The Benefits of an Industrial Organization Model Strategy

The chemical industry image by Шульгин Сергей from

Big firms use industrial organizational model strategy to help maintain a large stake in a highly segmented market. In this economic model, there are few firms pegging their product against limited competitors using advertising information, strategic government alliances and production and transaction costs. This model strategy keeps the pool of competition small, creates entry barriers and helps a firm assess the next step of its few competitors. By using this strategy, a dominant company will try to maintain a foothold on the industry.

Limited Competition

Industrial organization focuses on the interrelation of big industries, which are normally markets that have few competitors. This is quite different from a perfectly competitive market with many players vying for market share. In the industrial organization model, one large firm's actions can have a direct effect on its market. Thus, firms participating in this model benefit from the fact that there are fewer competitors so they can better control the market. If more competitors entered the market, the large firm would lose this foothold and the market would become unattractive. For instance, few firms manufacture turbine jets; thus, they have more control over price, information, research and development of the industry. More competitors in the industry could drive the price down, which would change the way the few firms compete.

Entry Barriers

Another benefit of the industrial organization is barriers for entry and consequences for exit. Sociological, economical, political or technological barriers can keep new competitors out of a highly segmented market. Having these barriers in place means an entering firm needs more than the capacity to build the product to enter the market -- sometimes, it might need political ties or larger amounts of capital for direct investment. Consequences for exit, such as severing ties with a governing body, also would keep new firms firm entering the market. An example of an entry barrier is a large firm striking a deal with a country to relocate its facilities. Because the firm's presence could offer jobs and benefit the local economy, it might be able to strike a deal making sure that another competitor has difficulties setting up shop in the area. In this way, it can guarantee less local competition and gain a firm footing in the country’s political and economical infrastructure.

Competition Predictions

The industrial organization model allows firms to get a better gauge on a competitor's actions with the use of game theory. Game theory, also known as interactive decision theory, consists of a finite amount of players (the competition) and a limited amount of decisions they can make. Using mathematical matrices and tree diagrams, a firm can assess its next move, by simulating its competitors' choices and possible outcomes of those choices. This strategy can only be used with a limited amount of competitors, a benefit of the industrial organization model. Understanding a competitor's next possible move could determine how a firm wants to interact with its competitor, a business strategy that is unique to this model. After calculating the competitor's next possible moves, a company could discover that it would be best to pre-empt the market, making the first strategic move and beating its competitor to the punch.