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.
Understanding the VRIO framework
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:
A value proposition is about how you create value for customers. While many entrepreneurial theories draw from customers’ problems and pain points, value can also be created via demand generation, which is about enabling people to identify with your brand, thus generating demand for your products and services.
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, inevitably eroding profit margins.
The best solution for these businesses is to go back to the start of the process and reassess.
An organizational structure allows companies to shape their business model according to several criteria (like products, segments, geography and so on) that would enable information to flow through the organizational layers for better decision-making, cultural development, and goals alignment across employees, managers, and executives.
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.
Examples of the VRIO framework in business
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.
Other VRIO framework examples
In the final section, let’s take a look at a VRIO framework for Nike.
1 – Value
Nike very much delivers a brand that adds value to the lives of its customers, whether that be running shoes with extra cushioning or sports apparel that wicks sweat away from the body.
Some consumers also wear or collect Nike products for their associated status.
These characteristics alone do not offer Nike a competitive advantage, but Nike’s brand image as a pioneer and innovator in the sports industry does.
For example, no other company can lay claim to inventing the nylon upper, waffle sole, or cushioned spike plate.
Importantly, Nike maintains this culture of innovation today and by extension, earns continued business from its loyal customers.
2 – Rarity
Does Nike control scarce resources or capabilities?
Nike’s brand image is certainly rare among its peers, both in terms of appeal and financial value. Worth around $33 billion, Nike’s brand is the most valuable apparel brand in the world.
This is a title the company has held for seven consecutive years, with Gucci at $15.6 billion, a very distant second.
Nike’s research and development center in Oregon also allows it to create patents that, by their very nature, cannot be reproduced and made more common.
Over many decades of innovative product development, the company has amassed over 25,000 patents.
3 – Imitability
Nike’s rare and valuable products are expensive to reproduce.
Consider the Nike Sports Research Lab, for example, which among other things houses 400 motion-sensing cameras, 97 force plates, body-mapping equipment, and over 80 prototyping machines.
There are also full-size basketball courts, athletics tracks, and other real-world simulation facilities where athletes train with sports scientists to develop innovative products using machine learning, artificial intelligence, and big data.
4 – Organization
As we noted earlier, Nike has developed the ability to consistently innovate to maintain a competitive advantage.
The company also has an extensive global network of dealers, suppliers, resellers, and manufacturers.
Today, it would be almost impossible for a new or established business to recreate Nike’s network at scale.
The company believes in diversity, inclusion, and the power of people to drive it forward.
This tendency to respect racial and ethnic minorities, in particular, is echoed in Nike’s mission and vision statements.
Nike wants to create sports apparel for the everyday athlete – not just professionals.
It respects the unique experiences, perspectives, and values of its customers in much the same way that it does its global employee team.
To ensure this culture is not only embodied but sustained, employees are encouraged to memorize core philosophies such as “Be a sponge” and “If you have a body, you’re an athlete.”
Nike also uses a Winnebago as a conference room because this is where CEO Phil Knight started selling shoes.
The famous waffle iron that co-founder Bill Bowerman used to make rubber shoes is also displayed at Nike’s headquarters like a museum piece.
If nothing else, these small touches create a sense of shared history, values, and culture that is difficult to replicate.
Crossdock centers – the back end of the distribution chain where containers from international vendors hold stock until it is needed at a fulfillment center.
Sortation centers – where parcels are sorted by zip code and, in America, sent to USPS sites. These centers were introduced in 2014 and have enabled Amazon to speed up delivery and control “last mile” distribution.
Delivery stations – in urban areas, these are often the last step until parcels are delivered. Courier companies and Amazon Flex drivers tend to handle these deliveries.
Prime Now Hubs – smaller locations that carry a limited selection of items and are built for speed. This includes products from Whole Foods, for example, that must be on the customer’s doorstep within 2 hours.
Amazon’s customer-centrism is underpinned by various pillars that enable it to embody a culture of innovation.
Founder Jeff Bezos’s “Day 1” mantra encourages Amazon to maintain the sense of youthful dynamism and adventure that tends to desert established companies.
This encourages Amazon to maintain a level of excitement, stay nimble, and make rapid decisions in the best interests of the customer.
In a 2017 Forbes article, Bezos noted the strategy was present when the company started as a bookseller in 1994: “It’s been Day 1 for a couple of decades. Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. That’s why it is always Day 1.”
Key takeaways
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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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
