The main focus area of VRIO analysis is the internal resources and capabilities of an organisation. Learn what VRIO analysis is and how to use its results during strategic planning sessions.
- Introduction to VRIO
- Practical comments on VRIO
- Steps to apply VRIO for strategic planning
- Example of VRIO for users of BSC Designer
The Role of VRIO in Strategic Planning
During the strategic planning (the “strategy formulation” step), we might look at business from different perspectives:
- General advantages and weaknesses (SWOT analysis),
- Approach to innovations (Three Horizons analysis),
- Actual performance versus expected one (GAP analysis),
- External factors (PESTEL analysis), risks, or constraints.
VRIO analysis forms a part of the strategic analysis toolkit. It suggests looking at the resources and capabilities and deciding which of them might lead to sustainable competitive advantage.
The main focus area of VRIO analysis is the internal resources and capabilities of an organisation.
The discussion about the use of resources to achieve competitive advantage was started by Birger Wernerfelt in 1984 (RBV – Resource Based View framework). Later, in 1991, Jay Barney, a professor in strategic management, evolved the RBV and introduced the VRIO framework as we know it today.
The Types of Resources
VRIO analyzes the resources and capabilities of the organisation. Here are some starting points to define the candidates for analysis:
- Financial resources (own funds, access to financing)
- Human resources (skills, knowledge, contact network)
- Material resources (tools, materials, equipment)
- Non-material resources (brands, intellectual property)
Practical Comments to the VRIO Analysis
VRIO stands for Value – Rarity – Imitability – Organization. Many authors have given an excellent explanation of the meaning of each component, so I’ll focus on the practical ideas that would help to evaluate the resources.
- Look at the position of the resource in your value creation chain. What’s the role of the resource there? What would happen if you lose access to the resource? What would happen if you double its volume?
- In the technological world, we are talking more often about the rarity of talents and skills and their correlation with achieving competitive advantage.
- Anything can be imitated, the question is the cost (think about Tesla superchargers network) and the possibility of reproducing certain conditions (think about the market conditions at the beginning of PC age).
- Having certain resources doesn’t necessarily mean that the organisation exploits those resources effectively. Your company might hire the best talents, but without access to a proper innovative structure, they will not be able to build the next Google for you.
Using VRIO Analysis for Strategic Planning
Using VRIO to understand a sustainable advantage works great for the MBA classroom. VRIO is an excellent tool to formally explain why Apple/Tesla/Google are great companies.
In real case situations, we are more interested in finding the resources/capabilities that could help us to achieve that sustainable advantage, or if we are lucky to have one, understand how to maintain and improve it.
The idea of VRIO is to find the resource/capability that has the highest potential to become your sustainable advantage. Your strategy can be focused on developing these advantages.
Here are the steps to use VRIO analysis for the description stage of strategic planning.
1. List the Resources and Capabilities
Make sure to list tangible and intangible resources, such as talents, finance, tools, IP, brand.
2. Evaluate the Resources/Capabilities
Use the four VRIO questions to evaluate the resources/capabilities.
Is there the potential to improve resources/capabilities with a “No” answer? How can we maintain/improve the resources/capabilities with all four “Yes” answers?
No improvement points found? Plan to get back to the resource/capability when the conditions change.
3. Formulate a Strategic Hypothesis
Use the most promising resources/capabilities to formulate a strategic hypothesis.
- Map an improvement hypothesis on the strategy map.
- Write down the results of VRIO analysis as a rationale.
Using VRIO with BSC Designer
Let’s illustrate this approach with an example. You can do the analysis on paper or in any spreadsheet software. I’ll use BSC Designer to showcase some of the ideas.
I prefer this approach because it will be easier to use the findings of VRIO analysis on the strategy map and keep the results of VRIO analysis in case we need to get back and look at the reasoning behind the new strategic goals.
Create VRIO template
To save some time, I will start with a VRIO template. You can create it from My Scorecard > New > New Scorecard > More templates … > Frameworks).
If you don’t have an account in BSC Designer Online, then you can create one. It is free for small projects!
VRIO Analysis Example
Let’s image that we are evaluating these two resources:
- Customer support service
- Reliable IT architecture
Customer Service Capability
We can start with “Customer service.”
- Is it valuable? Yes! We know this according to the feedback of our users.
- Is it rare? In our case, we are talking about quick answers and video tutorials for all functions of BSC Designer. On this level of quality, it is rare.
- Is it inimitable? No, with certain patience and resources, any software company could provide their clients with something similar.
The classical VRIO analysis is supposed to stop as soon as we have the first “No.” In our case, the goal is not to find the perfect competitive advantage but find the improvement points, so we’ll continue.
- Is it organised? Customers have access to customer service via our website as well as via the online app.
Looking at the results of VRIO analysis for “Customer service,” we could come up with two ideas:
- Make the “customer service” even more valuable. For example, by not only helping our customers with the use of the software but with strategic planning in general.
- Make it harder to imitate, for example, by taking advantage of our network of partners.
These thoughts give me two candidates for strategic goals. I could formulate them in this way:
- Don’t just sell software, help with strategic planning as well
- Tech partners to provide effective support locally
Let’s do VRIO analysis for “Brand” resource.
- Is it valuable? People recognize it. But thinking about different markets, we could do an even better job here.
- Is it rare? Not really, most companies promote their brand
- Is it inimitable? We have a trademark.
- Is it organised? Probably, we could do a better job here by participating in industrial events.
The results of VRIO analysis generated a strategic hypothesis. I’ll add it to the strategy map in the form of:
- Promote brand on events for strategy execution professionals
Let’s do VRIO analysis for “Reliable IT architecture” resource.
- Is it valuable? Absolutely!
- Is it rare? Not at all.
- Is it inimitable? It can be reproduced with a certain effort.
- Is it organised? It is.
There is no specific strategic hypothesis in this case, instead we can formulate a general direction to follow:
- Develop and support reliable IT architecture
Additionally, we can formulate a risk that we discussed in the digital transformation article – “No connection to the customer value.” Any future development of the IT architecture should add the value to the end users or internal users.
As we have shown in the example above, VRIO analysis could generate many strategic hypotheses.
What should you do next? Treat those hypotheses as any other strategic hypothesis: discuss them with your team, formulate relevant goals on the strategy map, find ways to quantify and measure those goals with KPIs. Finally, validate your hypothesis through strategy execution!
- Access templates. Sign-up with a free plan at BSC Designer for immediate access to 31 scorecard templates, including VRIO Framework discussed in this article.
- Master skills. Check out free video tutorial for the Balanced Scorecard. Master your strategy planning and execution skills with Strategy Execution training.
- Automate. Learn what Balanced Scorecard software is and how it can make your life easier by automating strategy execution, KPIs, and strategy maps.
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More About Strategic Planning
Comparative Table of Strategic Planning Frameworks
- Strategy execution frameworks. Such as the Balanced Scorecard for the overall strategy and the more lightweight OKR framework for specific challenges.
- Strategy formulation frameworks. SWOT, Three Horizons, Constraints Analysis, PESTEL, Gap Analysis, etc. that help organizations to generate new ideas.