What is the VRIO Analysis?
A VRIO analysis is a framework that allows companies to assess their Competitive advantages.
This framework defines how solid a Competitive Advantage is based on 4 different questions.
These questions can be directed to:
- A Business unit.
- A Service offered.
- A particular Product.
Four Questions of the VRIO Framework
1. Value: How valuable is a Product, Service or a Business activity.
- Is it profitable?
2. Rarity: How Common is a Product, Service or Business activity.
- Is the market saturated?
3. Imitability: How difficult is a Product, Service or Business activity to be copied.
- Is it easy to copy?
4. Organization: How well economically exploited is a Product, Service or Business activity, by the Organization.
- Is the company “squeezing” all its economic potential?
As you may have already guessed, VRIO is an acronym for the Questions on which it is based.
- Value, Rarity, Imitability, Organization.
Depending on the answer to these questions, a Company can have a:
- Non sustainable Business.
- Sustainable Business model.
- Profitable Business model.
- Long term Profitable Business model.
- Business with a Competitive Advantage.
You’ll understand it better with a real example:
VRIO Framework example
Many analysts didn’t expect TikTok to be so successful.
- In the end… It is a video-based social network and… we already have YouTube (they thought).
What does TikTok have that YouTube doesn’t offer?
Let’s develop a VRIO framework:
- With 1 billion users there are endless ways in which TikTok can make a profit.
- Without a doubt, it is a Valuable product.
- Although YouTube offers a huge video platform, TikTok is much easier to use:
- You only need a phone.
- It is as simple as sending your friends a video through Whatsapp.
- Even if we considered YouTube as a direct competitor… How many video-sharing social networks are there?
- It is a “Rare” product.
- It is not easy to start a video-sharing social network… In fact, it is very difficult.
- You have to design and code a platform capable of hosting 1 billion users.
- You need to place all uploaded videos somewhere.
- That is very expensive.
- You have to promote your product.
- … and users must love what you offer.
- Therefore, TikTok is not an easy product to imitate.
- TikTok owners; ByteDance, declared revenues of 7 billion in 2018.
- That makes us think that they are economically exploiting TikTok very well.
TikTok is a product with a solid Competitive Advantage.
- It is Valuable, Rare, Difficult to Imitate, and it is well exploited by the Organization.
We know that this analysis (as many others) seem a bit “obvious”.
However, even large successful Companies have had problems that could have been avoided if they had done a VRIO analysis.
Why is VRIO Analysis important?
Developing a proper VRIO analysis is important for average products but essential for successful Companies.
You may think that you have a successful Business but… you may lose everything if you don’t analyze honestly:
- How Rare your product is.
- Many companies think its product is unique, when it isn’t.
- How Easy it is to copy what you offer.
- Some products are easier to copy than others.
- If you don’t care about this, if you bet everything on a single easy-to-copy product, your company is doomed.
- How well you are exploiting it.
- Having profit doesn’t necessarily mean that you are getting the full potential of a product.
A proper VRIO analysis is very important to assess how stable and solid your Business is.
Some companies get bigger and bigger by offering very weak products.
- Sooner or later, they end up having serious problems.
- If they developed a VRIO analysis, perhaps, they could face these problems better.
Let’s now explain when you should develop a VRIO analysis:
When should you use the VRIO Framework?
As we have just mentioned, developing a VRIO analysis is very important.
However, if you are Starting a Project (a Business Project) you should wait.
Final products are defined over time.
It makes no sense to develop a VRIO framework for a completely new product that will probably be modified.
- If this is your case, have all its variables in mind (Value, Rarity, Imitability and Exploitation) but don’t get obsessed with them.
We recommend to develop a VRIO analysis once a product or service is well defined.
Now, let’s see some examples:
VRIO analysis examples
We’ll give you one example of each VRIO Framework classification:
- One example of a Non sustainable Business.
- One example of a Sustainable Business model.
- One example of a Profitable Business model.
- One example of a Long term Profitable Business model.
- One example of a Business with a Competitive Advantage.
Typewriters - VRIO example
An example of a non-valuable product?
Surely, there is a big market for old vintage typewriters.
But, if you had had a typewriter company in the late 80’s it would have been better if you looked for another Business.
- Retreat on time is always a victory.
VRIO framework of a Typewriter company.
Barber Shop - VRIO example
Barber shops, Pubs, little restaurants… are perfect examples of Valuable but not Rare Businesses.
- They are Valuable since you can make a living from it.
As you can see in the VRIO framework, they are simply Sustainable companies.
VRIO framework of a Barber Shop.
Fidget spinner toy - VRIO example
Fidget Spinners: a rotating piece of plastic that moves and holds with your fingers.
- Simple, but everybody went crazy for them.
But, what happened to the person that invented it? Did she became rich?
In fact, the person who invented the first Fidget Spinner (Catherine Hettinger – According to Wikipedia) didn’t make a single dollar with it.
Possible plagiarism and/or misappropriations aside, the problem was that this Toy is extremely easy to copy.
Everybody made money with it, but no company could “monopolize” its success.
VRIO framework of a Fidget Spinner.
A Gold Mine in your backyard - VRIO example
We’ll now use an “extreme” example.
Imagine you discover a Gold Mine in your backyard.
Is gold a Valuable product?
- Yes, of course it is.
Is gold a Rare product?
- Yes, of course it is.
Is having a gold mine difficult to Imitate?
- In fact, you can’t Copy this product.
But…. Can you Exploit it economically?
- The answer is No.
- Exploiting a gold mine is expensive.
- You need millions of dollars, just to get started.
Of course you would:
- Ask for a collaboration with a mining company.
- Ask for a loan.
- etc, etc.
And you would end up with a Long term profitable Business.
VRIO framework of a Gold mine in your backyard.
Coca-Cola - VRIO example
Coca-Cola needs no introduction.
- How is possible that a simple Easy-to-Copy beverage has such a Competitive Advantage in the Market?
- How is possible that Coca-Cola has monopolized the beverage sector?
Because Coca-Cola is not just the canned “sweet black liquid”. It is much more.
“Coca-Cola” is the second most understood word in the world.
- Just after “OK”.
Its Value is not in the taste, but in the Brand: how it is perceived by customers.
Is Coca-Cola Rare?
- Well, there are numerous cola drinks.
- But there is not a single beverage company that is associated with “happiness”, “friendship”, “good moments”… like Coca-Cola.
Is Coca-Cola Easy to Imitate?
- Coca-Cola has invested billions of dollars in Marketing for decades.
- You can see it in movies, advertisements, TV…
- It is almost impossible to copy its Brand perception.
Is Coca-Cola economically Exploiting its products successfully?
- We don’t need to answer this question.
- We can’t imagine the margin that Coca-Cola obtains for each can sold.
VRIO framework of Coca-Cola.
If you have a defined Product, Service or Business activity, you should develop a VRIO analysis.
It allows you to assess whether you have a solid Competitive Advantage or a simple Business that can be easily copied.
The VRIO framework analyzes:
- The Value of your product.
- How Rare your product is.
- How easy to Imitate it is.
- If you are Exploiting it economically or not.
If developed properly, a VRIO analysis will tell you what you need to improve, what you should keep doing and …. when to retreat.