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The VRIO Analysis Framework

Introduction to the VRIO Framework

VRIO is an analysis framework for predicting the strategic importance of a given resource to an organization. Although it does not provide a numerical estimation of a resource's worth, it can be quite a powerful tool as part of a larger analysis.

The methodology of the model, often referred to as a resource-based view, is focused upon whether or not an organization can capture significant strategic benefit from a given resource and was first proposed by Professor Jay Barney in 1991.

Note: Resources need not be physical in nature. A corporation could use this model to analyze its holdings of wheat, as it could its logistics capability or patent holdings.

The Resource-Based View

VRIO and other resource-based models suggest that a firm's competitive advantages are a result of its ability to derive value from the resources that it controls. The better a firm can identify and utilize its resources, the better it will compete in the marketplace.

The term VRIO is an acronym for its four constituent areas of analysis:

Starting with the question of value, the user of the VRIO model works his way down the list, analyzing the given resource against the appropriate rubric.

Valuable? Rare? Difficult to Imitate? Organizationally Compatible? Result
No Benefit
Competitive Equality
Short-Term Advantage
Potential Core Competency
Actual Core Competency

The ideal result is for all four criteria to be satisfied. According to traditional usage instructions, if a resource fails a given test, analysis is halted. As noted in later sections of this document, there may be situations for which the use of this method is not the optimal approach.

Is the Resource Valuable?

The concept of value can be exceedingly complex, but for the sake of discussion we will define value as the potential to achieve a strategic objective.

Many managers consider only two strategic objectives: the reduction of costs, and the augmentation of revenue. However, users of this framework would be advised to consider other potential outcomes including production flexibility, speed of delivery and discoverability amongst a plethora of other measures.

Risks

There are several potential analysis errors that may crop up at this stage and go unnoticed.

Is the Resource Rare?

It is not enough for a resource to be valuable. It must also be rare. The world is awash in many items that prove exceedingly valuable, yet are free to any who wish to possess them. Common examples include such resources as sunlight, oxygen and gravity.

However, the more rare a valuable resource, the more strategically important it becomes to any who possess it. At the extreme end of the spectrum, a single company may be the only firm in the entire world that has access to a valuable resource. All things being equal, such a position could provide it with extreme strategic advantage.

It is vital to note that resource rareness is not static. Rather, it can be altered through artificial means including positioning and branding. A narrowing of definitions in the minds of consumers can cause common goods to become rare.

Bottled water companies, for instance, commonly take municipal (tap) water, rebrand it with unique names and declare the resulting product as a rare resource not to be found from any other vendor.

Other firms have found great success by incorporating relatively superficial changes to their resources. Minor shifts in packaging, language and appearance can remove much of the competitive landscape. A company producing a numerical software system, for instance, may be able to target a specialty market by labeling its product as a numerical software system for the nautical industry.

Risks

Is the Resource Difficult To Imitate?

A rare, valuable resource has great potential, but only if it remains both rare and valuable. In many cases, a firm can come along and simply imitate (or replicate) that resource.

There are some items that are impossible to imitate by definition. There is only one copy of da Vinci's Mona Lisa. No matter how much a painter may try, he will never be able to create an exact duplicate. Other characteristics can similarly be safe from imitation. For instance, there can only be one oldest vineyard within a country.

Nevertheless, for many valuable resources, the quantity available will continue to increase over time. Skills can be acquired, new suppliers can enter the marketplace, alternative sources of supply can be opened, and customer demand can be satiated.

Even the aphorism "land is a great investment, because they're not making any more of it" ceases to ring true on a long enough timeline. One can travel to the volcanoes of Hawaii to see that land is, in fact, being made on a slow, but regular basis. In a few tens of thousands of years, it might even be ready for purchase.

The fear of imitation has caused many businesses to attempt to limit imitation through artificial means. Two of the most popular are regulatory capture and government licensure. For instance, the South Sea Company was granted a monopoly by the British government for trade with South America in the early 1700s. Its license prevented direct competition and, thus, limited the ability of other enterprises to imitate. Other forms of legal privilege such as copyrights, patents and trademarks can be used to similar effect.

Risks

Can the Organization Exploit the Resource?

Up until this point, the VRIO framework has been an analysis tool for studying the strategic potential of a given resource at a generic firm. It is now proper to ask whether or not a specific organization can properly exploit that resource.

Many firms are inherently different from one another. Each has its own unique culture, product mix, strategy, customer base and resources availability. Thus, it should be of no surprise that a given resource considered vital to one firm may be nearly worthless to another.

In many cases, parties with resources that are valuable, rare, and inimitable find themselves best served by selling to an intermediary. Individual workers, for instance, often lack the marketing, capital and other resources to leverage the value to their own labors. Thus, they choose to sell their labors to companies, rather than to individual consumers.

Risks

Conclusion

The VRIO analysis framework can be a powerful tool for understanding a firm's available resources and its strategic potential. Nevertheless, it is not a panacea. Rather, this framework should be merely one tool in many when attempting to understand the strategic direction of a firm.

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