VRIO

It’s important to conduct a VRIO analysis in the

early stages of strategy planning, before making
your strategic plan.
The VRIO framework is a strategy tool that helps
organizations identify the resources and capabilities
that give them a sustained competitive advantage.
As we know, companies possess various kinds of
resources and capabilities. Such resources could be
financial, human, organizational, physical, or
technological in nature.
The VRIO analysis is an internal analysis that helps
determine the quality and usefulness of a firm’s
resources and capabilities.
 • VRIO framework is the tool used to
analyze firm’s internal resources and
capabilities to find out if they can be a
Definition source of sustained competitive
advantage. Term VRIO comes from the
words value, rarity, imitability and
organization.
 • In order to understand the sources of
competitive advantage firms are using many
tools to analyze their external (Porter’s 5
Forces, PEST analysis) and internal (Value
Chain analysis, BCG Matrix) environments.

Understanding • One of such tools that analyze firm’s internal

resources is VRIO analysis.
the tool
• 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 firm’s
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
Understanding VRIN model.

the tool • 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.
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 Beat Headphones
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 Parity refers to spending at
competitive disadvantage. par with your competitors, whereas in
competitive advantage we spend to
• It is important to continually review the value of the outperform our competitors.
resources because constantly changing internal or In competitive parity the products offered
external conditions can make them less valuable or by the competitors are similar in nature
useless at all. and the product can be easily substituted.
 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 Google is able to retain over 90% of market
are valuable but common. Losing valuable resources share in the search engine market for the
and capabilities would hurt an organization because years.
they are essential for staying in the market.
Costly to Imitate
• A resource is costly to imitate if other organizations that doesn’t have it can’t
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 can’t identify the particular resources that are the cause of
competitive advantage.
• Social Complexity. The resources and capabilities that are based on company’s culture or
interpersonal relationships.
Costly to Imitate
• A firm that enjoys a
competitive advantage
attracts significant
attention from its
competitors. They will
attempt to negate a firm’s
resource advantage by
either direct imitation or
substitution.
Costly to Imitate
• A firm that enjoys a
competitive advantage
attracts significant
attention from its
competitors. They will
attempt to negate a firm’s
resource advantage by
either direct imitation or
substitution.
Organized to Capture Value
• The resources itself do not confer any advantage for a company if it’s 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.

https://www.youtube.com/watch?v=G7E197PZtfk
•Adopted from Rothaermel’s (2013)
‘Strategic Management’, p.91

Competitive Parity refers to

spending at par with your
competitors, whereas in
competitive advantage we
spend to outperform our
competitors.
In competitive parity the
products offered by the
competitors are similar in
nature and the product can be
easily substituted.
•If the resource is not valuable, then the firm should
outsource it as it is of no use to the firm.

•If the resource is valuable but not rare, then the

firm is in competitive conformity. It means that even
though the firm is performing badly, it is still better
than its competition.

•If the resource is valuable and rare and not

expensive to imitate it, then the firm has a
temporary competitive advantage. But, if in the
future, other firms try to imitate, then the
competitive advantage is lost.

•If the resource is valuable, rare and is expensive to

imitate it but the firm is not able to organize them,
the resource becomes expensive for the firm.
VRIO Analysis of Starbucks
Google’s VRIO capability

Excellent employee management

Is a company organized to
Valuable? Rare? Costly to Imitate?
exploit it?

Yes Yes Yes Yes

Result: sustained competitive advantage

• Value: Use human capital management data to hire and retain innovative,
productive employees. These employees consistently create some of the most
popular consumer products and services in the world.

• Rarity: No other companies are using data-based employee management so

extensively.

• Imitability: Data-based human capital management is both costly and difficult to

imitate, at least for the near future. Companies have to build the software and
invest in training their HR staff on the new technology and strategy.

• Organization: Google is organized to capture value from this capability. The IT

department has the skills to collect and maintain the data, while HR and team
leaders are trained on how to use the data to hire, promote, manage, and improve
performance of employees.
What’s the difference between the VRIO framework
and a SWOT analysis?
• If you’re familiar with strategic planning, you’ve probably also heard of a SWOT
analysis. While you can use both SWOT and VRIO in the early stages of strategic
planning, they are different tools that produce different insights.

• The VRIO framework focuses solely on evaluating internal resources and is intended to
help identify the specific resources that make your firm more competitive.

• SWOT, on the other hand (an acronym for “Strengths, Weaknesses, Opportunities, and
Threats”), is a high-level strategic planning model that helps organizations identify areas
where they’re doing well and where they can improve, both from an internal and an
external perspective. It does not thoroughly evaluate your internal resources like VRIO
but rather aims to help you assess your future prospects based on your current position
and external conditions.
 NETFLIX VRIO ANALYSIS
Competitive
Resources Value Rare Imitation Organization Advantage
Position among Yes, firm has Yes, it has Difficult to Yes, over the Sustainable
Retailers and strong dedicated imitate though years company Competitive
Wholesalers – relationship with channel partners not impossible has used it Advantage
companyname retailers and successfully
retail strategy wholesalers

Brand Positioning Yes No Can be imitated Yes, the firm has Temporary
in Comparison to by competitors positioned its Competitive
the Competitors but it will require brands based on Advantage
big marketing consumer
budget behavior
Opportunities in Yes, the e- No, most of the The AI and It is just the start In the long run it
the E-Commerce commerce space competitors are inhouse analytics for the can provide
Space using is rapidly growing investing in IT to can be difficult to organization sustainable
Present IT and firm can enter the space imitate competitive
Capabilities leverage the advantage
opportunities
 Competitive
Resources Value Rare Imitation Organization Advantage
Financial Resources Yes No Financial Company has Temporary
instruments and sustainable financial Competitive
market liquidity are position Advantage
available to all the
nearest competitors

Marketing Expertise Yes, firms are No, as most of the Pricing strategies Yes, firm is Temporary
within the Netflix competing based competitors also are often matched leveraging its Competitive
Svod on differentiation in have decent by competitors inhouse expertise Advantage
the industry marketing know
how
Vision of the Yes No Can't be imitated by Not based on Can Lead to Strong
Leadership for Next competitors information Competitive
Set of Challenges provided in the case Advantage

Global and Local Yes, as it diversify Yes Can be imitated by Yes, it is one of the Providing Strong
Presence the revenue competitors most diversified Competitive
streams and isolate companies in its Advantage
company's balance industry
sheet from
economic cycles
 Competitive
Resources Value Rare Imitation Organization Advantage
Alignment of Yes No Each of the firm Yes, company Still lots of
Activities with has its own has potential to build
Netflix Svod strategy organizational on it
Corporate skills to extract
Strategy the maximum
out of it.
Supply Chain Yes Yes Near Fully utilized Keeps the
Network competitors also business running
Flexibility have flexible
supply chain and
share some of
the suppliers
Distribution and Yes, as it helps in No Can be imitated Yes Medium to Long
Logistics Costs delivering lower by competitors Term
Competitiveness costs but it is difficult Competitive
Advantage
QUERIES