VRIO framework (formerly known as VRIN) is a business analysis tool that helps determining the internal sources of sustainable competitive advantage and is also part of the Resource-Based View (RBV).
According to this model, resources and skills should have four attributes that contribute to sustainable competitive advantage. Resources should be valuable, rare, inimitable and Organization-wide supported: VRIO
- Components of a VRIO Analysis
- What is a VRIO Analysis used for
- When to perform VRIO Analysis
- Using the Tool
- Example of VRIO Analysis
- VRIO Analysis tips
- Advantages and Disadvantages of a VRIO Analysis
The VRIO Framework or VRIO Model is part of the Resource-Based View (RBV), a perspective that explores the relation between the internal features of a business and its performance. In order to assess performance and benefit potential (e.g. Porter’s Five Forces), RBV is also complementary to the Industrial Organization (I/O) viewpoints that look more at external factors such as competitiveness.
RBV’s proponents argue that instead of looking at the global world, companies should look within the enterprise to identify the sources of competitive advantage.
Thus, Firm Resources and Sustainable Competitive Advantage are the main concepts in this view. All properties, skills, organizational processes, company characteristics, information and knowledge managed by a company that helps it to enhance its efficiency and effectiveness can be described as company resources.
Resources are often classified into categories such as tangible (e.g. equipment, machinery, land, buildings and cash) and intangible (e.g. trademarks, brand reputation, patents and licenses) or physical, human and organizational resources.
Resources must have four attributes that can be summarized in the VRIO framework in order for businesses to turn these resources into a sustainable competitive advantage.
Components of a VRIO Framework
First and Foremost, Resources ought to be valuable. Resources are seen as important, according to the RBV, when they enable a business to execute strategies that enhance the effectiveness and efficiency of a company by leveraging opportunities or mitigating threats.
By looking at the Net Present Value (NPV), another way to determine whether a resource or investment is worthwhile is to mean that the costs invested in the resource should be lower than the projected future cash flows discounted back in time.
If non of the resources possessed by a firm are considered valuable, the focal firm is likely to have a competitive disadvantage.
Secondly, it is important to have rare resources. It is considered that resources that can only be obtained by one or several businesses are uncommon.
If a large number of players in the industry possess a certain valuable resource, each player has the capacity to leverage the resource in the same way, thereby enforcing a common strategy that gives a competitive advantage to none of the players.
Such a situation is described as competitive parity or equality of competition. If a business has a large number of important and rare properties, it is likely to have at least a temporary competitive advantage.
Although valuable and rare resources can help businesses engage in strategies that other businesses are unable to undertake because other businesses lack the appropriate resources, there is no guarantee of a long-term competitive advantage.
It will offer a first-mover advantage to the focus company, but rivals are likely to try to imitate these resources. Therefore, another condition that resources should fulfil is that they should be difficult and expensive to imitate or substitute. According to the RBV, resources can be imperfectly imitable due to a combination of three reasons:
Unique historical conditions: decisions taken in the past impact the choices a corporation has in the present and future (path-dependency). Similarly, there is an imperfectly imitable physical resource for a business that has situated its facilities in what turns out to be a much more valuable location than initially anticipated.
Causal ambiguity: when the relation between the resources managed by the focal company and its sustainable competitive advantage is not well known, causal ambiguity occurs. Competitors would not be able to replicate the focal business, since they actually do not know which resources they are meant to mimic.
Social complexity: if a company’s most valuable resource is a combination of the strength of its social network, interpersonal relationships, the atmosphere of a company and its credibility with both suppliers and consumers, creating an equal social network is very difficult for rivals because it relies on so many different factors.
If for the reasons listed above the resources of a business are both valuable, rare and inimitable, the target company has a high potential to achieve a competitive advantage that is sustainable over time. However, there is one more significant criterion that must be present within the organization.
Organization-wide supported (VRIO)
If the organization is not structured in a way to properly leverage these resources and capture the profit from them the resources themselves do not provide any value for a company.
Therefore, the focal firm requires the ability to efficiently organize and coordinate resources. The formal reporting structure of a company, strategic planning and budgeting systems, management control systems and compensation policies are examples of these organizational components.
Even companies with valuable, rare and imperfectly imitable resources will not be able to create a sustainable competitive advantage without the correct organization to acquire, use and monitor the resources involved. When all four resource characteristics are present, a business is reasonable to conclude that it has a unique capacity that can be used as a source of sustainable competitive advantage.
Below is a diagram that sums up in various cases the four VRIO characteristics and the resulting benefits the company has.
Hard to Imitate, Non-substitutable). Jay Barney, the creator of the system for VRIN and VRIO, merged the I and N into one attribute and incorporated the O as additional criteria. Therefore, inimitability in the VRIO system implies that resources are impossible to imitate because they cannot be duplicated and/or substituted by competitors.
In order to create a more comprehensive description of the strengths and limitations of the internal variables of the company, it is suggested to combine this approach with Porter’s Value Chain Analysis.
What is a VRIO analysis used for
The VRIO analysis is part of the strategic analysis toolkit. It implies looking at resources and skills and determining which of them could contribute to a sustainable competitive advantage.
The internal resources and skills of the company are the key subject of the VRIO analysis.
Strategic business planning
When beginning a business planning process, a VRIO analysis report is a valuable document to have available. It offers contextual information to the senior management team about the direction in which the organization is heading, brand positioning, growth goals, and any areas or threats related to a decrease in productivity. It may also assist in assessing the validity of current goods and services and in identifying the production of new products.
When to perform VRIO Analysis
The VRIO framework complements other strategic analysis approaches, such as SWOT Analysis, to give your company specific competitive advantages. For a well-rounded view of how each component of the business can position itself in the marketplace, a VRIO review may be applied company-wide or to specific divisions. Continuously reviewing the framework is critical – skills change over time and competitors adjust.
As mentioned at the beginning of this article, the best time to review your VRIO is at the beginning of your strategic planning process. The commitment to the VRIO process and the advancement of your research over time will protect your continued competitive advantages.
Using the Tool
Step1: Identify valuable, rare and costly to imitate resources
Two kinds of resources exist: tangible and intangible. Physical objects like land, buildings and machinery are tangible assets. Companies can quickly reach the market through them but tangible assets are hardly the source of competitive advantage.
Intangible assets, on the other hand, such as brand reputation, trademarks, intellectual property, a unique training method or a unique way to execute activities, cannot be so easily obtained and offer the advantages of sustainable competitive advantage. Therefore, you can first look at the intangible assets of the business to find important, scarce and expensive tools to mimic.
Finding valuable resources:
Looking at the value chain and SWOT analyses is a simple way to identify such resources. The most important operations, which are the source of cost or differentiation advantage, are defined by value chain analysis. You can quickly identify valuable resources or capabilities by examining the analysis.
In addition, SWOT analysis considers the company’s strengths that are used to take advantage of opportunities or protect against threats (which is exactly what a valuable resource does). If you still struggle finding valuable resources, you can identify them by asking the following questions:
- Which activities lower the cost of production, without reducing perceived customer value?
- What operations improve the differentiation of products or services and perceived customer value?
- Has your business been given an award or recognized as the best in something? (most innovative, best employer, highest customer retention or best exporter)
- Do you have access to scarce raw materials or are distribution networks difficult to obtain?
- Do you have a special connection to your suppliers, like a tightly integrated system of order and delivery driven by unique software?
- Do you have staff with unique abilities and skills?
- Do you have a reputation for quality, innovation and customer service as a brand?
- Do you do any things better than your peers do? Do you do them better?
- Does your business hold any other strengths compared to competitors?
Finding rare resources:
- How many other companies in your sector own a resource or can perform capability in the same way?
- Can a resource be easily purchased by rivals in the market?
- Can rivals obtain the resources or capacity, in the near future?
Finding costly to imitate resources:
- Can a resource easily be duplicated by other companies?
- Can a replacement resource be easily developed by rivals?
- Do patents protect it?
- Is a resource or capability socially complex?
- Is it difficult to define the unique procedures, tasks, or other variables that comprise the resource?
Step 2. Find out if your company is organized to exploit these resources
Following questions might be helpful:
- Does your company have an efficient strategic organizational management process?
- Are effective mechanisms of motivation and reward in place?
- Does your company’s culture reward innovative ideas?
- Is an organizational framework for the use of a resource designed?
- Are there excellent systems for management and control?
Step 3. Protect the resources
When you have found a resource or capability that has all 4 VRIO attributes, you can use all possible means to secure it. It is the root of your sustained competitive advantage, after all.
The first thing you can do is to make such a resource known to the top management and to suggest how it can be used to minimize costs or differentiate products and services. You should then think about ideas about how to make it more costly to emulate.
If a resource cannot be imitated at reasonable prices by other businesses, it may remain rare for much longer.
Step 4. Constantly review VRIO resources and capabilities
Over time, the value of resources changes and they must be continuously reviewed to find out whether they are as important as they once were. Competitors are also keen to gain the same competitive advantages, so they will be keen to duplicate the properties, which means they will not be rare anymore.
Often, within a company new VRIO tools or capabilities are created and you can secure the sources of competitive advantage more effectively by identifying them.
Example of VRIO Analysis
VRIO Analysis of B2B Company – Alibaba.com
As of 2020, Alibaba.com is the largest online B2B trading site for small businesses worldwide. Alibaba.com has three main services: Alibaba.com, an English-language platform that handles transactions between importers and exporters from more than 240 countries and regions, 1688.com, a Chinese portal that manages domestic B2B trade in China, and a transaction-based retail website that allows smaller customers to purchase small quantities of goods at wholesale prices.
The Alibaba business has a powerful financial base that is valuable to the company’s activities. The goods are highly distinct from China, which is a helpful advantage.
The company’s current distribution network gives them a strategic advantage over other organizations. As such, this marks the organization as a valuable asset.
The organization already has over 22,000 workers employed in its global operations (Alibaba 2019). The company’s personnel are highly trained and skilled, qualifying the company to be a valued asset.
The patents for the organization is valuable because the technologies used by the business will not be implemented by a rival firm.
Not many businesses, including Alibaba, can maintain a high degree of liquidity while still effectively operating their operations. As such a company’s financial assets are considered to be rare.
Employees are a rare asset because they are extensively and professionally qualified to function under numerous conditions that include customer service. Not many companies in this sector have the opportunity to retain well trained and skilled staff.
The products that the company distributes, however are not rare. This is because the items can be found in other areas or assembled. This will result in a competition. The company’s delivery networks are a rare resource due to their special and resilient existence. In order to have effective supply chain structure that is stronger than that of Alibaba, rival companies would have to inject more capital.
The innovative capabilities are demonstrated by the patents of the company, which is a rare resource since only in the company can be identified. Without competition, this enables the company to use it.
It takes a lot of time for the Alibaba business to produce financial capital. As such, the company’s financial resources are expensive to emulate.
As other companies will develop and prepare their workers to become highly skilled and create a competitive advantage for the business, the employees of the company are imitable.
For other companies, it would be expensive and impossible to emulate the delivery networks used by the organization. It takes a lot of time and investment to work successfully on a distribution network (Alibaba 2019).
The company’s creative capabilities are not imitable, as developing a new concept and getting a patent on it requires a lot of time and cost.
It is not expensive to copy the goods and services provided by the company because other competitors will come up with the same form of products.
In a way that adds value to the activities in which they operate, Alibaba has structured its financial assets. This has allowed the business to make acquisitions and to invest in other profitable avenues.
The imaginative resources have not been adequately exploited and structured to produce a competitive advantage for the company. There is an expiry date for the patents and copyrights covering its inventions, which restricts the time for exploitation.
To give the business a competitive edge in the industry, the supply chain and distribution network are well organized. The distribution networks are well structured for their customers to make the goods available in time.
|Resource or Capability||Valuable||Rare||Inimitable||Organized||Impact on Competitive Advantage|
|Financial Resources||Yes||Yes||Yes||Yes||Realized Sustainable Competitive Advantage|
|Human Resources||Yes||Yes||No||Yes||Realized Competitive Parity|
|Distribution Network||Yes||Yes||Yes||Yes||Realized Sustainable Competitive Advantage|
|Patents||Yes||Yes||Yes||Yes||Sustainable Competitive Advantage|
Outcome of VRIO Analysis of Alibaba
From the VRIO Analysis of Alibaba, it has been found that a sustained competitive advantage is given by the financial capital and distribution network. A source of unused competitive advantage is patents.
A transient competitive advantage for jobs exists. For local food items, a sustainable parity exists. Lastly, Alibaba’s cost structure is a competitive disadvantage. A strategic downside, too is research and development.
VRIO Analysis of B2C Company – Starbucks
Starbucks Corporation, headquartered in Seattle, Washington, is a major American coffee business and coffeehouse chain. With 30,626 shops in 79 countries, Starbucks is the largest coffeehouse business in the world. Nevertheless, figures do vary from these numbers.
Hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks are served at Starbucks locations. Pre-packaged food products, hot and cold sandwiches, and items such as mugs and tumblers are also sold in most supermarkets. After 4pm, Starbucks Evenings locations also sell a selection of beers, wines, and appetizers.
The company also promotes books, music and films through the Starbucks Entertainment division and the Hear Music brand. Many of the items of the business are seasonal or unique to the store’s locality. Starbucks-brand ice cream and coffee are also offered at grocery stores.
Having a strong global presence is an important asset for a company trying to increase their size, sales, and market share. It is a great way to gain more revenues from new and existing consumers.
Starbucks has many special and enjoyable coffee drinks that are not served on a daily basis by other rivals. In order to cater to a range of clients, Starbucks often provides calorie details for these specialty coffees on their menus.
The atmosphere at many Starbucks locations allows customers to drink a cup of coffee and feel relaxed with or without company. As the company website states “We believe a coffeehouse should be a welcoming, inviting and familiar place for people to connect, so we design our stores to reflect the unique character of the neighborhoods they serve.”
Starbucks is the largest multinational coffee company. Starbucks is the most recognizable, but there are other global coffee chains.
Although Dunkin ‘Donuts only offers specialty coffee drinks during the holidays, these types of specialty drinks are sold year-round by many local coffee shops. This means that specialty beverages are not exclusive to Starbucks.
The only big coffee shop with an upscale, sophisticated atmosphere is Starbucks. There is no atmosphere in most other coffee shops to allow clients to bring their machine and relax for a while.
No Starbucks rival could achieve such a broad global footprint in the short term. In order to do this, it will require considerable time and energy.
Given that other coffee shops already use this skill, the Starbucks model can therefore be imitated.
Renovating their stores and copying Starbucks’ business model will be pretty simple for other coffee shops. The upscale and comfortable atmosphere at Starbucks could therefore be imitated.
Starbucks is taking advantage of the strong global presence effectively. As quoted on their website: “With more than 5,500 coffeehouses in over 50 countries, it’s clear that our passion for great coffee, genuine service and community connection transcends language and culture.”
Starbucks is taking advantage of the specialty coffees by offering a range of choices and constantly updating their menu. Most people can find something they want with a lot of choices, and people who like to try new drinks will also do so at Starbucks easily.
Starbucks is using this upscale and cozy atmosphere wisely and building the experience that many clients thoroughly appreciate. The firm takes advantage of the fashionable lifestyle that is present in many American cities at the moment.
|Resource or Capability||Valuable||Rare||Inimitable||Organized||Impact on Competitive Advantage|
|Strong Global Presence||Yes||Yes||Yes||Yes||Realized Sustainable Competitive Advantage|
|Specialty Coffees||Yes||No||No||Yes||Realized Competitive Parity|
|Upscale and Cozy Atmosphere||Yes||Yes||No||Yes||Realized Temporary Competitive Advantage|
Outcome of VRIO Analysis of Starbucks
Starbucks’s VRIO Analysis has found that the financial capital and distribution network offers a sustained competitive advantage. Patents represent a source of unused competitive advantage.
There exists a temporary competitive advantage for workers. A continuous parity exists for local food goods. Lastly, the cost structure of Starbucks is a competitive disadvantage. Study and growth are also a competitive drawback.
VRIO Analysis tips
To perform a VRIO analysis, some valuable tips are:
- Collaborate-there would be a better result for a study with multiple viewpoints.
- Using the skills and resources inside the organization that are already available.
- Along with other approaches, such as SWOT analysis, Porter’s Five Powers, competitor analysis, or scenario preparation, use VRIO analysis.
- To track changes in the market climate, integrate the study into an ongoing process.
- Try not to get bogged down by gathering large quantities of quantitative information without adequately evaluating and interpreting the data.
- Don’t leap to the past or present-based conclusions about the future.
Advantages and Disadvantages of a VRIO Analysis
There are many advantages to the VRIO framework, including:
- It is simple and effective as a resource analysis
- When performed well a strategic positioning of companies can be improved
- It’s thorough, but not complicated
- It is very focused on internal review
As with every framework, VRIO has some limitations including:
- It could be time consuming
- It depends on a lot of subjective judgement.
- It focuses solely on internal analysis, so that other frameworks are required