Industrial Organization Model versus Resource-Based View
The industrial organization (I/O) model favors the external environment.
It explains that the industry or industry segment in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices that it makes inside the organization.
The resource-based view (RBV) favors the internal environment.
It assumes that each organization is a collection of unique resources that provides the basis for its strategy. According to this model, differences in firm performances across time are due primarily to their unique resources rather than the industry structural characteristics. Firms that have unique resources can develop core competencies to gain a competitive advantage.
Research on I/O Model versus RBV
Research shows that approximately 20 percent of a firm’s profitability is explained by the industry in which it chooses to compete. However, research also shows that 36 percent of the variance in firm profitability can be attributed to the firm’s characteristics and actions.
Thus, managers’ strategic actions affect the firm’s performance in addition to or in conjunction with external environmental influences. These findings suggest that the external environment and a firm’s resources, capabilities, core competencies, and competitive advantages influence the company’s ability to achieve strategic competitiveness and earn above-average returns.
Most of the firms in the airline industry are similar in services offered and in performance. They largely imitate each other and have performed poorly over the years. The few airlines which have not followed in the mode of trying to imitate others have developed unique and valuable resources and capabilities on which they have relied to provide a superior product (better service at a lower price) than major rivals.
The Right Model: I/O or RBV?
In general, both the industrial organization (I/O) model and the resource-based view (RBV) affect the profitability of a firm. It is hard to confirm with any degree of certainty that either external or internal factors will always or even consistently be more important in seeking competitive advantage.
Research shows that both the industry environment and a firm’s internal assets affect that firm’s performance over time. A firms’ profitability can be explained by the industry environment in which it chooses to compete. It can also be attributed to the firms’ internal resources, capabilities, and core competencies. Thus, to form a vision and mission, and subsequently to select one or more strategies and determine how to implement them, firms use both the I/O and resource-based models. In fact, these models complement each other in that one (I/O) focuses outside the firm while the other (resource-based) focuses inside the firm.
It is not just a question of whether the external or internal environment is more important in gaining and maintaining competitive advantage. A firm should explore its internal resources (RBV model) and keep them in synergy with the external environment (I/O model). Effective integration and understanding of both environments are the keys to securing strategic competitiveness. In conjunction, the external and the internal environment drive the performance of a firm. Both of these environments influence the firms’ ability to achieve strategic competitiveness and earn above-average returns.