The VRIO Framework is useful for assessing the internal resources of the firm
The VRIO Framework is useful for assessing the internal resources of a company to ascertain whether the firm’s resource provides the basis for a sustainable competitive advantage. The framework looks at resources in turn, considering whether the resources are:
- Valuable: Whether the resource helps the firm enact its strategy
- Rare: Whether other firms have the resource or not, with a valuable and rare resource providing the basis for a competitive advantage
- Hard to Imitate or Substitute: Whether other firms are able to develop or acquire a comparable resource, determining if the resource provides a temporary or sustainable competitive advantage
- Whether the firm is Organized to capture the value: Do other resources and the organizational structure allow the firm to capture the value from the resource
When to use the VRIO framework
There are a number of situations when it is useful to assess the internal resources of companies, including:
Internal analysis of your own resources
There are many benefits of looking internally and assessing the resource position of your own firm. This can help identify key potential sources of competitive advantage – things that you can do that other firms cannot. Having identified such resources, you can then make sure that the firm is organized to capture the value and to emphasize this distinction to differentiate your firm from others.
The VRIO analysis is also useful when examining possible acquisition candidates. Systematically examining the resource position of the firm that you are examining can help determine if the firm has a sustainable advantage relative to other firms in its industry, or whether other firms are likely to be able to catch up and compete on equal dimensions at a later point.
Similarly, the VRIO analysis can also be useful when considering investing in companies. If as an investor you are considering a company that has rare resources for example, but it is not difficult for other companies to imitate or substitute those resources, then this may serve as a warning that competition between this firm and its competitors may increase over time as other companies erode into an initial competitive advantage.