I always like to say that I grew up in a sales and marketing environment, having had the privilege of being exposed to small business management and entrepreneurship from a young age. Once I started my studies in marketing and business management and gained more experience in the space, I started really noticing the gap between theory and implementation, especially in small businesses. I’d like to think that this is partly due to the concepts having been established for and taught with the aim of implementing them in larger organisations rather than smaller businesses. So many of these concepts are incredibly valuable to small businesses as well, even for the so-called solopreneurs. One such concept that I have been exposed to over the last year or so has been that of sustainable competitive advantage and the VRIO framework.
Let’s have a look at what sustainable competitive advantage is, how to measure it, and how to plan for it in a small business setting.
What is a Sustainable Competitive Advantage?
Having a competitive advantage over others in your industry means that there is something about your business that allows you to outperform your competitors. Basically, when you are better at competing in your industry than others within your industry you have a competitive advantage. As basic as that might sound, many small business owners neglect to take the time to consider if they are actually competitive in their industry and why. After all, there must be a reason why customers and clients opt to make use of your product or services? Now, once you have established if you in fact have a competitive advantage, the next question to ask is, is that competitive advantage sustainable? Will it be possible for your business to continue to compete and perform at the level that you do for the foreseeable future?
How do I Know if I Have a Sustainable Competitive Advantage?
Determining if your business does have a sustainable competitive advantage is not as simple as just looking at what you are doing from an output and profit point of view. You need to have a deeper look at your business’ resources and capabilities, effectively what your business has (resources) and what your business can do (capabilities). These can be tangible or intangible. For example, the physical ingredients in your products, skills and knowledge, patents, your office building, your time, etc. These resources and capabilities are what allow you to compete in your industry. Now, to understand if these resources and capabilities offer you a sustainable competitive advantage, we need to put them through the VRIO framework.
The VRIO Framework
Below is a handy illustration of how we go about putting the business’ resources and capabilities through the VRIO framework. This framework requires us to look at our resources and capabilities and ask the following questions:
Is it valuable?
Is it rare?
Can it be easily imitated?
Do we as a business have the capability of taking advantage of it?
As you can see in the diagram, as you move from one step to the next in the framework, you attain different levels of competitive advantage. For your resource or capability to offer you a sustainable competitive advantage, you need to be able to answer yes to all of the questions. In effect, your resource or capability should be valuable, rare, and difficult to imitate, and you should be able to take advantage of it.
A practical example of this could be a certain teaching method for a sport that you have perfected over the years and you would like to start your own coaching practice. This method is an intangible resource or capability that we now can put through the VRIO framework to see if it really does offer you a sustainable competitive advantage.
Is the teaching method valuable? Yes. It has proven to aid competitors of the sport in their endeavour to excel and achieve in the sport.
Is the teaching method rare? Yes. You are the only person who understands it and can teach it.
Is the teaching method easy to imitate? Yes. Someone could attend the classes and copy what you do.
Are you able to take advantage of the teaching method? Not entirely. You are only one person and you won’t be able to teach enough students to make enough profit to support yourself.
Effectively what we have here is a small business that has a temporary competitive advantage and also borders on unused competitive advantage. We didn’t really have to ask the last question because the framework requires that you stop once you come to a stage where the answer is no, but I included it as an example of how to ask the question.
How Do I Address the Different Stages in the Framework?
The most basic requirement for any resource or capability to be worth your time and effort is that it must be valuable. As the saying goes: “innovation is creativity that is useful.” If it doesn’t add value, it’s not worth it (competitive disadvantage).
If it is valuable but not rare, then you are able to compete in your industry but not excel (competitive parity). When something is rare, it means that it is not easy to come by, which in turn increases demand. In our example, the teaching method adheres to the rarity requirement which means that access to the method is not easy to come by. This will allow you to ask for a higher price per coaching session because people are willing to pay for it (valuable) and there is a high demand (rarity). If it is not rare, people will still be willing to pay for it, but you won’t be able to charge higher than the market rate because they can simply go elsewhere to get it.
If it is valuable and rare but easy to imitate, then you have an advantage for now (temporary competitive advantage). As explained in our example, it could be possible for competitors to imitate the training method. Honestly, true inimitability is incredibly rare to come by. Anything and everything we do, especially in small businesses, is imitable in one way or another. What’s more, when we talk about imitability, we’re not just talking about an exact copy, we’re also talking about substitutes. There are rare instances (like Coke) where the resource or capability is completely inimitable and this is generally a result of great effort by the business themselves. For small businesses, I feel that inimitability should always be considered as part of a bigger whole. Where the teaching method could be imitated, it can be difficult for the competitor to imitate the teaching experience, the prestige that you as the coach bring with you (your brand), the feeling of community that your student has as part of the classes, any sundry perks that your students receive from being part of your sessions, and so forth. So, while the single resource or capability is imitable, it’s important for small businesses to consider it as part of the whole when reaching this stage in the framework.
If it is valuable, rare, difficult to imitate, but you are unable to take advantage of it, then it offers no value to your business unless you do something about the way in which your business is structured to take advantage of what it has to offer (unused competitive advantage). In our example, you are limited in your capacity to take advantage of the teaching method due to your capacity. Now you need to consider how you are going to restructure your other resources to address this limitation. For more on resource management for small businesses, have a look this my post “Effective Resource Management for Small Businesses”.
Why Should I Bother With the VRIO Framework?
At each stage in this framework, there are questions that you must ask yourself and steps that need to be taken that will help you make the most of the resources and capabilities that your business has. Following this approach will help you shift your thinking from the ‘the accidental entrepreneur’ to the one who chooses to be one. Knowing that your resources and capabilities will continue to provide you with an income and having the ability to spot gaps in your business structure and activities in advance is a must for any business owner. Using this framework will empower you to focus your efforts on that which will benefit your business the most and will help you to make decisions about business growth. An opportunity might sound great, but if it isn’t valuable it’s not worth it; if it isn’t rare it won’t add that much to your profits; if it’s imitable you’ll need to adapt again soon, and if you can’t take advantage of it, then it’s better to look elsewhere.
While this whole piece has been about sustainable competitive advantage, there is, however, an argument to be made that sustainable competitive advantage is not obtainable. Hyken does have a point in his article when he says that the whole concept is a myth and the strategist in me tends to agree. The way in which business and industry develop and evolves requires change, no matter how competitive your business may be. So, I would like to challenge you to approach this concept, not with the view of trying to obtain a sustainable competitive advantage for your business, but rather to reduce your need for change to stay relevant in your industry. While change is necessary for any business to survive, obtaining a competitive advantage (whether sustainable or not) shifts that change from defence (where you need to change in order to survive) to offence, where change is driven by growth instead of mere survival.