VRIO framework (VRIO analysis explained)
This article aims to explore VRIO framework (VRIO analysis) developed in 1991 by Jay Barney, an American professor. There is no doubt that organisations use different tools to analyse the internal and the external environments to understand their capabilities. One of such tools is VRIO framework.
What is VRIO framework (VRIO analysis)?
VRIO stands for Valuable, Rare, Inimitable, and Organised. It is a strategic analysis tool that organisations can use to analyse their internal resources. It helps them explore and protect their resources and capabilities that can be utilised to gain a long-term competitive advantage over the competitors. Organisations need to ask four questions i.e. are their resources: valuable? rare? expensive to imitate? and finally, are they organised well to make use of the resources adequately to capture their value?
According to Barney (1991) the resources of a firm can only be sources of competitive advantage or sustained competitive advantage when they are valuable. Valuable resources are those that help organisations exploit opportunities, safeguard against threats, and create and increase value for customers. If resources are not valuable, a company will have competitive disadvantages over its competitors.
Rare resources are those that are possessed by one or a very few organisations. Valuable resources possessed by a large number of firms cannot be the sources of competitive advantages or sustained competitive advantages (Barney, 1991). Rather, they provide a firm with competitive parity i.e. a standard or average result as compared to the competitors. It is important to note that valuable and rare resources do not dismiss common resources of an organisation as unimportant. It should also be mentioned that defining rarity of resources is perhaps as difficult as getting a rare one.
Costly to imitate resources
Valuable and rare resources may be a source of competitive advantage; however, they can be a source of sustained competitive advantage only if organisations that do not have those resources currently, find them very costly and difficult to imitate. Organisations that have rare resources that are extremely difficult to imitate by the competitors can gain competitive advantage. According to Barney (1991) one or a combination of three reasons i.e. historical conditions, casual ambiguity, and social complexity may make a firm’s resources hard to imitate by competitors.
Historical conditions imply that a resource may have been acquired at a time in history. Once that time is elapsed, other organisations may not have the space and time to get hold of it. Casual ambiguity exists when the relationship between an organisation’s resources and sustained competitive advantages is not understood or understood imperfectly. Likewise, some resources may be socially complex and may be imperfectly imitated if they are based on firm’s culture, interpersonal relationships among its managers, and its reputation among suppliers (Barney, 1991).
Organised to capture value
A firm’s tangible and intangible resources may be valuable, rare, and hard for others to imitate; however, if the firm itself is not organised well to transform and utilise them, then these resources become sources of unused competitive advantage. Organisations must organise their policies, processes, structure, culture, and management systems to capture the full potentials of their resources. That organisation of resources will then help them achieve a sustained competitive advantage.
Example of VRIO framework (VRIO analysis)
Valuable: Coca-Cola regards its recipe as extremely valuable.
Rare: The recipe is considered rare and certainly secret. It is written on a piece of paper which is kept in a vault in the United States (Coca-Cola Company, 2017).
Costly to imitate: As the recipe is secret, it is extremely difficult to imitate. Many companies around the world tried and failed.
Organised to capture value: Coca-Cola is enormously organised and made use of the recipe extremely well that has made the company a global household brand.
Advantages of VRIO framework (VRIO analysis)
- VRIO can be used to identify and evaluate the resources in a company
- It can be used with other strategic analysis tools
- It is easy for big organisations to apply in their contexts
Disadvantages of VRIO framework (VRIO analysis)
- VRIO model only looks into the internal resources of a company. It does not look into the macro-environmental factors
- It may be difficult for a company to determine when it has achieved a sustainable competitive advantage
- It may be difficult for small companies to apply the VRIO model due to a limited number of resources and capabilities.
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Last update: 02 February 2020
Barney, J. (1991) Firm resources and sustained competitive advantage, available at: https://josephmahoney.web.illinois.edu/BA545_Fall%202019/Barney%20(1991).pdf (accessed 01 February 2020)
Coca-Cola Company (2017) Who knows the secret formula of Coca-Cola? Available at: https://www.coca-cola.co.uk/faq/who-knows-the-secret-formula-of-coca-cola (accessed 01 January 2020)
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Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.