Assuption of the industrial organization model
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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:
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)
Most firms competing in an industry or an industry segment control similar sets of strategically-relevant resources and thus pursue similar strategies.
Resources used to implement strategies are highly mobile across firms.
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:
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).
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.
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:
General Environment
Industry Envrionment
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:
Demographic - population size, age structure, ethnic mix, & income distributions (Why is understanding this environment important?)
Economic- Inflation and interest rates, savings rates (personal and Business), trade deficits/surpluses, & GDP.
Political/Legal - Laws (antitrust, tax, & labor), regulatory philosophies, & educational philosophies.
Sociocultural - Workforce diversity, quality of work life, environmental concerns, & work and career preferences.
Technological - Product & process innovation, R&D issues, & application of knowledge.
Global - Important global events, different cultural & institutional characteristics.
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)
Most firms competing in an industry or an industry segment control similar sets of strategically-relevant resources and thus pursue similar strategies.
Resources used to implement strategies are highly mobile across firms.
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:
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).
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.
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:
General Environment
Industry Envrionment
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:
Demographic - population size, age structure, ethnic mix, & income distributions (Why is understanding this environment important?)
Economic- Inflation and interest rates, savings rates (personal and Business), trade deficits/surpluses, & GDP.
Political/Legal - Laws (antitrust, tax, & labor), regulatory philosophies, & educational philosophies.
Sociocultural - Workforce diversity, quality of work life, environmental concerns, & work and career preferences.
Technological - Product & process innovation, R&D issues, & application of knowledge.
Global - Important global events, different cultural & institutional characteristics.
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