 The industrial organization (I/O) model is a model constructed to help us better understand the Industrial organization. Show
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 ModelDuring 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 ModelTo 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 ModelTo 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) ModelThe industrial organization (I/O) model assumes the following:
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,
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. ResourcesFurther ReadingRelated ConceptsReferences
You're Reading a Free Preview
In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. Pratik Poudel A strategy is the combination of actions to exploit core competencies through which a company creates its own competitive edge. Every firm has or must makea strategy. A strategy is the only way that gives a clear cut path for a company or firm to excel. Similarly a person should also have a strategy, isn’t it? How can somebody excel without strategy? But for strategy you need to have your core competencies first. What are your core competencies? For this you need to keep exploring yourself. Don’t be afraid from exploring yourself.Well, let’s focus on two particular theories to make strategies. The first theory is called the I/O Model or Industrial organization model. This model explains it is the external environment which you should take care of before you make your strategy. This model explains that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices managers make inside the organization. The I/O model has four assumptions. The first assumption is that it is the external environment that creates pressures and constraints for a firm to make its strategy. The second assumption is that the firms competing within a particular industry has similar resources under their control. Therefore the firms under these industries are more or less equal. The third assumption is that the resources that are under their control are highly mobile. And the fourth assumption is that the organizational people are rational human beings. The resource based model on the other hand gives us a different aspect than theI/O model. The resource based model assumes that each organization is a collection of unique resource and capabilities that provides the basis for its strategy and that is the primary source of their return. According to this model, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics. So, this model focuses on unique resources and capabilities. If you have those unique resources, then you can develop the capabilities to gain competitive advantage. So, which is the model that you should follow to make personal strategy? I think you need to have the amalgamation of both models to make strategies. First, as Ihave already stated earlier, don’t hesitate to explore various things. As an entrepreneur you should not stick your own personal tastes and preferences. You should try to explore the market (external environment) to determine your resources (develop unique resources) to gain competitive advantage. Every firm has its own uniqueness. But the uniqueness does not have any value unless that uniqueness leads you to competitive advantage. Therefore, explore your core competencies (Resource based model) and keep it updated with the external environment (I/O Model). |
What is the difference between the IO and resource based models?
Pos Terkait
Copyright © 2024 membukakan Inc.
