FREE online courses on Introduction to Strategic Management - Alternative Models of Developing Strategic Competitiveness - The I-O Model

 

The I/O or Industrial Company model adopts an external perspective. It starts with an assumption that forces external to the company represent the dominant influences on a company's strategic actions.  In other words, this model presumes that the characteristics of and conditions present in the external environment determine the appropriateness of strategies that are formulated and implemented in order for a company to earn above-average returns.   In short, the I/O model specifies that the choice of industries in which to compete has more influence on company performance than the decisions made by managers inside their firm.

 

The I/O model is based on the following assumptions:

 

The external environment-the general, industry and competitive environments imposes pressures and constraints on companies and determines strategies that will result in superior returns.

 

In other words, the external environment pressures the company to adopt strategies to meet that pressure while simultaneously constraining or limiting the scope of strategies that might be appropriate and eventually successful.

 

Most companies competing in an industry or in an industry segment control similar sets of strategically relevant resources and thus pursue similar strategies.

This assumption presumes that, given a similar availability of resources, the majority of companies competing in a specific industry-or in a segment of the industry-have similar capabilities and thus follow strategies that are similar. In other words, there are few significant differences among companies in an industry.

 

Resources used to implement strategies are highly mobile across firms. Significant differences in strategically relevant resources among companies in an industry tend to disappear because of resource mobility.  Thus, any resource differences soon disappear as they are observed and acquired or learned by other companies in the industry.

 

The I/O model was a dominant paradigm from the 1960s through the 1980s. According to this model companies must pay careful attention to the characteristics of the industry in which they choose to compete, searching for one that is the most attractive to the firm, given the company's strategically relevant resources.  Then the company must be able to successfully implement strategies required by the industry's characteristics to be able to increase their level of competitiveness.  The five forces model is an analytical tool used to address and describe these industry characteristics.

 

 

Figure: Five step Process of the I/O Model

 

Based on its underlying assumptions, the I/O model prescribes a five-step process for companies to achieve above-average returns as shown in the figure above:

1.                  Study the external environment-general, industry and competitive-to determine the characteristics of the external environment that will both determine and constrain the company's strategic alternatives.

2.                  Select an industry (or industries) with a high potential for returns based on the structural characteristics of the industry.

3.                  Based on the characteristics of the industry, in which the company chooses to compete, strategies that are linked with above-average returns should be selected. A model or framework that can be used to assess the requirements and risks of these strategies, the Generic Strategies (cost leadership and differentiation), will be discussed in detail later.

4.                  Acquire or develop the critical resources-skills and assets-needed to successfully implement the strategy that has been selected.

5.                  The I/O model indicates that above-average returns will accrue to companies that successfully implement relevant strategic actions that enable the company to leverage its strengths (skills and resources) to meet the demands or pressures and constraints of the industry in which they have elected to compete.

 

The I/O model has been supported by research indicating 20% of company profitability can be explained by industry characteristics and 36% of company profitability can be attributed to company characteristics and the actions taken by the company. Overall, this indicates a reciprocal relationship-or even an interrelationship-between industry characteristics (attractiveness) and company strategies that result in company performance.