The BEST Tool for Competitive Advantage

This week we discuss a great tool for business strategy called the VRIO Framework!

VIDEO SUMMARY

Last week we talked about sustainable competitive advantage. There are a lot of different books written on business strategy and competitive advantage. And there are a lot of different tools and techniques you can use. I think they are all great, and you should use all of them. But in this video, I want give my number one tool that I have found is the most useful for analyzing competitive advantage.

The problem with business strategy is that it is very difficult to implement. When you take an idea like competitive advantage, it seems very simple. You just have to identify the attribute where you earn the most profit. But when you try to implement this, you realize it is much more complex. For example, if you are the leader of an organization, you are looking at the future and trying to identify what you can focus on. You have almost unlimited options of different opportunities you can pursue. When you have unlimited options, how do you decide which one thing to choose? That is why business strategy is so difficult.

The way to solve this problem is to approach business strategy in a very structured way. When you look at all the different tools that are out there for business strategy, they all are doing the same thing. They are evaluating your options in a structured way, so you can make better decisions.

I am going to give you my favorite tool to analyze business strategy and sustainable competitive advantage. If you have not figured it out yet, I am an accounting nerd. I think I have different heroes than most people. One of my personal heroes is a business professor called J.B. Barney. This guy is a genius when it comes to business strategy. He was a professor at Ohio State, but I think he is now at University of Utah. He developed a tool called the VRIO framework. I love this tool and I use it all the time. It is very simple and easy to communicate to other people.

Let me explain how it works. You start by performing your SWOT analysis where you list out your company’s strengths, weaknesses, opportunities, and threats. You generate all these lists, and you run into the famous problem, where you have all these options and you have to decide which one gives you a sustainable competitive advantage. For instance, your business might have a long list of strengths. There might be a lot of things you are good at. But not all of them are going to generate the same amount of profit.

This is where the VRIO framework comes in. You can take your list of strengths and apply the VRIO framework. VRIO is an acronym for four different questions.

• Is it Valuable?
• Is it Rare?
• Is it difficult to Imitate?
• Is it exploited by the Organization?

You can ask these four questions for each item on your list, and the answers will show you areas of sustainable competitive advantage.

Let us look at the questions again.

1. Is it Valuable? This asks if your product or service creates value. Is there a need in the market? If you are creating fax machines, I would suggest fax machines are not valuable for today’s market.
2. Is it Rare? This goes back to supply and demand. If something is rare, the market will pay more money for it. If something is easy to get, no one will pay you much money for it, because they can always get it from somewhere else.
3. Is it difficult to Imitate? This asks whether it will it be easy for another business to copy your product. It does not matter if you create an innovative product, if another business can copy you and start selling your same product. The more difficult to imitate, the longer your advantage will last.
4. Is it exploited by the Organization? Just because a company has a competitive advantage does not mean they are exploiting it. You see this all the time in businesses. A company might go after several different markets when they only have an advantage in one. In that situation, all you accomplish is spreading your staff out, which means you are giving up profit.

What is really cool about these questions, is that it ties back to the idea of sustainable competitive advantage. The more questions you can answer “yes,” the more likely you have a sustainable competitive advantage.

For instance:

V – No

R – No

I – No

O – No

This equals competitive disadvantage where you have no apparent advantage over your competition.

V – Yes

R – No

I – No

O – No

This equals Competitive parity

V – Yes

R – Yes

I – No

O – No

This equals Temporary Competitive Advantage

V – Yes

R – Yes

I – Yes

O – Yes

This equals Sustainable Competitive Advantage. This is a company strength that is valuable, rare, difficult to imitate, and exploited by the organization.

You can see how easy it is to apply this technique and identify your areas of sustainable competitive advantage. It does not have to be just one area. If you can start with a list of ten different things and narrow it down to three, you are so much better off. You can then focus your energy on developing those three areas in your business.

My goal for this video was to share this tool with you called the VRIO framework. This is four simple questions to help you think about sustainable competitive advantage in a structured way. In the next video, I want to show you an example of how this plays out in the real business world. So definitely come back for that.

Leave a comment down below letting me know what you think!

If you find these videos helpful, please subscribe to my YouTube channel.

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.