This paper is going to try and identify the important issues that is critical to organisations is as far as the implementation of the both the Resource-Based View (RBV) and the Industrial organization (IO) models of Above Average Returns. It will draw results after comparing and contrasting the impacts of the internal and external environments on the organisation and in particular how strategically important it is to use or adopt the correct model. Both models have their advantages and disadvantages and this paper is going to try and capture them and put into perspective what issues that can be adopted from both models so that the organisation is able to sustain its operations and growth.
When studying Strategic Management, one cannot overlook the fact that there are two critical theories that are subjugated in the study and furthermore are deeply rooted on a diverse set of basic assumptions. These are Barney’s (1991) Resource-Based View (RBV) and Porter’s (1980) philosophy of Industrial Organization (IO). Dwelling further on these two models, it is evident that with the IO Model, its competitive advantage is greatly influenced by the industry whereas with the RBV Model, it is the company’s resources that will influence its economic growth or competitive edge.
Hypothetical and experimental results have indicated that industrial and organisational factors critically contribute to the required growth. They are inevitably part of both models and therefore are important to consider when deciding what model to adopt.
Resource-Based View (RBV) and Porter’s Industrial organization (IO), over the years, has proved to be one of the controlling viewpoints for strategic management studies. Spanos and Lioukas have identified that traditionally, these viewpoints were beheld reasonable vis-à-vis the root of unrelenting financial uprising. (Spanos & Lioukas 2001).
Drnevich & Kriauciunas both support the idea that when looking at the IO in detail, it is noted that the assets of any organisation are homogenous and transportable – in detail the homogeneous attributes of the resources can be identified as being comparatively undifferentiated, exclusive to the firm, widespread in the industry, idiosyncratic and not specific to the organisation or its competitors. (Drnevich & Kriauciunas, 2011:255).
Barney on the other hand says that with the RBV standpoint, the resources within a corporation is both permanent and heterogeneous. (Barney 1991). Amit & Schoemaker, Teece, Picano & Schuen and Drnevich & Kriaciunas all subscribe to the fact that the heterogeneous proficiencies are idiosyncratic, customized, unique, and/or specific to an organisation. Amit & Schoemaker (1993), Teece, Picano & Schuen (1997), Drnevich & Kriaciunas (2011:255)
Furthermore, commercial entities have the chance to develop on its competitive edge by utilising internal resources that are exclusive to the firm, uncommon, valuable, not easily imitated, and of course well systemised that is considered a VIRO Criteria. (Value, Imitability, Rarity, Organisation)
Both models have their own exclusive rarities which isolates them from another in the sense that the obvious features of movable, immovable, homogeneity and heterogeneity, imitable and inimitable, of which they are overly contradictory and therefore they are considered very competitive to each other.
Strengths and Weakness of each model
Strengths and Weaknesses of I/O model and RBV
Since both models are of equal importance to Strategic Management Studies, it must be categorically stated herein that no theory is perfectly well suited to organisations. We look into more detail on their merits and demerits prior to pursuing their individual differences.
Strength of I/O model
In above-average returns, organisations are able to strategize effectively given the pressures and constraints the external environment exerts.
Firms that adopt this model and compete in the same industry are seen to control similar resources and pursue similar philosophies with regards to those available resources.
Weakness of I/O Model
First, the lack of potential industries that will provide an above average returns automatically disables the model and therefore impacts on the growth of the organisation.
Poor Strategy formulation: inappropriate selection of certain policies linked with above-average returns in a particular industry
Absence of business skills sets to embrace the external environment and capitalize of the opportunities that are abound – that will propel the organization to greater heights.
Strength of RBV
Fahy (2002) contended that the primary contribution of the RBV of the firm is a theory of competitive advantage. The RBV focusses in on the assets in the businesses and how those resources can be fully utilised into growing the company’s financial advantage. RBV forces the organisation to deeply look at its internal competencies and what makes them unique from the competitors – and this enables the firm to carry out its business with exclusivity to its skills sets, product offerings and services. The costs to emulate their uniqueness presents a deterrent to other organisations. Their compliance to the VIRO Theme is a great advantage for this model.
Weakness of RBV
The exclusivity of this model presents a predicament in the event whereby the company is not able to adopt to the changing market place as quickly as possible. Barney (1991) then maintains that the sustainable competitive advantage exists within the corporation’s resources and the way it is effectively utilised. Additionally, Barney further adds that if firms want to realize sustainable competitive advantage and accordingly exceeding normal profits, the resources they utilise has to be inimitable, rare, valuable and non-substitutable.
But the introductory state for a firm to secure those resources at a price, that permits optimistic economic profits, is the presence of factor market limitations and heterogeneity (Barney, 2011).
Similar and Opposing issues
External & internal
The two models are concepts are obvious through Strategic Management Studies. The IO model is structured towards to the external environment or outward looking whereas with the RBV model, is focused at looking internally within the organisation and identifying its strengths and opportunities that can be adopted to capture external business chances.
Looking deeper into the IO model it is noted that external environment consists of the competitor environment together with the general environment. Both these platforms allow for the firm adopting the IO model to claim success and economic growth when it captures what is on offer. On the contrary, the RBV model prides in its assets that is held by the company which enables the firm to enjoy success and growth irrespective of the magnitude of the supply or stock of resources.
The IO Model is also adopting the idea of strategic groups. This means these groups are strategically organised within a particular industry and at the same time monitoring similar approaches. These groups because of their alliances to the IO model are often considered to be in contrast with the RBV organisations for obvious reasons. Adding on, it is evident that both the IO and RBV models endeavour to strategically construe diversified business opportunities. IO model adopts a post-strategy option while the RBV assumes a pre-strategy focus.
In a more detailed fashion, there is a strong sense of commitment towards the RBV model where it is evident that this model adopts the sustainable competitive increase articulated by realising internal strengths rather than external factors that is obviously embraced by the IO model.
RELATIONSHIP BETWEEN BUSINESS ENVIRONMENT AND BOTH MODELS
Starr has stated that the IO Model is founded on four expectations. These compliments a vantage viewpoint that services external to any organisation with dominate the business strategies. (Starr 1990)
Superior Revenues are a result of external competitive setting forces. These forces exert pressures and restrictions on organisations to excel. (Organizations & External Environment)
Similar sets of strategically aligned business practices in an industry are controlled by majority of the competing companies. – comparable strategies are trailed by these competing firms
Implementing policies across companies are made possible by extremely mobile resources.
Decision making in the best interest of the company is made by balanced and dedicated executives.
The Resource-Based Model
18288008572500Grossing above average returns is made possible by an organisation’s exceptional internal asset portfolio. This model focuses on the importance of exploring and developing the internal resources to its maximum benefits.
The model is established on three expectations:
Exceptional financial returns for a firm is made possible by capturing the opportunities each assembly of exclusive resources and solid foundation within an organisation.
Organisations are expected to implement and utilise differing policies in order to achieve its effectiveness strategically. It is further enhanced over time when the firms harness and develop unique skills sets or competencies.
Resources may not be exceedingly transportable across corporations. (One exception to this is individuals’ skills, e.g., IT industry).
Poudel maintains that a strategy is the combination of actions to exploit core competencies through which a business creates its own competitive edge. Every firm has or must make a strategy. A strategy is the only way that gives a clear cut path for a company or firm to excel. (Poudel 2016)
There are three distinct features in an organisation’s environment:
TYPES OF ENVIRONMENT
General Environment: This comprises of fundamentals that any organisation that strives for profitability or strategic effectiveness will undoubtedly be exposed to an environment that incidentally can stimulate the industry or entities within that industry.
Industry Environment: Comprises of factors that can overly influence or dictate the economic growth of an organisation. It also unswervingly disturbs the organisation’s cost effective plans and its strategic policies.
Competitor/Competitive Environment: Every organisation has its business challenges and the competitor environment allows for an appreciation of those predicaments – which can often lead to a review of the business policies of competing firms.
Finally, from this project, I am of the opinion that both the internal and external environments are critical for the effectiveness of both models. They have their own merits and demerits as identified in the investigation of this paper. It is therefore necessary to understand how these models can effectively be adopted in order to attract businesses and at the same time provide growth to the organisations that are adopting either model.
Therefore, the environments in which they operate is an inevitable part of the situation whereby either model will be able to operate it.
It must be noted, however, that the models are diametrically opposite in its focus whereby the I/O Model looks outwards into the industry and identifies potential opportunities to attract its business for growth. In other words it operates on an “Outside – In” Mode whilst the other model operates the other way.
The RBV model looks inwards and identifies resources internally that can propel the organisation outwards in order to carry out its operations effectively. (Inside – Out Mode).
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