Competition is a key component of capitalist economies. While it might not have been fully understood by the originators of capitalism, modern economists have outlined how competition directly stimulates innovation and thus, leads to wealth creation. However, competition has a negative side – it puts a lot of strain on businesses, sometimes even leading to liquidation.
Jay Barney invented the VRIN framework in 1991. However, 5 years later, he improved his theory and remodelled it into VRIO – a set of attributes that a company must possess to maintain a competitive edge. It is a tool with which business analysts can evaluate their company’s resources and capabilities to determine the prospective competitive advantages they may offer.
VRIO is an acronym that stands for:
V – Value: Does the resource exploit an opportunity or mitigate a threat in the business?
R – Rarity: Who has control over the supply of the resource and how available is it to your competitors?
I – Imitability: What would it cost to imitate the resource, how easy would it be to duplicate or imitate?
O – Organization: Does your firm have the structure and ability to fully exploit the resource?
The question here is whether the resource adds any value to the firm. Primarily, you are looking out for whether it can help reduce cost and/or increase overall profits.
Can it help to exploit opportunities to increase revenues or can it help protect against a factor threatening revenues? If the answer is no, then the resource has no value and should not be pursued any further. But, if the answer is yes, you can move on to the next question.
Theoretically, in every free economy, resources are equally accessible to all industry participants. However, factors like cost and intellectual property laws can restrict access. The more access your competitors have to the resource, the less valuable it is to your firm.
This however does not mean that you should not invest in common but valuable resources. It just means that to maintain a competitive edge, rare and exclusive resources are more important. When you have answered this question, you can move on to the next question.
It is not enough for a resource to be rare and controlled, it also has to be non-imitable. There are two ways by which imitation can occur, competing firms can either duplicate the resource or find a substitute. Either way, imitation takes away your competitive edge.
The question here is – would it be easy and cheap to duplicate or substitute the resource? If the answer is yes, then whatever competitive edge it offers would not last long. But, if the answer is no, then you can move ahead to the next question.
The final question is your firm’s ability to capitalize on the resource. It is not enough for the resource to be valuable, rare, and non-imitable; your firm has to have the required structure to fully exploit it. If the answer is no, the next line of action would be to improve your structures, as going ahead to implement the resource would most likely be a waste of time and capital.
And if the answer to the ‘Organization’ question is yes, you can finally go ahead as the resource has satisfied all four criteria of the VRIO framework.
Applying the VRIO framework
Now that you fully understand the VRIO framework, how do you apply it? It is outlined below in 4 easy steps.
Step 1: Identify and classify available resources
The very first step in applying the VRIO framework is to identify all resources available to the firm. Finding all tangible assets is the easy part. However, they can all be bought on the market and are thus available to competitors and do not offer a substantial competitive edge.
The real work here is in identifying intangible assets. These are the assets that confer a competitive advantage. This might be a little tricky though, as it might not be easy to outline them, compared to tangible assets that are already written into the books. The best way to find them is to do a step-by-step analysis of the value chain.
Step 2: Put them through the VRIO framework.
When you have properly outlined the available resource, individually put them through the four criteria of the VRIO framework. They all do not need to satisfy the four criteria. Some resources are common but critical. Your effort should be directed at finding and prioritizing the resources based on how well they satisfy the four criteria.
Step 3: Protect the resources
When you have identified the resources that satisfy all four criteria, proceed to institute some form of protection to perpetuate their usefulness as a competitive edge. For example, if the identified resource is an aspect of the production process, you can copyright it or you may restrict access to it in-house.
Step 4: Constantly review resources using the VRIO framework
The market is always in a state of flux. This is why it is important to routinely review resources using the VRIO framework. Resources that offered a substantial competitive edge during the previous review might have become publicly available. Among other factors. A consistent review keeps your firm up to speed and competitive.
Coupled with the SWOT analysis and other strategic planning tools, the VRIO framework is a great tool in increasing your firm’s competitive edge.
For the maximum efficiency and to prevent wastage, it is recommended that you carry out the analysis at the start of your strategic planning process. However, as mentioned earlier, it is important to routinely carry out VRIO analysis to keep your firm competitive.