The I/O Model of Above-Average Returns: explains the external environment’s dominant influence on a firm’s strategic actions. The model specifies that the industry in which a company chooses to compete has a stronger influence on performance than the choices managers make inside the organizations do. FOUR BASIC ASSUMPTIONS:
1. The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above average returns.
2. Firms competing within an industry or a certain segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources.
3. Resources used to implement strategies are assumed to be highly mobile across firms, so that any resource differences that might develop between firms will be short-lived.
4. Organizational decision-makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors. STEPS TAKEN IN THE I/O MODEL:
1. Study the external environment, specifically the industry environment.
a. The external environment: general, industry, and competitor environment.
2. Locate an industry with high potential for above average returns.
a. An attractive industry: an industry whose structural characteristics suggest above average returns.
3. Identify the strategy called for by the attractive industry to earn above average returns.
a. Strategy formulation: selection of a strategy linked with above average returns in a particular industry.
4. Develop or acquire assets and skills needed to implement the strategy.
a. Assets and skills: assets and skills required to implement a chosen strategy.
5. Use the firm’s strengths (developed/acquired assets/skills) to implement the strategy.
a. Strategy Implementation: selection of strategic