The IO Model of Above - Average Returns PDF

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Resumen de un articulo que habla sobre un modelo especifico de negocios. Resumen en Ingles. ...

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The I/O Model of Above - Average Returns. In the mid-twentieth century the ideal strategy for a company was the industrial organization model of above-average returns. This model describes the external environment as a primary determinant for a strategy of firms to use for successfulness. The strategy was used because the firms used to think that the industry in which you compete must be essential to do a better work than change the way of administration in the company. Some examples of external environment can be economies of scale, barriers to market entry, diversification, product differentiation, the degree of concentration of firms in the industry, and market frictions. The I/O model have four assumptions: the external environment would determine the strategy of above-average returns; firms that compete in the same or similar industry would have the same strategy and resources to compete; similar resources would be used in the firms, and the differences between resources in the firms would be used only for short time; the decisions made in the firms would be only in the best interest of the company. This model was so popular due to all the companies that used the same resource and strategy, so the firms started to imitate each other in order to compete in an equal level in the same industry. The five forces model was used to identify the attractive in a company as also to help find the position in the market. The five forces are supplier, buyers, competitive rivalry among firms currently in the same industry, product substitutes, and potential entrant in the industry. The interaction between those five forces function to identify the profitability of the industry. The I/O model explains that when a firm does a correct investigation about the external environment as the main focus for creating a strategy, it will give above-average returns. Meaning that firms that tend to invest more in their strategies for the external environment are more prone to succeed that one firm that does not. The model follows five steps: (1) The study of the external environment, not forgetting the importance of the industrial and the competitor environment; (2) Find an attractive industry, where the firm will know that they will get above-average returns; (3) When the industry is selected, according to it and to the main goal, which is above-average returns, they firm need to find the perfect strategy that will be implemented; (4) For implementing the strategy, it is very important to invest in it, so that it will turn out well, so it is very important to develop and/or acquire assets and skills to carry out the strategy; and (5) This step is when the strategy is implemented by using the firm strengths, that are the new and developed skills. This model can lead to realize that as much as everything is important to consider when trying to succeed as a firm, it is extremely important to know what and how to make it

succeed. Meaning that at the end of the day it doesn’t really matter what the firm is selling but how does the firm is approaching to the public. The I/O model tells us that we must analyze and deeply understand the external environment for a company to succeed, for this managers must be able to locate the industry with the highest potential but also find the correct management strategy. This strategy cannot focus solely on eliminating or joining the competition (ex. joint ventures), it also has to innovate and add value to their products. For the company to accomplish its vision it must be prepared internally and understand what’s happening externally and so be ready to manage the variables and uncertainties of venturing the market. The airline industry can be an example of the I/O Model, since for many years it was heavily regulated, which caused many companies in the market to be virtually similar, even after deregulation. Many mergings occured overtime (Northwest Airlines and Delta, United and Continental, US Air and American) due to consolidation. The services did not differed significantly, but improved instead (On-Time flights, less carriage loss, etc) proving that it still represented a major part for the industry. Airlines like American and Delta suffered several fall-outs with time. It was in cases like those that the difference between airlines were shown. On the other hand, companies like Southwest developed its resources and capabilities, allowing it to improve its service and performance....