VRIO Analysis

Background

The VRIO framework is a strategy tool that helps organisations identify the resources and capabilities that give them a sustained competitive advantage. Usually, companies possess various kinds of resources and capabilities. For example, such resources could be financial, human, organisational, physical, or technological in nature. The VRIO analysis is an internal analysis that helps determine the quality and usefulness of a firm’s resources and capabilities. VRIO is an acronym for:

This framework was developed in 1991 by Jay Barney [1]. The author identified four attributes that firm’s resources must possess for sustained competitive advantage. According to him, the resources must be valuable, rare, imperfectly imitable and non-substitutable. Jay called his original framework, VRIN. In 1995, in his later work, he introduced VRIO framework as an improvement of VRIN model.

About the model

The VRIO analysis is an internal analysis that helps determine the quality and usability of a company's resources and capabilities. 

A company needs to have strong core competencies to compete in the market. 

Since not all core competencies provide the same competitive advantages, the VRIO analysis can be used to assess the strength of each core competence.

VRIO is an abbreviation for the four characteristics of a core competence:

V for valuable

R for Rare

I for inimitable

O: organized

Let's look at each of the 4 characteristics:

Valuable

A resource is valuable if it helps the company to either exploit an opportunity or address a threat due to competitive advantages, even if it cannot outcompete competitors. It is therefore a strength. When assessing a resource, it would be a good thing to ask: How does it help the company?

This can be in areas such as efficiency, quality, customer relations and innovation.

Rare

The resource is not available to other companies. It may be used in the manufacture of unique or rare products. A brand is not a rare resource, as other brands in the same industry may be just as valuable. 

Not copyable

If other companies cannot immediately copy the resource or replace it with a similar one, it is not imitable and therefore not copyable. This can be a matter of reputation, company culture and similar intangible resources. If a resource is difficult to imitate, it is often due to patents or cultural relations in the company that cannot be imitated or other conditions that may provide first mover advantages.

Organized

The resources themselves do not create any advantage for a company. To exploit the advantages and achieve value, a company should organize itself so that it effectively collects and coordinates its resources. 

This includes the company's organizational structure, strategic planning and budgeting systems, management forms, etc. Without a well-functioning organization, a company cannot create a sustainable competitive advantage through its resources.

Criticism of the model

There have been criticisms of RBV and VRIO, including that they are based on tautology - that the theory fulfills itself by presenting tautological arguments. Because resources are defined in terms of their performance, and thus the theory is not testable. It is an academic debate, where Jay Barney has, among other things, responded to the criticism in an article "Is the Resource-Based View a Useful Perspective for Strategic Management research? Yes" RBV has also been criticized for using difficult-to-observe variables, which makes it difficult to conduct an empirical study and validate the results.

VRIO has its strength in focusing on resources that are either not valuable or not utilized sufficiently or organizationally correctly. The analysis can help to illuminate where a connection is - or is not but should be. Among other things, it can be revealed whether there are departments that do not work together in the organization and thus do not receive the optimal input or output. Areas where you can work on improving competitiveness.