How do you know if a venture is worth your time, investment, and resources? Value, rareness, imitability, and organizational health are vital to determine long-term competitive advantage. The VRIO Analysis framework uncovers the internal resources that should be central to your organization's overall strategy. Use this deck to identify the core capabilities that will ensure your ultimate success.
After your mission statement, VRIO helps to set the stage for strategic planning by committing the right capital and resources. (Slide 1)
Project owners and leadership teams can analyze ventures across the four dimensions of VRIO. (Slide 7)
Table VRIO visualizations help stakeholders analyze multiple competitive traits in one place. (Slide 10)
A VRIO analysis is an easy-to-follow checkpoint to evaluate an organization's internal resources. Use this framework to identify and assess your current state and develop plans to attain future goals. If your current resources are valuable, rare, hard to imitate and organized properly, VRIO provides the clearance you need to move full-speed ahead.
VRIO typically comes after you've come up with a mission statement that sets the grand vision for your project. But note that VRIO analysis should take place before the strategic planning process. This is because VRIO uncovers the resources and capabilities that give your organization a long-term competitive advantage. Whatever results you extract from this analysis will in turn determine how you approach your strategic decisions. Each of the four letters (VRIO) asks key questions to determine if the business is well equipped with the resources to be competitive. If it turns out your company lacks certain traits and can't be competitive in specific areas, VRIO can help you avoid pursuing the wrong ideas. (Slide 2)
It's important to understand VRIO in context. The outer shell of this diagram indicates your macro environment — the economy, technological environment, social trends, and political and regulatory climate. The middle circle is your micro- environment. These are potential products and new entrants that could substitute you, your competitors, and the relationship between suppliers and buyers. In the center lies your core resources, such as current employees, assets, and internal technology. This is the internal environment and also where VRIO falls. These resources are what you already have to set yourself up for success. Critically, a VRIO assessment could also determine what you lack so that you don't push resources that are uncompetitive or underperforming. (Slide 3)
Advantages vs. Disadvantages
VRIO analysis comes with advantages and disadvantages. It is an easy model to apply to an existing organization, but more difficult to apply to startups. This is why VRIO analysis is more commonly used in larger corporate settings. VRIO can help identify and use competitive advantages, but it does not guarantee sustainable advantage. VRIO does help you identify and rank opportunities and threats. As such, it can set you up for success, but don't expect it to carry you for multiple decades because it doesn't take external factors like shifting marketplaces into account. VRIO is a very strong tool for managers and project owners to make decisions on how to allocate internal resources. However, it can be difficult to put into practice as the key to implementation is not just a strong vision, but also effective leadership. (Slide 4)
So now that we've established the benefits, let's dig into the four dimensions of VRIO analysis. Start with tallying up your current resources. For instance, let's say you are a digital company that creates software for workplace efficiency.
To determine value, ask yourself if you offer a resource that has value for customers. Or can that resource's value be replaced by another product or feature? The answer is yes, it provides value for large corporate purchasers that want their employees to be more productive.
To determine rarity, ask yourself if you have a resource that is hard to find or in demand. Your software might have advanced technology or a patent that is hard for your competition to replicate.
For inimitability, is it difficult for your competition to replicate your software? Yes, because you have exclusive access to a pool of talents and contracts that other companies don't have access to. It's not that others don't know what you're doing — but more that they don't have access to the same resources that make it possible.
Lastly, does your company have organized management systems, processes, structures, and the right culture to capitalize on your resources and capabilities? You might have all the great resources listed above, but if you mismanage it all and don't assign the right talent to the right task, or have the right processes in place to execute all your exclusive contracts, you could fumble your other three advantages. (Slide 5)
This flowchart visualization shows how each dimension of VRIO affects the next. If during the assessment, you find your current platform and technology has value, then move forward to the next assessment.
If it does not have value, then you know you are at a competitive disadvantage and should move on and develop something else. Now let's say you find it provides value, but it's not rare. That means your current resources achieve competitive parity and achieves standard or average results compared to others in your industry. However, if your platform provides a valuable service and is rare, move on and assess if it is inimitable? If it's not, it's only a temporary competitive advantage that others might catch up to. But if all three criteria are met, and you find that your platform is still poorly organized, that means you have an untapped competitive advantage that might still be activated with stronger organizational resources. If it's a yes to all four, then congratulations, you have a sustained competitive advantage that's worth pursuing. (Slide 6)
Your business could have multiple resources at your disposal across areas like e-commerce, quality of service, brand recognition, distribution stability, and customer service. Use VRIO to compare these traits to determine your core strengths.
For example, let's say your VRIO analysis uncovers that distribution stability is your organization's core strength. Customer service, on the other hand, is not. This type of VRIO analysis can help you make managerial decisions to determine which areas are worth spending more capital and resources on and which aren't. Does it make sense to dedicate more resources to customer service, or do you have enough value, rarity, imitability and organization in enough other areas that it's okay to take the loss? With a strong sense of where you stand now, VRIO helps you make the call. (Slide 11)
Take VRIO analysis a step further to compare the competitive and economic implications of individual features. For instance, perhaps as a digital platform, ad revenue could have economic implications.
Let's say one of the features you want to develop is a privacy tool that would allow users to limit the ability of advertisers to track them across your platform. This feature could create economic value for customers and would be a definite rarity. It would be unlikely to be imitated, at least at first, and your company is organized for an efficient rollout. However, the economic impact will require you to find a new way to capitalize on your ad service, so you'll need to weigh this against a strong VRIO analysis. (Slide 13)