Lecture 2

I/O Model

The I/O (Industrial Organization) Model adopts an external perspective to explain that
forces outside of the organization represent the dominate influences on a firm's
strategic actions and is based on the following four assumptions:

1. The external Environment The general, industry, and competitive environments

impose pressures and constraints on firms and determines strategies that will
result in superior returns. (External Environment à Organization)
2. Most firms competing in an industry or an industry segment control similar sets
of strategically-relevant resources and thus pursue similar strategies.
3. Resources used to implement strategies are highly mobile across firms.
4. Organizational decision-makers are assumed to be rational and committed to
acting only in the best interests of the firm.

Study the external environment; locate an industry with high potential for above average returns;
identify the strategy appropriate for the industry which brings the returns sought; develop or
quire assets and skills needed to implement the strategy; use the firm's developed strengths to
implement the strategy. (Can describe one or more weaknesses of this model?)

The Resource-Based Model

This model adopts an internal perspective to explain how a firm's unique internal resources and
capabilities serves as a basis for earning above average returns. The model is based on three
assumptions:

1. Each firm is a collection of unique resources and capabilities that provides the basis for
its strategy and is the primary source of firm returns (i.e. characteristics of the firm itself
constrains or limits the scope of strategies that might be appropriate).
2. Over time, firms acquire different resources and develop different or unique capabilities.
Firms therefore are likely to adopt and implement different strategies in their attempts to
achieve strategic competitiveness.
3. Resources may not be highly mobile across firms. (Once example of an exception to this
is people skills, e.g., computer industry).

To sum: according to this model a firm's resources and capabilities, found in its internal
environment, are more critical to determining the appropriateness of strategic actions, then the
conditions of the external environment. (Can you describe one or more weaknesses with this
model?)

One important aspect of this model has to do with internal resources and capabilities. These lead
to a competitive advantage when they are: valuable, rare, costly to imitate, and non-substitutable.
When they meet this standard they become known as core competencies or what the company is
known for being good at. Give some examples of company core competencies: Intel - designing
new chips quickly.

Stakeholders - Are the individuals and groups who can affect and are affected by the strategic
outcomes achieved and who have enforceable claims on a firm's performance.

Every organization has numerous stakeholders, both internally and externally. Sometimes the

The organization's environment consists of three components:

1. General Environment
2. Industry Envrionment
3. Competitor/Competitive Environment

General Environment: Consists of elements in the broader society that can indirectly influence an
industry and the firms within the industry. The general environment has an indirect effect on
strategic competitiveness and firm profitability. Consists of six segments:

1. Demographic - population size, age structure, ethnic mix, & income distributions (Why is
understanding this environment important?)
2. Economic- Inflation and interest rates, savings rates (personal and Business), trade
deficits/surpluses, & GDP.
3. Political/Legal - Laws (antitrust, tax, & labor), regulatory philosophies, & educational
philosophies.
4. Sociocultural - Workforce diversity, quality of work life, environmental concerns, &
work and career preferences.
5. Technological - Product & process innovation, R&D issues, & application of knowledge.
6. Global - Important global events, different cultural & institutional characteristics, &
emerging economies and markets.

Industry Environment: Consists of the factors that directly influences a firm and its competitive
decisions and actions. The IE directly affects strategic competitiveness and firm
profitability. Michael Porter's Five Forces Model of Competition illustrates the IE.

 Threat of New Entrants

 Threat of Substitute Products (Substitute Products? Fax machines for overnight delivery;
nutrasweet for sugar; plastics for glass)
 Bargaining Power of Buyers (Customers)
 Bargaining Power of Suppliers
 Rivalry Among Competing Firms in an Industry
Competitor/Competitive Environment: The competitor analysis provides an understanding of the
organization's current competitors and is a follow-up to an industry analysis.

 Future Objectives - Seeks to answer "What drives the Competitor?" Comparing goals,
emphasis, and attitudes toward risk.
 Current Strategy - Seeks to answer "What is/can the competition do?" How are we
competing and does our strategy support changes in the competitive structure?
 Assumptions - Seeks to answer "What does the competitor believe about itself and the
industry?" Volatile future or stable competitive conditions?
 Capabilities - Seeks to answer "What are the competitors capabilities?" Competitor's
strengths/weaknesses and comparison of yours to theirs.

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