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What Is The VRIO Framework And Why It Matters In Business?
The VRIO framework is a tool that businesses can use to identify and then protect the factors that give them a long-term competitive advantage. The VRIO framework will help assess reality based on four key elements that make up its name (VRIO): value, rarity, imitability, and organization. VRIO is a holistic framework to assess a business.
The VRIO framework is an acronym of value, rarity, imitability, and organization. Each of these four components is traditionally approached in the style of a decision tree.
Following is the VRIO framework broken down into its constituent parts, with some important questions that may be asked:
Value – does the business offer a product or service that adds value to the lives of its customers? Does this value offer the business a competitive advantage? Businesses that answer yes to these questions can move to the next part.
Rarity – does the business have ownership of rare resources or capabilities that are in demand? Businesses that answer no to these questions may have value but lack rarity and competitiveness and should go back to the first part.
Imitability – is the rare and valuable product expensive to produce? Are there alternatives and similarly rare and valuable substitutes? Most businesses that fail to answer yes to these questions will have a competitive advantage, but only temporarily. Maintaining this advantage will require considerable time and money that will inevitably erode profit margins. The best solution for these businesses is to go back to the start of the process and reassess.
Organization – for businesses with the good fortune to offer something valuable, rare, and difficult to imitate, they must next turn to their internal operations. Do such businesses have the appropriate processes, structures, and culture to maintain their competitive edge? Businesses who answer no to this last part have unfulfilled potential. That is, they do not have the required systems in place to take advantage of their competitive advantage.
Those that answer yes to the last step have reached the ultimate goal of the VRIO framework – sustained competitive advantage.
Google is perhaps the best example of the VRIO framework in action. Their data-driven employment management system is valuable and rare. Indeed, no other company uses this form of employee management so extensively. Because of the size of Google’s workforce, it will prove prohibitively expensive for most companies to imitate. Google also invests heavily in training for HR managers so that they can derive maximum value from their competitive advantage.
Unlike Google, Coca-Cola has managed to exploit a solid VRIO framework in what is a very competitive market. The organization’s value lies in its high brand equity, or the perceived value of a brand in the minds of consumers. Coca-Cola’s product is not rare, but its presence in consumer lives is always associated with positive memories.
This makes their appeal hard to imitate because they have spent decades and billions of dollars in advertising to earn this place in consumer’s lives. With a presence in 196 countries worldwide, it is easy to appreciate Coca-Cola’s competitive advantage.
The VRIO framework determines whether a particular business has any resources or capabilities that are valuable in a competitive context.
The VRIO framework consists of the four constituent parts of value, rarity, imitability, and organization. A business must satisfy each part before moving on to the next.
Large, multinational companies with efficient systems are best placed to take advantage of the VRIO framework – regardless of existing market competition.
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