Compare and contrast the industrial organization (I/O) and resource-based views (RBV) on competitive advantage.1. How does each develop a...

Compare and contrast the industrial organization (I/O) and resource-based views (RBV) on competitive advantage.

1. How does each develop a competitive advantage?

2. What is the focus of each view?

3. What are their determinants of profitability?

 

Expert Answers
rogal eNotes educator| Certified Educator

The Resource-Based View (RBV) is a model that sees the performance of the firm in terms of its resources. Its proponents focus on the view that firms should look for the sources of competitive advantage within the firm rather than outside of it. The firm’s resources lead the path towards the achievement of greater performance. Two types of resources are defined: Tangible and intangible. Tangible resources are the physical resources such as land, buildings, machinery and other fixed assets. These resources can easily be acquired by competitors, hence provide a short-lasting competitive advantage. Intangible resources, on the other hand, cannot be physically seen and include assets such as customer loyalty, the reputation of the brand and trademarks. They offer a longer lasting competitive advantage to the firm. The RBV model proposes that firms develop competitive advantages by making use of their heterogeneous sets of resources. For instance, two firms offering the same products to the market may compete effectively due to their differing brand reputations. Also, a firm’s resources must be VRIO (Valuable, rare, costly to imitate and nonsubstitutable) so as to attain a sustained competitive advantage. As such, the determinants of a firm’s profitability are its tangible and intangible resources that must be VRIO for sustained performance.

The Industrial organization (I/O) model focuses on the view that external forces are dominant influences to a firm’s competitive advantage. It looks at the interrelationships in big industries that have few competitors, hence can control prices of products or research and development within the market. These markets are also characterized by entry barriers such as high costs of technology. The I/O model proposes that firms develop a competitive advantage by gauging or predicting competitors’ actions using game theory, thus, are able to develop counter strategies that give them an edge. As such, the determinants of a firm’s profitability include external factors such as the number and size of firms in the market.

kjtracy eNotes educator| Certified Educator

1. How does each develop a competitive advantage?

Industrial organizational (I/O) views develop a competitive advantage through marketplace analysis and internal organizational adaptation. I/O models are continually changing their internal constructs to compete with a changing external market. Resource-based views are less changeable, as they focus on building a unique and profitable enterprise from the inside out. By comparison, I/O organizations are built from the outside in. I/O models compete by responding while RBV models compete by managing internal resources.

2. What is the focus of each view?

The I/O model focuses on environmental analysis through opportunities and threats. For example, an I/O model might assess a new strategy in terms of the opportunity for profit and the threat of loss it presents.

The RBV focuses on organizing a company according to its strengths and weaknesses. This model takes a thorough account of all resources the company currently possesses, making it highly internal in focus.

3. What are their determinants of profitability?

The I/O model provides above-average returns with a determinant of probability that focuses on the company's external environment. Internal skills are then developed to meet the demands of the external environment. Success in this last step is the primary determinant of profitability in an I/O model.

The primary determinant of profitability for a resource-based model is the number of quality resources the firm possesses. If the firm or company's strengths outweigh its weaknesses, it will be profitable. If the weaknesses outweigh or outnumber the company's strengths, the company will not be profitable. The uniqueness of the company's resources is also a strong determinant of its competitiveness in any given market.