VRIO analysis is a tool in strategic planning, used by firms to make efficient business decisions. The analysis provides information and the results will hopefully provide a competitive advantage.
What is VRIO analysis?
VRIO is an internal analysis. The VRIO framework is used to identify and evaluate resources in a company. Specifically answering the question, what competitive advantages will it supply the company?
The VRIO analysis template refers to four criteria firms consider when laying down the framework:
We’ll break down their involvement below and explain how to do a VRIO analysis.
The Value of Resources in VRIO Analysis
If resources can be used as an advantage, it’s possible they will provide beneficial opportunities. They can also eliminate or reduce the impact of a threat. Stakeholders determine value by whether or not resources are beneficial to the company.
The resource may help the company in various areas, internally and externally. Consider political, economic, social and technological advances. If the resource helps in one or many of these regions, it may be crucial for the firm’s development.
But if it doesn’t provide benefits, it’s not useful. That makes it a weakness in VRIO analysis. For example, it could be an expensive resource. If the firm cuts the funding, they can allocate the money elsewhere to see a growth in revenue.
You must consider buyers, suppliers, and rivalry too. The resource may be a threat to consumers, an issue with vendors, or increased competition from others. If it can be substituted, that’s also a weakness.
With this, the V in the VRIO analysis framework is complete.
The Rarity of Resources
How rare is the resource?
If it’s rare, this can be a strength. It means the competition will have a difficult time using it for themselves.
Here’s a VRIO analysis example: Consider if the resource is in short supply. Do you have repeatable access to it? Perfect! While you have a hard-to-find item at your disposal, the competition is forced to find substitutes.
But this can be reversed.
When you have access to the rare resource, but not repeatedly, it’s not a permanent advantage. This may be OK if you’re looking for a short period solution. But when the brand is built around this resource and it can’t be obtained? The business suffers.
Consider if it’s not rare or difficult to get. A common resource means, competitors will have access and use it. An easily accessible one means everyone can have it.
If the resource lacks rarity and availability, it may be a weakness. And thus should be cut.
The Imitability of Resources
A rare and difficult to acquire resource ensures difficulty to imitate. This gives you a competitive advantage.
It’s up to you whether to use the power and create opportunities. Or to nullify the effects of threats.
Keep in mind competitors will notice the resource. Especially if they’ve conducted competitor analysis.
They may ignore it.
When companies determine it’s not worth their funds or time to obtain the resource, they’ll move on. But they may decide to duplicate it. If it’s easily obtainable, it’s likely competitors will imitate or take the support for themselves.
If it’s rare, they will try to substitute it. They’re after the competitive advantage the resource provides, just as you are. If it’s cost-effective and makes logical business sense, the competition will do it.
Resources need to be more than rare or difficult to get. It must not be imitable.
The Value of Organization in VRIO Analysis
This is the final step in the framework of VRIO analysis. It requires determining the value, rarity, and imitability first. If the resource has passed all three of these requirements, the company has to be organized. Otherwise, the benefits may slip away.
The company can exploit the competitive advantage. At this point, departments within the company will be analyzed to ensure it’s ready to use this resource to full advantage.
Are there marketing campaigns dedicated to it? Are the salespeople pushing the resource? Are invoices ready to be sent out? Are suppliers readily available to provide it?
Once these questions are answered and the organization is set, the VRIO analysis is complete.