wasted if not deployed or used correctly.
It is where long-term competitive advantage can be realized by having the right people, processes, and technologies in place to do so.
What are the VRIO framework advantages?
There are several advantages to completing a VRIO analysis:
Identifying competitive advantages
A VRIO analysis can help a firm identify its unique resources and capabilities that give it a competitive advantage in the market. This can help the firm leverage these advantages to gain a competitive edge over its rivals.
Identifying areas for improvement
A VRIO analysis can highlight areas where the firm's resources and capabilities are not providing a competitive advantage. This can help the firm identify areas for improvement, such as investing in new resources or developing new capabilities.
Facilitating strategic planning
A VRIO analysis can provide a framework for strategic planning by helping the firm understand how its resources and capabilities can achieve its goals.
A VRIO analysis can provide valuable information that can be used to inform decision-making at all levels of the organization.
Improving resource allocation
A VRIO analysis can help the firm allocate its resources more effectively by identifying which resources provide the most value and should be invested in and which resources are not providing a competitive advantage and should be allocated elsewhere.
What are the challenges of completing a VRIO analysis?
Several challenges can arise when completing a VRIO analysis:
Identifying all of the firm's resources and capabilities
It can be challenging to identify a firm's resources and capabilities, especially if the firm is large and has a diverse range of activities.
Determining the value of the resources and capabilities
It can be challenging to determine the value of the firm's resources and capabilities, as value is often subjective and can depend on the context in which the resources are used.
Assessing the rarity of the resources and capabilities
It can be challenging to determine the rarity of the firm's resources and capabilities, as this can depend on the industry and market in which the firm operates.
Assessing the imitability of the resources and capabilities
It can be challenging to determine the imitability of the firm's resources and capabilities, as this can depend on the complexity and uniqueness of the resources and the ease with which competitors can replicate them.
Assessing the organization of the resources and capabilities
It can be difficult to assess the organization of the firm's resources and capabilities, as this can depend on the structure and processes within the firm and how effectively the resources and capabilities are being used.
How sustainable is a competitive advantage found through VRIO?
A competitive advantage is only sustainable if it can be maintained or improved.
This means that organizations should continually assess their strengths, resources, and capabilities to remain relevant and valuable in the current market.
To do this, organizations should regularly review the VRIO framework and identify where they have a competitive edge over their rivals. Additionally, businesses must stay abreast of technological changes, trends, and customer preferences to ensure their products are up-to-date and attractive to consumers.
Organizations should also consider how well they leverage their resources for maximum benefit. Are processes in place so that customer feedback can be collected and analyzed quickly?
Are adequate resources being allocated towards research and development so that new features can be added regularly?
Can the organization increase its competitive advantage by investing more in marketing or developing new products? By thinking critically about these questions, organizations can stay ahead of competitors while minimizing potential losses due to unforeseen external forces.
Furthermore, businesses must keep an eye on their competitor's actions as well:
- Are any new products or services being offered that could disrupt the market?
- What strategies are other companies using to gain a competitive advantage?
- Having access to similar data sets as competitors may not always give businesses an advantage; organizations may not be able to replicate them as easily as this company could without having established processes for collecting, analyzing, and utilizing the data.
Finally, businesses should also focus on creating unique value propositions that set themselves apart from the competition, such as offering personalized services or products tailored to individual needs.
Companies should strive for excellence in all aspects of operations—from customer service to product innovation—so that customers continue coming back for more. By keeping these things in mind, businesses can create sustainable competitive advantages that last well into the future.
How can the VRIO framework be used in practice?
Running the VRIO framework starts by coming up with a list of all the resources within your organization.
These resources can be tangible materials (e.g. equipment, business assets, raw materials, etc.), or they can be human in nature, both in terms of the people employed by the business, and the skills and knowledge they possess.
You should also take intangible resources into account, which could be financial (cash, shares, or other financial instruments), or business-related resources like patents, trademarks, brand names, and intellectual property.
You should then take each resource in turn, and ask four simple yes-or-no questions in relation to it:
- Is it valuable?
- Is it rare?
- Is it difficult to imitate?
- Are you organized in such a way as to take full advantage of its potential?
If for any of your resources, you answer “yes” to all four of these questions, then you have identified something that is driving sustained long-term competitive advantage for your business.
Answering yes to the first three means the resource is a means of driving competitive advantage, but you aren’t maximizing its potential.
If a resource gets yes answers for the first two, then there is a competitive advantage, but it is only likely to be temporary. And if a resource is only identified as valuable, then it is merely at the industry standard level and confers no advantage.
Example VRIO analysis
One example of a VRIO analysis comes from the technology industry.
Consider the case of a company that produces and sells software solutions for mobile devices.
In this case, the company needs to assess its resources and capabilities to identify where it has an advantage over its competitors.
In this case, the company can look at what makes its product beneficial compared to those offered by competitors:
- Is there anything unique about their offering?
- Does it provide any additional features or benefits?
- Is it more cost-effective than other alternatives?
Next, organizations must assess whether those resources are Rare.
This means evaluating how easily they can be obtained by market competitors at reasonable costs.
For example, if a certain piece of code used in the product is patented, it is unlikely that rivals will replicate it, giving this company an edge over them.
Afterward, organizations must also evaluate whether those resources are Imitable or not.
In this case, it may come down to proprietary algorithms, which could help them personalize their product based on user behavior and preferences to increase customer satisfaction and loyalty.
If these algorithms are complex enough, even if competitors have access to similar data sets, they may not replicate them as quickly as this company could.
Finally, businesses must also consider whether they have effectively organized these resources so that they can maximize their benefits from them:
- Are processes in place so that customer feedback can be collected and analyzed quickly?
- Are strategies being implemented to keep their products up-to-date with changing technologies and trends?
- Are adequate resources being allocated towards research and development so that new features can be added regularly?
Execute your strategies with i-nexus
The VRIO framework is just one part of a good business strategy, and that’s before the need to connect strategy to execution and ensure that theory is put into practice.
The i-nexus strategy execution solution is perfect for joining all the dots of putting your strategy in place so that you can plan, execute and track your progress confidently.
Take a closer look at how it can help your organization here.
Learn more about strategy execution
Take the next steps in your journey by exploring our strategy execution resource hub or any of the below:
- Key to strategy execution eBook: Read how companies like Danaher and HP have mastered strategy execution and what you can learn from them.
- What does it mean to be Business Agile?: Leap into the future of strategic planning and execution with this fascinating insight.
- How AI and Machine-Assisted Learning will help strategy execution: As Artificial Intelligence becomes a mainstay in our lives, read how AI and machine-assisted learning will evolve to support your strategy execution.
About the author
James Milsom is Head of Marketing at i-nexus.
As Head of Marketing, his drive is to raise awareness and understanding of enterprises' challenges in delivering strategic goals amidst changing markets and the obstacles traditional tools and methods present leaders.
If you’d like to talk more about strategy, reach out to James on firstname.lastname@example.org or connect with him on LinkedIn for the latest insights.