The VRIO framework is one of the most important strategy frameworks – central to the resource-based view of the firm. The VRIO framework is a systematic approach to analyze the internal resources and capability of the company – helping explain how resources can lead firms to a sustainable competitive advantage. Below is an explanation of the components of the framework
The first component of the VRIO framework is consideration for whether the resource is valuable. Is it helping the firm enact the strategy? Maybe the resource is helping the organization capitalize on an opportunity, or to neutralize a threat.
Most resources that are worthy of any consideration should be valuable (otherwise they are likely not worthy of time to be considered). It is possible that a firm may have old resources though – things that one time were helpful, but are now not – potentially putting the firm at a competitive disadvantage if it continuing to incur costs on such non-valuable resources.
It is also important to note that if a company lacks valuable resources that other firms have, then they may be at a competitive disadvantage.
The next component of the VRIO framework is whether that resource is rare. Not all valuable resources are rare, some things that are important for the firm may be commonplace. The firm may need a talented marketing department, but if all firms have comparable departments, then although it may be necessary it is not a rare resource.
Whether a resource is rare or not influences whether you are able to gain a competitive advantage relative to your rivals. If a resource is not rare – many other firms have it – then it may give you competitive parity with others. If on the other hand, you are one of the only firms that have the resource, then it provides the basis for a competitive advantage.
Whether or not that resource will give a temporary or a sustainable competitive advantage though is dependent upon whether the resource itself is hard for others to be able to imitate or substitute…
I: Hard to Imitate or Substitute
Whether a resource is hard for a firm to imitate or substitute will determine whether a valuable, rare resource is likely to provide a sustainable competitive advantage, or whether that advantage is likely to only be temporary in nature.
If a resource is hard for other firms to obtain either by imitating it or substituting it with another comparable resource, then this can allow the competitive advantage to be sustainable. If on the other hand, other firms can develop their own resources (potentially after you have proved how valuable it is), then the competitive advantage will only be temporary in nature.
O: Organized to support
The final component of the VRIO framework is whether the firm is organized to capture the value from the resource. Ultimately, one resource alone is unlikely to be sufficient to capture its value – the resource needs support with other aligned parts of the business. As such, to derive the competitive advantage from the resource, the firm needs other processes, procedures, and related resources in place to be able to support and capture the true potential of any resource.