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Chapter 1: Strategic Management and Strategic Competitiveness 15

Chapter 1: Strategic Management and Strategic Competitiveness 15

suggests that firms can earn above-average returns by producing either standardized products at costs below those of competitors (a cost leadership strategy) or by producing differentiated products for which customers are willing to pay a price premium (a differ- entiation strategy). We discuss the cost leadership and product differentiation strategies fully in Chapter 4.

As shown in Figure 1.2, the I/O model suggests that firms earn above-average returns by studying the external environment effectively as the foundation for identifying an attractive industry and implementing an appropriate strategy in it. For example, in some industries, firms can reduce competitive rivalry and erect barriers to entry by form- ing joint ventures. In turn, reduced rivalry increases the profitability potential of firms that are collaborating.83 Companies that develop or acquire the internal skills needed to implement strategies required by the external environment are likely to succeed, while those that do not are likely to fail.84 Hence, this model suggests that the characteristics


Figure 1.2 The I/O Model of Above-Average Returns

1. Study the external environment, especially the industry environment.

2. Locate an industry with high potential for above- average returns.

3. Identify the strategy called for by the attractive industry to earn above- average returns.

4. Develop or acquire assets and skills needed to implement the strategy.

5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy.

The External Environment • The general environment • The industry environment • The competitor environment

An Attractive Industry • An industry whose structural characteristics suggest above- average returns

Strategy Formulation • Selection of a strategy linked with above-average returns in a particular industry

Assets and Skills • Assets and skills required to implement a chosen strategy

Strategy Implementation • Selection of strategic actions linked with effective implementation of the chosen strategy

Superior Returns • Earning of above-average returns

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part without explicit permission. November 2019. WCN 03-300-273

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