In 1984, Birger Wernerfelt came up with the resource-based view (RBV) as “a basis for the competitive advantage of a firm that lies primarily in the application of a bundle of valuable tangible or intangible resources at the firm’s disposal.” This influential theory has become the basis for several frameworks, including VRIO.
According to Wernerfelt’s theory, a business is a bundle of resources. Businesses differ depending on what these resources are and how they are combined with one another. Resources include processes, capabilities, assets, attributes, information and knowledge. Together, they allow businesses execute various activities.
Not all resources a business has are equally strategically relevant, though. Certain resources give the business a competitive advantage. These have the VRIN characteristics, which can be discovered by focusing on four essential qualities:
- Value: Resources that can bring value can be a source of competitive advantage. Keep in mind that not all resources are equally easy to obtain.
- Rareness: Resources that are available to all competitors rarely provide any significant competitive advantage.
- Imitability: An ideal resource cannot be obtained by competing businesses.
- Non-substitutable: An ideal resource cannot be substituted by any other resource.
It was Jay Barney, an American professor in strategic management, who, in 1991, evolved the VRIN framework to VRIO, giving us a complete framework. The change of the last letter of the acronym refers to the so-called question of "organization", which is the ability to exploit the resource or capability. Barney realized that the business must also be ready and able to utilize the resource to capitalize on its value. A resource that meets each of these four criteria can bring about competitive advantage to the business. The VRIO framework is particularly useful for assessing and analyzing a firm’s internal resources and its potential for applying these resources to achieve competitive advantage.
The VRIO framework is great for evaluation of a company’s resources. It complements the PESTEL analysis method, which is mostly used by marketers to analyse and monitor the macro-environmental factors that have an impact on an organization. Business analysts can use VRIO to accurately assess the internal resources of a business, its competitive advantage potential, and possibilities of improvement of that resource within relevant business areas.
Like other frameworks characterized by simplicity and clarity, the VRIO framework is often combined with other analytical techniques to provide management a more detailed view of how to move the business forward.
To learn more about this framework, we highly recommend the book, Strategic Management and Competitive Advantage, written by Jay B. Barney and William S. Hesterly. In it, you can learn how to apply the VRIO framework in practice and study several useful real-world examples.