Industrial and Organization Paradigm of Strategy

¶ … Industrial/Organization Paradigm of Strategy promotes the idea that "a firm's performance in the marketplace depends critically on the characteristics of the industry environment in which it competes"(Michael Porter, 1983,-Page 610).

Basically, following this model, the constraints for the decision making process are not internal, as in the resource-based view model, but external. The external variables from the macroeconomic environment determine internal decisions reflecting themselves in the company's strategy and its performance. As such, the I/O Paradigm follow a three-steps approach: industry structure -> company strategy -> performance (Michael Porter, 1983,-Page 611). As we can see, the industry structure is essential in the decision making process, as one of its important determinants.

In terms of industry structure, the initial creators of this model referred to elements such as entry barriers, product differentiation on the market, number and size of the distribution firms etc. (Michael Porter, 1983,-Page 611). All these may determine the way that a company reacts on the market, the actions it takes and, in the end, through the decision making process, the way in which it gains a competitive advantage over other companies.

The relationships that the company is able to establish with the other entities on the market are also essential in determining strategy and performance, following the oligopoly theories later developed. In this sense, the model relies greatly on the competition structure that is formed on the market and defines organizational strategies in relationship with the way competition manifests itself on the market. Game theory, studying reactions from organization to different actions on the market, helps create scenarios of how economic entities are likely to act and react in certain macroeconomic conditions.

On the other hand, the Resource-Based View (RBV) model basis the strategic decision process on the analysis of internal resources and of the organization's internal environment. In other words, the RBV approach promotes the idea that "the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's disposal" (Wernerfelt, 1984, p172 and Rumelt, 1984, p557-558).

Following this model, the organization needs to be able to answer two important questions, referring to (1) the strongest business assets that will allow it to build a competitive advantage through increased economic value-added (EVA) and (2) the unique resources and capabilities that it can employ in this sense (Kotelnikov, on (http://www.1000ventures.com/business_guide/mgmt_stategic_resource-based.html).

The model proposes three important steps for the company's decision making process. First of all, the company needs to identify its key resources. These can range from the organization's financial strength to its human resource and dedicated, capable managers and can also include technological capacities, patents of invention that make it competitive on the market etc.

Second, once these key resources are identified, the organization's management needs to evaluate whether the key resources are valuable, rare, imperfectly imitable and imperfectly substitutable. These conditions lead to the development of a distinctive competitive advantage for the organization.

Obviously, if we look at this model, many of the statements are logical ones. An organization will create a competitive advantage on the market if it possesses one or more internal resources that are not available to other companies. This will create the economic value added that will make the difference on the market.

As we can see from the previous descriptions, the main difference between the Industrial/Organization Paradigm of Strategy Model and the Resource-Based View Model is related to the models' focus.

The I/O Model bases its focus on the external environment and on evaluations of opportunities and threats on the market, as well as the competition and relationships with other entities present on the market. The competitive advantage for an organization, following the I/O Model, results from the way it is able to speculate competitive relationships on the market and to improve external mechanisms such as distribution, customer retention processes etc.