Making the Most of Organizational Resources
Every so often, an organization needs to ask itself why it has a certain market position.
Why is it doing better – or worse – than its competitors?
Do the skills of its workers contribute to the organization's success?
Do its patents and copyrights put the company in a winning position?
Or is some other factor aiding it – or impeding it?
Many factors can contribute to market position. Each organization has its own specific set of resources – people, processes, physical assets, and more. The way that the company conducts business and uses these resources can be a major reason for its success.
In businesses that to some extent rely on underlying resources, you need to evaluate the potential and effectiveness of all of these resources on an ongoing basis, to build a competitive edge. VRIO analysis can help you do this.
The VRIO Parameters
VRIO stands for:
Resources and assets that are valuable, and rare, and inimitable, and that you are organized to use effectively, will be those that are likely to contribute most to your organization's mission. You need to make sure that you make the fullest use of these, and that you take care to protect them, and to maintain and enhance their value, rarity and inimitability.
Let's explore each one in detail.
Valuable resources are those that contribute most to your bottom line (or other overall mission, if you are a non-profit organization). They help you to reduce costs, or increase revenue, or – ideally – do both.
Value can be measured in several ways, for example, something that allows you to charge a price premium; an efficient manufacturing process that produces quality products; a productive workforce; an innovative product design that attracts buyers; or a popular brand image.
A resource is rare if no one else – or very few others – also have access to.
A brilliant researcher who works for you; a supply source that's not open to your competitors; a product or brand to which your customers are loyal; or leases on prime retail locations in every town – these can all be considered rare resources.
This takes the concept of rarity one step further and means that your rare resources cannot be imitated or copied easily, and there are few substitutes for them.
It can be difficult to assess this quality because, over time, many products are eventually copied. Someone takes an idea, and then develops it into a better or lower-cost product through research and innovation. The new product can compete with, and gradually replace, the original product.
Patents and copyrights can prevent copying for a certain number of years, and licenses can give you exclusive access to a resource for a period of time. During that time, your original product may provide key benefits to your company. However, more often that not, it's difficult to hold a product's unique market position for very long, particularly once this intellectual property protection has expired.
This refers to how well your organization is able to use the specific resources that are rare, valuable, and inimitable.
Your internal management control systems, your business processes, and your staff must all focus on exploiting these resources to maximize their benefit to your organization as a whole.
A properly structured organization will improve and make the most of its key resources. A good structure will likely ensure the company's continued growth, its brand building, and, ultimately, its profits into the medium and long term.
It's worth emphasizing that the assets and resources which will contribute most to your organization's mission, and which therefore merit the most attention, are likely to be those that possess all four of the VRIO attributes.
For example, when the first color-screen mobile phones were launched, these products were valuable and rare, and so initially made good returns for their manufacturers, who could charge premium prices.
But the technology was also easy to imitate. As such, the advantage was quickly lost, and prices were forced down. On the other hand, while many companies produce mp3 players nowadays, Apple continue to be able to sell their iPod at premium prices because of the strong brand value it has created, and because it continues to innovate with design.
How to Use the Tool
Identify which of your resources and assets are Valuable, Rare and Inimitable, and that you're well Organized to use.
Use the checklists below to help you do this.
Brainstorm your assets to determine which currently – or have the potential to – bring the greatest returns to your organization. While the definition of "value" will depend on your specific situation, the following questions may help:
- Do you have resources that improve the efficiency of an important process?
- Do you have resources that help create new products that will meet customer needs?
- Do you have access to valuable raw materials, or other supplies?
- Have you invested in machinery, IT systems or other physical assets that allow you to create value?
- Do you have products, services or a brand to which customers have a strong loyalty, such as a 24/7 call center, home delivery, after-sales service, and so on?
- How long will the "value" of the resource last? Remember that customer preferences and tastes change over time.
- Do the benefits of the resource outweigh the cost of maintaining it?
It's important that you focus on those resources that have the potential to contribute to your organization's bottom line. It may be the case that your organization has assets that seem valuable, but if this "value" can't be turned into hard cash, or other relevant outputs, they're not actually valuable, at least in the sense of this article.
For example, a team who are highly skilled in designing mainframe computer systems would have been a valuable asset 20 years ago, but with demand for this type of system having dropped off nowadays, the team is a less valuable asset now.
For the valuable assets identified above, identify those that are rare. Again, the way in which you measure this will depend on your situation, but the following questions may help:
- How long will the resource remain rare or unique?
- Is the resource available only to your company and not to your competitors?
- Will your competitors be able to obtain the resource soon?
Take your list of valuable resources that are also rare and determine whether each can be easily copied. Use these questions to help you:
- Is it easy for your competitors to duplicate the resource?
- Does the resource have an easily available substitute that competitors can use?
- If substitutes are available, can they provide the same level of customer satisfaction and loyalty?
- Is it likely that new entrants to the market will be able to develop better or cheaper products that can replace your product?
Finally, determine if your organization is structured appropriately to exploit this set of valuable, rare and inimitable resources:
- Do you have the right kind of workforce to make the most of these assets? Do your compensation packages attract and retain the kind of people you need?
- Are your management structures appropriate? For example, if you rely on innovation to create rarity, do you have a system which allows new ideas to get to market quickly?
- Are your back office support systems, such as sales processing and financing, able to support your key resources?
Having identified your key resources, you then need to think about what you need to do to protect them, and what you can do to make better use of them. Use these questions to help you brainstorm ways to do this:
- Does your company give proper focus to the resource?
- Could you make better use of the resource, or use it to generate more revenue? If so, how?
- How can you extend the value, rarity or inimitability of the resource further into the future?
- How can you preserve the resource so it is not damaged or stolen, or so that their value, rarity and inimitability are not degraded?
- How could you better integrate the resource into your organization's processes, marketing, management, or other functions?
- Does the organization prioritize the products and services that use the key resources when it comes to investment in research and development, production resources or sales and marketing?
- Is your sales and marketing department basing their promotion messages on the Unique Selling Points (USPs) that come from having products and services that are valuable to customers?
- Are the core competences that your organization focuses on aligned with the key resources and assets identified as being valuable, rare and inimitable?
If you like this approach, you'll also find our article on Michael Porter's Five Forces Analysis useful.
VRIO analysis helps you evaluate how your organization's resources contribute to your market position. Resources that are highly valuable, rare, inimitable, and which you are organized to use will contribute most to your market position, and so need to be nurtured and exploited to the full.