The VRIO framework is a strategic planning tool designed to help organizations uncover and protect the resources and capabilities that give them a long-term competitive advantage. Note that we’re not simply talking about a list of your strengths, which are things you do well but are not necessarily unique to your organization. Nor are we talking about advantages that are fleeting. Sustainable competitive advantages are those that competitors can’t easily duplicate in the foreseeable future; they are also a crucial element of business success.
Whether you have one or many sustainable competitive advantages, a VRIO analysis will help you identify and leverage them as part of your strategic plan. In this article, we’ll outline what a VRIO analysis entails, share a VRIO framework example, and explain what to do with your VRIO insights after the exercise is complete.
VRIO is an acronym for a four-question framework focusing on value, rarity, imitability, and organization, the criteria used to evaluate an organization’s resources and capabilities. You can use a decision tree to help map the outcomes of your probe, depending on whether you deem a resource as having met the criteria or not.
Before you get started, make a list of your resources and capabilities. These may be tangible or intangible items and may consist of material, financial, or human resources, such as patents, machinery, people skills, cost advantages, or anything else. Intangible resources tend to be the source of most sustainable competitive advantages, but that’s not always the case. To apply the VRIO framework, evaluate each item on this list through the following four lenses:
There’s no doubt that Google is one of the most powerful companies in the world, and its success arguably stems from a sustained competitive advantage in human capital management. If we were to break down Google’s VRIO framework from the HR perspective, it might look something like this:
Having a VRIO framework in place allowed Google to take a completely different approach to human capital management and make decisions using massive amounts of objective data. For example, Google’s People Operations team set out to identify which characteristics make a great manager. The data used to determine this included surveys, performance evaluations, and great-manager nominations. Google also conducted double-blind interviews with the company's highest- and lowest-rated managers. By determining what qualifies as a great manager, Google strengthens its internal team and the foundation of its sustained competitive advantage. (Source: Strategic Management Insight, “VRIO Framework.”)
Few organizations take the time to delve into their core competencies to determine what makes them unique. In our view, it’s a worthwhile exercise because:
While the VRIO framework is useful for understanding your competitive position and providing strategic insights, it also has some limitations:
What’s the difference between the VRIO framework and a SWOT analysis?
If you’re familiar with strategic planning, you’ve probably also heard of a SWOT analysis. While you can use both SWOT and VRIO in the early stages of strategic planning, they are different tools that produce different insights.
The VRIO framework focuses solely on evaluating internal resources and is intended to help identify the specific resources that make your firm more competitive.
SWOT, on the other hand (an acronym for “Strengths, Weaknesses, Opportunities, and Threats”), is a high-level strategic planning model that helps organizations identify areas where they’re doing well and where they can improve, both from an internal and an external perspective. It does not thoroughly evaluate your internal resources like VRIO but rather aims to help you assess your future prospects based on your current position and external conditions.
It’s important to conduct a VRIO analysis in the early stages of strategy planning, before making your strategic plan. In particular, this exercise will inform your vision statement, which is a forward-thinking proclamation of where your company wants to be in the future. The differentiators and advantages you identify through VRIO will help determine how to approach the marketplace and inform strategic decisions that shape the fate of your company. So, think about how you can best exploit your VRIO resources to provide the most value to your customer, and use those ideas to formulate a precise vision statement.
The VRIO framework can also inform your SWOT analysis. Whatever competitive advantages you uncover should be included in the “Strengths” section of your SWOT analysis. Even some resources that don’t pass the full VRIO test may still be considered strengths (for instance, if something is VRO—valuable and rare, and your organization can capitalize on it); however, don’t identify a resource or capability as a sustainable competitive advantage unless it meets all the criteria—that’s where your uniqueness lies. On the flip side, if an existing resource isn’t yet a sustainable competitive advantage and you would like to change that, you could identify it as a “weakness” or an area that needs improvement.
The VRIO framework and SWOT analysis are important parts of the strategy development phase. Once you’ve developed your strategic plan, you’ll then need to take specific actions to make it come to fruition. Many organizations use a strategic framework (like the Balanced Scorecard) to help transform their strategy ideas into an actionable plan and strategy software (like ClearPoint) to break those ideas into manageable goals they can then organize and track.
If you’re ready to take on strategic planning but don’t know where to start, download our booklet of strategic planning templates. It includes eight of the most popular strategic planning approaches—including the VRIO framework and SWOT analysis—and will help set you up for success. In the meantime, if you have any questions about strategy planning—or how ClearPoint performance management software can help—please reach out!