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Explaining The VRIO Framework (With A Real-Life Example)
Find your company’s sustainable competitive advantages using the VRIO framework.
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 analysis tool designed to help organizations uncover and protect the resources and capabilities that give them a long-term competitive advantage. The framework should be put into play after the creation of a vision statement, but before the strategic planning process. Why? The differentiators and advantages you identify will determine how to approach the marketplace and inform strategic decisions that shape the fate of your company.
What is VRIO Analysis?
VRIO is an acronym for a four-question framework of value, rarity, imitability, and organization. It is used to uncover "sustained competitive advantage." The four components of VRIO analysis are typically approached in the style of a decision tree:
- 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.
Ready to tackle strategic planning for your organization? Use these free templates to jump start your planning process.
A real-life VRIO framework example is 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.”)
Once you apply the VRIO framework to your human capital strategy, consider using a RACI matrix to define who is responsible, accountable, consulted and informed for the processes and projects across your organization.
Final Words On VRIO Analysis
The VRIO framework complements other strategic analysis methods, such as a SWOT Analysis, to provide your organization with clear-cut competitive advantages. A VRIO analysis can be applied company-wide or to individual departments for a well-rounded view of how each aspect of your business should position itself in the marketplace. It’s important to continually review your framework—capabilities change over time and competitors adapt.
As we stated in the beginning of this article, the best time to review your VRIO is at the onset of your strategic planning process. Commiting to the VRIO process and evolving your analysis over time will protect your sustained competitive advantages.