The modern business outlook is defined to a large extent by the interactions that take place within and outside our competitive environment. These interactions spread from the workplace to the markets and the industries that serve them. And then, they influence the strategic behavior of the involved firms.
Many firms develop their strategic behavior in response to these market and industry interactions. And this strategy formulation forms the thrust of this article.
What is it?
The industrial organization (I/O) model describes the impact of a business's interaction with its external environment. These interactions shape the journey from strategy formulation to execution while providing the resource framework for everything in-between. They also offer a broader perspective on the corporate affairs of business organizations and their implications for market share.
The industrial organization aims to help firms identify and operate in environments that offer significant opportunities for growth, competitiveness, and profit-making. It offers insights into a firm's strategic behavior and interactions across market and industry lines.
When do we use it?
Industrial organization (I/O) provides several benefits that you can leverage for various purposes. Some of them include the following:
To create a corporate business strategy
I/O offers a big-picture view of business management and strategy formulation. It provides the grounds upon which companies can seek industry-wide partnerships. And these partnerships may call for more complex strategic planning.
To process mergers and acquisitions
I/O models prepare businesses to respond to market shifts and consolidations in the best way possible. So if you plan on joining forces with another industry player per the I/O model, you can always keep your market share. This way, you don't suffer any serious loss in the aftermath.
To access market performance
I/O models use certain operational metrics to measure performance. So if you find out that your firm is underachieving, you can weigh its performance against the industry standard scale. Doing so will help you identify and then address the problem areas.
To develop industrial policy
Your industrial policy may favor large production volumes, open innovation, or strategic partnerships. Whichever one it is, an I/O approach will give you a better perspective and make for easier decision-making.
What business questions is it helping us to answer?
The industrial organization framework can provide answers to the following questions:
What is your idea of market power?
For some people, market power translates to profits, and for others—position and reputation. The industrial organization model makes it easier to pick a side due to the many external interactions it exposes your business to.
How can you achieve significant market share capture?
The I/O model proves that the market (and the larger economy) responds to organized industrialization more than anything. It shows us that capital investment in technology and other relevant infrastructure is key to market domination. The short of it is that the more you invest resources into your business, the more profits you make.
How can I achieve industry-scale growth?
I/O emphasizes leaving your comfort zone and taking up more complex but potentially rewarding business prospects.
Why do businesses fail or succeed?
I/O helps you understand how a business operates and the factors influencing its overall strategy. Knowing these factors can help you avoid the troubles that plagued others or replicate the successes that trailed others.
How do we use it?
Do you want to create a business strategy and then run the business with insights acquired from the I/O model? Here are a few things to note.
Study the external environment
If you're still considering what industry to focus on, ensure that your due diligence touches on profitability and sustainability. Also, understand what influences affect your industry (and the general) environment of choice. Focus on government regulations, corporate policy, and other industry interactions. Take note of the following as bordering on your business environment:
Economic regulation
Contract enforcement
Competition policy
Antitrust laws.
Develop your strategy
Your previous research will have given you a clear idea of what you want to do. You should have now identified the industry segment (and operating environments) that provides opportunities for growth and competitiveness. Also, you should have identified the relevant goals and industry relationships to pursue and the external influences to consider. This information should form a key part of your strategy definition.
Gather resources for strategy execution
Ensure to settle the demands of the industrial organization model before you can act on any strategy based on it. You must provide the resources or facilities needed to make it work. These resources include capital investment in product development and differentiation, cost controls, and all the relevant cost bases.
Execute the strategy
You've put everything in place, so now is the time to let it play out. Put your best foot forward in the markets, advertise aggressively, and prospect for growth. Pursue collaboration with other industry players to make inroads into the market.
Practical Example
We use the Apple example to discuss the impact of industrial organization on company operation and profitability. Apple manufactures its iPods across countries like China, Taiwan, and Korea, while final assembly occurs in China.
The company has leveraged the low-cost base, the healthy operating environment, and the technology infrastructure in these places to great gain.
Also, back home, Apple has made strategic acquisitions like PrimeSense, an Israeli 3d Sensing firm, and Topsy, a socio-analytic firm with access to Twitter. These interactions have increased the company's profit returns and competitive levels.
Advantages
It provides insight into market behavior
The concept of industrial organization touches on consumer trends as influenced by purchasing habits. Knowing these factors helps to shape business strategies around the customer's needs. And the goal is to help you always get ahead of the customer.
It promotes strategic collaboration across industry lines
Industrial organization explains why we've recorded many business crossovers that could not have been imagined before. From electricity-powered cars to biomedical engineering, history is replete with cross-industry partnerships. And I/O models give life to them.
It provides performance appraisal insights
Want to know how the strategic business units from the biggest firms compare against yours under similar operating conditions? You could measure against industry leaders under the I/O model. This way, you know what performance gaps exist in your business and what standards to measure up to.
It influences corporate governance and strategy formulation
A business's interactions with its internal and external environment will influence its organizational structure. These interactions shape policy direction in ways that affect a firm's operations across its value chain.
Disadvantages
There is the risk of undue influence and pressure
I/O interactions with industry players can expose your business to negative external influences. You may suffer the fallout from government policy shocks or be subjected to acquired harsh economic realities.
It creates room for negative competition
The I/O model seeks to close the gap between the world's leading businesses while fostering better economic worldviews. This has the reverse effect of creating negative competition that does not benefit any party.
It is not suited for small businesses
The industrial organization favors firms with the resource capacity needed to leverage market opportunities. Small firms without capital power will struggle to benefit from I/O.
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