VRIO

Definition

VRIO framework is the tool used to analyze firms internal resources and
capabilities to find out if they can be a source of sustained competitive
advantage.

Understanding the tool

In order to understand the sources of competitive advantage firms are

using many tools to analyze their external (Porters 5 Forces, PEST
analysis) and internal (Value Chain analysis, BCG Matrix) environments.
One of such tools that analyze firms internal resources is VRIO analysis.
The tool was originally developed by Barney, J. B. (1991) in his work Firm
Resources and Sustained Competitive Advantage, where the author
identified four attributes that firms resources must possess in order to
become a source of sustained competitive advantage. According to him,
the resources must be valuable, rare, imperfectly imitable and non-
substitutable. His original framework was called VRIN. In 1995, in his later
work Looking Inside for Competitive Advantage Barney has introduced
VRIO framework, which was the improvement of VRIN model. VRIO
analysis stands for four questions that ask if a resource is: valuable? rare?
costly to imitate? And is a firm organized to capture the value of the
resources? A resource or capability that meets all four requirements can
bring sustained competitive advantage for the company.

Adopted from Rothaermels (2013) Strategic Management, p.91

Valuable
The first question of the framework asks if a resource adds value by
enabling a firm to exploit opportunities or defend against threats. If the
answer is yes, then a resource is considered valuable. Resources are also
valuable if they help organizations to increase the perceived customer
value. This is done by increasing differentiation or/and decreasing the
price of the product. The resources that cannot meet this condition, lead to
competitive disadvantage. It is important to continually review the value of
the resources because constantly changing internal or external conditions
can make them less valuable or useless at all.
Rare
Resources that can only be acquired by one or very few companies are
considered rare. Rare and valuable resources grant temporary competitive
advantage. On the other hand, the situation when more than few
companies have the same resource or uses the capability in the similar
way, leads to competitive parity. This is because firms can use identical
resources to implement the same strategies and no organization can
achieve superior performance.
Even though competitive parity is not the
desired position, a firm should not neglect
the resources that are valuable but
common. Losing valuable resources and
capabilities would hurt an organization
because they are essential for staying
in the market.
Costly to Imitate
A resource is costly to imitate if other
organizations that doesnt have it cant
imitate, buy or substitute it at a
reasonable price. Imitation can occur in
two ways: by directly imitating
(duplicating) the resource or providing the comparable
product/service (substituting).
A firm that has valuable, rare and costly
to imitate resources can (but not
necessarily will) achieve sustained
competitive advantage. Barney has
identified three reasons why resources can be hard to imitate:
Historical conditions. Resources that were developed
due to historical events or over a long period usually
are costly to imitate.
Causal ambiguity. Companies
cant identify the particular
resources that are the cause of
competitive advantage.
Social Complexity. The resources and capabilities that
are based on companys culture or interpersonal
relationships.
Organized to Capture Value
The resources itself do not confer any advantage for a
company if its not organized to capture the value from
them. A firm must organize its management systems, processes, policies,
organizational structure and culture to be able to fully realize the potential
of its valuable, rare and costly to imitate resources and capabilities. Only
then the companies can achieve sustained competitive advantage.
Using the tool

Step 1. Identify valuable, rare and costly to imitate

resources
There are two types of resources: tangible and intangible. Tangible assets
are physical things like land, buildings and machinery. Companies can
easily by them in the market so tangible assets are rarely the source of
competitive advantage. On the other hand, intangible assets, such as
brand reputation, trademarks, intellectual property, unique training
system or unique way of performing tasks, cant be acquired so easily and
offer the benefits of sustained competitive advantage. Therefore, to find
valuable, rare and costly to imitate resources, you should first look at
companys intangible assets.
Finding valuable resources:
An easy way to identify such resources is to look at the value chain and
SWOT analyses. Value chain analysis identifies the most valuable
activities, which are the source of cost or differentiation advantage. By
looking into the analysis, you can easily find the valuable resources or
capabilities. In addition, SWOT analysis recognizes the strengths of the
company that are used to exploit opportunities or defend against threats
(which is exactly what a valuable resource does). If you still struggle
finding valuable resources, you can identify them by asking the following
questions:
Which activities lower the cost of production without decreasing
perceived customer value?
Which activities increase product or service differentiation and
perceived customer value?
Have your company won an award or been recognized as the best in
something? (most innovative, best employer, highest customer
retention or best exporter)
Do you have an access to scarce raw materials or hard to get in
distribution channels?
Do you have special relationship with your suppliers? Such as tightly
integrated order and distribution system powered by unique
software?
Do you have employees with unique skills and capabilities?
Do you have brand reputation for quality, innovation, customer
service?
Do you do perform any tasks better than your competitors do?
(Benchmarking is useful here)
Does your company hold any other strengths compared to rivals?
Finding rare resources:
How many other companies own a resource or can perform
capability in the same way in your industry?
Can a resource be easily bought in the market by rivals?
Can competitors obtain the resource or capability in the near future?
Finding costly to imitate resources:
Do other companies can easily duplicate a resource?
Can competitors easily develop a substitute resource?
Do patents protect it?
Is a resource or capability socially complex?
Is it hard to identify the particular processes, tasks, or other factors
that form the resource?
Step 2. Find out if your company is organized to exploit
these resources
Following questions might be helpful:
Does your company has an effective strategic management process
in organization?
 Are there effective motivation and reward systems in place?
Does your companys culture reward innovative ideas?
Is an organizational structure designed to use a resource?
Are there excellent management and control systems?
Step 3. Protect the resources
When you identified a resource or capability that has all 4 VRIO attributes,
you should protect it using all possible means. After all, it is the source of
your sustained competitive advantage. The first thing you should do is to
make the top management aware of such resource and suggest how it can
be used to lower the costs or to differentiate the products and services.
Then you should think of ideas how to make it more costly to imitate. If
other companies wont be able to imitate a resource at reasonable prices,
it will stay rare for much longer.
Step 4. Constantly review VRIO resources and
capabilities
The value of the resources changes over time and they must be reviewed
constantly to find out if they are as valuable as they once were.
Competitors are also keen to achieve the same competitive advantages so
theyll be keen to replicate the resources, which means that they will no
longer be rare. Often, new VRIO resources or capabilities are developed
inside an organization and by identifying them you can protect you
sources of competitive advantage more easily.
VRIO example

Googles capability evaluated using VRIO framework

Google's VRIO capability

Excellent employee management

Valuable Rare Costly to Is a company organized to

? ? Imitate? exploit it?

Yes Yes Yes Yes

Googles ability to manage their people effectively is a source of both

differentiation and cost advantages. Unlike other companies, which rely on
trust and relationship in people management, Google uses data about its
employees to manage them. This capability allows making correct (data
based) decisions about which people to hire and the best way to use their
skills. As a result, Google is able to hire innovative employees that are also
very productive ($1 million in revenue per employee). Besides being
valuable, it is also a rare capability because no other company uses data
based employee management so extensively. Is it costly to imitate? It is
costly to imitate, at least, in the near future. First, companies should build
the highly sophisticated software, which is both costly and hard to do.
Second, HR managers should be trained to make data based decisions and
forget their old management methods. Is Google organized to capture
value from this capability? Certainly, it has trained HR managers that know
how to use the data and manage people accordingly. It also has the
needed IT skills to collect and manage the data about its employees.
Sources

1 Barney, J. B. (1995). Looking Inside for Competitive Advantage.

Academy of Management Executive, Vol. 9, Issue 4, pp. 49-61
2 Rothaermel, F. T. (2012). Strategic Management: Concepts and
Cases. McGraw-Hill/Irwin, p. 91
Sullivan, J. at ere.net (2013). How Google Became the #3 Most Valuable
Firm by Using People Analytics to Reinvent HR.