VRIO Analysis (Strategy) - Explained
What is the VRIO Analysis?
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Table of ContentsWhat is the VRIO Analysis?How is the VRIO Analysis Used? What is a Valuable Resource? What is a Rare Resource? What is an Inimitable Resource? When is a Firm Organized to take advantage of a Resource?What is a Core Competency?
What is the VRIO Analysis?
The VRIO analysis is a tool used to conduct internal analysis of a firm based upon the internal resources and capabilities. The acronym VRIO means Valuable, Rare, Inimitable, and Organization.
Back to: STRATEGY & PLANNING
How is the VRIO Analysis Used?
The VRIO allows a firm to identify internal resources that have the potential to create a sustainable competitive advantage.
To give rise to a sustainable competitive advantage, the internal resources must be valuable, rare, inimitable (not capable of substitution). Further, the firm must be organized in a way that allows it to take advantage of those resources.
VRIO analysis is also a way to distinguish resources and capabilities from core competencies.
Furthermore, whether an organization has VRIO resources will give insight into its competitive position.
What is a Valuable Resource?
A resource or capability is said to be valuable if it can be used strategically to exploit opportunities or negate threats in the environment.
There are two types of resources: tangible and intangible. Tangible resources are physical and can be touched. Intangible resources are not physical and cannot be touched (such as intellectual property).
Intangible resources are generally the most valuable.
This is the initial connection between the resource and the company’s competitive position.
What is a Rare Resource?
A rare resource is an asset or ability that is not easy accessed or obtained by a competitor.
The rareness quality of the resource allows one firm to exploit opportunities to differentiate itself or create a lower cost structure - as other firms are not able to obtain the resource easily.
Further, it may allow the firm to negate threats in the marketplace that still exist for other competitors.
This allows for the creation of a competitive advantage over firms that cannot possess the resource. The nature an extent of the advantage will vary based upon the rareness and value combination.
What is an Inimitable Resource?
An inimitable (not capable of being copied or imitated) resource is difficult to imitate through the creation of some substitute for the resource. Another way to say this is that another resource cannot be substituted for this resource.
There are three recognized 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.
Note: Intangible resources tend to be the most difficult to imitate.
As such, a valuable and rare resource will only allow for the creation of a sustainable competitive advantage if other firms are not able to acquire the resource or some viable substitute for the resource. Thus, inimitability is essential.
When is a Firm Organized to take advantage of a Resource?
To give rise to a competitive advantage, a firm must have the organizational capability to exploit the VRI resource. That is, the firm must be able to employ the resource in a manner that allows the capture of value.
Organization entails such attributes as control systems, reporting relationships, compensation policies, and management interface with both customers and value-adding functions in the firm.
What is a Core Competency?
A core competency is simply a resource, capability, or bundle of resources and capabilities that is VRIO.
Companies may establish a core competency through resources that are any combination of Valuable, Rare, and Inimitable, but not all three. This simply gives rise to a form of advantage that is not sustainable or long-term.