Question
Please provide an answer for this following essay: The I/O model of above-average returns explores the external environment influence of firms' strategic actions.The I/O model
Please provide an answer for this following essay:
The I/O model of above-average returns explores the external environment influence of firms' strategic actions.The I/O model indicates that the industry or a segment in the industry in which the company chose to compete has strong influence on performance than the choices of the managers inside the organization. The model challenges firms to operate in the most attractive industry, with high profit potential, and learn how to use their resources in implementing the strategy needed by industrial structural characteristics. Typically, the I/O model indicates that firms can earn above average returns by producing standardized goods at a cost that is lower than that of competitors (following a cost leadership strategy) or producing differentiated goods in which customers are willing to pay a higher price (Ireland, Hitt, & Hoskisson, 2016).The model suggests that above average returns are earned when firms effectively study the external environment as the basis of identifying the attractive industry and implementing the right strategy. For instance, in some industries, firms can reduce competition and erect barriers by establishing joint ventures to increase profitability. In the model, firms' earnings are determined by external characteristics rather than the unique internal capabilities and resources.
The 1/O model has four economic assumptions that firms should follow to earn above-average earnings. First, the external business environment is assumed to impose some constraints that determine strategies that result in above-average returns. Secondly, most firms competing in the industry are assumed to control similar resources and pursue similar strategies. Thirdly, resources used in implementing the firms' strategies are assumed to be highly mobile across the industry. Finally, decision-makers in the organization are assumed rational and committed to working for the firm's best interest (Ireland, Hitt, & Hoskisson, 2016). Essentially, the I/O model pushes firms to compete in attractive markets because it assumes that most firms will have similar and highly mobile resources. A firm's performance can only increase if the firm operates in a market that has high-profit potential.
References
Ireland, D., Hitt, M. A., & Hoskisson, R. E. (2016). Strategic Management: Concepts and Cases: Competitiveness and Globalization. Boston, MA: Cengage Learning.
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