What is VRIO?
Developed in 1991 by an American business professor and scholar, Dr. Jay Barney, the VRIO is an internal business framework that answers the question of whether or not the company or entity’s capabilities and resources are valuable, rare, difficult to imitate, and assures that the firm is organized in a way to capitalize these advantages to achieve sustained competitive advantage.
The quality of the firm’s resources and capabilities are qualified and accounted for through several factors. Resources include but are not limited to financial, human, organizational, physical, or technological. At the same time, capabilities speak of the organization and execution of these resources and correlate to the reach and relevance of the product and service.
A firm that can answer with “Yes” to all four aspects of the VRIO framework can confidently say that its firm has achieved sustained competitive advantage at the time the VRIO framework was used. More often than not, companies that fall under this category are monopolies (a sole entity within the market), oligopolies (few competitors within the market), or at the very least main stays and market leaders within the market that they choose to participate in.
However, it should be clear that the VRIO is one of many internal and external frameworks firms use to achieve sustained competitive advantage. Frameworks such as Porter’s Five Forces (external), PESTEL (external), and SWOT (mixed) are some of the many frameworks that complement the use of the VRIO framework. A successful entity would also have more than one aspect, principle, or factor contributing to its success. The VRIO framework also narrows in on the core competencies that allow the firm to thrive. Lastly, the VRIO framework can also show the firm and entity where they place within their competitive landscape; using the VRIO on other firms, albeit without perfect information, can also provide an idea as to why they are leading the market they are in.
My Experience with VRIO
Having graduated with a degree focused in the field of Food & Beverage entrepreneurship, I have had to ask about the value and worth of the product/s and service/s that I conceptualized while figuring out which resources and capabilities are the most crucial to possess to fulfill the VRIO framework to formulate what my potential business’ core competencies could and should be. Throughout my stay at university and even now as an aspiring restauranteur, the food, beverage, and hospitality industry is a heavily saturated one. Thus the VRIO is an invaluable and indispensable tool when theorizing and conceptualizing the products and services I wish to pursue, even if it is within the academic vacuum. Although the information asymmetry does not guarantee the accuracy, it brings a conclusive idea of how the product or service may be fair when pursued and, in my context, aids in answering if I should follow the idea or deter me from a wasted investment.
My most crucial takeaway from utilizing the VRIO framework is that entrepreneurs and entities who wish to use it must establish and define the degree to which they qualify the first three factors, especially within the realms of food and beverage (F&B). Seeing as food and beverage are often not seen as rare; no singular type of food can be seen as more valuable than another for long periods, and food & beverage are some of the most substitutable products, restaurant, and hotel owners must redefine these factors with price, availability, ambiance, and recognizability among other factors to claim that their product and service is more valuable, rarer and more difficult to imitate than their competitors. Since the market is very saturated, market leaders differentiate themselves by clearly answering, based on the VRIO, why they’re competitive, relevant, and different from the rest of their competitors.
To know whether or not the firm’s resources and capabilities are valuable, the entity must first ask what value these resources and capabilities generate for its customer. How do these resources and capabilities showcase and utilize the opportunities for the company while negating, if not minimizing, its threats and opportunity cost?
Suppose the firm’s resources and capabilities cannot do this. In that case, it is advised for the firm to redraft and rethink how it can better use what they have to generate value, garnering the capability of lowering the price in comparison to its competitors or securing quality resources or staff. This will result in higher quality product or resources and could then lead to the company’s resources and capabilities to be seen as better value. If not, it could lead to the firm having a competitive disadvantage instead.
Brand Name: Coca-Cola & Pepsi
An example of a valuable core competency would be Coca-Cola’s brand name. As a brand, Coca-Cola is the market leader alongside its main competitor, Pepsi, whose own brand name holds value. These brands are easily recognizable, widely available, and cost-friendly to all types of consumers. This is a factor that little to no other firms or companies can boast of within the market of non-alcoholic beverages and is a consistent factor of both companies’ relevance.
At first glance, determining whether a firm’s resources and capabilities are rare is straightforward. Answering whether or not the resource or capability is difficult to obtain by competitors, or even better — when it is solely in one firm’s possession, can clearly define whether the resource or capability is rare. Economically, a resource that is scarce and high in demand can also be considered rare; in fact, the concept of scarcity is often, if not always, tied to rarity.
However, rarity comes into question regarding the more personal aspects of capabilities. Looking into the F&B industry, chefs and bartenders are relatively common commodities. Still, highly skilled or even name stays within the industry are what separates chefs into categories of scarcity as a resource. A genuinely time and experience-tested Michelin star chef can be considered a rarity due to the personal skill and talent they bring to the table. Determining and conceptualizing how a common good or resource can be utilized as a rare one is also one way to formulate a cost-friendly core competency for the firm.
Defining and establishing rare resources and capabilities makes the company competitive. Suppose the company cannot do so but has determined that its resources and capabilities are valuable. In that case, equal footing with competing companies results in competitive parity. Finding the differentiating factor and securing a rare or scarce resource allows the firm to thrive.
Perhaps the most notable and famous title a restaurant and chef can be crowned with is the Michelin star. According to the modern luxury magazine LUXE digital, as of September 2021, there are 2,290 Michelin Star restaurants, 113 of which hold three Michelin stars. That may seem like a large number. However, in the world of F&B, where countless restaurants exist, even if we were to narrow it down to luxury restaurants specifically, it can still be considered a rare resource to hold a Michelin star. It is a declaration and proof of renown skill and a unique princess dining experience. This example also goes to show that rarity should be taken into context. It is simple to see a large number and write it off as common; understanding the scale and context would be more accurate when utilizing this framework.
The factor of inimitability can also be phrased as “difficult or costly to imitate,” meaning that the firm’s resource has little to no substitute. In an attempt to duplicate the competition’s value and rarity, any other players with similar resources had to go through a high barrier of entry to achieve competitive parity.
If the resource or capability the firm has is rare and valuable but not costly to imitate, the firm has achieved a temporary competitive advantage in that similar players that cannot answer the framework the same way will naturally lag due to the lack of differentiation. However, companies with identical playing fields having similar rare and valuable resources will begin to pursue more in-depth and creative ways to utilize them to gain sustained competitive advantage.
The act of imitation is taken into two categories.
1. Direct Imitation
When speaking of direct imitation, it is as stated; a company will invest in being able to offer a nearly similar product while having its own variance that some may find more appealing than others. Going back to the example of Coca-Cola and Pepsi, although they are both known to be recognizable brand names within the soft drinks market, despite Coca-Cola being made and founded first, Pepsi was able to capture a similar audience by providing a sweetened carbonated beverage reminiscent of the taste of Coca-Cola’s very own line of drinks.
2. Service/Product Substitute
Product substitution is a common occurrence within the F&B market. The different kinds of food and dietary restrictions, self-imposed or otherwise, have allowed the F&B market to thrive, differentiating itself as the substitute or, at times, a better alternative to its more known counterpart. For example, soy milk and its popularity over the years can be seen as a product substitution from whole, skim, or even non-fat milk. It is often marketed as the “healthier alternative” to today’s more health-conscious eaters.
Within the F&B industry, it is challenging to claim that a particular restaurant or hotel’s food and beverage cannot be imitated nor substituted; as such, a better example of something costly to replicate can be found within the technology market and landscape. Anything from patented operating systems to owning the rights to distribute electricity or internet access is often the most costly to imitate.
Having that said, the F&B industry is not incapable of answering this question with a “yes.” Specialty, luxury, home-owned, and fast food alike hold on to their recipes, likely protected by non-disclosure agreements. These recipes may be imitated to capture similar tastes. However, this would be more resource-intensive for those who must invest in research and development to reverse engineer the recipes. Even then, the resulting product may vary. Thus, restaurants owning or advertising home-grown and secret recipes provide themself with something authentic to the audience they’ve set their establishment for.
Having been able to answer that the firm’s product is, in fact, valuable, rare, and difficult to imitate, it is now up to the firm’s capability and capacity on how they’re able to most efficiently execute how they will be utilizing the resources and core competencies identified. Only when the company can organize its resources to realize its value can the organization claim sustained competitive advantage while its most current VRIO remains relevant.
Starbucks’ “Third Place” and Employee-Driven, Cultural Success
One example of such ability is Starbucks’s leadership structure and company culture. The Employee driven and servant leadership style of Starbucks has nurtured a professional, hospitable, and effective line of staff that is recognized across the globe. The staff, independently growing within the entity, shares the values and competencies of Starbucks willingly. In their leadership’s ability to foster such an environment, the human resource of Starbucks can tie the ambiance and food and beverage experience together with their service to make Starbucks the “third place” or home away from home of its regulars, including myself, around the world.
The Difficulties of VRIO Framework
- Understanding the scope and scale of your company is arduous. This factor sets the groundwork and context of the entity to give its decision-makers the most precise picture moving forward with utilizing the framework. Being unable to do so may result in untrustworthy results.
- Analysis paralysis is a risk that comes with using many business frameworks. These research-intensive processes produce a lot of data the company must then analyze to pick and choose the relevant data sets to arrive at the most informed decisions benefitting the firm. Otherwise, the firm suffers losses due to the inefficient and incorrect use of these frameworks.
- The unknown timeframe of relevance each VRIO has makes some question its worth; considering the complexities surrounding this framework, some may shy away from using it. Often they will come to the conclusion that the opportunity cost of the endeavor is too great for the company to invest in.
- Clearly define the company’s immediate and extended context. Doing so provides the aforementioned clear picture and setting for the firm’s decision-makers to start on the right foot.
- Be reminded that these frameworks are meant to organize and narrow down possibilities. Be decisive about which core competencies to focus on and learn to pivot if results after some time dictate otherwise.
- Trends will change and cycle endlessly as time progress and new ideas and innovations are brought about. Being diligent in observing these changing trends, recognizing them, and acknowledging when the current VRIO has deviated from what is present for the company and its landscape allows the firm to recognize and shore up any weaknesses that may arise quickly.
FAQ – VRIO Framework
Question: What are misconceptions about VRIO?
Answer: As mentioned, VRIO and its permanence of relevance to the company would be its biggest misconception. Trends are ever-changing, and as the trends change, so do the firm’s resources and capabilities. Thus, updating the VRIO framework of the company often is crucial to aiding the firm.
Question: When is it best to use the VRIO framework?
Answer: There are no bad times to use the VRIO framework. It addresses the internal capacity of the business and finds the root of what makes an entity competitive. If a company’s performance or niche within their market is unanswered or come to question, the VRIO framework can help diagnose the company’s internal resource and capabilities.
Having said that, fully utilizing the VRIO in a small-scale or budding enterprise may be challenging. Smaller-scale enterprises often begin with limited capabilities compared to their larger counterparts and must take the extra step to reassess who they compete with. While budding enterprises may lack the experience and resources to efficiently create a reliable VRIO framework. However, it can still be used as an effective tool in theory crafting when used in a vacuum.
Question: How can we be sure that the context determined by the entity is correct?
Answer: When it comes to context or the scope of the business, it is usually the task of the decision-makers and leaders of the company. Although the context set may be overreaching or ambitious in some instances, that may simply be due to the goals that the entity’s leader has set for the firm regardless of fully recognizing its resources.
As an example, an entrepreneur starting a cafe in their local vicinity should not have the same mission, vision, and goals that a named brand like Starbucks would have. Slowly quantifying the firm’s resources and capabilities can allow it to logically set its context and scope before proceeding to quality them through VRIO.
The VRIO framework is a tried, tested, and practical internal business analysis framework. Qualifying the value, rarity, and imitability of a company’s resources and its capability to organize these resources to their utmost potential will allow the firm to understand where it stands in its current market. It will also enable the firm to pinpoint its essential resources to formulate the company’s core competencies around them. As a practical internal analysis, when appropriately utilized, the framework will continue to answer how the company maintains its sustained competitive advantage, which will only improve if not keep the company healthy and relevant within its landscape.
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