Lesson 4A: Analysing The Firm Flashcards
Why should we look at the firm?
Strategy concerns both the internal and the external.
The internal part of an organisation can also create value.
Porters model does not explain why some firms in non attractive industries earn money and vice versa.
So we need to look at how a firm can create and organise its resources, activities and competences.
Competition takes more and more place on a organisational (competence) level and not only at the product level.
What is the value system?
Firms are often part of a bigger distribution chain. This chain is made up of suppliers and customers.
The strategic question is where to draw the line between our firm, our suppliers and customers.
Should we eliminate competition at one part of the distribution channel by forward or backward integration.
In what part of the value system (distribution chain) is the return of investment biggest?
What is the value chain?
Primary activities: inbound logistics, production, outbound logistics, sales & marketing, service
Primary activities are those activities connected to the creation and distribution of a product or a service to the customer.
Primary activities fall in different categories depending on the type of organsations we look at.
Secondary activities: procurement, technology, human resource management and infrastructure.
Secondary activities support the primary activities and these categories of activities might be of the same kind across companies;
The value chain is connected to the Strategic Business Unit Level
What are the steps in a value chain analysis?
1) Identify main categories of activities
2) Estimate how much value each activity create for the customer
3) Estimate the cost fo each activity
4) Evaluate and adjust the balance between value creation and cost
5) Optimse the linkage between:
A. Primary activities
B. Primary and secondary activities
C. Activities across internal value chain (other SBU’s)
D. Own activities and the activities of our suppliers and customers (bundling strategies)
What is the deeper analysis of the activities?
1) Identify the activities and how they are connected
2) Optimise the activities and how they are related
3) ARe these sources for competitive advantages
What are the sources for cost efficiency in each group of activities?
1) Economies of scale
2) Experience
3) Supply costs
4) Product design
How can we reduce the cost of activities through experiences?
By doing the same activities again and again we become better and better, and reduce the cost of performing the activity.
We create a competence in doing the activity.
Efficiency should grow and cost decline in our activities over time.
A first mover position can be important to create the lowest cost.
What is value creation through product featurs (bundling strategies)
B2B:
What do the customers value, what are the sources of creating a unique product?
Can the unique product feature be communicated?
B2C: Maslow’s hierarchy of needs:
By conceptualising the customer as more than a buyer it is possible to find needs and develop product features as a source of differentiation
What is valued change over time?
In the fifties and sixties Ford and GM had a global dealer and production network
IN the 60 and 70s the Japanese had a superior management of production and suppliers
In the 80s and 90s these competences are no longer unique but only necessary
IN the 90s and forward the unique lifestyle of the cars has been the core competences
What is the concept of benchmarking?
How can we measure our activities:
1) By comparing historical figures:
The disadvantage is that improvement over time is not always sufficient
2) By industrial standards
= the disadvantage is that whole industries sometimes can lag behind
3) By benchmarking = best in class
Comparison across industries
Make room for a competitive jump
Benchmarking can be done on selected activities
Benchmarking: industry/sector = strategic groups or best-in-class
Limitations: surface comparisons = not show underlying reasons for performance;
Simply achieving competitive parity = doesn’t helpt to get a competitive advantage
What are resources & competences?
1) Threshold capabilities = required to be able to compete in a market
Threshold resources = meet the minimum customer requirements, eg. IT infrastructure
2) Distinctive capabilities = required to achieve competitive advantage
Distinctive resources = underpin competitive advantage eg/ long established brand
What are the types of resources?
1) Physical: machinery, buildings, iT hardware
2) Financial: cash, drawing rights
3) Human resources: human beings, knowledge, relations
4) Structural: patents, brand, databases, procedures
What are necessary vs unique resources,
1) Necessary resources:
The essential resources for being part of the industry and for delivering acceptable goods and services for the customers.
2) Unique resources
= resources that provide customers with extra perceived value, and that are difficult for competitors to get access to = hard to imitate
What are the characteristics of competences?
Competences are organsational skills that are applied and produced through organisational activities, which create value for the customers
Organsational skills are created through doing the same activities several times = creating a routine
Routines are institutionalised behaviour, which often have the form of both silent knowledge and taken for granted.
It takes time to create institutionalised behaviour (routines) that express accumulated learning and thereby potential efficiency and earnings
Organsational competences very often cut across products and organsational units but can be mobilised within the products and services to the customers.
Difference between required and core competences
Required competences:
Activities & processes that are necessary in order to meet the minimum requests from customers
Core competences = activities and processes that create special value for the customers and that are difficult for the competitors to imitate
Strategic capabilities:
The ability to meet the necessary goal supported by the organsational resources and competences
How can we identify competences and core competences?
1) Competences can be identified by Porter’s value chain
Inbound logistics, production, outbound logistics, sales & marketing, service, procurement, technology, HRM, infrastructure, other categories of company activities.
2) Organsational diagram:
Functions (procurement, production, sales and marketing)
Stab functions: IT, R&D, Communication
Departments/groups
Three questions for identifying core competences:
1) Does the skill create an ability to enter potential markets?
2) Does the skill contribute to the value creation for customers
3) Is the skill difficult to imitate for our competitors
Where are the areas where we apply the resource based view?
1) Developing competitve strategies
Create a unique value that the customers appreciate
Create a value that is difficult for competitors to acquire = competitive advantage
2) Developing growth strategies
= market penetration, product development, market development and diversification
Internal growth, collaboration, M&A
3) Developing innovative and international strategies
= either being no. 1 or 2
Types of international stratgies and models for entering foreign markets
4) Role of corporate centre
Transferring competences between SBU, compose a portfolio of competences, competences to understand and manage subsidiary
What is the VRIO model?
1) Does the capability create VALUE by opening up new opportunities and neutralise threats within the market?
2) Is the capability RARE among the firms of the industry?
3) Is the capability DIFFICULT TO IMITATE because:
Is it ambiguous, historical anchored, socially/cultural aanchored, difficult to substitute?
4) Can the capability be ORGANISED within the firms product and services
What are the criteria for inimitability?
1) Complexity
Internal and external linkages
2) Causal ambiguity
Characteristic ambiguity, linkage ambiguity
3) Change
To innovate and keep ahead of competitors
4) Culture and history
= taken-for-granted activities, path dependency
What is the job of managers?
Prahalad & Hamel:
Firms compete on competences. We ought to focus on competences instead of products. Firms should be seen as a portfolio of competences.
Development of competences is a question of choosing business activities. Managers’ job is to build a strategic architecture = select core competences
Managers ought to allocate resources, organise around the selected competences
What is the general task concerning core competences?
Identify and select competences
Acquire and build competences
Insert and utilise competences
Protect and further develop competences
What are the other analyses of the company?
Analysing the overall financial performance of the firm
Analysing the performance of products, customers and markets
Analysing the organsation of the company
What is analysing the financial performance?
In order to get an idea of the room for strategic actions, it is relevant to look at the overall financial situation of the company.
Overview financial situation = key accounting figures for the overall firm and for each of its SBU’s
Key accounting figures: Gross margin (gross profit), operation margin, return on assets, return on equity, the equity ratio
Asses the development of these figures for the previous 3 years, and give an estimation of the coming 3 years
Analysing products, customers & markets
For the total firm and for each of its SBU’s, it is important to investigate
What is the revenue, gross profit and earnings: Products, customers, markets and employees
What is the need for capital investment?
What are the consequences for the cash flow
Can the composition of products, customers, markets and employees be further optimised?
Which parts are most attractive the coming years
What is evolutionary theory about?
It is about explaining how different types of firms and industries have developed to what they are
How has this development taken place?
Focus on the population, and not on the single unit
How do we explain development,
Changes can be of different nature as for instance, random, cyclical, calculated, optimised, revolutionary, dialetic
Transmission mechanism = genes/routines
Variation mechanism = mutation/innovation
Selection mechanism = survival of the fittest/markets
A long-term accumulative and irreversible process
How is a firm and its development described?
Organisations are made up of routines
Organsational routines are developed both conscious and unconscious
The most efficient routines are selected
Selections take place both through internal and external mechanisms
As a consequence the firm is constituted by both continuation and change
On what assumptions are the theory based?
Human beings, organsations and industries develop routines for efficient handling of their behaviour over time
The market and organisational procedures select the most efficient routines over time
Single individuals and firms play a rather unconscious and passive role in the process
What is the evolutionary theory as a research program
Focus on differences in populations and on time
The single units act unconscious and bounded rational
It is not the best, but the most efficient variations that are selected
Build on producural rationality and a change orientated model of explanation
Things are often investigated through simulation
What are the implications for strategy and industrial politics?
The task of organsation is to develop as many innovations as possible and the market’s task is to select the most most efficient innovations
The managers’ task is passive because they cannot predict or calculate the selections
Evolutionary theory is especially good at understanding long-term development
From an evolutionary point of view one can argue that it is important that the state develops market institutions to protect technological development
This could for instance be the institutions of patents
What is resource based theory?
The resource based theory explains why some firms earn more money than others
It tells us why organsations specialise the way they do
The resource based theory shed light upons some of the internal processes within organsations
How does the resources based theory view the firm?
The firm is perceived as a bundle of resources
Resources can be physical, financial, human or structural
Many of these resources can be bought, and therefore organisations rarely create over-normal profit
Resources can be combined to more unique resources
A special group of recources are competences, organsational abilities created over time through repetitive actions (routines and instituationalised behaviour)
Organisational competences are difficult to buy, they take time to develop and therefore they create competitive advantages and profit
How do explain firms performance?
Firms can acquire resources cheaper than their competitors, firms can utilise the resources better than the competitors.
In both circumstances = Ricardo Rent
Organisaitons create and sell products & services, which create profit (more resources) and competences (by doing the same thing one more time)
Competences release managerial time to new innovations
Resources and competences appreciated by consumers, that are both rare, difficult to imitate and possible to organise can create over-normal profit
On what assumptions is the resource based theory
Human beings act bounded rational
Human beings and organisations develop routines, which releases time to look at new/other things
Routines and knowledge are accumulated over time through an evolutionary process
What is the resource based view as a research program
Focus on explaining the organisational differences as a consequence of its resources and competences, and on how they have accumulated over time
Time and bounded rationality are the primary variables of explanation
Focus on how firms develop under different types of conditions
What are the implications of strategic management of resource based theory?
Firms ought to focus on developing long term patterns of actions which they can compete on
Profit is not a function of positioning within the market
Profit is created by developing competences and acquiring and utilising resources cheaper and more efficient than competitors
Developing competences can have an impact on how the firm diversifies
Firms ought to make related diversification in order to utilise existing knowledge and competences.
