Q 354. VRIO Framework can help businesses build competitive advantage over their competitors. What is VRIO framework and how is it deployed?

 

 

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VRIO:

 

The VRIO framework is an analytical tool designed to help the organizations to uncover and protect their workforce and capabilities that gives a long-term competitive advantage.

 

V – Value

R – Rarity

I - Inimitability

O - Organizations

 

Value:

 

First and fore-most resources have to be valuable, as a matter of fact in order for firm attributes to be labelled to determine resources they must be valuable in the first place, so technically the resources are always valuable to be consider resources. when they enable the firm to implement strategies that improve firm’s efficiency and effectiveness by exploring opportunities or by mitigating threats that will increase in revenue or decrease in cost. Its even possible to quantifying this with the Net present value. For example: If you come across a more efficient production machine for your product, to purchase a machine you have to invest of 1M dollars, however machine can save up to 200k every year, during the life time of 10 yrs, the NPV will help to calculate the value of the investment by this counting the value of the future cost savings of 200k, back to the present time using the discount rate. In this example if you see the discount rate of 5% to future cashflow are worth about 1.5M today which makes the NPV about 0.5M has to adjusting the initial investment of 1M dollar, any investment wouldn’t NPV outcome there is higher than 0 is supposed to add value to the firm and therefore can be consider a valuable resource.

 

Rarity:

 

Are the resources you are using rare? resources that can only be acquire by one or few companies are consider to be rare. if a certain valuable resource is possessed by a large amount of players in the industry, each of the players has the ability to explore the resources in the same way, thereby implementing a common strategy that gives none of the players a comparative advantage. Going back to our previous example, more efficient product machine. If all the compactors are using the same machine, you can gain the same advantage, but nobody can gain the comparative advantage. Rareness is therefore important.

 

Inimitability:

 

Valuable and Rare resources may help companies to engage in strategy that auto firms cannot pursue, since auto firms are elect relevant resources and it is no guarantee for long term comparative advantage. It may give the company first mover advantage but comparators will probably try to imitate the resources to duplication or substitution, for example they might try to build their own most efficiency production machine or look to purchase somewhat similar product machine from a different supplier and another quality, the resources should therefore have is that they are hard and costly to imitate or substitute, this quality is the combination of inimitability and Non-substitutability. While there are many reasons why resources are can be hard and costly to imitate.

 

Organization:

 

Even if a company possess a resources did a valuable, rare and inimitability it will not automatically lead to a straight comparative advantage, to fully realize this potential the company must also be organized to explode his resources in such a way the true value is being captured from the resources. For example, if you have highly skilled workforce, that is more valuable, rare, and hard to inimitable but not the appropriate division of labor and fair compensation policy this workers might not work to their full potential and true value is not being captured. Organizational factors such as formal reporting structure, compensation policies and management control systems surrounding the resources are therefore crucial as well

VRIO stands for Value , Rarity, Imitability and Organization. A Question Framework of the 4 mentioned matrix is created to analyze and uncover ‘Sustained Competitive advantage”. Since it is a tool that helps to plan for achievement of long term goals and create an edge over the competitors, VRIO framework forms a part of the Organization’s strategic Scheme.

Unlike SWOT, which is carried out on the organization as a whole, VRIO analysis is conducted on each individual resource or competency that needs to be reviewed.

The abovementioned four components of VRIO Analysis are arranged in a framework in a style of a decision tree with branches that lead to decisive strategies and then action points.

 

<Diagram1>

 

The said decision tree structure with branches or nodes are developed with some fundamental question that lead to decisive strategies and then action points. The most fundamental Question to put forth relevant to any resource/Competency is “Does the said Resource and/Competency add value to the customer?? It is pertinent that only resources/capabilities/competencies that add value, can lead to competitive advantage, else, any non-value adding resource may lead to competitive disadvantage only. After that the next relevant steps are taken in the defined course of the Framework – Refer to <Diagram 1>

 

Steps for VRIO Analysis;

 

Objective: To determine whether the Resource /Competence under review has a Competitive advantage or a competitive Parity or does it have only a temporary competitive advantage or an unused Competitive advantage or at the best it has a sustainable competitive advantage.

1)    Select and Define the Resource/ Competency that needs to be reviewed

2)    Ask questions to arrive at the Decision Nodes and verify the competitive edge of the resource/Competency in review.

3)    Use the 4 categories of Value, Rarity, Imitability & whether the organization is  able to capture the complete possible value.

4)    In the first Category we need to understand if the Resource is adding value to the Customer. If a resource is established as being not valuable to customers then it is only draining time, effort & money and there is definitely a Competitive disadvantage. Action points can be taken to either eliminate or improve the said resource /Competency

5)    If the Resource /competency has value but has less or no demand or is Easy to come by at the competitor’s as well- not rare; then it would fail, the rarity category test and will be said to bring in Competitive Parity. This would mean that the said resource is on equal footing with the Competitors in the market. Action Points to be decided to bring in that “Difference” to beat the competition and create a need /aspiration & demand in the market

6)    A resource with Value and Rarity is then tested for it’s Imitability. If the analysis through relevant questions and research data leads us to conclude that the resource is easily replicable and can also be attained by any competitor then there is a Temporary Competitive advantage, as there is always a chance that the similar product will be available in the market from other competitors. The action points need to focus on what can be done with the resource to remain ahead of the curve.

7)    If the resource in review is analysed to be Valuable, Rare and also inimitable then the said resource has still got the potential to be used to maximum. This resource probably has an Unused Competitive Advantage that the organization has to capture. The action points need to ensure that the organization puts in place the right systems, processes and procedures to utilize the unused advantage.

 

A Sustained Competitive Advantage is the best possible outcome of the analysis as it would imply that the resource/competency under review is bringing in multifaceted advantages to the business and the organization has robust systems, processes and procedures to take acquire due benefits of the competitive advantages that resource is providing- Then, the focus needs to be on marketing the resource/product/ competency.

 

The above concept can be used to the benefit of the organization- The benefits or advantages of the VRIO Framework concept are;

-      It is very Simple and Clear concept and gives decisive output

-      It shows where the business is doing well and where it is not doing well- Resource specific. This makes it easier to take focussed corrective & preventive and creative actions for continuous improvement

-      It is broad – any resource/competency can be analysed very quickly

-      The process can be repeated multiple times for review due to the less time it takes and the reliability of the output

-      It can be used to analyse competitors as well and then take action on edging them out- A possible and justifiable business objective.

-      Can be used to compare the organizations business advantages with that of the competitor. This ,combined with the need and demand analysis of the market can help to take major strategic decisions.

 

Almost every matured organization uses VRIO analysis in combination with other analytical techniques to help evaluate not only business resources and competencies, but also the products. For example let us take the Burger giants in the country. Each one of us will agree that there is not much to a burger than the bun, the dressing and the patty in between. However, you will see that each of the Burger brands are competing to create value through competitive pricing, Rare type of patties; I know of a brand which has started Raw Banana Patty to attract certain segments with religious practices, in the market. You will see these players investing to develop in-house (proprietary) sauces to make them inimitable and yes the organization is fully committed to utilize any unused advantage that any product, / resource/ competency that can help to do better business. Notwithstanding, this is a continuous business evaluation process.

Rajesh's answer explains VRIO framework in detail along with an example and hence has been selected as the winner.