Chapter 3 Organizational Resources and Competitive Advantage PDF

 Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be...

 Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Examples of Firm Resources and Capabilities Financial Human Superior CEO characteristics Excellent cash flow Experienced managers Strong balance sheet Well trained, motivated, loyal Superior past performance employees Strong links to financiers High performance structure or culture Knowledge and Learning Superior technology development Excellent innovation processes and organizational entrepreneurship Outstanding learning processes Physical General Organizational State-of-the-art plant or machinery Superiority in a value-adding Excellent reputation or brand name process or function Patents Superior locations or raw materials Exclusive Contracts Outstanding products and/or Superior linkages with stakeholders services  Six Questions that Determine the Value of Firm Resources and Capabilities 1. Does the resource 4. Do Firm organizational Resources or capability have systems exist that 6. Is the and value in the market? allow realization of resource or Capabilities 2. Is the resource or potential? capability capability unique? difficult or Financial 5. Is the 3. Is there a readily costly to organization aware Physical available substitute for imitate? of and realizing the the resource or advantages? Human capability? Knowledge and Learning General Potential Actual The Organizational Competitive Source of Competitive Advantage or Competitive Advantage or Core Advantage Core Competency* Competency Is Sustainable  Types of Resources Tangible Resources › Can be seen, touched and/or quantified › Examples are manufacturing processes and products › Tend to be easy to imitate Intangible Resources › Hard to quantify › Examples are knowledge, skills, abilities and relationships with stakeholders › Difficult to imitate. Makes them good sources of competitive advantage Industry Differences › The resources and capabilities that lead to competitive advantage vary from industry to industry  Competitiveness and Resource Interconnectedness Human High Quality Managers High Quality Employees Better Training Financial Knowledge and Learning Strong Financial More Innovation Position More Learning Physical General Organizational State-of-the-art Plant Strong Brand and Machinery Better Reputation Superior Functional Strong Stakeholder Processes Relationships Superior Products and Services  Commonly Used Financial Ratios Profitability › Gross profit margin ¤ Sales-COGS / Sales X 100 ¤ Efficiency of operations and product pricing › Net profit margin ¤ Net profit aft. Tax / Sales X 100 ¤ Efficiency after all expenses are considered › Return on Assets (ROA) ¤ Net profit aft. Tax / Total Assets X 100 ¤ Productivity of Assets › Return on Equity (ROE) ¤ Net profit aft. Tax / Stockholders Equity X 100 ¤ Earnings power of equity  Commonly Used Financial Ratios Liquidity › Current Ratio ¤ Current Assets / Current Liabilities ¤ Short-run debt paying ability › Quick Ratio ¤ Current Assets - Inventories / Current Liabilities ¤ Short-term liquidity Leverage › Debt to Equity ¤ Total Liabilities / Stockholder’s Equity ¤ Extent to which stockholders’ investments are leveraged › Total Debt to Total Assets (Debt Ratio) ¤ Total Liabilities / Total Assets ¤ Percent of assets financed through borrowing  Commonly Used Financial Ratios Activity › Asset Turnover ¤ Sales / Total Assets ¤ Efficiency of asset utilization › Inventory Turnover ¤ Cost of Goods Sold / Average Inventory ¤ Management’s ability to control inventory investments › Average Collection Period ¤ Receivables X 365 days / Annual Credit Sales ¤ Effectiveness of collection and credit policies ¤ Information may only be available to internal managers › Accounts Receivable Turnover ¤ Annual Credit Sales / Receivables ¤ Effectiveness of collection and credit policies ¤ Information may only be available to internal managers  Strategic Leadership Create organizational vision › Envision what the organization should be like in the future › Communicate this vision to followers › Empower followers to enact the vision Establish core values for the organization Develop strategies and a management structure Foster an environment conducive to organizational learning and development › Serve as coach, teacher and facilitator › Help organizational members question their assumptions Serve as a steward for the organization  Leadership Approaches Commander › CEO formulates strategy and then directs subordinates to implement Change › CEO formulates strategy and then plans changes to structure, personnel, information systems, and administration to implement it Collaborative › CEO initiates planning. Group discusses, agrees and takes responsibility for their parts of the strategy Cultural › CEO and top management team formulate vision and strategy and then mold a strategy-supportive culture Crescive › Lower-level managers formulate and implement their own strategic plans. CEO encourages innovation and filters out inappropriate ideas Typical Corporate Ownership Structure External Individual Stakeholders Shareholders Board of Directors Outsiders and Influence Elect Insiders Large-block Shareholders Monitor & Control Provide Services Obtain Resources Top Management Manage Manager Manager Manager Manager Manager Employees Employees Employees  Agency Theory Agents › Managers, as agents for the owners, should pursue their best interests Agency problem › Managers may maximize their own self-interests at the expense of owners Entrenchment › Occurs when managers gain so much power that they use the firm to further their own interests rather than the interests of shareholders Situations in Which Agency Problems Sometimes Exist › Empire building for status › Extremely high salaries of some CEOs › CEO duality  Effective Boards Take an active role in the organization › Protect shareholder interests › Advise top management › Provide resources such as contacts with external stakeholders Includes outsiders › External stakeholders who sit on the board › Bring fresh ideas and breadth of knowledge › High percentage of outsiders makes a board independent. The best defense against agency problems Includes insiders › Provide stability and enhanced understanding of internal operations  Employees Employees and the way they are managed are important sources of competitive advantage › More sophisticated HR practices lead to higher productivity, especially in capital-intensive industries › High performance work practices lead to lower turnover, higher productivity and performance Effective HR Practices › Work with people instead of replacing them or limiting the scope of their activities › Get people involved in organizational improvements › Employee stock ownership plans (ESOPs) › Performance-based compensation plans  Structure and Culture Organizational structure can greatly influence performance › Includes reporting relationships › Division of people into groups, teams, task forces, and departments › Some organizations are becoming “modular” in an attempt to increase speed and flexibility › Many organizations are decentralizing responsibility and improving rewards for innovations and flexibility Organizational Culture › A system of shared values of an organization’s members Defining an Organization’s Culture Attitude Towards Customers › Respect vs. indifference Attitude Towards Competitors › Compliance, cooperation, or competitiveness Achievement Orientation › Industry leader or follower Risk Tolerance › Degree to which individuals are encouraged to take risks Conflict Tolerance › Degree to which individuals are encouraged to express differences Defining an Organization’s Culture Individual Autonomy › The amount of independence and responsibility given to individuals in decision making Employee Relations › Cooperative vs. adversarial relationships among employees Management Relations › Cooperative vs. adversarial relationships between managers and employees Goal Ownership › Identification with goals and concerns of organization as a whole vs. identification with goals and concerns of a work group or department Management Support › Cooperative vs. adversarial relationships between managers and employees Defining an Organization’s Culture Perceived Compensation Equity › Perceived relationship between performance and rewards Decision-making Style › Rational and structured vs. creative and intuitive Work Standards › Diligent, high performing vs. mediocre Moral Integrity › Degree to which employees are expected to exhibit truthfulness Ethical Integrity › Degree to which decisions are expected to be balanced with regard to stakeholder interests vs. focused exclusively on a key objective like profitability  Types of Cultures Craftsmen › Focus on quality › Can evolve into “tinkerers” if obsession for perfection results in products that are overengineered and overpriced Builder › Focus on growth › If efforts to grow become careless, culture becomes “imperialist” Pioneer › Focus on being the leader in product / technology development › If firm pursues impractical products or technologies, it becomes “escapist” Salesman › Focus on marketing › If firm overemphasizes marketing at the expense of product capability or quality, if becomes “drifter” We Live in a Knowledge Economy Knowledge is an intangible asset Core vs. Integrative Knowledge › Core knowledge--scientific or technological knowledge associated with creation of a product or service › Integrative knowledge--helps integrate various activities, capabilities and products. ¤ More difficult to acquire and more difficult to imitate Codified vs. Tacit Knowledge › Codified knowledge--can be communicated completely through written means › Tacit knowledge--difficult to articulate in a way that is meaningful and complete ¤ More difficult to acquire and more difficult to imitate  Tasks Associated with Internal Knowledge Creation and Utilization Knowledge Creation › Develop reward systems that encourage innovative thinking. › Create a forum whereby creative ideas are shared. › Invest in research and development programs. Knowledge Retention › Document findings from research and development programs. › Create information systems that record and organize innovative ideas. › Document both the ideas and managerial responses or organizational responses to them. › Document successes and failures.  Tasks Associated with Internal Knowledge Creation and Utilization Knowledge Sharing › Create an information system that shares results from research and development projects with other parts of the organization. › Routinely pass new ideas on to managers who can act on them. › Create a database management system to organize ideas generated from employees and managers so that they can be retrieved systematically at a later date. Knowledge Utilization › Reduce bureaucratic barriers that prevent knowledge from resulting in new program and projects. › Encourage risk taking. › Reward success. Facilitating Knowledge Transfer in Joint Ventures Flexible Learning Objectives › Enter into a venture with learning objectives, but be willing to adjust those objectives if needed Leadership Commitment › A strong, higher-level manager must champion the learning objective. This person acts as a catalyst for knowledge transfer. A Climate of Trust › Critical to the free exchange of knowledge  Facilitating Knowledge Transfer in Joint Ventures Tolerance for Redundancy › Redundancy leads to more interaction among participants and interaction leads to more sharing of information Creative Chaos › High-stress events can enhance transfer of knowledge by focusing partners on solving problems and resolving difficulties Focus on Learning in Spite of Performance › Organizations can still learn from ventures that don’t perform well General Organizational Resources Patents and Brands Organizational Reputation Superior Relationships with Stakeholders Other Resources Specific to Each Firm  Major Concepts in Chapter 3 The value of a resource or capability as a source of competitive advantage depends on its market value, its uniqueness, whether a substitute exists, whether systems exist to take advantage of it, whether the organization is aware of a realizing the advantages and whether the the resource or capability is easy to imitate. Financial resources can be a source of competitive advantage, although they may not be unique or hard to imitate. Financial analysis is an important part of internal analysis  Major Concepts in Chapter 3 The value-adding activities (core and support) can be sources of competitive advantage Humans are an organization’s most unique asset. HR practices are being given increasing attention Boards of directors oversee the actions of top managers and provide advice and resources Agency problems can exist when managers pursue their own interests at the expense of the shareholders Organizational culture (shared values) is another potential source of competitive advantage  Major Concepts in Chapter 3 Knowledge management is critical to organizational success. The focus is on creation, retention, sharing and utilization. Joint ventures should be managed so as to maximize knowledge acquisition General organizational resources include brands, patents, reputation and relationships with external stakeholders