Criticisms and assessments regarding the IO theory 30

The IO theory considers only industry-level factors with competition and threats to attractive industries rather than cooperation and the internal elements of a firm (Porter, 1980a). The basic concept of the IO theory is that competitive advantage differs from the company’s external factors, which is not realistic because the firm’s inherent characteristics also influence the competitive advantage (Short et al., 2007; Spanos & Lioukas, 2001). Also, the company’s inter-industry is not considered in the same industry because the company’s resource is motionless. It does not influence the strategy although the company’s internal competitiveness relies on the dynamic heterogeneous firm’s resources to achieve market power (Hawawini et al., 2003; Shu-Chu Sarrina et al., 2007;

Spanos & Lioukas, 2001; Young, 2000). Also, continuous environmental learning enhances competitiveness; for instance, in the 1990s, the competitive school of thought was extended by the learning, knowledge-based and resource-based views in the turbulent market environment (Stonehouse & Snowdon, 2007).

The IO theory proposed that the principal factor to increase a firm’s profitability is to select the perfect specific industry to operate in. However, the traditional industries are not separated, and most of the industries overlap and converge with various resources; for example, Japanese firms concentrate on low-cost operational effectiveness (Rajshekhar et al., 2011; Stonehouse & Snowdon, 2007).

With respect to the company’s performance, the market structure is a weak concept because IO theory constitutes one side of the competitive advantage (O'Cass & Weerawardena, 2010; Shu-Chu Sarrina et al., 2007).

In the international context, the demand condition, supporting industries, firm’s infrastructure and factors condition, government policies and the chance events are the important factors because country characteristics, such as its social structure, education, religion and language, influence the company’s competitive positioning (Alashban et al., 2002; Cater, 2004; Porter, 1990a).

Table 4. The critical assessments of the IO theory

Categories Drawbacks Assessments

Definition The industry definition is not conclusive. The IO theory considers only the specific manner.

There is no explicit recognition of how the industry contributes to the firms’ overall SCA in different circumstances. The inconclusive external factors enable the companies to gain a competitive advantage.

IO theory should categorize the sector from various viewpoints.

Management All the theories have no endless managerial implication. Similarly, the IO has no adequate managerial application.

There are huge drawbacks in the administrative

applications.

Organizational resources

The motionless organizational resources are impossible because the resources are dynamic.

The resource is not motionless.

Intra-Industry IO theory does not consider the intra-industry even though internal competitiveness

Industry No industry is concrete. Most of the industries

converge and overlap. Industries are interdependent.

Cooperation IO theory does not consider cooperation. IO theory should consider cooperation along with competition.

Attractive

industry The firm does not always enter a fascinating

industry. The market is not steady.

Homogeneities The resources are heterogeneous, even though IO doctrine emphasizes resource homogeneities.

IO theory should reconsider the concept of resources.

Environmental

context The country characteristics influence the firm’s competitive positioning. The IO theory does not consider the micro and macro environmental distance elaborately in a cross-border setting.

In the transboundary context, the IO theory should reflect the micro and macro

environmental factors in-depth.

Competitive advantage

The IO doctrine finds a bundle of activities in the competitive advantage instead of a bundle of resources.

IO theory should consider a bunch of resources.

Performance The choice of an industry does not increase the firm’s performance because the overall performance depends on the resources. IO theory does not show the overall performance.

Also, the relationship between the market structure and performance is not so efficient because IO theory considers only one side of the competitive advantage.

IO theory should also consider which resources are valuable for the firm’s overall performance.

Source: Alashban et al., 2002; Alwuhaibi, 2009; Becerra, 2008; Cater, 2004; Foss & Knudsen, 2003; Hawawini et al., 2003; Kraaijenbrink et al., 2009; O'Cass & Weerawardena, 2010; Parnell et al., 2012; Porter, 1990a; Rajshekhar et al., 2011; Short et al., 2007; Shu-Chu Sarrina et al., 2007;

Spanos & Lioukas, 2001; Stonehouse & Snowdon, 2007; Young, 2000.

In conclusion, the IO theory has not as yet been able to explain the overall firm’s performance (Parnell et al., 2012). It should consider a new idea and definition.

It should be jointly applied to another theory in order to shed light on actual performance because the IO doctrine focuses on a bundle of activities while ignoring the company’s resources (Spanos & Lioukas, 2001). Though IO theory and RBV have many differences, both theories also have some commonalities.

2.4 RBV and IO Theory: Complementarities and Differences

The RBV and IO theory complement each other and explain the source of performance (Barney, 1991; Leonidou et al., 2013; O'Cass & Ngo, 2007; Peteraf &

Bergen, 2003), firm’s behavior (Spanos & Lioukas, 2001) and performance variances. For instance, RBV drives the performance outcome while the IO theory explains the market performance (Huang & Sylvie, 2010). The theories are co-related and do not compete with each other. For example, the IO theory mentions the microeconomic industrial determinants while the RBV considers a bundle of resources (Barney, 1991; Parnell, 2010; Porter, 1980a; Rajshekhar et al., 2011; Spanos & Lioukas, 2001).

There are also thematic complementarities between the two theories. For instance, RBV concentrates on long-run competitiveness while IO theory focuses on short-run external environments (Foss & Knudsen, 2003). Both theories complement each other in different application domains since both models look for a sustainable competitive advantage, the firm’s average returns (Spanos &

Lioukas, 2001) and a different level of analysis (i.e., company versus industry).

Huang and Sylvie (2010) and Sea-Jin and Singh (2000) found that the parent company influences the success and operations of the subsidiaries. The industrial effects on the company’s performance are about 20 percent while the firm’s resources account for 50 percent. However, the industry and resource factors depend on company size, industry aggregation, and business units. The study was conducted on 709 manufacturing companies between 1981 and 1989.

RBV usually considers the Ricardian rents from excellent resources which satisfy the customer’s needs (Peteraf & Barney, 2003) while IO theory contemplates monopoly and market power type rents (Porter, 1991a). The entry barrier is the essential strategic element of IO theory, but it also depends on the market power (Huang & Sylvie, 2010). On the other hand, at the firm level, the market power depends on the corporate brand, product brand, experiences, information, patents, corporate reputation, market share, price setting, business strategy and brand power (Barney et al., 2011; Grant, 1996). Also, RBV identifies the strength and weakness of the firm while IO theory looks over the opportunities and threats within the context of SWOT analysis (Spanos & Lioukas, 2001).

Therefore, a composite model of the company- and industry-level factors is influential for the company’s overall performance (Hawawini et al., 2003; Spanos

& Lioukas, 2001) since RBV and IO theory build two sides of the same coin (O'Cass & Weerawardena, 2010; Shu-Chu Sarrina et al., 2007).