Every company tries to create a competitive advantage via its resources. However, sustaining a competitive advantage, in the long run, requires a strategic assessment of your company’s resources. VRIO Framework provides you a simple but smart method to evaluate the capabilities of your company’s resources in creating sustainable competitive advantage.
What is the VRIO Framework?
VRIO is a framework that evaluates a company’s resources and capabilities. The tool was developed by Jay B. Barney, a professor in strategic management at the University of Utah, to understand if a business can create a competitive advantage using its resources. According to the framework, a business can achieve a sustainable competitive advantage only if its resources meet these four criteria:
- Valuable
- Rare
- Hard to Imitate
- Organized
As can be seen from the figure below, a business cannot have a sustained competitive advantage if any of these four is missing.
Valuable
The first question to ask is whether your company has a valuable resource (or capability). Resources are said to be valuable if they enable the business to do either of these two:
- Exploit an opportunity in the market, i.e. technological change.
- Mitigate a threat in the market, i.e. threat of new competitors.
Rare
Your company may have valuable resources. However, if those resources are not rare, your company can just match its competitors rather than creating a competitive advantage. On the other hand, having valuable and rare resources does not lead to a sustained competitive advantage if they can be easily imitated.
Hard to Imitate
In order to sustain its competitive advantage, your company needs to have resources that are difficult to imitate. If imitation is not a costly procedure for competitors, your resources will be easily copied, and you will lose your competitive advantage. Thus, resources need to be valuable, rare, and hard to imitate at the same time. Yet, if your company is not well-organized to take complete advantage of its resources, the competitive advantage is not fully utilized.
Organized
Once you make sure that your company’s resources are valuable, rare, and hard to imitate, the next step is to exploit these advantages. This can be achieved by having the required systems, structures, and processes within the business. Thus, your company should be organized in such a way that will allow it to exploit these advantages.
How to Use the VRIO Framework?
To make use of the VRIO Framework, follow the steps below:
- Determine all resources (or capabilities) your company possesses (financial, material, etc.).
- Analyze each resource using the steps explained above.
- Place each resource in one of the categories in the figure above.
- Focus on the resources that belong to the final category.
Conclusion
Ensuring a sustainable competitive advantage is the key to success in the long-term. To understand if you have the capabilities to do so, VRIO Framework tells businesses to look at four criteria: valuable, rare, hard to imitate, and organized. If your resources meet all of them, you have the resources and capabilities required to create sustained competitive advantage.
Contact us to determine where your competitive advantage lies and how to exploit it.
