AEM2200 Business Management and Organizations Final Presentation PDF

AEM2200 Business Management and Organizations Lectures F 10/4 – M 10/7 Principles of Strategic Management Strategy and difference Frameworks for strategic management Five Forces Analysis SWOT Analysis Positioning strategies Industry dy...

AEM2200 Business Management and Organizations Lectures F 10/4 – M 10/7 Principles of Strategic Management Strategy and difference Frameworks for strategic management Five Forces Analysis SWOT Analysis Positioning strategies Industry dynamics To Whom Does the Value Created by Businesses Belongs? To Review Objectives of a Functions of Firm Management Survival Planning Growth Organizing Social utility Leading Profit Controlling  Strategy “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” Michael Porter, “What is strategy?”, HBR, Nov-Dec 1996 Core Competencies Bundle of skills and technologies that enables a company to provide a particular benefit to customers; Examples Apple, “pocketability”, ease of use, design; Smartphone industry, growing competition FedEx, on-time delivery and logistics management; Express delivery services industry, stable and credible competition (UPS, DHL, Yamato, Aramex, SF Express, Sinotrans Air Courier, etc.) Wal-Mart, the choice-availability-value trilogy and logistics management; AMAZON!!! Sustainable Competitive Advantage The provision of greater value for customers than competitors through means that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate. Valuable resources Rare resources Imperfectly imitable resources Nonsubstitutable resources Airline Industry Responses Consolidation American + United + Delta Adoption of yield management Filling the empty seats at the back with no-frills fares Better responses to changing demand patterns Southwest going from 101 to 117 destinations, hence more empty seats Strategy, Core Competencies, Sustainable Competitive Advantage Strategy is about difference; Difference is achieved by deliberately pursuing a different set of activities to deliver a unique mix of value; Sustainable competitive advantage is the provision of greater value for customers than competitors through means that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate. Conceptual Structure of the SWOT Framework Internal Factors External Factors Favorable Factors Strengths Opportunities Unfavorable Factors Weaknesses Threats  SWOT Analysis Strengths Weaknesses Unique or distinct Operations or procedures advantages that make your in need of streamlining; organization stand out in Areas in which competitors the crowd; are better, how and why. What makes the customers Areas that you or your organization may be choose your organization avoiding; over the competition; Market segments from Products or services which which your organization is your competition cannot shut-out. imitate (now and in the future). Threats Areas in which competition Opportunities is forcing action that is Attractive choices within harmful to the your marketplace: where organization; and what; Changes in customer demand; Emerging trends; Changes in technology. Potential new products and What kind of elements of SWOT analysis are core competencies? a) Strengths b) Weaknesses c) Opportunities d) Threats STARBUCKS SWOT Internal Factors External Factors Favorable Strong brand image Expansion in developing markets Factors Extensive global supply Business diversification chain Partnerships or alliances with Moderate diversification other firms through subsidiaries Unfavorable High price points Competition involving low-cost Factors Imitability of products coffee sellers Complexity and Imitation obsolescence Independent coffeehouse Labor unrest movements From http://panmore.com/starbucks-coffee-swot-analysis Porter’s Five Industry Forces Competitive Rivalry A measure of the intensity of competitive behavior between companies in an industry Threat of New Entrants A measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry Threat of Substitute Products A measure of the ease with which customers can find substituted for an industry’s products Bargaining Power of Suppliers A measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs Bargaining Power of Buyers A measure of the influence that customers have on a firm’s prices Porter’s Five Industry Forces - Starbucks Competitive rivalry – Strong Large number of coffeehouses and food-service firms (strong force) Low switching costs between coffeehouses (strong force) Bargaining power of customers – Strong Low switching costs between coffee shops (strong force) High availability of substitute foods and beverages (strong force) Bargaining power of suppliers – Moderate Limited variety of suppliers (moderate force) Supply shortages (strong force) Threat of new entrants – Moderate Moderate cost of doing business (moderate force) Moderate supply chain costs (moderate force) Threat of substitute products – Strong High availability of substitute foods and beverages (strong force) Low switching costs between coffeehouses and substitutes (strong force) High affordability of substitute products (strong force) Five Forces Framework: Important Considerations Barriers to Entry Price Competition occurs when Supply side economies of scale Nearly identical products Network effects with low switching costs; Customer switching costs Economies of scale Capital requirements regimes; Incumbency advantages Rigid capacity; Access to distribution Perishable products; channels Government policy Porter’s Generic Competitive Strategies Porter’s Generic Competitive Strategies A company that pursues a cost leadership strategy aims to provide a product or service at as low a price as possible to a broad audience. McDonalds, Ikea, Ryanair When pursuing a differentiation strategy, a firm seeks to be unique in its industry along a dimension or a group of dimensions that are valued by consumers and can command a premium price. Apple, Louis Vuitton, Starbucks In a focus strategy, a company “focuses” its sales efforts on a specific geographical region, a specific group of purchasers, or a specific product type. While pursuing a focused strategy, a firm may do so by either being low- cost or differentiated; Cascadian Farm, Chipotle (tried, there are others), Dollar General For example Differentiation Tesla (?) Mercedes-Benz Whole Foods, (BMW) Trader Joe Wegmans, Publix Cost BYD (?) Toyota Aldi (Volkswagen) WalMart Focus Broad In Summary SWOT analysis tells us about the firm itself 5F analysis tells us about the firm and the industry in which it operates It helps us think about the cooperation and competition for value across the supply and value chain, from our supplier to our competitors to our customers The generic strategies framework helps us see how competition in our industry is structured, and what we should do. Innovation and the Firm’s Life Cycle Exploration vs. Exploitation “Flexible organization” vs. “Machine/Exploiting Hierarchy” Disruptive innovation vs. incremental innovation Innovation and Change Innovation generally refers to changing processes or creating more effective processes, products and ideas. For businesses, this could mean implementing new ideas, creating dynamic products or improving your existing services. Innovation can be a catalyst for the growth and success of your business, and help you to adapt and grow in the marketplace. Being innovative does not only mean inventing. Innovation can mean changing your business model and adapting to changes in your environment to deliver better products or services. Successful innovation should be an in-built part of your business strategy, where you create a culture of innovation and lead the way in innovative thinking and creative problem solving. Innovation can increase the likelihood of your business succeeding. Businesses that innovate create more efficient work processes and have better productivity and performance. https://www.business.gov.au/change-and-growth/innovation Organizational change refers to the processes and activities that organizations go through to align themselves with the internal and external business environment and to prepare for future potential opportunities. management, p. 284 Exploration and Exploitation: Two Fundamental Strategic Modes Exploration refers to learning and knowledge development intended to increase organizational performance through the exploration of new possibilities. Exploration can be though of as the invention or discovery of a new technology. "The essence of exploration is experimentation and new alternatives. Its returns are uncertain, distant, and often negative."(March, 1991, p. 85) Exploitation refers to an organization's ability to be aligned and efficient in its management of today's business demands. “The essence of exploitation is the refinement and extension of existing competences, technologies, and paradigms. Its returns are positive, proximate, and predictable.” (March, 1991, p. 85) Incremental Innovation and Incremental Change Incremental innovation is a series of small improvements or upgrades made to a company's existing products, services, processes or methods. The changes implemented through incremental innovation are usually focused on improving an existing product's development efficiency, productivity and competitive differentiation. https://searchcio.techtarget.com/definition/incremental-innovatio n Incremental change is a process in which small improvements or changes are made to processes and approaches on an ongoing basis. management, p. 293 What do airlines / governments look for in a passenger / transport plane? SAFETY and Reliability Speed Capacity A Short History of the Passenger Plane Industry Early designs were small, slow, and better suited for, say, mail service; Competition from railroads, sea liners, and the nascent auto industry; First “true” passenger plane: DC-3 Dominant design WWII 20,000 DC-3 / C-47 produced! (Including U.K. and U.S.S.R.) Lockheed, Boeing (U.S.A.), DeHavilland (GB) also participants; Junker Ju-52, 5,000 produced, German equivalent. Lessons Industries do not grow and consolidate until there is a dominant design Scale matters The Jet-Liner Era Europe tries to break in DeHavilland Comet – 100 units SudAviation Caravelle – 300 units Concorde – 20 units The American response Boeing 707 – 100 units Boeing 737 – 8,500 units DC – 8 – 500 units DC – 9 – 2,500 units Airliner Industry - 1970 Differentiation Concorde McDonnell Douglas Cost Caravelle Boeing Focus Broad What do airlines / governments look for in a passenger / transport plane? SAFETY DC – 3 Speed Jet Liners Concorde??? Capacity Wide-body airplanes, Boeing 747 Consolidation and New Challenges Wide body airplanes – 747, DC-10, L1011 see off the first European challenge; Lockheed drops, Boeing acquires McDonnell Douglas (1997). European competitors unite to create Airbus SAS. Airbus competes head to head with Boeing and, eventually, becomes the largest producer of airliners in the world. Airliner Industry - 2015 Differentiation Bombardier, Boeing Embraer (COMAC, United Aircraft Cost Corporation) Airbus Focus Broad Boeing and Airbus – head to head 737 A 320 Short range workhorse, 100 – Short range workhorse, 132 – 200 passengers; 236 passengers; 747 A 380 Long range workhorse, Long range workhorse, 500 – 600 passengers 550 – 850 passengers 767, now 787 737 for long-range, 200 – 400 passengers 777 A 330, 350, 350 Extra long range, between 767 Medium / long range, frequent and 747, 300 – 500 passengers route 350 passengers Lessons Industries do not grow and consolidate until there is a dominant design Scale matters Mature industries consolidate into oligopolies. Depending on barriers of entry and scale, even a duopoly or a dominant firm with “also runs”  Competition for the 97 – 240 Airliner Segment 16,800 737 and 320 Bombardier CS100 – CS300 (in operation) Sukhoi Superjet (in operation) Embraer E195 – E2 (2019) COMAC C-919 (2019) Irkut MC-21 (in development) Strategic Resolution Airbus buys out 50.01% of Bombardier’s aircraft division. The CS Series becomes the A220. Boeing tries to buy out 80% of Embraer’s commercial jet business. Did not succeed, but Embraer distracted Airbus drops the A380  Airbus Shows Danger of Wanting it Bigger and Faster, WSJ, 2/15/19 The fiasco of the four-engine A380 should serve as a cautionary lesson in airline economics: Carriers’ top priority isn’t to save on aircraft—by having fewer planes seating more passengers—but to save on fuel. Of an airline’s total costs, less than 10% is spent on aircraft, whereas fuel makes up roughly a third. Chasing speed has similarly proved a vanity project: It’s no accident that it takes as long to fly between New York City and London now as it did 60 years ago. Technological breakthroughs have all been devoted to economizing on fuel by building more efficient engines and more aerodynamic fuselages and wings. Fuel burned by new aircraft fell by 45% between 1968 and 2014, according to The International Council on Clean Transportation. Lessons Industries do not grow and consolidate until there is a dominant design Scale matters Mature industries consolidate into oligopolies. Depending on barriers of entry and scale, even a duopoly or a dominant firm with “also runs” Oligopolists must be wary of disruptive innovation / niche players Eventually, dominant designs hit limits  On the Shareholder View and its Consequences AEM2200 Business Management and Organizations To Who Does Belong the Value Created by a Business? To its shareholders Shareholder view To its shareholders, but under the injunction of neither harming the environment nor society Corporate Social Responsibility view To all actors (stakeholders) who interact under the umbrella of the business and obtain value from that interaction Stakeholder view  The Stakeholder Corporation and CSR: a critique There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. Milton Friedman – Nobel laureate  The Managerial/Shareholder Model Businesses are to be managed solely for the benefit of shareholders. Any other benefits (or harms) that are created are incidental. Managerialism, hierarchy, stability, and predictability all evolved together… to form the most powerful economic system in the history of humanity. The rise of bureaucracy and managerialism was so strong, that the economist Joseph Schumpeter predicted that it would wipe out the creative force of capitalism, stifling innovation in its drive for predictability and stability. During the last fifty years this “Managerial Model” has put “shareholders” at the center of the firm, as the most important group for managers to worry about. This mindset has dealt with the increasing complexity of the business world by focusing more intensely on “shareholders” and “creating value for shareholders.”  Defending the Shareholder View The Principle of Ownership Has its philosophical origins with John Locke Since firms are the property of those whose capital is invested in them, firms must be managed for the profit of the owners; Fiduciary duty Opportunism: self-interest seeking with guile. Shirking: doing less work than agreed. Principle of Utilitarian Ethics As per Adam Smith, private self-interest mediated by the market results in public benefit, hence it is appropriate (and necessary) for business owners and managers to pursue profits relentlessly. The stronger the profit motive, the more efficient the work of markets. Profits to shareholders as a focusing mechanism. According to the principles of utilitarian ethics, the Separation Principle (business decisions are independent of ethics decisions) obtains. The Shareholder View and Neoliberalism Shareholder View of the Firm; Neoliberal approach to governance and society; Homo Œconomicus; Market society Neoliberal Approach to Governance and Society The shareholder view is enabled by a Neoliberal perspective on the relationship between the state and the economy. Legitimacy of the state based on the space for economic freedom that is allows. Economic freedom minimal or no state intervention in the economy, emphasis on promoting economic competition rather than economic production or exchange, an active role for the state in preserving and increasing the space for economic competition. The goal is to actively encourage all economic actors, both firms and individuals, to act as producers of value and entrepreneurs. Homo Œconomicus Given economic value maximization within the neoliberal governmentality, individual value and worth derives from the ability to compete in the economy. Breaking labor into capital and income, capital is the set of all physical and psychological factors which make someone able to earn a given wage, and income is the accumulation of wages over time, the product or return on capital. Homo Œconomicus Entrepreneur of himself, within an economy made of enterprise-units. Consumption: enterprise activity by which the individual, precisely on the basis of the capital at his disposal, produces his own satisfaction. Interpreting individuality as homo œconomicus allows to decipher traditionally non-economic social behavior in economic terms; Crime Education Divorce. Market Society – Michael Sendel Way of life in which market values seep into every aspect of human endeavor and social relations are made over in the image of the market Market reasoning empties public life of moral argument. We live in a time when almost everything can be bought and sold, where markets and market values govern our lives as never before, not because of an increase in greed but because markets and market values have seeped into spheres of life traditionally governed by nonmarket norms. However, The hazards of shirking and opportunism works both ways Firm’s employees may break the law, or not pay close attention to legal and ethical limits, in their pursuit of profits. Contemporary business firms tend to appropriate economic value and externalize economic losses. Who cleans the environment? Who heals society? Social Consequences Inequality. In a society where everything is for sale, life is harder for those of modest means. The more money can buy, the more affluence—or the lack of it —matters. As money comes to buy more and more, the distribution of income and wealth looms larger. Corruption. Putting a price on the good things in life can corrupt them. Markets don’t only allocate goods; they express and promote certain attitudes toward the goods being exchanged. Personal Consequences Stress / anxiety Loneliness Despair Maxine Bedat, in Unraveled (2021) quotes Tim Kasser’s The High Price of Materialism (2002) on the consequences of materialist values and goals: Have more financial problems; Have lower levels of well-being; Demonstrate more antisocial behaviors; Show worse ecological attitudes and behaviors; Show low intrinsic motivation. For nearly three decades, the religion of technology and GDP and the crude 19th-century calculus of self-interest have dominated politics and intellectual life. Today, the society of entrepreneurial individuals competing in the rational market reveals unplumbed depths of misery and despair; it spawns a nihilistic rebellion against order itself. With so many of our landmarks in ruins, we can barely see where we are headed, let alone chart a path. But even to get our basic bearings we need, above all, greater precision in matters of the soul. The stunning events of our age of anger, and our perplexity before them, make it imperative that we anchor thought in the sphere of emotions; these upheavals demand nothing less than a radically enlarged understanding of what it means for human beings to pursue the contradictory ideals of freedom, equality and prosperity. Welcome to the Age of Anger, Pankaj Mishra, The Guardian, December 8, 2016 The Managerial/Shareholder Model is Resistant to change Supported by precedent, not law Dodge vs Ford (1919) context Fiduciary duty? Not ethically sound The Separation Fallacy: It is useful to believe that sentences like “x is a business decision” have no ethical content or any implicit ethical point of view. And, it is useful to believe that sentences like “x in an ethical decision, the best thing to do all things considered” have no content or implicit view about value creation and trade (business). The Integration Thesis Most business decisions or sentences about business have some ethical content, or implicit ethical view. Most ethical decisions or sentences about ethics have some business content or implicit view about business Corollary: The Responsibility Principle Most people, most of the time, want to, actually do, and should accept responsibility for the effects of their actions on others. Business is fully situated in the realm of humanity Capitalism is ultimately a scheme for social cooperation Corporate social responsibility Refers to the comprehensive approach that a corporation takes to meet or exceed stakeholder expectations beyond measures of revenue, profit and legal obligation. community investment, human rights and employee relations, environmental practices ethical conduct. The Triple Bottom Line Profits Environmental sustainability Social responsibility But, can it all be measured? And is the economy really so static?  Sustainability Meeting the needs of the present generation without compromising the ability of future generations to meet their own needs. Brundtland Commission, 1987. Objections to CSR Milton Friedman (also Levitt, 1958) Business is not equipped to handle social activities Dilutes businesses’ primary purposes Businesses already hold too much power Commitment to CSR makes a business less competitive Arguments for CSR It is in business’ long-term self interest – enlightened self-interest – to be socially responsible; Ward-off government regulation; ‘Business has the resources’ ‘Let business try’ Proacting (anticipating, acting, and initiating) is better than reacting Business should engage in CSR because the public strongly supports it. Why do businesses engage CSR? (1) defend their reputations (pain (1) cost and risk reduction; alleviation), (2) gaining competitive (2) justify benefits over advantage; costs (the ‘traditional’ (3) developing reputation business case), (3) integrate with their and legitimacy; and broader strategies (the (4) seeking win–win ‘strategic’ business outcomes through case), and synergistic value creation. (4) learn, innovate and (Kurucz et al, 2008) manage risk (New Economy Business case) (Zadek 2000) Key Distinctions between Shareholder and Stakeholder Firms Attibute Shareholder Firm Stakeholder firm Goals Maximize shareholder wealth Pursue multiple objectives of parties with different interests Governance Managers are agents of Coordination, structures and shareholders; control is cooperation, conflict key processes the key task. resolution are key tasks. Performance Shareholder value sufficient Fair distribution of value metrics to maintain investor created to maintain commitment. commitment of multiple stakeholders. Residual risk Shareholders All stakeholders holders Stakeholder Investors / owners All stakeholders influence ESG Criteria ESG criteria refer to environmental, social and corporate governance factors that are taken into account when investing in a company. They are a reference for socially responsible investing. ENVIRONMENT encompasses the effect that companies’ activities have on the environment - directly or indirectly SOCIETY includes the impact that a certain company has on its social environment in the community. GOVERNANCE alludes to the company’s corporate governance - for example, the composition and diversity of its Board of Directors, transparency policies for its public information, or its codes of conduct. A Broken System Needs Urgent Repairs, The Economist, 7/21/22 ESG Investing – Impact Investing – The Economist, 7/23/22 Asset Managers Attract younger investors Increase business and fees Investors Selling a “white lie” Defining ESG investments Companies How do we measure and “internalize” externalities? ESG rating agencies “Aggregate confusion” Measure less, but better Carbon taxes? Regulation and redistribution Take Aways The business environment changes constantly and represents a source of threats and opportunities for both entrepreneurs and established businesses. The corporate form of organization creates conflicts of agency and social allocation of resources. Business obtains resources and legitimacy from society, and it is therefore responsible to it.