We are continuing the Business Strategy Boot Camp and this is week four the VRIO analysis. If you are not familiar with VRIO analysis, it is a very powerful strategy tool. I have made a couple of videos on VRIO and I will put a link in the description box below if you want to find out more. In this video, we are just going to focus on the practical application. So I will be asking you some questions, and coming up with a strategy for your business. Watch now!
PDF Worksheet download: https://wolvesandfinance.com/wp-content/uploads/2019/11/Ep-4-Worksheet.pdf
My previous VRIO videos:
The BEST Tool for Competitive Advantage (VRIO)
Example of Competitive Advantage (Commercial Space Industry)
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The reason we talk about business strategy is you want to focus your business on areas that generate the most value. You will make the most profit in areas where you have competitive advantage. So the whole point of strategy is to define those unique areas for your company. Once you understand your areas of competitive advantage, you can make business decisions to focus your company resources, which will result in more money.
To define our competitive advantage, we are going to use VRIO. VRIO is an acronym that stands for four different questions.
- V: Is it valuable?
- R: Is it rare?
- I: Is it difficult to imitate?
- O: Is it exploited by the organization?
Our task here is very simple. You are going to think about your organization and ask yourself these questions for each of your main company attributes. We are evaluating our company resources, and then later in the boot camp, we will organize those resources in compelling revenue streams that have strong strategic advantage. Right now we are just evaluating and trying to understand the resources our company has to work with.
So the first step is to list out all the things that make your company unique. When you describe your company to a customer, there is normally a list of things you talk about that makes your company special. What are those things? Last week we described our company by Who, What, When, Where, and Why. Now we are expanding that definition even more by listing out unique attributes.
Here are a few questions to think about. What kind of background, skills, and abilities do you have? What knowledge do you have? What kind of customer base do you have? Are there any special defining characteristics of your culture? How do others describe your company? What things are different between you and your competitors? What things can you boast about to others as accomplishments or things you do well? What are some highlights from your company’s past?
The problem most people run into is they have a list of items that describe their company. But they never do the second step of analyzing that list for competitive advantage. Because I am betting that when you look at your list, there are some items that are better than others in terms of giving your company an edge in the market place.
The first step is write out a list of your company attributes. You want to have at least 10 attributes, if not more. The second step is we are going to rank them and identify which of these attributes are really contributing to your competitive advantage. Next to your list, we are going to answer each of the questions in VRIO. The attributes with the most Yes answers, have the highest potential for competitive advantage.
These are the questions you are going to ask:
- Is it valuable? Is this something that people are willing to give you money for? You never want a situation where you put a product out on the market, and no one wants to buy it. So you want to ask yourself, is this characteristic valuable? The easiest way to identify this, is are people actively searching for this product? Do people search on the internet looking to pay someone for this thing your business has? That means you have something valuable.
- Is it rare? Are there lots of other companies with the same attribute. If you were to do an internet search would you find lots of options to choose from, or only your company. If there is a lot of competition, you will not be able to make high profits, because customers can easily find other cheaper alternatives.
- Difficult to imitate? This question will identify if someone else can duplicate what you are doing and steal your customers. You are really looking for things that would take a rival company ten years to duplicate what you are doing. So for instance, if your list of attributes includes a cool website, that might be valuable to customers, but it is very easy to imitate. You can set up a website in 24 hours. But let’s say your company has a strong network of relationships with buyers in a specific industry that took you ten years to develop. It will take someone ten years to imitate those relationships. Let’s say you have ten years of valuable experience. No one can start a new business and say, I have ten years of experience in this area. You want to look through your list and find areas that are difficult for other companies to copy.
- Is it exploited by your organization? This is the area, where all your frustrations about your company will pop up. Most frustration in business comes from when you see an opportunity, and your company is not doing anything about it. So you have all these attributes… Are you doing anything about it? For example, a company might have two products. Product A is in an area of competitive advantage and Product B is not very competitive. And yet you might have 75% of your sales force working on Product B. That is an example of “No.” The attribute is not being exploited by the organization.
So those are the four questions and that is how you perform a VRIO analysis.
Now I am going to give you a secret to take this analysis to the next level. What I like to do is look at this list. For every no I write a short description of why I put no. You are trying to identify whether that no is within your control or outside of your control. You might have the ability to change that no to a yes by doing something. That would improve the ranking of competitive advantage of that attribute.
For example, we talked about your sales force split up between two products. Well that is something you can change. And suddenly the structure of your sales force becomes part of your company’s competitive advantage. I will give you another example I see a lot. Let us say you have 10 years of strong customer relationships. That is difficult for a new company to come in and imitate. However, your company puts very little money into customer service. If you are not maintaining those relationships, that is a “No” for whether that area is exploited by your organization. But that is also something that you can change and make your customers an area of competitive advantage.
Let me explain the point of VRIO analysis. The great thing about life is that all of us are in unique situations. I don’t care where you are at in life, we have different skills and different opportunities. VRIO is trying to identify what is unique about your situation that your competitors do not have.
Let me explain why this is important. In the financial world, they talk about this all the time. Investors looking to invest in companies want to find a business with a competitive advantage. They want to know you have a unique product, that competitors will not be able to swoop in and steal your market share.
In the description below this video, there is a PDF document you can download with questions to help you think through this. This should only take you about 30 minutes. Just think about your business and see if you can perform this VRIO analysis. You are trying to identify company attributes that give you the most “Yes” answers.
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.