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VRIO Framework
Ovidijus Jurevicius | October 21, 2013 Print

De nition
VRIO framework is the tool used to analyze rm’s internal resources and capabilities to nd out if they can be a source
of sustained competitive advantage.

Understanding the tool

In order to understand the sources of competitive advantage rms are using many tools to analyze their external
(Porter’s 5 Forces, PEST analysis) and internal (Value Chain analysis, BCG Matrix) environments. One of such tools that
analyze rm’s internal resources is VRIO analysis. The tool was originally developed by Barney, J. B. (1991) in his work
‘Firm Resources and Sustained Competitive Advantage’, where the author identi ed four attributes that rm’s resources
must possess in order to become a source of sustained competitive advantage. According to him, the resources must
be valuable, rare, imperfectly imitable and non-substitutable. His original framework was called VRIN. In 1995, in his
later work ‘Looking Inside for Competitive Advantage’ Barney has introduced VRIO framework, which was the
improvement of VRIN model. VRIO analysis stands for four questions that ask if a resource is: valuable? rare? costly to

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imitate? And is a rm organized to capture the value of the resources? A resource or capability that meets all four
requirements can bring sustained competitive advantage for the company.

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Adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

Valuable
The rst question of the framework asks if a resource adds value by enabling a rm to exploit opportunities or defend
against threats. If the answer is yes, then a resource is considered valuable. Resources are also valuable if they help
organizations to increase the perceived customer value. This is done by increasing differentiation or/and decreasing
the price of the product. The resources that cannot meet this condition, lead to competitive disadvantage. It is
important to continually review the value of the resources because constantly changing internal or external conditions
can make them less valuable or useless at all.

Rare
Resources that can only be acquired by one or very few companies are considered rare. Rare and valuable resources
grant temporary competitive advantage. On the other hand, the situation when more than few companies have the
same resource or uses the capability in the similar way, leads to competitive parity. This is because rms can use
identical resources to implement the same strategies and no organization can achieve superior performance.

Even though competitive parity is not the desired position, a rm should not neglect the resources that are valuable but
common. Losing valuable resources and capabilities would hurt an organization because they are essential for staying
in the market.

Costly to Imitate
A resource is costly to imitate if other organizations that doesn’t have it can’t imitate, buy or substitute it at a
reasonable price. Imitation can occur in two ways: by directly imitating (duplicating) the resource or providing the
comparable product/service (substituting).

A rm that has valuable, rare and costly to imitate resources can (but not necessarily will) achieve sustained
competitive advantage. Barney has identi ed three reasons why resources can be hard to imitate:

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Historical conditions. Resources that were developed due to historical events or over a long period usually are
costly to imitate.
Causal ambiguity. Companies can’t identify the particular resources that are the cause of competitive advantage.
Social Complexity. The resources and capabilities that are based on company’s culture or interpersonal
relationships.

Organized to Capture Value

The resources itself do not confer any advantage for a company if it’s not organized to capture the value from them. A
rm must organize its management systems, processes, policies, organizational structure and culture to be able to fully
realize the potential of its valuable, rare and costly to imitate resources and capabilities. Only then the companies can
achieve sustained competitive advantage.

Using the tool

Step 1. Identify valuable, rare and costly to imitate resources

There are two types of resources: tangible and intangible. Tangible assets are physical things like land, buildings and
machinery. Companies can easily by them in the market so tangible assets are rarely the source of competitive
advantage. On the other hand, intangible assets, such as brand reputation, trademarks, intellectual property, unique
training system or unique way of performing tasks, can’t be acquired so easily and offer the bene ts of sustained
competitive advantage. Therefore, to nd valuable, rare and costly to imitate resources, you should rst look at
company’s intangible assets.

Finding valuable resources:

An easy way to identify such resources is to look at the value chain and SWOT analyses. Value chain analysis identi es
the most valuable activities, which are the source of cost or differentiation advantage. By looking into the analysis, you
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can easily nd the valuable resources or capabilities. In addition, SWOT analysis recognizes the strengths of the
company that are used to exploit opportunities or defend against threats (which is exactly what a valuable resource
does). If you still struggle nding valuable resources, you can identify them by asking the following questions:

Which activities lower the cost of production without decreasing perceived customer value?
Which activities increase product or service differentiation and perceived customer value?
Have your company won an award or been recognized as the best in something? (most innovative, best employer,
highest customer retention or best exporter)
Do you have an access to scarce raw materials or hard to get in distribution channels?
Do you have special relationship with your suppliers? Such as tightly integrated order and distribution system
powered by unique software?
Do you have employees with unique skills and capabilities?
Do you have brand reputation for quality, innovation, customer service?
Do you do perform any tasks better than your competitors do? (Benchmarking is useful here)
Does your company hold any other strengths compared to rivals?

Finding rare resources:

How many other companies own a resource or can perform capability in the same way in your industry?
Can a resource be easily bought in the market by rivals?
Can competitors obtain the resource or capability in the near future?

Finding costly to imitate resources:

Do other companies can easily duplicate a resource?

Can competitors easily develop a substitute resource?
Do patents protect it?
Is a resource or capability socially complex?

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Is it hard to identify the particular processes, tasks, or other factors that form the resource?

Step 2. Find out if your company is organized to exploit these resources

Following questions might be helpful:

Does your company has an effective strategic management process in organization?

Are there effective motivation and reward systems in place?
Does your company’s culture reward innovative ideas?
Is an organizational structure designed to use a resource?
Are there excellent management and control systems?

Step 3. Protect the resources

When you identi ed a resource or capability that has all 4 VRIO attributes, you should protect it using all possible
means. After all, it is the source of your sustained competitive advantage. The rst thing you should do is to make the
top management aware of such resource and suggest how it can be used to lower the costs or to differentiate the
products and services. Then you should think of ideas how to make it more costly to imitate. If other companies won’t
be able to imitate a resource at reasonable prices, it will stay rare for much longer.

Step 4. Constantly review VRIO resources and capabilities

The value of the resources changes over time and they must be reviewed constantly to nd out if they are as valuable
as they once were. Competitors are also keen to achieve the same competitive advantages so they’ll be keen to
replicate the resources, which means that they will no longer be rare. Often, new VRIO resources or capabilities are
developed inside an organization and by identifying them you can protect you sources of competitive advantage more
easily.

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VRIO example
Google’s capability evaluated using VRIO framework

Google's VRIO capability

Excellent employee management

Valuable? Rare? Costly to Imitate? Is a company organized to exploit it?

Yes Yes Yes Yes

Result: sustained competitive advantage

Google’s ability to manage their people effectively is a source of both differentiation and cost advantages. Unlike other
companies, which rely on trust and relationship in people management, Google uses data about its employees to
manage them. This capability allows making correct (data based) decisions about which people to hire and the best
way to use their skills. As a result, Google is able to hire innovative employees that are also very productive ($1 million
in revenue per employee). Besides being valuable, it is also a rare capability because no other company uses data
based employee management so extensively. Is it costly to imitate? It is costly to imitate, at least, in the near future.
First, companies should build the highly sophisticated software, which is both costly and hard to do. Second, HR
managers should be trained to make data based decisions and forget their old management methods. Is Google
organized to capture value from this capability? Certainly, it has trained HR managers that know how to use the data
and manage people accordingly. It also has the needed IT skills to collect and manage the data about its employees.
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There are many more businesses that have VRIO resources or capabilities, including many of the companies we
analyzed using swot analysis.

Sources
1. Barney, J. B. (1995). Looking Inside for Competitive Advantage. Academy of Management Executive, Vol. 9, Issue 4,
pp. 49-61
2. Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases. McGraw-Hill/Irwin, p. 91

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About Ovidijus Jurevicius

Ovidijus is the founder of SM Insight and the lead writer since 2013. His interest and studies in strategic
management turned into SM Insight project, the No.1 source on the subject online.

He's been using his knowledge on strategic management and swot analysis to analyze the businesses for
the last 5 years. His work is published in many publications, including three books.

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