vrio-framework

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.

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:

  • 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.

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.

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.

Other connected frameworks

Porter’s Five Forces

porter-five-forces
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.

SWOT Analysis

swot-analysis
A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

BCG Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Balanced Scorecard

balanced-scorecard
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.

Blue Ocean Strategy 

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

GAP Analysis

gap-analysis
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Scenario Planning

scenario-planning
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

Read also: Business Strategy, Examples, Case Studies, And Tools

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here