When you set out to analyze your business and its strengths and weaknesses, using VRIO analysis is one of the best tools for the job. This is a business analysis framework that is used by a wide range of organizations, and there is a good chance that you will find it beneficial for your business regardless of your specific sector or industry.
The title of this framework, VRIO, stands for the following –
When used correctly, looking at these four points one at a time can have a powerful effect on how you understand your business. It is essential to be constantly evaluating the capabilities that your company has on hand, as it is those capabilities that you will use to compete out in the market. If you don’t understand exactly what you have in house, there will be no way to win when you face the tough competition that you are sure to encounter.
To better understand how VRIO Analysis can help you as you are putting together a strategic plan for your company, we will walk through the four points one by one below.
Question of Value
When looking at a resource within your organization, one of the first things you should do is determine whether or not that potential resource actually has any value to the company as a whole. So, if something within your company can help you to exploit a hole in the marketplace, it can usually be considered valuable. Or, on the other hand, if it can help you to hold off a threat that could potentially damage your operation, it can be valuable as well. However, if a resource does nothing to either help you take advantage of the market or mitigate a market threat, it should be considered a weakness.
Understanding the value (either positive or negative) of everything within your company is one of the keys to experiencing success in the long term. In many ways, this is like a manager knowing the strengths and weaknesses of each player on his or her team. Using players in the right way is how a team succeeds in a sport, and the story is the same in business. By knowing what kind of value you can get from all resources on hand, you can move forward confident that you are making the right decisions.
Question of Rarity
Rarity can be hard to come by in business, but it is exceptionally valuable when it does exist within your company. Do you hold something inside your organization that is rare in your field? For rarity to actually take hold as an advantage that you possess over your competition, it needs to meet two specific qualifications – it needs to be hard to find, and it needs to last.
If something is short lived, or if it can be easily be obtained by other firms, then it is does not meet this definition of rarity. Once you successfully identify elements within your operation that meet the classification of rarity, you should then look for ways to take advantage of them in the market. Having rare resources is only going to be beneficial to your bottom line if you put them to use effectively.
Question of Imitability
Imitation is everywhere in business. When a company sees that a competing company is having success with a given product, they will often quickly work toward imitating that product as closely as possible in order to enter the market as a direct competitor. The second company to come to market will usually try to compete with a lower price, as the initial entry will already have brand recognition and some degree of loyalty. So, when it comes to the things you are doing in your business, how likely are they to be imitated? If they can be imitated relatively easily, what would be the cost of doing so? Thinking about these points will help you predict in advance exactly what the competition is going to do.
If you can protect your resources in the way of patents and other legal protections, you may be able to make it difficult for competition to imitate your products (although you likely won’t be able to make it impossible).
There are usually ways around legal protections, especially for companies that are driven to take back as much market share from your business as possible. When something is relatively easy imitated, often the only way to stay ahead in the market is to constantly be innovating and taking your offerings to a new level that has not yet been copied.
Question of Organization
The last point on this list is the question of organization. This is where the company is structured in such a way that it is able to exploit any and all advantages that have been discovered within the first three points. As was mentioned above, and advantage is only useful if you are able to successfully leverage it into additional sales, market share, profits, etc.
So, at this stage of the VRIO Analysis process, you are going to think about how you can structure your organization in order to make sure that you give yourself the large competitive advantage possible. This can be termed as ‘playing to your strengths’. By giving the business the opportunity to do what it does best as often as possible, you will be on the path toward a prosperous future.
Using VRIO Analysis is a great way to locate the advantages that your company may possess over the competition. You are likely going to find that you have some weaknesses in addition to your strengths, and that’s okay. You want the truth when you work through this kind of analysis, as honest review of your company is the only way to build for the future. Once you go down the list of the four points above for all of the resources you have on hand, you will have a great picture of where you stand today and what you can do to improve your standing going forward.
- The strategic process that any firm goes through begins with a vision statement, and continues on through objectives, internal and external analysis, strategic choices (both business-level and corporate-level), and strategic implementation.
- VRIO Analysis falls into the internal analysis step of these procedures, but is used as a framework in evaluating just about all resources and capabilities of a firm, regardless of what phase of the strategic model it falls under.
- The VRIO Analysis considers several evaluation dimensions for the organization as well as for its competitors: Value, Rareness, Imitability, Organization.
- Value: ‘Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?’
- Rarity: ‘Is control of the resource/capability in the hands of a relative few?’
- Imitability: ‘Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?’
- Organization: ‘Is the firm organized, ready, and able to exploit the resource/capability?” “Is the firm organized to capture value?’
- Using VRIO Analysis is a great way to locate the advantages that your company may possess over the competition.