Assessing your competitive strength - the VIRO framework

“What is your competitive advantage?” is a question angel investors and venture capital is almost automatically programmed to ask – so you need a clear, concise way to respond. Understanding what makes you unique is critical to product differentiation and market positioning.

The best way to answer this is to understand assets or resources that provide you a unique ability to generate value. These assets can be physical, such as machinery or real estate, but are more likely intellectual property such as parents, designs, procedures or brands. If you control over an asset that is strategically valuable, you have a unique competitive advantage – but what makes an asset strategically important?

The VRIO Framework developed by Jay Barney helps you breakdown the strengths of your organisation quickly by proposing four questions that should be asked about every asset you own or control:

• V: Is this asset valuable?
• R: Is this asset rare?
• I: Is this asset imitable?
• O: Does our organization own or have the ability to exploit this asset?

So lets break each of these down:

Is this asset valuable?

• An assets value can be thought of as it ability to increase profit over a sustained period of time. This could be through generating profits by moving through the value chain converting low value inputs to high value outputs, by reducing costs or by helping sell higher volumes of products.
• An expensive espresso machine isn’t valuable to a café because of how much it cost to buy, but its ability to convert low cost coffee beans to high cost drinks. Value also come from the ability to reach customers, such as a café location in an office complex with lots of foot traffic to reach customers.

Is this asset rare?

• The rarity of an asset comes to its uniqueness, or the ability for competitors to get access to the same resource. A valuable, rare resource has greater strategic value to an organization as this provides a competitive advantage by giving an opportunity to exploit the asset for profit.
• Its very obvious that an espresso machine for a café is not rare – as every café will have one. But a café that has the lease for the only kiosk in a high-traffic office complex holds a very rare location, while a café in a food court has a very common. Another rare asset is intellectual property developed by an organization, such as recipe for a unique coffee blend – but whether this is valuable is a matter of taste!

Is this asset imitable?

• Competitive advantages rarely last as others will seek to access the same resources and if that isn’t possible they will try to imitate them. Imitability measures how easy it is for someone to reproduce something very similar to the asset. The more difficult or costly to reproduce an asset the more likely it is that you can sustain your advantage over time.
• Imitable doesn’t mean no one can produce something similar, as they say imitation is the most sincere form of flattery. But there must be some component that only you can produce or perform, either because of legal restrictions such as patents, or a technical difficulty that makes is very hard to reproduce.

Is this asset owned by the organization?

• Our last test is about the ability to own or control an asset - do you, and you alone, have control over the asset. This could be a uniquely build product, location, process or intellectual property. But it must be something that is owned and controlled by your organisation. This could be a proprietary patent, or ownership of a central real estate location. But the key is that no-one else has any legal avenue to use the asset without your explicit permission.
• Sometimes a leased asset, such as lease over a location or an exclusive licensing agreement for distribution or use of another companies information could be considered “owned” if your agreement is legally strong enough. Otherwise, if the licence or lease can be revoked, it may not be strong enough to be a competitive advantage.

An example of VRIO in practice

Looking at all four, lets examine three assets for a local café – their espresso machine, their lease of location as the sole kiosk on the ground floor of an office complex, and their unique coffee recipe.

1. Their espresso machine is very valuable as it generates products for clients and the café as an organization can use it, but it is not rare and easy to imitate as other cafes can easily purchase them.
2. Their location is valuable as it provides prime access to clients as their leave their office, and as the only kiosk in the building is rare and difficult to imitate. However, the organization only own this resource as long as they hold the lease – and another café could bid on this in future.
3. Their unique coffee recipe is valuable, as it has proven very popular in the local area, it is rare as it is a newly developed technique, and is difficult to imitate as it is hard to reproduce a recipe from a final product. Lastly, because the coffee recipe was invented at the cafe, it is owned.

Of the first two assets, their lease has the highest strategic value – and highlights an important weakness that should be mitigated. For the café to continue operating, it must maintain on good terms with the complex manager to ensure they keep control of the location. But the asset that gives the best competitive advantage, is the recipe - this then presents the best opportunity for strategic growth.