Identifying whether an organisation or offering will or has a sustained competitive advantage can be determined by a VRIO framework (also referred to as VRIO model or VRIO analysis). Understanding whether you have a sustained competitive advantage is important in two areas; first, it can enable organisations to identify whether they have a sustained competitive advantage over their competition and if not, where they’re going wrong, and second, for organisations and start-ups to identify niches and plan product and service offerings that will give them a sustained competitive advantage.
The VRIO framework looks at four perspectives to identify whether an organisation or firm sustains a competitive advantage, or to what extent they maintain a competitive advantage, over their competition.
What is the VRIO Framework used for?
A VRIO framework looks at four factors along a route to determine whether a sustained competitive advantage has been achieved, the factors are:
- Valuable – If the organisation’s offering is not valuable to the market they are operating at a competitive disadvantage.
- Rare – If the offering is not rare and is easily substituted, the organisation is operating with competitive parity, in other words, they are no better or worse than their competition. Consumers will happily switch to a competitor given any circumstances including a brand being out of stock or not immediately visible to the consumer.
- Imitable – If the product or service can be easily imitated but there are no imitation/substitute products available on the market then the organisation will be operating with a temporary competitive advantage (e.g. an organisation can hold a patent preventing competitors imitating their product until the patent expires, this is often seen in the pharmaceutical industry; one organisation will hold the patent to a drug for X amount of years giving a competitive advantage until the patent expires where their competitors can then begin manufacturing their formula with the same active ingredients as the drug manufactured by the patent holder.
- Organised – If the organisation is well organised, with coordinated strategies and resource planning, where they can quickly adapt to market changes (including the expiry of a patent by developing a new or improved drug) then the organisation will be operating at a sustained competitive advantage.
It is only when each step has been reached that an organisation can move onto the next step. An organisation could have a rare product that isn’t easily imitated and the best organisation in the world but if the product isn’t valuable and there is no demand for it then they are automatically left at a competitive disadvantage.
Understanding each step of the VRIO model
Value can, of course, be determined by numerous factors and not necessarily whether a product fills a need. We can determine value by the price, the demand and scarcity of the product, as well as how easy it is to substitute. If a product has many substitutes and is priced significantly higher than similar products offered by competitors, customers will not find value in the offering as the expense eliminates any value derived from demand and scarcity, especially where there are substitutes available.
If substitutes are not available and the offering is rare, then there are opportunities for businesses to monopolise their market through price gauging. It is recognised with the price of fuel for our cars, we have to get around and whether the price is 98p a litre or £1.20 a litre, we will continue to fill up our cars (albeit a growing trend for green energy and increasing preference for bicycles).
When the offering isn’t imitable, for the same reasons as when the offering is rare, the organisation can monopolise their market and benefit from being the only operant in their current market. They also benefit from sustained sales during any period their offering is not being imitated, the more complex a product or service is, the higher the value offered makes an offering more difficult to imitate extending the temporary competitive advantage relative to the value and complexity of the offering.
An organised business allows for adaptability, ease of communication and quick decision making meaning innovation progress can be made swiftly, whether it’s through improving the offerings already available to the market, discontinuing less valuable offerings to focus resources on high-revenue generating offerings and/or developing new offerings. Less profitable offerings may be realised by applying the VRIO framework to each offering individually, rather than the organisation as a whole, in this case, the ‘organised’ factor is applied to the individual(s) or teams directly involved with the production and distribution of the offering.
I’ve adapted the model to include a further step which is to regularly review their position, as seen in the diagram above. It is important to continuously monitor their competitive advantage as it can be quickly snatched from them as other organisations develop capabilities to better compete. Mobile phones are a good market to look at when considering how new entrants can destroy an organisation’s competitive advantage; mobile phones were very expensive and very few manufacturers produced them, those who did, therefore, had a competitive advantage in the telecommunications market over landline telephones as a result of their portability and convenience, however because of the price of the first handsets, the value wasn’t recognised by the average consumer. It’s only as time progressed and the cost of handsets fell that more consumers recognised their value and started purchasing them. Before long new entrants had discovered the niche and started manufacturing their handsets and developing new mobile technologies overtaking the original mobile handset manufacturers in terms of value, rarity and imitability – the original manufacturers could be as organised as they like, they just couldn’t compete with old-fashioned tech.
Applying the model
The application of the VRIO model enables organisations and firms to adapt their current offerings to keep ahead of their competition, it enables them to identify uncompetitive environments including blue oceans and it allows business owners to identify opportunities for growth and development.
Ignoring the VRIO framework is at your own peril, often, entrepreneurs will believe they have a fantastic product and it’s not unusual to come across pitches on shows like Dragon’s Den/Shark Tank/The Apprentice where entrepreneurs claim they have the next best unique value proposition just to be ravaged by investors/advisors because there are numerous substitute products. This sort of embarrassment would have been avoided had they reviewed their organisation and product against the VRIO framework. The video below features an entrepreneur who believes their mobile network price comparison service, powered by user data, is worth investment, however, because they haven’t conducted a VRIO analysis, they haven’t realised that their data represents just 0.06% of all UK mobile phone users. So, whilst their product sounds very good, upon conducting a VRIO analysis, it is evident there is little value and the product is imitable, the threat of substitution is high when we consider the resources of more established mobile deal comparison sites.