VRIO Analysis PDF

VRIO Analysis: The Four-Question Framework in Competitive Advantage ypically, when a business wants to locate sources for a sustained competitive advantage they’ve got two options. It can either analyze the external factors impacting the business (Porter’s Five Forces and PESTLE Analysis), or it c...

VRIO Analysis: The Four-Question Framework in Competitive Advantage ypically, when a business wants to locate sources for a sustained competitive advantage they’ve got two options. It can either analyze the external factors impacting the business (Porter’s Five Forces and PESTLE Analysis), or it can look at the internal factors (BCG Matrix and Value Chain Analysis). The VRIO Framework or VRIO analysis falls into the latter category. It’s a business tool used to examine an organization’s internal resources to achieve sustained competitive advantage. It was first introduced to us by strategic management professor, James Barney, in his 1991 paper Firm Resources and Sustained Competitive Advantage. In it, he suggests that analyzing external factors on their own isn’t enough. To truly seek out sustained competitive advantage, businesses must also take a resource-based view (RBV) and analyze the internal firm resources. Before we can move on to the VRIO Framework, I think it would be helpful to quickly define what Barney means by “firm resources”. What are Firm Resources? In his paper, Barney defines firm resources as: “All assets, capabilities, organizational processes, information, knowledge, etc. controlled by a firm that enables them to conceive and implement strategies that improve its efficiency and effectiveness.” To provide further clarity, this innumerable list of resources can be broken down into 3 categories: Human Capital Organizational Capital Physical Capital Human Capital Human capital resources include employee training and development, individual managers’ judgment, experience, and industry knowledge/insight. Organizational Capital Organizational capital resources include a firm’s internal reporting structure, formal and informal planning, controlling, and coordinating systems, as well as both internal and external relationships. Physical Capital Physical capital resources can refer to the physical technology a company uses, operating plants, factories, and equipment. It can also include an organization’s geographic location as well as its access to specific raw materials. Now clearly, not all firm resources are going to have a positive strategic impact on your business. In fact, some may even hinder it! But by conducting a VRIO analysis you’ll be able to uncover which firm resources allow you to deploy a unique, value-creating strategy not used or duplicable by your competitors. VRIO Framework For companies to be able to transform these resources into a sustained competitive advantage, they must meet the four requirements of the VRIO Framework: Valuable Rare Inimitable Organization Valuable The first criterion or question to ask is: “Is this resource valuable?” A resource is considered valuable if it helps a business implement strategies that increase effectiveness or improve efficiency. Alternatively, you could use Net Present Value (NPV) when assessing internal resources and capabilities. This formula essentially determines whether the amount invested in “X” resource is lower than the expected future cash flows discounted back in time. It should come as no surprise to you that if a business is doing (or using) something that provides no value to customers, it puts them at a competitive disadvantage. However, should you deem a resource to be valuable, it moves on to the next stage of VRIO analysis - rarity. Rare The second question to ask when analyzing a resource or capability is: “How easy is it for competitors to obtain this exact same resource?” Rare resources can give companies a significant edge over the competition. They’re able to deploy them and implement value-creating strategies not available to competitors. On the other hand, if a resource isn’t deemed rare or is easily obtainable, it brings a state of competitive parity. An example of this would be Coca-Cola’s brand power. Yes, it’s definitely valuable. People love and recognize the Coca-Cola brand the world over. However, it’s not a rarity. Some of its key competitors such as Pepsi and Red Bull also enjoy the benefits of powerful brands. If a resource is both valuable and something of a rarity, then it passes to the third stage of VRIO analysis - imitability. Inimitable The third question to ask when analyzing a resource or capability is: Will it be expensive/possible for competitors to imitate or replicate? Now, while possessing resources that are both valuable and rare allows companies to engage in strategies competitors can neither conceive nor pursue, it doesn’t immediately lead to sustained competitive advantage. This first-mover benefit could be short-lived… If competitors can duplicate the resource or substitute it for something else, it leads to a temporary competitive advantage. Certainly not a bad thing! But everything should be done The good news is that if a business has valuable, rare, and induplicate resources, they possess all the right ingredients to achieve sustained competitive advantage. Only one question remains in the VRIO Framework... Organization “Does your organization have the internal, structures, systems, and processes to exploit this advantage?” Simply possessing the resources isn’t enough on its own to eke out a sustained competitive advantage. The business has to have the right processes in place to make it happen. If not, the resource becomes an unused competitive advantage. A great example of a company set up to exploit firm resource advantages is Spotify. It’s one of the standout digital transformation examples of how organizations can restructure internally. The music streaming service doesn’t operate a traditional, hierarchical structure. Instead, they’ve opted for a model that encourages experimentation, efficiency, and accountability. Similar to an Agile “Matrix Organizational Model”; engineers and team members work fluidly across departments to ensure they can quickly identify opportunities and adapt them quickly to their platform. How to Use The VRIO Framework So, you’re familiar with the VRIO framework, how it works (in principle), and understand how to arrive at a sustained competitive advantage. Now it’s time to apply that framework, to your business. To do so, I recommend you follow this 4-step process: #1 - Identify Resources #2 - Conduct a VRIO Analysis #3 - Protect Resources #4 - Bi-Annual Review Step #1 - Identify Resources A great place to start combing through your internal resources is a value chain. A value chain analysis studies the entire series of activities and resources required to turn raw materials into a customer-facing product, uncovering how and where along that chain value can be added. This is perfect for locating your most valuable resources and capabilities. Step #2 - Conduct VRIO Analysis Once you’ve identified your key resources or capabilities, it’s time to run them through the aforementioned VRIO framework. To guide your decision process, try asking yourself some of the following questions: Value Are your employees extremely proficient in their particular areas of expertise? Does your management team have an inside on the latest industry trends? Do you own (or are part of) any exclusive distribution channels? Do you have a strong brand, recognized brand? What are your strengths over your rivals? Rare Do you have access to scarce raw materials? How easy is it for competitors to obtain this resource? Is it easily found in the industry marketplace? How many of your competitors currently have access to this resource? Is your CEO considered a thought leader within your industry? Imitability Is this resource easily duplicated? Can it be substituted for something else? Is it patent protected? Would be difficult for competitors to adapt your internal processes? How long would it take them to adapt? Organization Is your company in a position to exploit this sustained competitive advantage? If not, what needs to be changed? Are employees rewarded for adapting to or implementing change? How long will this adaption process take? Is the internal company hierarchy structure flexible enough? Step #3 - Protect Resources Once your key resources and capabilities have been identified, you must do everything to protect them. These are your “golden leads” - the source to maintaining a sustained competitive advantage over the competition. It would be folly to relinquish it without a fight! Some potential strategies include making these resources harder to obtain, difficult to duplicate, and impossible to substitute out for alternatives. The longer you’re able to open the gap between you and your competitors, the more profitable your advantage becomes. Step #4 - Bi-Annual Review As you’re well aware, the competitive landscape can change so quickly. Ambitious startups are blitzscaling their way into markets with new and exciting products. That’s why a VRIO analysis can’t become a stagnated document revisited once every blue moon. Your competitors will be constantly trying to blunt your competitive edge. They may have even successfully duplicated or substituted some of your key resources. If so, they’ll no longer be as rare, inimitable, or hold as much value as before. So, we recommend you take a breeze through this at least once every 6 months. This way you should be able to sustain that competitive advantage for as long as possible. VRIO Analysis Example To give you a good idea of how the VRIO Framework can be used in practice, let’s take a look at a VRIO analysis of Starbucks. VRIO Analysis Starbucks During a study by Jennifer Azarian, Kristin Kennedy, and Colleen Steele, they conducted a VRIO analysis on three of Starbucks’ firm resources: Strong Global Presence Specialty Coffees Upscale and Cozy Atmosphere Let’s take a look at what they found. Strong Global Presence Valuable: Having a strong brand presence worldwide is certainly a valuable resource. It means more market access, increased revenue, and a certain amount of protection from negative press. Rare: While there certainly are other global coffeehouse chains, Starbucks is by and far the most recognizable. Inimitable: It’s extremely hard to imagine another coffeehouse chain competing with Starbucks on a brand level, at least for now. Organization: The infrastructure is in place for them to open stores worldwide Result: Realized Sustainable Competitive Advantage Specialty Coffees Valuable: One of Starbucks’ big draws is the wide variety of sweet, sugar variants they offer. It’s most definitely one of their valuable resources. Rare: You’d be hard-pressed to say these types of drinks are rare though. Almost all coffeehouse chains and local shops offer these types of specialty drinks. Inimitable: Other coffeehouse chains are already making similar specialty drinks. Organization: Starbucks is continually changing its menu, taking full advantage of this resource. Result: Realized Competitive Parity Upscale and Cozy Atmosphere Valuable: Ever since Howard Schultz’s buying trip to Milan in 1983, Starbucks wanted to change how American’s perceived coffee, turning it into an “experience” rather than a morning commodity. That’s why their signature store atmosphere is relaxed, cozy, and comforting. Rare: For the time being it remains the only large coffeehouse chain to live and die by the in-store experience they provide. However, competitors such as Costa Coffee are hot on their heels Inimitable: It wouldn’t be difficult for other coffeehouse chains to change their interior decor to try and match the Starbucks ambiance. Organization: It’s a core part of the brand’s identity and the company has been built around this concept since the mid to late ’80s. Result: Realized Temporary Competitive Advantage Starbucks Blue Ocean Strategy VRIO Analysis Template If you’re looking to conduct your own VRIO analysis, then feel free to go ahead and use our VRIO analysis template below. And if you have any questions regarding how to use the VRIO framework, start your analysis, or locate key firm resources, be sure to let us know in the comments below! Roca, C. (2021, August 6). VRIO analysis: The four-question framework in competitive advantage. ThePowerMBA. https://www.thepowermba.com/en/blog/vrio-analysis For an in-text citation, you can use: (Roca, 2021)