MGT 409 CHPT 3

Types of firm resources

firm resources are all assets, capabilities, organization processes, information, knowledge, and so forth, controlled by a firm that enables it to develop and implement value creating strategies 3 types: tangible resources intangible resources organizational capabilities

Manager bargaining power

Mangers' power is based on how well they create resource-based advantages

Problems often occur in the balanced scorecard implementation efforts when the commitment to learning is insufficient and employees' personal ambitions are included.

Without a set of rules for employees that address continuous process improvement and the personal improvement of individual employees, there will be limited employee buy-in and insufficient cultural change. Thus, many improvements may be temporary and superficial. Often, scorecards that failed to attain alignment and improvements dissipated very quickly. And, in many cases, management's efforts to improve performance were seen as divisive and were viewed by employees as aimed at benefiting senior management compensation. This fostered a "what's in it for me?" attitude.

Social complexity

A firm's resources may be imperfectly inimitable because they reflect a high level of social complexity. Such phenomena are typically beyond the ability of firms to systematically manage or influence. When competitive advantages are based on social complexity, it is difficult for other firms to imitate them. A wide variety of firm resources may be considered socially complex. Examples include interpersonal relations among the managers in a firm, its culture, and its reputation with its suppliers and customers. In many of these cases, it is easy to specify how these socially complex resources add value to a firm. Hence, there is little or no causal ambiguity surrounding the link between them and competitive advantage

Path dependency

A greater number of resources cannot be imitated because of what economists refer to as path dependency. This simply means that resources are unique and therefore scarce because of all that has happened along the path followed in their development and/or accumulation. Competitors cannot go out and buy these resources quickly and easily; they must be built up over time in ways that are difficult to accelerate

In a study of 50 Canadian medium-size and large organizations, the number of users expressing skepticism about scorecard performance was much greater than the number claiming positive results

A large number of respondents agreed with the statement "Balanced scorecards don't really work." Some representative comments included: "It became just a number-crunching exercise by accountants after the first year," "It is just the latest management fad and is already dropping lower on management's list of priorities as all fads eventually do," and "If scorecards are supposed to be a measurement tool, why is it so hard to measure their results?" There is much work to do before scorecards can become a viable framework to measure sustained strategic performance.

Value chain analysis

A strategic analysis of an org that uses value-creative activities views the org as a sequential process of value-creative activities The approach is useful for understanding the building blocks of competitive advantage Value is the amount that buyers are willing to pay for what a firm provides them and is measure by total revenue, a reflection of the price a firm's product commands and the quantity it can sell A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceed the cost of production is a key concept used in analyzing a firm's competitive position

What are the "operations," or transformation processes, of service organizations

At times, the difference between manufacturing and service is in providing a customized solution rather than mass production as is common in manufacturing For example, a travel agent adds value by creating an itinerary that includes transportation, accommodations, and activities that are customized to your budget and travel dates. A law firm renders services that are specific to a client's needs and circumstances. In both cases, the work process (operation) involves the application of specialized knowledge based on the specifics of a situation (inputs) and the outcome that the client desires (outputs). The application of the value chain to service organizations suggests that the value-adding process may be configured differently depending on the type of business a firm is engaged in. As the preceding discussion on support activities suggests, activities such as procurement and legal services are critical for adding value. Indeed, the activities that may provide support only to one company may be critical to the primary value-adding activity of another firm.

customer persepctive

Clearly, how a company is performing from its customers' perspective is a top priority for management. The balanced scorecard requires that managers translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers. For the balanced scorecard to work, managers must articulate goals for four key categories of customer concerns: time quality performance and service and cost.

Internal business perspective

Customer-based measures are important. However, they must be translated into indicators of what the firm must do internally to meet customers' expectations. Excellent customer performance results from processes, decisions, and actions that occur throughout organizations in a coordinated fashion, and managers must focus on those critical internal operations that enable them to satisfy customer needs. The internal measures should reflect business processes that have the greatest impact on customer satisfaction. These include factors that affect cycle time, quality, employee skills, and productivity

Four factors help explain the extent to which employees and mangers will be able to obtain a proportionately high level of profits that they generate

Employee bargaining power Employee replacement cost Employee exit costs manager bargaining power

Substitutability may take at least two forms

First, though it may be impossible for a firm to imitate exactly another firm's resource, it may be able to substitute a similar resource that enables it to develop and implement the same strategy. Clearly, a firm seeking to imitate another firm's high-quality top management team would be unable to copy the team exactly. However, it might be able to develop its own unique management team. Though these two teams would have different ages, functional backgrounds, experience, and so on, they could be strategically equivalent and thus substitutes for one another Second, very different firm resources can become strategic substitutes. For example, Internet booksellers such as Amazon.com compete as substitutes for brick-and-mortar booksellers such as Barnes & Noble. The result is that resources such as premier retail locations become less valuable

Firm resources and sustainable competitive advantages

For a resource to provide a firm with the potential for a sustainable competitive advantage, it must have four attributes: First, the resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm's environment. Second, it must be rare among the firm's current and potential competitors. Third, the resource must be difficult for competitors to imitate Fourth, the resource must have no strategically equivalent substitutes. recall that resources and capabilities must be rare and valuable as well as difficult to imitate or substitute in order for a firm to attain competitive advantages that are sustainable over time.

Innovation and learning perspective

Given the rapid rate of markets, technologies, and global competition, the criteria for success are constantly changing. To survive and prosper, managers must make frequent changes to existing products and services as well as introduce entirely new products with expanded capabilities. A firm's ability to do well from an innovation and learning perspective is more dependent on its intangible than tangible assets. Three categories of intangible assets are critically important: human capital (skills, talent, and knowledge), information capital (information systems, networks), and organization capital (culture, leadership).

The balanced scorecard enables managers to consider their business from four key perspectives: customer, internal, innovation and learning, and financial

How do customers see us? (customer perspective) what must we excel at? (internal business perspective) can we continue to improve and create value? (innovation and learning perspective) how do we look to shareholders? (financial perspective)

Is the Resource Rare?

If competitors or potential competitors also possess the same valuable resource, it is not a source of a competitive advantage because all of these firms have the capability to exploit that resource in the same way. Common strategies based on such a resource would give no one firm an advantage. For a resource to provide competitive advantages, it must be uncommon, that is, rare relative to other competitors. Monopoly True monopoly near monopoly local monopoly fewer firms than needed to generate perfect competition too little supply to meet market needs

Employee bargaining power

If employees are vital to forming a firm's unique capability, they will earn disproportionately high wages. For example, marketing professionals may have access to valuable information that helps them to understand the intricacies of customer demands and expectations, or engineers may understand unique technical aspects of the products or services. Additionally, in some industries such as consulting, advertising, and tax preparation, clients tend to be very loyal to individual professionals employed by the firm, instead of to the firm itself. This enables them to "take the clients with them" if they leave. This enhances their bargaining power.

Employee replacement cost

If employees' skills are idiosyncratic and rare (a source of resource-based advantages), they should have high bargaining power based on the high cost required by the firm to replace them. For example, Raymond Ozzie, the software designer who was critical in the development of Lotus Notes, was able to dictate the terms under which IBM acquired Lotus.

A firms financial position should not be analyzed in isolation

Important reference points are needed. We will address some issues that must be taken into account to make financial analysis more meaningful: historical comparisons comparisons with industry norms and comparisons with key competitors.

Can the Resource Be Imitated Easily?

Inimitability (difficulty in imitating) is a key to value creation because it constrains competition. If a resource is inimitable, then any profits generated are more likely to be sustainable. Having a resource that competitors can easily copy generates only temporary value.

Organizationally exploitable

Is the firm organized, ready, and able to exploit the resource/capability?" "Is the firm organized to capture value? You need to have other attributes (like the one below) to be valuable. complementary assets physical resources - must have enough to exploit the value financial resources - must have enough to exploit the value human resources - must have enough to exploit the value organization cultures - must have enough to exploit the value if your missing any of these, you cannot exploit the the value of your resources

Financial perspective

Measures of financial performance indicate whether the company's strategy, implementation, and execution are indeed contributing to bottom-line improvement. Typical financial goals include profitability, growth, and shareholder value. Periodic financial statements remind managers that improved quality, response time, productivity, and innovative products benefit the firm only when they result in improved sales, increased market share, reduced operating expenses, or higher asset turnover

Is the Resource Valuable?

Organizational resources can be a source of competitive advantage only when they are valuable. Resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. creation of market opportunities exploitation of market opportunities buffering organizational threats

VRIO

The Question of Value: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?" The Question of Rarity: "Is control of the resource/capability in the hands of a relative few?" The Question of Imitability: "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?" The Question of Organization: "Is the firm organized, ready, and able to exploit the resource/capability?" "Is the firm organized to capture value?

Two approaches when evaluating a firm's performance

The first is financial ratio analysis, which, generally speaking, identifies how a firm is performing according to its balance sheet, income statement, and market valuation. As we will discuss, when performing a financial ratio analysis, you must take into account the firm's performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. The second perspective takes a broader stakeholder view. Firms must satisfy a broad range of stakeholders, including employees, customers, and owners, to ensure their long-term viability. Central to our discussion will be a well-known approach—the balanced scorecard—that has been popularized by Robert Kaplan and David Norton

Physical Uniqueness

The first source of inimitability is physical uniqueness, which by definition is inherently difficult to copy. A beautiful resort location, mineral rights, or Pfizer's pharmaceutical patents simply cannot be imitated. Many managers believe that several of their resources may fall into this category, but on close inspection, few do

Are substitutes readily available

The fourth requirement for a firm resource to be a source of sustainable competitive advantage is that there must be no strategically equivalent valuable resources that are themselves not rare or inimitable. Two valuable firm resources (or two bundles of resources) are strategically equivalent when each one can be exploited separately to implement the same strategies

Limitation and potential downsides of the balanced scorecard

There is general agreement that there is nothing inherently wrong with the concept of the balanced scorecard. The key limitation is that some executives may view it as a "quick fix" that can be easily installed. If managers do not recognize this from the beginning and fail to commit to it long term, the organization will be disappointed. Poor execution becomes the cause of such performance outcomes. And organizational scorecards must be aligned with individuals' scorecards to turn the balanced scorecards into a powerful tool for sustained performance.

Employee exit costs

This factor may tend to reduce an employee's bargaining power. An individual may face high personal costs when leaving the organization. Thus, that individual's threat of leaving may not be credible. In addition, an employee's expertise may be firm-specific and of limited value to other firms.

Causal Ambiguity

This means that would-be competitors may be thwarted because it is impossible to disentangle the causes (or possible explanations) of either what the valuable resource is or how it can be re-created. What is the root of 3M's innovation process? You can study it and draw up a list of possible factors. But it is a complex, unfolding (or folding) process that is hard to understand and would be hard to imitate. Often, causally ambiguous resources are organizational capabilities, involving a complex web of social interactions that may even depend on particular individuals

The balanced scorecard: description and benefits

To provide a meaningful integration of the many issues that come into evaluating a firm's performance, Kaplan and Norton developed a "balanced scorecard." This provides top managers with a fast but comprehensive view of the business. In a nutshell, it includes financial measures that reflect the results of actions already taken, but it complements these indicators with measures of customer satisfaction, internal processes, and the organization's innovation and improvement activities—operational measures that drive future financial performance

Integrating customers into the value chain

When addressing the value-chain concept, it is important to focus on the interrelationship between the organization and its most important stakeholder—its customers. Some firms find great value by directly incorporating their customers into the value creation process. Firms can do this in one of two ways. First, they can employ the "prosumer" concept and directly team up with customers to design and build products to satisfy their particular needs. Working directly with customers in this process provides multiple potential benefits for the firm. As the firm develops individualized products and relationship marketing, it can benefit from greater customer satisfaction and loyalty. Additionally, the interactions with customers can generate insights that lead to cost-saving initiatives and more innovative ideas for the producing firm

Marketing and sales

activities are associated with purchases of products and services by end users and the inducements used to get them to make purchases they include advertising, promotion, sales forces, quoting, channel selection, channel relation, and pricing

Tangible resources

are assets that are relatively easy to identify They include the physical and financial assets that an organization uses to create value for its customers. Among them are: financial resource (e.g., a firm's cash, accounts receivable, and its ability to borrow funds); physical resources (e.g., the company's plant, equipment, and machinery as well as its proximity to customers and suppliers); organizational resources (e.g., the company's strategic planning process and its employee development, evaluation, and reward systems); and technological resources (e.g., trade secrets, patents, and copyrights)

Organizational capabilities

are not specific tangible or intangible assets, but rather the competencies or skill that a firm employees to transform input into outputs in short, they refer to an org's capacity to deploy tangible and intangible resources over time and generally in combination and to leverage those capabilities to bring about a desired end Examples of organizational capabilities are outstanding customer service, excellent product development capabilities, superb innovation processes, and flexibility in manufacturing processes

General adminstration

consists of a number of activities, including general management, planning, finance, accounting, legal and government affairs, quality management, and info systems administration (unlike other support activities) typically support the entire value chain and not individual activities Although general administration is sometimes viewed only as overhead, it can be a powerful source of competitive advantage In a telephone operating company, for example, negotiating and maintaining ongoing relations with regulatory bodies can be among the most important activities for competitive advantage. Also, in some industries top management plays a vital role in dealing with important buyers

Human resource management

consists of activities involved in the recruiting, hiring, training, development and compensation of all types of personnel it supports both individual primary and support activities (e.g. hiring of engineers and scientist) and the entire value chain (e.g. negotiations with labor unions)

Technology development

every value activity embodies technology The array of tech employed in most firms is very broad, ranging from tech used to prepare documents and transport goods to those embodied in process and equipment or product itself tech development relates to the product and its feature supports the entire value chain, while other tech development is associated with particular primary or support activities

Four characteristics of inimtability

if the resource has one of the four it can forestall and sustain profits for awhile to develop strategies around it Physical uniqueness Path dependency Causal ambiguity social complexity

Potential issues with the competitive advantage framework

inability to respond to market volatility (not being able to adapt to a market shift) focus on "winning" (not seeing competitors as potential collaborators" success breeding failure (becoming so good at what it is, it stops being valued by the market, people might want something different)

Five primary activites

inbound logistics operations outbound logistics marketing and sales service contribute to the physical creation of the product or service, its sales and transfer to the buyer, and its service after the sale

Operations

includes all activities associated with transforming inputs into the final product form, such as machining, packaging, assembling, testing, printing, and facility operations

Procurement

refers to the function of purchasing inputs used in the firm's value chain, not to the purchased inputs themselves purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings

Social capital

intra firm connections: ties between employees and groups within the firm enhances retention facilitates knowledge flow and coordination (specifically bridging relationship) building and enhancing trust (specifically higher closure) but at extreme levels, can create group think and narrow search for new ideas

Outbound logistics

is associated with collecting, storing, and distributing the product or service to buyers these activities include finished goods, warehousing, material handling, delivery vehicle operations, order processing, and scheduling

What makes up a firm

it is made up of resources and capabilities there to create, leverage, integrate, and regenerate resources critical resources and core competencies --> sustainable competitive advantages

interrelationships among value chain activities with and across organizations

managers must not ignore the importance of relationships among value chain activities there are two levels: 1. interrelationships among activities within the firm and 2. relationships among activities with the firm and with other stakeholders (e.g. customers and suppliers) that are part of the firm's expanded value chain interrelationships: collaborative and strategic exchange relationships between value chain activities either a. within firms b. between firms. Strategic exchange relationship involve exchange of resources such as info, people, tech, or money that contribute to the success of the firm

Intangible resources

much more difficult for competitors and for a firm's own manager, to account for or imitate typically embedded in unique routines and practices that have evolved and accumulated over time. these include: human resources (e.g., experience and capability of employees, trust, effectiveness of work teams, managerial skills), innovation resources (e.g., technical and scientific expertise, ideas), and reputation resources (e.g., brand name, reputation with suppliers for fairness and with customers for reliability and product quality). A firm's culture may also be a resource that provides competitive advantage.

Resource based view of the firm

perspective that firms' competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute combine two perspectives: 1. the internal analysis of phenomena within a company and 2. an external analysis of the industry and its competitive environment It goes beyond the traditional SWOT (strengths, weaknesses, opportunities, threats) analysis by integrating internal and external perspectives. The ability of a firm's resources to confer competitive advantage(s) cannot be determined without taking into consideration the broader competitive context. A firm's resources must be evaluated in terms of how valuable, rare, and hard they are for competitors to duplicate. Otherwise, the firm attains only competitive parity. A firm's strengths and capabilities—no matter how unique or impressive—do not necessarily lead to competitive advantages in the marketplace

extra firm connections (connections outside of firm)

political goodwill and ties alliance partnerships supplier and/or distributor ties ties to capital and debt providers other stakeholder relationship

Inbound logistics

primarily associated with receiving, storing, and distributing inputs to the products. It includes material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers JIT for example were designed to achieve efficient inbound logistics. In essence, Toyota epitomizes JIT inventory systems, in which parts deliveries arrive at the assembly plants only hours before they are needed. JIT systems will play a vital role in fulfilling Toyota's commitment to fill a buyer's new-car order in just five days.This standard is in sharp contrast to most competitors that require approximately 30 days' notice to build vehicles. Toyota's standard is three times faster than even Honda Motors, considered to be the industry's most efficient in order follow-through. The five days represent the time from the company's receipt of an order to the time the car leaves the assembly plant. Actual delivery may take longer, depending on where a customer lives

Service

primary activity includes all action associated with providing service to enhance or maintain the value of the product such as installation, repair, training, part supply, and product adjustment

Support activities

procurement, technology development human resource management and general administration either add value by themselves or add value through important relationships with both primary activities and other support activities

Financial ratio analyssi

the beginning point in analyzing the financial position of a firm is to compute and analyze five different types of financial ratios Short term solvency or liquidity long term solvency measures asset management (or turnover) profitability Market value

5th characteristic of imitability

unique historical conditions: created in the past, now hard to recreate ex ante limits to competition foresight luck

Factors that may influence sustainability of competitive advantage

volatility of the market capabilities of the competitors competitors' prior commitments degree of control over the rules