Explaining The VRIO Framework (With A Real-Life Example)

What makes your organization special? How close are your competitors to overtaking you? Too many companies can’t answer questions like these and simply believe hard work will guarantee success.

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.

What is the VRIO framework, and how does it uncover “sustainable competitive advantage”?

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.

Looking for a VRIO decision tree template? Download our free strategic planning templates to help you get started with VRIO and other strategic planning approaches.

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:

• Value: Do you offer a resource that adds value for customers? Are you able to exploit an opportunity or neutralize competition with an internal capability?
• ‍No: You are at a competitive disadvantage and need to reassess your resources and capabilities to uncover value.
• Yes: If value is established, move on in your VRIO analysis to rarity.

• Rarity: Do you control scarce resources or capabilities? Do you own something that’s hard to find yet in demand?
• ‍No: You have value but lack rarity, putting your company in a position of competitive parity. Your resources are valuable but common, which makes competing in the marketplace more challenging (but not impossible). It’s recommended to go back one step and reassess.
• Yes: With value and rarity identified, your next hurdle is imitability.

• Imitability: Is it expensive to duplicate your organization’s resource or capability? Is it difficult to find an equivalent substitute to compete with your offerings?
• ‍No: If your resource has value and rarity, but is affordable or easy to copy, you have a temporary competitive advantage. It will require considerable effort to stay ahead of competitors and differentiate your services—go back one step and reassess.
• Yes: You offer something that’s valuable, rare, and hard to imitate—now the focus is on your organization.

• Organization: Does your company have organized management systems, processes, structures, and culture to capitalize on resources and capabilities?
• ‍No: Without the internal organization and support, it will be difficult to fully realize the potential of your valuable, rare, and costly-to-imitate resources. Your company will have a unused competitive advantage and will need to reassess how to attain the needed organization.
• Yes: Your company has achieved the ultimate goal of sustained competitive advantage when it has successfully identified all four components of the VRIO  framework.

A Real-life VRIO Example: Google

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:

• Value: Use human capital management data to hire and retain innovative, productive employees. These employees consistently create some of the most popular consumer products and services in the world.

• Rarity: No other companies are using data-based employee management so extensively.

• Imitability: Data-based human capital management is both costly and difficult to imitate, at least for the near future. Companies have to build the software and invest in training their HR staff on the new technology and strategy.

• Organization: Google is organized to capture value from this capability. The IT department has the skills to collect and maintain the data, while HR and team leaders are trained on how to use the data to hire, promote, manage, and improve performance of employees.

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.”)

What are some benefits and limitations of the 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:

• It allows you to take advantage of previously unrecognized competitive advantages.
• It can help set the course for future plans and help you better allocate business resources.
• It can produce insights that may help identify and evaluate potential opportunities and threats to determine which ones are more important.

While the VRIO framework is useful for understanding your competitive position and providing strategic insights, it also has some limitations:

• The business environment is constantly changing, making it difficult (but not impossible) to have a sustainable competitive advantage for the long term; three to five years is more realistic.
• New and small businesses may find it more difficult to apply the VRIO framework simply because they haven’t yet fully developed their resources or capabilities to establish a sustained competitive advantage.
• VRIO is solely an internal analysis, so you will need other frameworks (like the SWOT analysis) to fill in the gaps.

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.

What do you do with the resulting VRIO insights?

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.

Need help getting started with the VRIO framework?

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!