One of the key questions in strategic business analysis is the existence of key skills or resources that enable the company to gain a competitive advantage, the VRIO model answers this fundamental question.
Understanding the VRIO model
The VRIO model formalized in 1995 by American professor Jay Barney provides a framework for answering this question.
Strategic analysis takes place in a competitive environment. As part of the internal strategic analysis, the VRIO model is designed to assess what Jay Barney calls the company’s “strategic capability,” i.e. its distinctive skills and resources (tangible and intangible assets) that give it a competitive advantage.
This strategic capability includes:
- Specific know-how, autonomous or interconnected skills in a business process: innovation, research and development, marketing, sales, production, logistics, HR management;
- Body assets, for example, for a hotel that owns its walls, the quality and location of the building, an important stock that ensures a complete product offering, a specific geographical location;
- Intangible assets: a patent, a well-known brand, a broad customer portfolio, well-established partnerships with suppliers or customers, an information system. These intangible assets are or are not recognized in accounting.
The acronym VRIO is the result of the following terms: Value – Rarity – Imitability – Organization that is confronted with the skills and resources of the company.
Competence or resource helps to create value for the customer, for example, allows to produce at a good level of quality, at a lower cost, to cover all the needs of the market is an attractive brand for customers.
The strategic skill or resource is unique if not rare. Rare skills are for example sheet metal and riveting for shipbuilding, mastery of leather work for the luxury industry, a unique technological monitoring system to meet all customer needs. A skill or resource shared by all market players would by definition not be distinctive;
While the resource is scarce but easily imitable, it provides a competitive advantage that is only temporary. If it is also difficult to imitate or substitute, it provides a lasting advantage. A new competitor should spend a lot of time and money developing this resource without necessarily having the assurance of making a return on their investment.
Often the distinctive know-how of a company is difficult to imitate because it corresponds to several uns formalized skills, implemented in interaction with each other in the course of a process and moreover, within the framework of a given corporate culture. The know-how is difficult to imitate because it forms a whole. The company then benefits from a barrier to informal entry. Experience shows that a strong corporate culture can make it more difficult to successfully integrate newly acquired companies.
This criterion refers to the ability of management in the broadest sense (information systems, the nature of objectives, decision-making method, etc.) to make good use of these resources. The strategic resource must be recognized as such by management in order to be sufficiently developed.
Not all of a company’s skills and resources are distinctive. The author uses the term “threshold capacity” to refer to the basic skills and resources needed to be able to intervene in a market, thus non-strategic. For example, for a frozen food distributor, cold chain management is a basic skill in claiming to intervene in the market. A threshold capability, of course, does not provide a strategic advantage. A company with no significant strategic advantage will obviously be vulnerable when competition intensifies.
Analysis from the VRIO model is a state of affairs at a given time that needs to be regularly updated. The efforts of existing or new competitors, technological change, changing customer needs, make it difficult to say that current strategic skills and resources will still be so in the future.
Strategic analysis consists of two main steps:
- External analysis focuses on macro-trends and the industry, identifying opportunities and threats;
- The internal analysis focuses on the company itself, it leads to the determination of its strengths and weaknesses to which the VRIO model attaches
Understand how the VRIO model interacts with other strategic concepts
The value chain scheme, created by Michael Porter, traces all the company’s activities that use specific skills and resources, which are compared to the criteria of the VRIO model;
The Key Success Factors refer to the skills and resources that determine the acquisition of a competitive advantage. If the company masters this activity better than its competitors, it increases its competitive advantage. While Key Success Factors are often very specific to each trade, they relate to the traditional functions of the company: design, marketing, production, marketing, logistics, etc. The company has a competitive advantage if it has the skills and resources corresponding to the Key Success Factors identified in the trade.
Identifying strategic skills and resources leads to the definition or improvement of its business model. The business model describes how the company organizes itself to satisfy its customers in the best conditions of profitability and flexibility. The company invests primarily in strategic skills and resources, avoids investing in other skills and resources, or even outsources them.
The VRIO model leads to determine the strengths and weaknesses of the company that then power the EMOFF/SWOT matrix.
How to use the VRIO model
This model is used to:
- Review the company’s skills and resources to identify those that provide a real strategic advantage;
- Improving its business model raises the question of outsourcing “threshold capabilities” in order to improve the profitability and flexibility of the company (variabilization of expenses);
- Strengthen underutilized strategic skills and resources to increase competitive advantage;
- Identify new business segments for which our current skills and resources would provide a competitive advantage.