How do the industrial organization (I/O) and resource-based views (RBV) develop competitive advantage, focus, and determine profitability?

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The industrial organization perspective focuses on external factors in the marketplace, while proponents of a resource-based view focus on internal matters within the company.

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Proponents of the industrial organization model believe that a firm’s competitive advantage is based on external factors. According to this model, a company will get ahead by observing the actions of competitors and predicting their next moves. Competitive advantage, therefore, is obtained by gaining information on what other players in the market are doing.

According to the resource-based perspective, on the other hand, competitive advantage comes from internal rather than external sources. In other words, it is the human capital of the business, the customer loyalty that has built up around the brand, and other assets that the business already has that will make it more successful. As the name implies, the company will develop its competitive advantage based on the resources that it has.

The focus of the industrial organization model is on the external forces which impact the relevant industry and on the actions of competitors. For those following a resource-based perspective, the focus is internal and would include matters such as human resources policies to obtain and retain the greatest possible human capital.

In terms of determinants of profitability, those looking at the industrial organization model would consider the number, scale, and scope of their competitors. Those looking internally in accordance with a resource-based view would consider the determinants of their firm’s profitability to be the human and non-human resources that they have available. This would include their staff and the qualifications that various staff members have, equipment and technology that the company has at its disposal, and any raw materials and stock that the company owns.

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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 toward 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, and thus, they provide a short-term 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 noninterchangeable) so as to attain a sustained competitive advantage. As such, the determinants of a firm’s profitability are its tangible and intangible resources.

The Industrial Organization (I/O) model focuses on the view that external forces are the dominant influences on a firm’s competitive advantage. It looks at the interrelationships in big industries that have few competitors and 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 and then developing 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.

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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.

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