I/O Model of Superior Returns

External
External Action required:
Environment
Environment Study the external
environment, especially the
General
General Environment
Environment industry environment.
Industry
Industry Environment
Environment
Competitive
Competitive Environment
Environment
 I/O Model of Superior Returns

External Action required:

Environment Locate an industry with high
An
An Attractive
Attractive
potential for above-average
Industry
Industry
General Environment
returns.
Industry Environment
An
An industry
industry whose
whose
Competitive
structural
structural characteristics
characteristics
Environment
suggest
suggest above-average
above-average
returns
returns are
are possible
possible
 I/O Model of Superior Returns

External Action required:

Environment Identify strategy called for by
Attractive
the industry to earn above-
Industry
General Environment
average returns.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment
suggestSelection
above-average
Selection of
of aa strategy
strategy linked
linked with
with
returnsabove-average
are possible returns
above-average returns in
in aa
particular
particular industry
industry
 I/O Model of Superior Returns

External Action required:

Environment Develop or acquire assets and
Attractive
skills needed to implement the
Industry
General Environment
strategy.
Industry Environment Strategy
An industry whose
Competitive Formulation
structural characteristics
Environment Selection of Assets
suggest above-average a strategyand Skills
returns are possible
linked with above-average
returns in a Assets
Assets and
and skills
particular skills required
required
industry to
to implement
implement aa chosen
chosen
strategy
strategy
 I/O Model of Superior Returns

External Action required:

Environment Use the firm’s strengths (its
Attractive
assets or skills) to implement
Industry
General Environment
the strategy.
Industry Environment Strategy
An industry whose
Competitive Formulation
structural characteristics
Environment Selection of Assets
suggest above-average a strategyand Skills
returns are possible
linked with above-average
returns in a Assets andStrategy
particular Strategy
skills required
industry Implementation
Implementation
to implement a chosen
strategy
Selection
Selection of
of strategic
strategic actions
actions
linked
linked with
with effective
effective
implementation
implementation of of the
the
chosen
chosen strategy
strategy
 I/O Model of Superior Returns

External Action required:

Environment Maintain selected strategy in
Attractive order to outperform industry
Industry
General Environment
rivals.
Industry Environment Strategy
An industry whose
Competitive Formulation
structural characteristics
Environment Selection of Assets
suggest above-average a strategyand Skills
returns are possible
linked with above-average
returns in a Assets and Strategy
particular skills required
industry to implement a chosen
Implementation
strategy Superior
Superior Returns
Returns
Selection of strategic actions
linked with effective
Earning
Earning ofof above-
above-
implementation of thereturns
average
average returns
chosen strategy
 Resource-Based
Model of Above-Average Returns
 Resource-Based
Model of Above-Average Returns
 Each organization is a collection of unique resources and
capabilities, which provides the basis for designing its
strategy and helps to earn above average return.

 Capabilities which are evolved must be managed dynamically.

 Differences in firms’ performances are due primarily to their

unique resources and capabilities rather than structural
characteristics of the industry.

 Firms acquire different resources and develop unique

capabilities
Resources and Capabilities
Resources:
Inputs into a firm’s production
process.
(Can be tangible or intangible)
Capital equipment
Technology
Financial position
Skillful workforce
Innovation
Brand name
Capabilities:
Capacity of a set of resources to
perform a task in an integrative
manner.
A capability should not be:
 So simple that it is
highly imitable
 So complex that it defies
internal steering and
control
Four Key Criteria of Resources and Capabilities

1. Valuable

2. Rare

3. Costly to Imitate

4. Non-substitutable:
Core Competencies
 When the four key criteria of resources and capabilities are met,
they become core competencies.

 Core competencies serve as a source of competitive advantage.

 For Example:
◦ Honda: Small engine design and manufacturing;
◦ Sony: Miniaturization;
◦ Microsoft: User-friendly products
◦ PepsiCo: Mass production and distribution.
◦ Apple: Product design
Resources and Capabilities, Core Competencies, and
Outcomes

Core
Valuable
Competencies

Competitive
Rare
Advantage

Costly to Imitate Value Creation

Above Average
Non-substitutable
Returns
Steps in Resource-Based Model of
Above-Average Returns
Resources

1. Identify the firm’s resources.

Study its strengths and
weaknesses compared with
those of competitors.

• Inputs into a firm’s

production process
 Cont..
Resources

Capability 2. Determine the firm’s

capabilities. What do the
capabilities allow the firm to
do better than its competitors.

• Capacity of a set of
resources to integratively
perform a task or activity
 Cont..
Resources

Capability 3. Determine the potential of the

firm’s resources and capabilities
in terms of a competitive
Competitive advantage.
Advantage
• Ability of a firm to
outperform its rivals
 Cont..
Resources

Capability 4. Locate an attractive industry.

Competitive • An industry with

Advantage
opportunities that can
An Attractive be exploited by the
Industry firm’s resources and
capabilities
 Cont..
Resources

Capability 5. Select a strategy that best allow

the firm to utilize its resources
and capabilities relative to
Competitive opportunities in the external
Advantage environment.

An Attractive • Strategic actions taken to

Industry earn above-average
Strategy returns
Implementation
 Cont..
Resources

Capability

Competitive
Advantage

An Attractive
Industry • Superior returns: earning
Strategy
of above-average returns
Implementation

Superior Returns