What is VRIO Analysis? The VRIO Framework explained in Detail

Vrio Analysis can be defined as an inception of the 4 question framework that focuses on the resources and the capabilities of the organization to determine its competitive potential and advantage.

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Breaking Down the Vrio Analysis

Vrio Analysis is an analytical and a brilliant technique to evaluate the company’s resources and capabilities that result in the competitive advantage

It was developed by Jay B. Barney with an objective of evaluating the resources of the organization on the level of the microenvironment that comprises of financial resources, human resources, material resources and non-material resources such as information about the market, knowledge of the industry, and more.

The Four Questions of VRIO Framework

1) The Question of Value

The V in the framework of Vrio Analysis answers the basic questions that are the resources and capabilities are valuable for the company’s growth and development or not. And will they be able to exploit and make optimal use of the opportunity available for the growth or mitigate the threat posed at the marketplace?

If it defines one of the two aspects mentioned above then it can be considered as the strength of the company and if it does not, it is the sheer weakness of the company that needs to be worked on in a dedicated manner. However, depending on the merit of the situation and the industry domain, some of the resources and capabilities can be considered as a weakness to one company and strength to the other.

Below mentioned are the six common types of opportunities that a firm can exploit for its growth and development are:

Cultural shift amongst the target audience
Technological change
Demographic change
Economic change
International events
Legal and Political conditions

The five threats that the firm’s resources or capabilities could avoid or mitigate are:

The threat of competition or rivalry
Threat of buyers
Threat of suppliers
The threat of new entrants in the market
Threat of substitutes

In both the cases of exploiting the opportunity or mitigating the threat, the end result lies in the increase of the revenues, decrement in the costs or both the scenarios depending on the merit of the situation and the play of internal and external factors affecting the operations of the company.

2) The Question of Rarity

The concept of rarity results in the competitive advantage for the firm as the firm has the valuable set of resources and capabilities that are extremely unique and special as compared to the competitors in the market and gives an edge to the firm amidst the dynamic nature of the market. The question arises on how to figure out if the firm’s resources are rare in nature and help it gives a competitive edge in the industry?

The available resources and capabilities of the firm should be able to sustain the competitive advantage being short in supply and should persist over a period of time. If both the factors are not met, the firm fails to attain the objective of competitive advantage in the market.

3) The Question of Imitability

In the framework of Vrio Analysis, the primary and main question on the front of Imitability arises that, do the firms without any set of unique resources and capabilities face the demerit of cost disadvantage for obtaining or developing it as compared to its competitor’s firms that already possess the same. The companies that have the rare and valuable resources that are quite unique in nature and are quite difficult to imitate gain the first mover advantage in the market gaining the competitive advantage.

To gain the competitive edge and attain the objectives of higher sales and elevated profits, the companies optimally harness on its rare and valuable resources to exploit the growth opportunities available or mitigate the threat posed by the external factors such as growing competition, change in the government policies or evolving tastes and preferences of the customers.

When the competitors of the company discover the same, they either ignore and continue with their business operations with the old ways with whatever amount of profits they have been earning or in the second option, they carefully understand and analyze the resources that work as the competitive advantage for the firm and try to duplicate or imitate the same.

However, if the resources are quite innovative and the resources are not that easy to access, imitation gets quite difficult. And in such as case, the company enjoys the long-term and sustained competitive advantage in the market-beating its arch-rivals and competition.

Various forms of Imitation

The imitation can be done in two forms, either through direct duplication or coming up with the substitutes. After the careful observation and analysis of the firm’s resources possessed by the firm that works in its favor as the competitive advantage, the competitive firm directly imitates. If the cost of imitation is high, the company will be able to sustain the competitive advantage on a long-term basis and if not, it will be temporary in nature. The second option for the imitating firm is to come up with the substitute to gain the similar level and form of competitive advantage.

Cost of Imitation of the resources

Special and Unique Historical Conditions through which the innovative firm gains low-cost access to exceptional resources in a particular time and space,

In the case of causal ambiguity, the imitating firm cannot figure out and analyze the factors that lead to the competitive advantage of an innovative firm,

The case of social complexity arises when the resources involved in gaining competitive advantage are based on interpersonal relationship, culture, and other social backgrounds.

When the innovative resources work as the long-term competitive advantage is duly certified through the process of Patents by the specific authorities.

4) The Question of Organization

The next aspect in the framework of Vrio Analysis is the organization that comprises of many factors that include the compensation policies, management reporting structure, and the management control systems for the entire hierarchy of the firm. The management reporting structure comprises of the aspects of the various reporting authorities and who reports to whom in the organization.

The management control system comprises the rules and regulations to make sure that the manager’s decisions are well aligned with the firm’s strategies. It consists of the regular meetings, budgeting procedures, and the other reporting activities to keep the management well informed about the day-to-day activities. The informal activities include the company’s innate culture and motivating employees to monitor each other to attain the firm’s aims and objectives.

To make the employees work in a certain order, the company comes up with the various compensation policies such as bonuses; leave salaries, travel allowances, additional vacation days to keep them motivated that will help the firm to attain the competitive advantage in the market.