Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

Learning Objectives To understand: The characteristics of resources and capabilities that create a foundation for sustainable competitive advantage How resources are interconnected and the implications of resource interconnectedness for firm performance The responsibilities of boards of directors and the agency issues associated with corporate governance The usefulness of the value chain in understanding sources of competitive advantage Strategy inf Focus Watch on Youtube the video Amazon.com Amazon.com, Inc. opened its virtual doors in the world wide web in July 1995. the company seeks to be the Earths most customer-centric company, focusing on three primary customer groups: (1) online retail consumers, (2)sellers and (3)developers. This company also generates revenue through co-branded credit cards and online advertising. In 2008 the company started shipping Kindle, a wireless reading device that offers hundreds of thousands of titles. Sales of Kindle have exceeded the companys expectations. Amazons focus on customer satisfaction earned it first place on Business Weeks list of the top companies for customer service in 2009. this might seem odd for an internet-based company because most transactions are handled without any human contact. CEO Jeffrey Bezos explains that the customer experience includes (1)having the lowest price, (2)having the fastest delivery, (3)having it reliable enough so that you dont need to contact *anyone+. Behind the scenes at Amazon are complex operating systems and a myriad of contractual agreements. The company runs its own fulfillment centers, warehouses and customer service centers around the world, as well as creating outsourcing agreements with other companies to provide these services. Amazon also provides e-commerce service for other businesses that may include technology development; fulfillment services; inventory management; tax collections; payment processing; engaging 3rd parties to perform hosting and other services; and licensing of third party software, hardware and content. Organizational Resources Leading to Sustainable Competitive Advantage

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

The internal resources and capabilities that lead to competitive advantage are different in each industry and can also change over time. Organizational resources only result in a competitive advantage if they are uniquely valuable in the external environment. Internal resources and capabilities fall into four general categories: financial, physical, human, and organizational. Capabilities and resources become strengths leading to a competitive advantage if two conditions are met: - The resources or capabilities are valuable. -they allow the firm to exploit external opportunities and/or neutralize external threats. In general, value comes from the ability to use the resource to provide a good or service at a lower cost or to provide a good or service that is more desirable to the consumer. Nevertheless, value itself does not make a resource a source of competitive advantage. Additional conditions must be met. - The resources or capabilities are unique. -if numerous organizations posses a particular resource or capability, then the situation is described as competitive parity-no company has the advantage. On the other hand, if only one or a small group of organizations posses a valuable resource or capability, then that resource or capability maybe a source of competitive advantage. In addition, the competitive advantage becomes sustainable over time if the resources or capabilities are difficult or expensive to imitate. For a firm to realize an advantage from unique and valuable resources, the firm must also be organized to take advantage of it. If a resource or capability is valuable, unique, hard to imitate, and it also can be applied to more than one business area, it is called a core competency or distinctive competence Tangible and intangible resources can be used as a form of competitive advantage for most organization. For example a Patent (tangible) may provide an organization with an advantage but the capability to quickly and accurately develop and introduce new products involves integration of several resources (e.g. marketing. Product development, operations and others) Often, the key to competitive advantage is to combine resources and develop capabilities that are hard to imitate. These integrated resources and capabilities are particularly difficult for competitors to observe and imitate. Organizational reputation and a well-known corporate brand are also hard to imitate. Unique configurations of stakeholder relationships can also be very difficult, if not impossible, to imitate.

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

The diagram represents strong interconnections between human; physical; knowledge and learning resources (information); Financial; General Organizational Human Resources

Human resources hold excellent potential for sustainable competitive advantage. Possible sources of competitive advantage. Possible sources of advantages include excellent human resources, superior top managers or an excellent system of corporate governance. Directors can provide advice to top managers and help the firm acquire resources through its stakeholder networks. Managers CEO and top management team Employees recruitment, training programs, rewards system Owners/board of directors effective corporate governance

Watch Little Caesar's Commercial Video on YouTube.

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

Position of Board of Directors

In publicly owned companies, the interests of shareholders are protected by a board of directors that is elected by the voting shareholders. The board of directors is responsible for hiring, firing, supervising, advising and compensating top managers within the firm, and approves major strategic decisions such as the development of new lines of business, mergers, acquisitions, or entrance into foreign markets. The Chief Executive Officer (CEO) has the primary responsibility for setting the strategic direction of the firm Although larger organizations are typically led by several high ranking officials Corporate Governance Corporate governance is concerned with the balance between: Economic and social goals Individual goals of managers and firm goals The board of directors: Hires, fires, supervises and compensates top management Approves major strategic decisions Ensures that the firm and its managers are acting responsibly Provides advice to top management Provides a social network that helps firms acquire resources

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

Agency Theory Agents--managers with a fiduciary duty to act in the best interests of owners Agency problem--managers maximize their own self-interests at the expense of owners High salaries of CEOs Emphasis on short-term performance at expense of long-term performance Empire building for status CEO duality Top managers become agents for the owners of the firm--they have a fiduciary duty to act in the owners' best interests. On occasion, top managers attempt to maximize their own self-interest at the expense of shareholders, which creates an agency problem. Boards of directors monitor conflicts of interest.

Physical Resources Tangible resources such as machinery, plants and products easy to imitate, but the processes to create them are not Locations competitive clusters can provide advantages to companies and consumers Clustering may lead to higher performance because of improved productions that comes from the availability of raw materials or in human resources Competitive Cluster refers to industry being cluster (group) together so that they can take maximum advantage of the resource available in an area. Competitive cluster exist in computer technology (silicon valley), high-tech automobiles (southern Germany), and Entertainment (Hollywood)

Financial Resources Strong cash flow, low levels of debt, strong credit rating, access to low interest capital and reputation for creditworthiness can increase strategic flexibility more responsive to new opportunities Financial Analysis is used to indicate the ability of the firm to finance growth (high leverage VS strong balance sheet) Financial resources can be a source of competitive advantage, although they rarely qualify as Unique or difficult to imitate.

Use of Financial Analysis in Strategic Management Identify strengths and weaknesses Diagnose problems Declining profitability Insufficient liquidity Leverage too high or too low Internal mismanagement Essential comparisons Firm to competitors Firm to itself over time

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

Financial resources can be a source of advantage, although they rarely qualify as unique or difficult to imitate. 1. Strong cash flow, low levels of debt, a strong credit rating, access to low interest capital, and a reputation for creditworthiness are powerful strengths that can serve as a source of strategic flexibility. 2. Firms often attempt to compare their expenses, investments, sources of income, and resulting profitability to competitors as a way of assessing the success of their strategies. 3.. The findings from a competitor comparison must always be weighed against the goals of the firm. 4. Firms also track their own expenses and sources of income over time as a way of identifying trends. Poor financial trends are sometimes symptoms of greater problems.

Some Commonly Used Ratios Profitability Gross Profit Margin Net Profit Margin ROA ROE Liquidity Current Quick Leverage Debt to Equity Total Debt to Total Assets (Asset Ratio) Activity Asset Turnover Average Collection Period Accounts Receivable Turnover Inventory Turnover Knowledge and Learning Resources Organizational learning leads to strengths in other resource areas. It involves: Knowledge creation CREATED Knowledge retention - STORED Knowledge sharing - SHARED Knowledge utilization KNOWLEDGE TRANSFER Two types of knowledge: Codified can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage (Codified knowledge like formulas; designs; computer code) Tacit difficult to describe with words. Better source of sustainable competitive advantage (Tacit knowledge tends to link (associate) with intangible resources and capabilities) General Organizational Resources Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage: Organizational reputation Corporate brands

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

Unique configurations of stakeholder relationships joint venture, long-term contracts and other types of partnerships and alliances Organizational structure and internal systems Organizational culture Organizational Resources are hard to imitate that tends to be highly competitive.

Resource Analysis and the Development of Strategy Strategy should be based on what the organization does well relative to Competitors Capabilities Resources Long-term organizational success often depends on developing new competencies that will create competitive advantage in the future.

Corporations Value Chain

The value chain framework allows systematic study of the various value-adding activities of a business. Value chain analysis may be used to identify key resources and processes that represent strengths, areas that need improvement, and opportunities to develop a competitive advantage. The value chain divides organizational processes into distinct activities that create value for the customer.

Business Policy Chapter3 - The Organizational Resources and Competitive Advantage

Prof. Noel M. Teves

- The primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. - Organizations also engage in activities that support these primary functions, including procurement, technology development, human resource management, and administration. - An organization can develop a competitive advantage a. in any of the primary or support activities or b. in the way they are combined or c. in the way internal activities are linked to the external environment. The cumulative effect of value chain activities and the way they are linked inside the firm and with the external environment determine organizational strengths, weaknesses, and performance relative to competitors.

Primary Activities Inbound Logistics Includes supply chain activities associated with acquiring inputs that are used in the product warehousing, materials handling and inventory control Operations Refers to the transforming inputs into the final product through activities such as machinery, assembly, molding, testing and printing Outbound Logistics Activities related to storing and physically distributing the final products to costumers, such as finished goods warehousing, order processing and transportation Marketing and Sales Includes processes through which customers can purchase the products and through which they are induced to do so, such as advertising, distribution of catalogs, direct sales, distribution channeling, promotion and pricing. Service Refers to providing services to enhance or maintain product value such as repairing, supplying parts and installation.

Activities that Support the Primary Activities Administration Consist of general management activities such as planning and accounting Technology Development Refers to product and process development and to organizational learning processes. Which results in improved products and services and improvements in the way organizational functions are performed Human Resource Development Includes human based activities such as recruiting, hiring and training, performance evaluation, employee development and compensation Procurement Refers to the process and activities involve in purchasing inputs and not to the inputs themselves or the way they delivered or handled

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