In any organization or venture, there are resources, capabilities and activities of the firm that drive value. These “secret sauce” ingredients help make up the unique combination elements that make the organization competitive. Whether these resources provide your organization with a long-term advantage is the primary question in assessing their sustainability. What follows is a process to determine whether your resources are sustainable over the long term or whether they are just temporary advantages. One framework or tool that can be used to assess this is called the VRIO Framework.
The VRIO Framework was developed in 1991 by a professor named Jay Barney. In his research, he developed four specific attributes that must be attained by a firm in order for the resources that they possess to be sustainable over the long term. Two advantages of this tool is that it is very straightforward and clear.
For companies to capitalize on their resources and convert them into a sustainable competitive advantage, these four attributes must be present:
- Inimitable, and
- Organization-wide supported
First, a resource must be valuable. Is your resource valuable? An organization is at a competitive disadvantage if none of the resources that it possesses is valuable. Resources should be able to help enable your strategy, and distinguish you in the market with your customers. Valuable resources help improve your organizational efficiency and enable you to be effective with the work that you conduct.
Second, a resource must be rare. Is your resource rare? If everyone in the market in which you compete has access to the same resources, then you are at competitive parity or competitive equality. No competitor in that case is gaining advantage because of a resource that is common to everyone. If the resource that you possess is in fact rare, and few competitors enjoy the same resource, then you are considered to have a competitive advantage, however it is likely to be temporary.
Third, a resource must be difficult to imitate. Is your resource difficult to imitate? If your resource is very easily copied, it is likely that your competitors will move to acquire similar resources. Consider that McDonald’s was a first mover in offering an all-day breakfast menu, however they are no longer the only chain who enjoys that advantage now. Resources that are difficult to imitate or that are expensive to imitate will provide you with a temporary competitive advantage.
Finally, a resource must be capitalized on to provide maximum value over the long term. Is your firm organized to capture the value of this resource? For example, if one of the resources within your firm is a strong engineering team, and this is relatively valuable, rare and difficult to imitate in your industry, however you don’t provide avenues for these engineers to brainstorm, meet, innovate, and share ideas, then the organization is not capitalizing on this valuable resource, and your advantage is only temporary. If, however, your firm is capitalizing on these resources, then your competitive advantage should be sustainable over time.
The VRIO analysis is straightforward and simple. It provides you with a clear framework from which to assess the long-term sustainability of the resources that you possess. Use VRIO in a company-wide assessment, or to consider each line of business or department within the construct of a larger organization. Pulling your key resources through this model as part of your strategic planning will enable you to uncover and protect the resources that are the most valuable to your performance.
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