Introduction to VRIO
VRIO stands for value, rarity, imitability, and organization. VRIO is a four-question framework used for the evaluation of the resources for the organization. Moreover, VRIO Analysis is beneficial for a durable competitive advantage. Here are the four components:
Are you providing a resource that is valuable for your customers?
Do you have the ability to beat the competition?
If your answer is No. Then there is a need to rediscover your capabilities and resources to make them valuable.
If your answer is yes, then the value is added for your resources, moving to the rarity in the VRIO analysis.
Do you have any resources which are rare but still in demand?
Are you able to handle rare capabilities or resources?
If you lack rarity, then your resources are only adding value but are very common, which makes the competition more difficult. So you should take a reverse gear and fix the issue.
If you have identified rarity, next, you have to take care of the imitability.
- Imitability: This involves the questions:
Is it easy and cost-effective to copy the resources of your company?
Is it tricky to find an equal substitute for your capabilities?
Do you have a planned management strategy, culture, and process structures to amplify the capabilities and resources of your organization?
Practical comments on VRIO
- VRIO is the framework to analyse the resources of an organization.
The first step involved is to analyse the role of resources for your organization.
- After that, go for the rarity of your resource for the benefits of your organization.
- It is good to analyse that your resources should be tricky to imitate and also check for its imitation costs.
- Make sure that your resources can easily access the latest innovative structures to beat the competition.
How to make the VRIO Analysis?
There are some simple points to follow in VRIO Analysis. Have a look:
2. Explain the capability/resource
3. Check the resource value
4. Analyse the competitive disadvantage
5. Inspect the Rarity
6. Understand your capability/resource’s rarity
7. Acknowledge your competition.
What is the VRIO good for?
VRIO is ideal for the estimation of the organization’s resources. Moreover, if the resources are known, it would be easy to acknowledge the competitive benefits or shortcomings. The following listed questions are considered by the VRIO for each kind of resource, both for your organization and for your opponents. These questions are also called evaluation dimensions. Have a look at these dimensions:
- Value: How much is the cost of resources, and how easy is it to get in the market?
- Rare: How limited or rare is the resource/capability?
- Imitability: How tricky is it to copy the resource/capability?
- Company respective arrangement: Is the resource upheld by any existing plans? Can the company utilize it properly?
Steps to apply VRIO for strategic planning
VRIO is a wonderful tool to explain formally why Google/Tesla/Apple are excellent companies.
In practical situations, we are more curious in searching for the capabilities/resources that could be helpful to attain a sustainable advantage. Luckily, if we get one, then we learn how to improve and maintain it.
The main goal of VRIO is to find the capability/resources with the highest potential that could become a sustainable advantage to your company. The basis of your planning should be on creating these advantages.
The steps to apply VRIO for the strategic planning are:
- List the Resources and Capabilities: It is necessary to analyze and list the intangible and tangible resources. These resources include finance, IP, tools, brand, and talents.
- Evaluate the Capabilities/Resources: Use these below-mentioned VRIO questions to analyze capabilities/resources.
- Is it possible to optimize capabilities/resources with a “No” answer?
- How to improve/maintain the capabilities/resources with all “yes” answers?
- Are there any improvement points? If no, then decide to get back to the capability/ resource when the situation changes.
- Prepare a Strategic Hypothesis: Make sure to use the most favourable capabilities/resources to prepare a strategic hypothesis. Use a strategy map to plan your improvement hypothesis. Note down the outcomes of VRIO analysis as an explanation.
Using VRIO with BSC Designer
It is better to understand this approach with the help of an example. You can also try this inspection in any spreadsheet software or on paper. Here, a BSC designer demonstrates a few new ideas.
This approach is one of the easiest to check for VRIO analysis. Moreover, using this approach, it is convenient to utilize the VRIO findings on the strategy map and save the results if you have to revise the logic behind the strategic ambitions.
Make VRIO template
It is better, to begin with, a basic VRIO template to save your precious time. Or you can make it by selecting My scoreboard, then click on new-> then select New Scoreboard-> After that, click on More templates and then select frameworks.
You can sign up using a free plan to approach the VRIO framework account. You can also go with a fresh login on BSC Designer, in case you are a new user. It is free to use for minor projects. Select the required components, i.e., value, rare, imitable, organized, and set these calculating units to binary. For your convenience, you can variate the scale to percentage to make it more flexible while giving answers to the questions of VRIO.
VRIO Analysis Example
The best VRIO Analysis example is Google. Moreover, if we break down their components of the VRIO framework, it might look like this:
- They use human resources to keep productive and innovative employees who create famous services and products for the entire world.
- There is no other company that uses data-based employee management, which justifies the rarity.
- Data-based human resource management is very expensive to copy, so companies are unable to follow their strategy.
- Google can easily attain value from its capability. Their IT team is so proficient in maintaining the data, and they know how to handle and enhance the employee’s performance.
Practical Comments to the VRIO Analysis
VRIO is an acronym for Value, Rarity, Imitability, Organization. Here, the main light is on the practical ideas that are helpful to calculate the resources.
- First of all, evaluate the place of resources in your organization. What is the responsibility of your resources? Moreover, what will be the outcome if you lose your resource? What would happen if you increased the number of your resources?
- In the technology era, we discuss the rarity of skills and talents and their relation with gaining competitive benefits.
- Nowadays, due to such advancements, it is possible to imitate anything. But here, the question arises, what will be the cost of copying the resources just like the Tesla superchargers and the probability of reproducing some conditions.
- You may hire wonderful talents for your organization. But if a well-maintained innovative structure is not approachable to them, there is less chance to compete with the opponents.
List the Resources and Capabilities
Typically, there are three categories of resources:
- Tangible Resources: It includes stocks, liquidity, cash, buildings and lands, manufacturing machinery.
- Intangible Resources: It involves industrial secrets, copyrights, patents, marketing expertise, branding strategy, R+D and customer experience.
- Human Resources: These resources include the recruitment process, hiring policy, talent management and motivation.
Capabilities are determined by how a company uses its resources. Is it able to get the desired output? Both of them have their weightage. However, capabilities without resources are of no use. No matter how strong a car is, it is like a box without a driver.
Difference between VRIO and VRIN
VRIO analysis is a method for the estimation of a company’s or business’s competitive survey along with the company assets. It is the symbol for rareness, imitability followed by the company. Moreover, VRIO analysis helps to understand the resources of the company. If the resources of the company are known, it would be easy to understand the shortcomings of the company. Additionally, the resource value is an advantageous to the company as it provides various beneficial opportunities.
On the other hand, VRIN helps calculate the resources or competitive power of ability. The Valuable and Rare component of VRIN calculates whether the resources are likely to be measured so that they can offer a competitive advantage. Moreover, it is also important to address the resource value regarding relative costs and benefit to serve as a base for competitive advantage.
Rare indicates that the assets or resources need to be limited, then only it will generate demand for its production and use. Moreover, it should be a little tricky to copy. VRIN framework concentrates on the resources to get enough competitive benefits.
So, we can say that both VRIO and VRIN are necessary for business analysis. However, VRIO is the basis of inspecting the competitive benefits of the company. There is a need to understand the primary difference and then arrange an analysis of such a management tool before utilizing it in your project or assignment.
This VRIO framework is beneficial for other planning methods like SWOT Analysis. It can be applied to individual departments or the bigger organizations. Moreover, a timely analysis of the framework will protect your business and provide durable benefits.