How to use VRIO framework
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No business exists in a vacuum—there’s always competition. And, naturally, you’ll want to have a leg up on that competition. Competitive advantage—or the way your business stacks up against competitors—is a key factor in your business’ success (or failure). So how do you determine your business’s competitive standing?
Enter the VRIO framework.
The VRIO framework is a structured approach to competitive advantage analysis. Basically, VRIO analysis helps you and your team identify and evaluate resources. By the end of the process, you’ll know what your resources are, how well you are using them, and if they give you competitive advantage.
In this post we’ll walk you through the basics of the VRIO framework and give you the necessary skills and knowledge to evaluate your resources.
What does VRIO stand for?
Even if this is the first you’ve heard of VRIO analysis, you’ve probably figured this much out: VRIO is an acronym. (The capitals give it away, don’t they?) Each letter corresponds to an aspect of your resources that you will evaluate.
The four parts of VRIO analysis are: valuable, rare, imitable, and organized.
If a resource meets each of those criteria, it gives your company a sustained competitive advantage. But more on that later. Let’s take a closer look at what each of part of VRIO means:
Valuable: To determine a resource’s value, ask yourself this series of questions:
- Does this resource help our business take advantage of any market opportunities?
- Does it help defend your business against market threats?
- Does this resource make us more appealing to customers?
If you answered yes to any of those questions, the resource is valuable.
Rare: This one is pretty self-explanatory. A resource is considered rare if only a few companies have access to it. It’s important to note that a resource is usually rare for a finite period of time—eventually other companies will catch on and imitate that resource for themselves.
That’s why it’s important to frequently evaluate your resources. If you’re sitting on a rare resource, you should leverage that advantage while you have it. The clock is ticking—make the most of rare resources while you can!
Imitable: Remember how we said that rare resources are only rare until others copy them? What if those resources were hard to imitate? This could prolong the advantages those resources give you.
This leads us to the third part of VRIO analysis: How hard is the resource to imitate? Factors to consider are cost, trademarks, and patents. If a resource is costly to acquire or protected by a patent, it is considered hard to imitate.
Organized: So you’ve identified a resource that is valuable, rare, and hard to imitate. Now what? None of that matters unless your business is organized in a way that allows you to put that resource to good use.
To get the most out of your resources, your company should have clear management systems, processes, and structure. Making use of a resource may require adjustments to current projects and initiatives. Does your company culture value flexibility and ownership? If not, you may identify resources and be unable to use them.
How to use VRIO framework
Now that you understand each element of the VRIO acronym, let’s take a look at the VRIO framework in practice: How do you actually use VRIO analysis to identify and exploit competitive advantage?
There are three steps to the process: define, categorize, and analyze. We break down each in the section below.
Before diving into those steps, you’ll need a list of resources to evaluate. Gather a team of individuals from across your company and hold a brainstorming meeting. Together, you should be able to come up with a list of your company’s resources.
(Stuck? As you and your coworkers brainstorm company resources, you may want to use SWOT analysis. Fortunately, we’ve got a blog post on the subject to help you get started!)
With your list of resources in hand, you’re ready to dive into the VRIO process.
1. Define resources
Resources typically fall into one of four categories: financial, human, material, or non-material. Before applying the VRIO framework, you’ll want to determine which category each resource falls into.
To help with the process, we’ve explained each type of resource below:
- Financial: Simply put, financial resources refer to capital—the money your company has at its disposal. (This capital doesn’t have to be cold, hard cash. It could be shares or bonds, for example.)
- Human: Human resources are the resources your employees bring to your company—namely knowledge and skills.
- Material: Material resources are the physical, tangible resources your company has. These might include facilities, equipment, and materials. (Note: Material resources tend to be the easiest to imitate. If a company has capital, they can simply purchase the necessary facilities and materials.)
- Non-material: Non-material resources can be anything from intellectual property (such as patents) to brand recognition among customers.
2. Categorize resources
Now that you’ve defined your resources, it’s time to put each one through the VRIO framework. At the end of the process, you’ll have labeled each resource as competitive parity, temporary competitive advantage, unused competitive advantage, or long term competitive advantage.
Think of the VRIO as a series of questions to ask about each resource:
- First, is it valuable? If yes, move on to the next question.
- Is it rare? If you answered yes again, onto the next question. If you answered no, that resource gives your competitive parity, but no advantage.
- So your resource is valuable and rare—but is it hard to imitate? If yes—you guessed it!—you can move on to the final question. If you answered no, the resource gives your company a temporary competitive advantage.
- And finally, is your company organized to use that resource? If yes, that resource gives your company a long term competitive advantage. If you answered no, it can be categorized as an unused competitive advantage.
3. Analyze resources
You’ve defined and categorized your resources—now what? Those first two steps are pointless without analysis. You need to look at the results and turn the data into action.
Your goal is to identify resources that can be developed into a competitive advantage. In other words, which resources can be taken from their current category to a higher one?
The starting point should be obvious: Do you have any resources in the unused competitive advantage category? To turn those into long term competitive advantages, all you have to do is organize your company to utilize them.
Easier said than done, right? The exact steps to turn an unused competitive advantage into a long term advantage will change depending on the resource. But this much is always true: To use those resources, you’ll need to develop a business strategy that takes each into account.
This won’t happen overnight. Meet with stakeholders and teams across the company to build out an informed, realistic strategy to capture all of your resources.
The VRIO framework is a great tool for internal analysis—and internal analysis is a great place to start! But remember, the competition is out there: To really be competitive in your market, you’ll need to analyze their businesses as well. Enter SWOT analysis. After using VRIO analysis on your own company, try using SWOT analysis to see how you stack up against competitors!
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