When you are running a business or you’re one of the business heads in the organization, assessing from time to time as to where your resources stand is of utmost importance. This is achieved by the VRIO framework.
So, what is VRIO in the first place? It may be mentioned here that VIRO or VRIO is an acronym for “Value”, “Rareness”, “Imitable”, and “Organization”.
Let us find out more. VRIO analysis allows a company to assess its resources at the microlevel.
The VRIO framework Explained
It is a tool that you use to analyze the company’s internal resources and potentialities. With the help of this tool, you will be able to know whether these resources can help the company is enjoying a competitive advantage.
More about the origin and history
Developed by Barney, J.B (1991) and in his writings recorded in the work “Firm Resources and Sustained Competitive Advantage”. Assessing the competitive advantage of the resources is a classical Vrio analysis example.
He pointed out that there are 4 attributes that every company must possess so that VRIO resources serve for sustained competitive advantage. These are as follows. According to him,
- Resources must be rare
- They must be valuable
- Non- substitutable
- Imperfectly imitable
In fact, the introduction of the VRIO framework is basically an improvement in the VRIN model.
VRIO analysis is equally important as it encompasses questions, namely,
1. Are the resources of any value
2. Are they rare?
3. Is it an expensive affair to imitate the resources?
4. Is a firm capable enough to “capture the value of resources”?
How does the VRIO model work?
After carrying out the VRIO analysis, the evaluation process begins. The outcome of the analysis and evaluation is used to work out strategies and make decisions for the company keeping long-term goals in mind.
Aside from assessing the company’s competitive advantage, the result of the analysis also helps in making changes to the extent that sometimes certain “components can be outsourced” as well.
Few other factors that might work in conjunction with the VRIO analysis components are-
Analysis techniques employed
With the help of data obtained from the above parameters, a company can access a wealth of information pertaining to a company’s resources and competitive advantage.
4 VRIO resources – Brief Explanation
The four resources of the VRIO framework can be explained as such-
The question of Value
The main question that “V” in the VRIO framework asks is, are the resources of any value to the company? The resource must have the ability to “mitigate a threat in the marketplace” or “exploit an opportunity”.
Rarity is the property when a company has resources that are unique to the company. This is usually not available with the other potential competitors operating in the market. The resource needs to have an abundant supply to assess a company’s capabilities.
If a firm does not have the resources do they suffer due to cost disadvantage? The “first-mover” advantage is usually enjoyed by those companies that have rarer resources and cannot be usually imitated by other firms.
The question of organization
Once the individual carrying out the VRIO analysis understands the nuances of value, rarity, imitability, this is usually followed by the company’s organization process. It involves ways for the company to exploit the resources for its benefit and competitive advantage.