The VRIO Framework is a business analytical tool used for evaluating the internal situation of an organization by determining whether its resources and/or capabilities can be a source of sustained competitive advantage. VRIO specifically stands for value, rarity, imitability, and organization. The entire framework actually corresponds to four questions an analyst must ask about the resources and/or capabilities to determine their competitive potential. These questions are: (1) the question of value; (2) the question of rarity; (3) the question of imitability; and (4) the question of organization.
Defining VRIO Framework as a Resource-Based View
The VRIO Framework exemplifies the core tenet of Resource-Based View Theory. This theory is a strategic management perspective that considers organization performance and competitive advantage as something that is fundamentally determined by internal factors like its resources and capabilities and not by external factors or situations in the immediate environment.
Remember that a resource or a capability can pertain to a tangible or intangible element, component, or possession that a business and even nonprofit organization uses as an in integral part of its day-to-day operation and to produce value to its customers. This can pertain to its financial resources and workforce or to its financial strategy and human resource management competencies.
Technological resources and capabilities such as having a team of highly competent IT or engineer professionals and owning state-of-the-art equipment and machinery are other examples. Physical resources such as location and facilities are also an example. Established brand reputation and marketing competency can also be considered a resource and capability.
Some might argue for a clear distinction between a resource and capability. This is true to a certain extent. A resource can be considered as those tangible or intangible things used by an organization to implement its strategies or go about its daily operation. On the other hand, a capability can be considered as the ability of an organization to effectively used its resources.
However, in real-world settings, the distinction between the two has been blurred in practice. For example, having a highly competent and productive workforce is not only a resource but also a capability because it demonstrates the capacity of an organization to screen and recruit, onboard and train, retain, and develop further its employees and the entire workforce.
Another example is branding. A reputable brand image is not only a capability but also a resource because not only it demonstrates the marketing ingenuity of an organization but also it corresponds to having an intangible asset used as a leverage against lesser-known competitors. A strong brand is a source of competitive advantage. Consider companies like Apple as an example.
Applying the VRIO Framework for Business Analysis
Using the VRIO Framework for analyzing an organization is relatively easy because it primarily involves answering a set of questions to determine the competitive potential of a particular resource and/or capability. Below are the questions:
1. The question of value: Does the resource or capability of the organization enables it to exploit an opportunity and/or neutralize a threat in the market or environment?
2. The question of rarity: Is the resource or capability of the organization unique when compared against existing and potential competitors? Or is the resource or capability controlled by a relatively small number of competing organization?
3. The question of imitability: Is it difficult for an existing or potential competitor to acquire or develop a resource or capability that has been a source of competitive advantage of the organization? Will it face a cost disadvantage in doing so?
4. The question of organization: Does the organization has policies and processes to support the exploitation of its valuable, rare, and unique resource or capability?
Affirmative answers to all of the aforementioned close-ended questions would indicate that the particular resource or capability being analyzed gives the organization a sustained competitive advantage. It is still important to note that the VRIO Framework is used to analyze not just a single resource and/or capability but a set of resources and/or capabilities.
Interpreting the Answers to the VRIO Questions
Some situations do not bring forth affirmative answers to all of the aforementioned close-ended questions. Other situations only bring forth affirmative to some but not all questions. Nonetheless, a standardized guide has been designed and used to interpret the answers to the VRIO Framework. Take note of the following:
1. A resource or capability has a COMPETITIVE DISADVANTAGE if it is not valuable and exploitable, while its rarity and imitability cannot be determined. Under these circumstances, organization performance is BELOW AVERAGE.
2. A resource or capability has a COMPETITIVE PARITY if it is both valuable and exploitable although it is not rare and its cost to imitate cannot be determined. Under these circumstances, organization performance is AVERAGE.
3. A resource or capability has a TEMPORARY COMPETITIVE ADVANTAGE if it is valuable, rare, and exploitable although its cost to imitate is low. Under these circumstances, organization performance is ABOVE AVERAGE.
4. A resource or capability has a SUSTAINED COMPETITIVE ADVANTAGE if it is valuable and rare, has high cost to imitate, and exploitable. Under these circumstances, organization performance is CONSISTENTLY ABOVE AVERAGE.