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Empowerment Through Knowledge
No.14: VRIO Framework

The VRIO framework is one way you can analyse an organisation’s internal resources and capabilities to identify whether they will contribute towards a sustained competitive advantage. It was the original work of J.B. Barney, publicised in his 1995 paper ‘Looking Inside for Competitive Advantage’. Through this framework you will identify whether the resource or capability in question can meet the four VRIO characteristics, helping to express its strategic relevance to the organisation.

These characteristics are; Value, Rarity, Inimitability, and an Organised system. To complete the VRIO framework, you should ask and answer four questions in relation to these characteristics.

Is the individual resource or capability Valuable?

This first question asks whether the individual resource or capability can be used to exploit opportunities, or protect against threats, and thus add value to the organisation. If the answer to this question is ‘no’ then this resource or capability will lead the organisation to competitive disadvantage. Such resources or capabilities need to be monitored closely and reviewed constantly as their value can change with internal or external modifications. Sometimes this means that the resource can lose its value completely. However, resources can even be valuable by simply improving the customer’s perception of the organisation’s total value or the value of other business offerings.

 

Is the individual resource or capability Rare?

A resource which can be developed or bought by only a very small number of organisations is considered to be rare. The same goes for a capability that is difficult to attain. A valuable and rare resource can give a temporary competitive advantage. However, when a resource is easily available and is used in exactly the same way across different organisations, there can be no exceptional performance when compared to competing organisations. In this situation the resource will lead the organisation to competitive parity, meaning that it is equal to that of other organisations. Although being on the same level playing field with other organisations is not the preferred status of an organisation, such common resources are sometimes required and can be complemented with other business offerings. Such resources, which are crucial for staying in the market, can create damage to the organisation if lost.

 

Is the individual resource or capability easy or costly to Imitate?

Easy to imitate resources and capabilities do not offer long-term competitive advantage. Typically, competing organisations will either duplicate the resource or substitute the resource for a similar, and sometimes even better version of the original. Barney (1995) identified three situations through which valuable and rare resources or capabilities can be costly to imitate:

  1. Historical – When resources are developed through historical events, or when resources are developed over many, many years.
  2. Chance (unplanned) – When other organisations are uncertain of which resource gives their competitors an advantage.
  3. Social – Resources and capabilities that are based on the culture of the organisation and/or the relationships between employees and with customers.

 

Is the business Organised enough to secure value?

Is the organisation well adapted to take full advantage of the resources and capabilities that are valuable, rare, and costly to imitate? Some companies are not organised enough to capture the full value of their own resources and capabilities. In turn, this means that the organisation is not securing any advantage from its resources and capabilities. To ensure that value can be gained, organisations need processes, policies, and standard operating procedures (SOPs), the right organizational culture and structure, and other managerial practices to achieve sustained competitive advantage.

 

Conclusion

Decisions taken along this framework can be subjective. This can be a good point for internal discussions to balance the subjectivity, and be more objective when estimating performance. External factors that can influence performance can be analysed through other methods, such as PESTEL Analysis and Porter’s 5 Forces, discussed in edition 3 and 9 of Empowerment Through Knowledge. If after justifications and discussions you can answer ‘Yes’ to all of the VRIO questions, ideally in relation to a number of resources of capabilities within the organisation, then your business can enjoy sustained competitive advantage and greater resilience in many situations.

 

The VRIO Framework is covered in our Level 6 Award in Strategy, and our Bachelor in Business and Management.

 

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