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When did you last ask yourself why your business has a certain market position? Do you know why it's doing better or worse than its competitors?
For example, how do your team's skills and knowledge contribute to the organization's success? Do your patents and copyrights put the company in a winning position? Or is some other factor helping – or impeding – you?
Each organization has its own specific set of resources, from people through processes, physical assets, and more. And the way that you use those resources to operate day to day will be a major factor in your success, too.
You'll need to evaluate both the potential and the effectiveness of all of these resources, so that you can build a competitive edge. And one useful model for doing this is VRIO Analysis.
What Is VRIO?
VRIO Analysis was developed by Jay Barney, as reported in his article, "Firm Resources and Sustained Competitive Advantage." [1] At first, Barney used the terms "Value," "Rareness," "Inimitability," and "Substitutability" but, in later writings, he changed "Substitutability" to "Organization," leading to the acronym we know today: VRIO.
According to Barney, the resources and assets that are valuable, rare and inimitable, and that you are organized to use effectively, will likely contribute most to delivering your organization's mission. Therefore, you need to make sure that you make the fullest use of such resources, and take care to protect them.
But what do these terms mean in this context? Let's explore each one in detail*.
How to Identify Your Key Assets With VRIO
Take some time to understand the precise meaning of the four VRIO parameters. Then, sort through your assets to see which ones might meet these criteria, by applying the checklists that we suggest below.
Value
In the VRIO model, "valuable" resources are those that impact your financial bottom line. They help you to reduce costs, to increase revenue, or – ideally – to do both.
Value can be measured in several ways. For example, a product feature that allows you to charge a premium price; an efficient manufacturing process; engaged and productive team members; an innovative product design that attracts buyers; or a popular brand image.
Depending on your specific situation, the following questions may help you to determine which of your resources bring – or could bring – the greatest returns to your organization.
- Do you have resources that improve the efficiency of an important process?
- Do you have resources that help you to meet changing customer tastes and expectations?
- Do you have access to valuable raw materials and how likely is that to continue?
- Have you invested in machinery, IT systems, or other physical assets that allow you to create value?
- Do you have products, services or a brand to which customers have a strong loyalty?
- Do the benefits of the resource outweigh the cost of maintaining it?
Tip:
Your organization might have assets that seem valuable in general terms but which are not valuable in VRIO terms, because they can't be turned into hard cash or other relevant outputs.
Another way to look at value is to consider Porter's Value Chain.
Rarity
You would consider a resource to be "rare" if no one else – or very few others – has access to it.
Examples might include: a team member with exceptional expertise, experience or networks; a supplier that you have an exclusive arrangement with; a product or brand to which your customers are especially loyal; or a location for your office or store that draws higher-quality recruits or customers to your business.
How rare are the assets that you identified as valuable? Again, the way in which you measure this will depend on your situation, but the following questions may help:
- How long will the resource remain special or unique?
- Is the resource available to your competitors, too?
- Will your competitors be able to obtain the resource soon?
Inimitability
This quality takes the concept of rarity one step further. It means that your rare resources cannot be imitated or copied easily, and that there are few substitutes for them.
It can be difficult to assess inimitability because, in reality, most successful products are eventually copied to some extent. Someone takes an idea, and develops it into a better-quality, more convenient, or lower-cost product through research and innovation. The new product then competes with, and gradually replaces, the original.
Patents and copyrights can prevent copying for a certain number of years, and licenses can give you exclusive access to a resource for a period of time. For a while, therefore, your original product may provide key benefits to your company. However, you'll likely find it difficult to hold a unique market position for very long, particularly once this intellectual property protection has expired.
Take your list of valuable resources that are also rare, and determine which are inimitable. Use these questions to help you:
- Is it easy for your competitors to duplicate the resource?
- Does the resource have an easily available substitute that competitors can use?
- If substitutes are available, can they provide the same level of customer satisfaction and loyalty?
- Is it likely that new entrants to the market will be able to develop better or cheaper products that can replace your product?
Organization
You'll waste your valuable, rare or inimitable resources if you can't use them to their full potential – or "organize," in VRIO terms.
So, focus your internal management control systems, your business processes, and your people's time and energy on exploiting these resources to maximize their benefit to your organization as a whole. But be sure to think long-term, too, so that you can protect and improve your key resources for the future.
You can determine whether you've structured your team or organization appropriately to exploit your valuable, rare and inimitable resources by asking yourself questions such as:
- Do you have the right kind of workforce to make the most of your assets?
- Can you attract and retain the kind of people you need?
- Are your management structures appropriate? For example, if you rely on innovation to create rarity, do you have a system that allows new ideas to get to market quickly?
- Are your finance systems and website able to support your key resources?
Tip:
The assets and resources most worthy of your attention will possess, or have the potential to possess, all four of the VRIO attributes.
What to Do With Your Key Assets
When you've identified your key resources, think about what you need to do to protect them, and what you can do to make better use of them.
For example, you might identify a range of products that you can price highly because it has a loyal customer base. But be sure to keep in touch with changing consumer tastes and expectations, to stay ahead of any would-be imitations, and to run a reliable and secure operation that delivers your brand promises.
Use these questions to help you:
- Does your company give proper focus to the resource?
- Could you make better use of the resource, or use it to generate more revenue? If so, how?
- How can you extend the value, rarity or inimitability of the resource further into the future?
- How can you preserve the resource so it is not damaged or stolen, or so that its value, rarity and inimitability are not degraded?
- How could you better integrate the resource into your organization's processes, marketing, management, or other functions?
- Does your organization prioritize the products and services that use the key resources when it comes to investment in research and development, production resources, or sales and marketing?
- Do your sales and marketing Unique Selling Points (USPs) come from having products and services that are valuable to customers?
- Are the core competencies that your organization focuses on aligned with your key resources and assets?
Tip:
If you like this approach, you'll likely find our article on Michael Porter's Five Forces Analysis useful, too.
Key Points
VRIO Analysis helps you to evaluate how your organization's resources contribute to your market position.
Resources that are highly valuable, rare, inimitable, and that you are organized to use, will contribute most to your market position, so be sure to nurture and exploit them to the full.
*Permission to publish details of this tool kindly granted by Jay Barney.
References[1] Barney, J. (1991). 'Firm Resources and Sustained Competitive Advantage,' Journal of Management, 17(1), 99-120. Available
here.
