According to the i/o model, what should a firm do to earn above-average returns?

. I/O Model of above average Returns
Introduction:
It explains influence of external environment influence on a firm's strategic actions and performance.
Assumptions:
1) External environment can leading to AAR.
2) Most firms compete in an industry control similar resources & strategies
3) Resources are highly mobile across firms
4) Decision makers should be rational & act in the firm’s best interests
Steps:
1) Study the external environment
2) Locate the industry
3) Identify the industry’s strategy
4) Develop assets & skills on the strategy
5) Using the firm’s strengths in the strategy
Conclusion:
The I/O model of AAR challenges firms to locate the most attractive industry in which to complete because of the four assumptions.

2. Resource based model
Introduction:
Explain the unique internal resources & capabilities of a firm
1) Acquire different resources & develop unique capabilities
2) Resources are not mobile across firms
3) The unique resources & capabilities lead to differences in firms’ performance
4) Differences in resources & capabilities is the source of competitive advantage
Steps:
1) Identify the firm’s resources
2) Determine the firm’s capabilities
3) Determine the potential of its resources & capabilities in competitive advantage
4) Locate an attractive industry
5) Select a best strategy

3. Vision, Mission
Vision is picture of what the firm want to be & achieve
[Microsoft: A computer on every desk, running Microsoft software]
Mission: Identify the firm’s purpose & reason for existence
[3M: Innovative solutions to problems]

4. Stakeholders
Individuals and group who can affect & are affected by the firm.
Three classifications:
Capital Market: shareholders; capital suppliers (banks)
Product Market: customers; suppliers; unions
Organizational: employees; managers

Topic 1A

Eight Performance measures
1) Firm Survival
2) Accounting Measures
3) Multiple stakeholder approach
4) Present value
5) Market value added and Economic value added
6) Balanced score card
7) Corporate social responsibility
8) Sustainability and Triple Bottom Line

Lecture 2

5. Components of external environment analysis
1) Scanning: Identifying early signals of environmental changes & trends (EBay records information from customers; Cookies)
2) Monitoring: Detecting ongoing observations of environmental changes & trends (Size and wealth of middle class African-Americans is increasing)
3) Forecasting: Forecasting what might happen based on monitored changes & trends
4) Assessing: Determining the timing & importance of environmental changes & trends (ability to receive video on cell phone)

6. How components of general environment affects strategy
1) Demographic: It analysed on Global basis, like population size (1.3billion), age, geographic distribution, ethnic mix & income distribution. For example, a firm can use demographics to predict future business demand; population growth & decline must be included in long range strategic planning of every corporation.
2) Economic: the nature & direction of the economy in which a firm competes (inflation rates, interest rates)
3) Political/Legal: How organizations & government influence each other (Employment laws)
4) Socio-cultural: Saudi women cannot drive cars
5) Technological: product innovation
6) Global: new global market, important political event

7. Industry environment analysis using Porters’ five forces model and interpreting Industry Analysis
Industry: group of firms producing products that are close substitute.
1) Threat of new entrants: can threaten market share of existing competitors by bringing additional production capacity. Two factors: barriers to entry (economies of scale: quantity ↑ cost↓, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, Gov’t policy) & Expected retaliation (Honda in US market)
2) Bargaining power of suppliers: Increasing prices or reducing the quality. Powerful when

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The industrial organization (I/O) model is a model constructed to help us better understand the Industrial organization.

Industrial organization is a field in economics. It studies the structure of firms and the markets where firms compete against one another. Understanding these concepts is vital for firms in setting the right strategic direction.

Note that there are four basic market types: (1) perfect competition, (2) monopolistic competition, (3) oligopoly, and (4) monopoly. The other three advanced types are (1) duopoly, (2) oligopsony, and (3) monopsony.

The industrial organization (I/O) model stems from the literature on monopolistic competition.

Simple Explanation of the I/O Model

During strategy formulation, firms consider two primary factors: the external and internal environment. The external environment consists of the general environment and the industry environment.

In the I/O model, the industry environment has a dominant influence on strategies. It is most likely to determine the firms’ strategic conduct, and actions to deploy. These actions then result in competitive advantage.

The internal environment is only a minor factor in determining strategies. Resources and capabilities do not have a big impact on the firms’ strategic direction.

The First Implication of the I/O Model

To achieve strategic competitiveness, firms need to identify the industry that provides the best opportunities.

This is because the I/O model implies that the industry in which a firm operates has a much higher impact on its performance than internal resources, capabilities, and core competencies.

Managing strategically from the I/O model perspective would entail firms competing in attractive industries, avoiding weak or faltering industries. Firms should gain a full understanding of key external factor relationships within that attractive industry.

Characteristics of the industry would dictate the firms’ performance. Higher performance then leads to higher above-average (superior) returns.

These characteristics include (but are not limited to) barrier to entry, economies of scale, product differentiation, price discrimination, industry life cycle, measures of concentration, market power, and market frictions.

The Second Implication of the I/O Model

To increase their performance, firms can prepare internal resources and capabilities needed to implement necessary strategies.

The companies that can utilize their resources, capabilities, and core competencies might succeed in earning above-average returns. Those that do not are likely to fail.

Thus, firms must either find ways to imitate each other or try to develop strategically unique and valuable resources. Firms with imitation may perform poorly, especially in long term. Those that can obtain strategic resources and capabilities might, on the other hand, develop a foundation for superior products and services at a lower price.

The Four Assumptions of Industrial Organization (I/O) Model

The industrial organization (I/O) model assumes the following:

1. The external environment imposes pressures and constraints that determine the firms’ strategy.
2. Most firms control similar resources and pursue similar strategy that utilizes these resources. Thus, firms under an industry are more or less equal.
3. Resources are mobile across firms, so any resource differences might only be short-lived.
4. Organizations’ decision-makers are rational and committed to acting in the firms’ best interests.

These are the limitations of this model.

Process to Earn Superior Returns (based on I/O Model) 

To earn above-average returns, the I/O model suggests these five steps that firms should complete. 

They are,

1. Study the external environment. This includes the general environment and industry environment.
2. Locate the industry or industry segment with high above-average returns potential.
3. Formulate strategy based on the industry or industry segment identified.
4. Prepare resources (assets and capabilities) needed to implement the strategy.
5. Deploy these resources (as the firms’ strengths) for actual implementation of the strategy.

Industrial Organization (I/O) Model versus Resource-Based View (RBV)

The industrial organization (I/O) model favors the external environment.

It explains that the industry or industry segment in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices that it makes inside the organization.

The resource-based view (RBV) favors the internal environment.

It assumes that each organization is a collection of unique resources that provides the basis for its strategy. According to this model, differences in firm performances across time are due primarily to their unique resources rather than the industry structural characteristics. Firms that have unique resources can develop core competencies to gain a competitive advantage.

The Right Model: I/O or RBV?

In general, both the industrial organization (I/O) model and the resource-based view (RBV) affect the profitability of a firm.

A firms’ profitability can be explained by the industry environment in which it chooses to compete. It can also be attributed to the firms’ internal resources, capabilities, and core competencies.

In conjunction, the external and the internal environment drive the performance of a firm. Both of these environments influence the firms’ ability to achieve strategic competitiveness and earn above-average returns.

It is not just a question of whether the external or internal environment is more important in gaining and maintaining competitive advantage. A firm should explore its internal resources (RBV model) and keep them in synergy with the external environment (I/O model).

Effective integration and understanding of both environments are the keys to securing strategic competitiveness.

What is the i/o Model of strategy?

What does it mean for a company to earn above normal above

What is the key to success according to the i/o Model?

What strategy enables a firm to achieve above