As shown in Figure 1.2, the I/O model suggests that firms earn above-average returns
by studying the external environment effectively as the foundation for identifying an attractive industry and implementing an appropriate strategy in it. For example, in some industries, firms can reduce competitive rivalry and erect barriers to entry by forming joint ventures. In turn, reduced rivalry increases the profitability potential of firms that are collaborating.83
Companies that develop or acquire the internal skills needed to Hence, this model suggests that the characteristics implement strategies required by the external environment are likely to succeed, while those that do not are likely to fail.84
Figure 1.2 The I/O Model of Above-Average Returns
1. Study the external environment, especially the industry environment.
The External Environment • The general environment • The industry environment • The 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.
• Selection of a strategy linked with above-average returns in a particular industry
4. Develop or acquire assets and skills needed to
Assets and Skills implement the strategy.
• 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
• Earning of above-average returns