. I/O Model of above average Returns
Introduction:
It explains influence of external environment influence on a firm's strategic actions and performance.
Assumptions:
1) External environment can leading to AAR.
2) Most firms compete in an industry control similar resources & strategies
3) Resources are highly mobile across firms
4) Decision makers should be rational & act in the firm’s best interests
Steps:
1) Study the external environment
2) Locate the industry
3) Identify the industry’s strategy
4) Develop assets & skills on the strategy
5) Using the firm’s strengths in the strategy
Conclusion:
The I/O model of AAR challenges firms to locate the most attractive industry in which to complete because of the four assumptions.

2. Resource based model
Introduction:
Explain the unique internal resources & capabilities of a firm
1) Acquire different resources & develop unique capabilities
2) Resources are not mobile across firms
3) The unique resources & capabilities lead to differences in firms’ performance
4) Differences in resources & capabilities is the source of competitive advantage
Steps:
1) Identify the firm’s resources
2) Determine the firm’s capabilities
3) Determine the potential of its resources & capabilities in competitive advantage
4) Locate an attractive industry
5) Select a best strategy

3. Vision, Mission
Vision is picture of what the firm want to be & achieve
[Microsoft: A computer on every desk, running Microsoft software]
Mission: Identify the firm’s purpose & reason for existence
[3M: Innovative solutions to problems]

4. Stakeholders
Individuals and group who can affect & are affected by the firm.
Three classifications:
Capital Market: shareholders; capital suppliers (banks)
Product Market: customers; suppliers; unions
Organizational: employees; managers

Topic 1A

Eight Performance measures
1) Firm Survival
2) Accounting Measures
3) Multiple stakeholder approach
4) Present value
5) Market value added and Economic value added
6) Balanced score card
7) Corporate social responsibility
8) Sustainability and Triple Bottom Line

Lecture 2

5. Components of external environment analysis
1) Scanning: Identifying early signals of environmental changes & trends (EBay records information from customers; Cookies)
2) Monitoring: Detecting ongoing observations of environmental changes & trends (Size and wealth of middle class African-Americans is increasing)
3) Forecasting: Forecasting what might happen based on monitored changes & trends
4) Assessing: Determining the timing & importance of environmental changes & trends (ability to receive video on cell phone)

6. How components of general environment affects strategy
1) Demographic: It analysed on Global basis, like population size (1.3billion), age, geographic distribution, ethnic mix & income distribution. For example, a firm can use demographics to predict future business demand; population growth & decline must be included in long range strategic planning of every corporation.
2) Economic: the nature & direction of the economy in which a firm competes (inflation rates, interest rates)
3) Political/Legal: How organizations & government influence each other (Employment laws)
4) Socio-cultural: Saudi women cannot drive cars
5) Technological: product innovation
6) Global: new global market, important political event

7. Industry environment analysis using Porters’ five forces model and interpreting Industry Analysis
Industry: group of firms producing products that are close substitute.
1) Threat of new entrants: can threaten market share of existing competitors by bringing additional production capacity. Two factors: barriers to entry (economies of scale: quantity ↑ cost↓, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, Gov’t policy) & Expected retaliation (Honda in US market)
2) Bargaining power of suppliers: Increasing prices or reducing the quality. Powerful when