Understanding the VRIO framework of business analysis

Understanding the VRIO framework of analysis

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The VRIO framework is a business analytical tool used for evaluating the internal situation of an organization, specifically by determining whether its resources and/or capabilities can be a source of sustained competitive advantage.

As an acronym, VRIO stands for value, rarity, imitability, and organization. The entire VRIO framework actually corresponds to four questions an analyst must ask about the resources and/or capabilities to determine their competitive potential. These questions are: (1) the question of value; (2) the question of rarity; (3) the question of imitability; and (4) the question of organization.

VRIO framework as a resource-based view

The VRIO framework is a prime example of a resource-based view. By definition, a resource-based view is a strategic perspective that considers organization performance as something that is fundamentally determined by its resources and/or capabilities.

Remember that a resource or a capability can pertain to any tangible or intangible thing that an organization uses as an in integral part of its day-to-day operation. This can pertain to its financial resources and workforce, or to its financial and human resource management competencies.

Technological resources and capabilities such as having a team of highly competent IT or engineer professionals and owning state-of-the-art equipment and machinery are other examples. Physical resources such as location and facilities are also an example. Established brand reputation and marketing competency can also be considered a resource and/or a capability.

Some might argue for a clear distinction between a resource and capability. To some extent, this is true. A resource can be considered as those tangible or intangible things used by an organization to implement its strategies or go about its daily operation. On the other hand, a capability can be considered as the ability of an organization to effectively used its resources.

However, the distinction has been blurred in practice. For example, having a highly competent and productive workforce is not only a resource but also a capability because it demonstrates the capacity of an organization to recruit, retain, and develop its employees. A reputable brand image is not only a capability but also a resource because not only it demonstrates the marketing ingenuity of an organization but also it corresponds to having an intangible asset used as a leverage against lesser-known competitors.

Applying the VRIO framework for business analysis

Using the VRIO framework is relatively easy because it primarily involves answering a set of questions to determine the competitive potential of a particular resource and/or capability. Take note of the following:

1. The question of value: Does the resource or capability of the organization enables it to exploit an opportunity and/or neutralize a threat in the market or environment?

2. The question of rarity: Is the resource or capability of the organization unique when compared against existing and potential competitors? Or is the resource or capability controlled by a relatively small number of competing organization?

3. The question of imitability: Is it difficult for an existing or potential competitor to acquire or develop an existing resource or capability of the organization? Will it face a cost disadvantage in doing so?

4. The question of organization: Does the organization has policies and processes to support the exploitation of its valuable, rare, and unique resource or capability?

Affirmative answers to all of the aforementioned close-ended questions would indicate that the particular resource or capability being analyzed gives the organization a sustained competitive advantage. Of course, it is important to note that the VRIO framework is used to analyze not just a single resource and/or capability but a set of resources and/or capabilities.

Interpreting the answers to the VRIO questions

Some situations do not bring forth affirmative answers to all of the aforementioned close-ended questions. Other situations only bring forth affirmative to some but not all questions. Nonetheless, a standardized guide has been designed and used to interpret the answers to the VRIO framework. Take note of the following:

1. A resource or capability has a COMPETITIVE DISADVANTAGE if it is not valuable and exploitable, while its rarity and imitability cannot be determined. Under these circumstances, organization performance is BELOW AVERAGE.

2. A resource or capability has a COMPETITIVE PARITY if it is both valuable and exploitable although it is not rare and its cost to imitate cannot be determined. Under these circumstances, organization performance is AVERAGE.

3. A resource or capability has a TEMPORARY COMPETITIVE ADVANTAGE if it is valuable, rare, and exploitable although its cost to imitate is low. Under these circumstances, organization performance is ABOVE AVERAGE.

4. A resource or capability has a SUSTAINED COMPETITIVE ADVANTAGE if it is valuable and rare, has high cost to imitate, and exploitable. Under these circumstances, organization performance is CONSISTENTLY ABOVE AVERAGE.