The I/O Model of Above-Average Returns

• 1. Study the external environment, especially the industry environment.

  THE EXTERNAL ENVIRONMENT

  • general environment
  • industry environment
  • competitor environment
• 2. Locate an industry with high potential for above-average returns.

  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

  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.

  ASSETS AND SKILLS

  • assets and skills required to implement a chosen strategy
• 5. Use the firm's strengths (its developed or acquired assets and skills) to implement the strategy.

  STRATEGY IMPLEMENTATION

  • selection of strategic actions linked with effective implementation of the chosen strategy
• SUPERIOR RETURNS


  earning of above-average returns
• Above-average returns are earned when firms are able to effectively study the external environment as the foundation for identifying an attractive industry and implementing the appropriate strategy.
• For example, in some industries, firms can reduce competitive rivalry and erect barriers to entry by forming joint ventures.
• joint ventures increase profitability in the industry
• Companies that develop or acquire the internal skills needed to implement strategies required by the external environment are likely to succeed, while those that do not are likely to fail.
• I/O model suggests that returns are determined primarily by external characteristics rather than by the firm’s unique internal resources and capabilities.