INTRODUCTION Strategizing Around the Globe Industry and Resources

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INTRODUCTION: Strategizing Around the Globe: Industry and Resources Pedro Coelhoso Class 2

INTRODUCTION: Strategizing Around the Globe: Industry and Resources Pedro Coelhoso Class 2

Thought for the Day Business is risky, and business people receive signals but not

Thought for the Day Business is risky, and business people receive signals but not complete information. People read signals differently and so act differently even where their goals are identical. -Stephen H. Hymer

Outline for Today Discuss SWOT understanding Analyzing Industry Competition Economic Justification for Expanding Scope

Outline for Today Discuss SWOT understanding Analyzing Industry Competition Economic Justification for Expanding Scope Across Geographic Markets Industry Analysis – Making a choice Competing Using Resources Main Points for Today. Set-up for tomorrow (Dec 15, 2009)

Applying Perspectives on International Strategy These impact how firms behave. Industry-based Competition Firm-specific Resources

Applying Perspectives on International Strategy These impact how firms behave. Industry-based Competition Firm-specific Resources & capabilities Institutional Conditions: - Formal - Informal Acquisitions/Restructuring Global Competitive Dynamics Entering Foreign Mkts Country Selection Local Competition Locating activities across countries Structure Strategic Decisions International Strategy Implementation/ Performance Learning/Alliances

(Strategy is) Value Creation* Consumer Surplus A Buyer’s Maximum Willingness To Pay V: Value

(Strategy is) Value Creation* Consumer Surplus A Buyer’s Maximum Willingness To Pay V: Value to Customer V-P P: Price per unit Business Unit’s Profit P-C C: Cost per unit Production Cost Per Unit of Product Or Service C

Introduction to Intl Strategy Economic Justification for Expanding Scope Across Geographic Markets Heterogeneity Scale

Introduction to Intl Strategy Economic Justification for Expanding Scope Across Geographic Markets Heterogeneity Scale Volatility Implications

Geographic Diversification and Firm Performance Source: Adapted from F. Contractor, S. K. Kundu, &

Geographic Diversification and Firm Performance Source: Adapted from F. Contractor, S. K. Kundu, & C. -C. Hsu, 2003, A three stage theory of international expansion: The link between multinationality and performance in the service sector (p. 7), Journal of International Business Studies, 34: 5– 18. Figure 9. 2

Ownership Test and Market Failure Pro-Market (ie. Use contracts) Market prices as incentives Market

Ownership Test and Market Failure Pro-Market (ie. Use contracts) Market prices as incentives Market prices as information sources Market Failures and Distortions (i. e. Inside) Time lags Costly negotiating Knowledge: pricing and applications Institutional pricing distortions Leverage market power

Sources of Opportunities and Threats in the General Environment Demographic changes. Economic changes. Political

Sources of Opportunities and Threats in the General Environment Demographic changes. Economic changes. Political and Legal changes. Sociocultural (attitudes and values) changes. Technological changes. Global and Globalization changes.

Industry Analysis Potential Entrants Threat of new entrants Suppliers Bargaining power of suppliers Industry

Industry Analysis Potential Entrants Threat of new entrants Suppliers Bargaining power of suppliers Industry competitors Rivalry among existing firms Threat of substitute products or services * Competitive Strategy Michael Porter, 1980 Substitutes Bargaining power of buyers Buyers Complementors

Five Forces Framework: Intensity of Competitor Rivalry Warning signs of a high degree of

Five Forces Framework: Intensity of Competitor Rivalry Warning signs of a high degree of rivalry: frequent price wars proliferation of new products intense advertising campaigns high cost competitive actions and reactions

Competing on Resources Focus of the industry-based view: How “average” firms within an industry

Competing on Resources Focus of the industry-based view: How “average” firms within an industry compete. Focus of the resource-based view: How individual firms differ from each other within an industry and can outperform the industry average consistently and significantly.

Competing Using Resources: Generic Strategy: u Typically impossible to outperform competitors on all dimensions.

Competing Using Resources: Generic Strategy: u Typically impossible to outperform competitors on all dimensions. – Delivering superior customer benefits is usually costly – Reducing costs often entails quality compromises. u How you configure your activities when you strive to attain a low-cost position is likely to be different from how you configure activities when you strive to deliver superior customer benefits. u SO: Have two broad routes to competitive advantage

Examples of Resources and Capabilities Sources: Adapted from (1) J. Barney, 1991, Firm resources

Examples of Resources and Capabilities Sources: Adapted from (1) J. Barney, 1991, Firm resources and sustained competitive advantage (p. 101), Journal of Management, 17: 101; (2) R. Grant, 1991, Contemporary Strategy Analysis (pp. 100– 104), Cambridge, UK: Blackwell; (3) R. Hall, 1992, The strategic analysis of intangible resources (pp. 136– 139), Strategic Management Journal, 13: 135– 144. Table 3. 1

The VRIO Framework: Value The Question of Value Creates value for the customer. It

The VRIO Framework: Value The Question of Value Creates value for the customer. It does not mean that it is expensive. Only value-adding resources can lead to competitive advantage, whereas non-value-adding capabilities may lead to competitive disadvantage. If firms do not shed non-value-adding resources and capabilities, they are likely to suffer below-average performance or become extinct. The search for valuable resources and capabilities is an ever present challenge for virtually all firms in all countries.

The VRIO Framework: Rarity The Question of Rarity What you have and most/all competitors

The VRIO Framework: Rarity The Question of Rarity What you have and most/all competitors don’t have. Valuable common resources and capabilities can lead to competitive parity but no advantage. Valuable rare resources and capabilities can provide, at best, temporary competitive advantage. Resources and abilities that add value in new areas needed to keep up with the competition (benchmarking). Once competitors develop equal abilities, then no unique and distinctive capability remains on which to build a competitive advantage.

The VRIO Framework: Hard to Imitate/Substitute Valuable and rare resources and capabilities are a

The VRIO Framework: Hard to Imitate/Substitute Valuable and rare resources and capabilities are a source of competitive advantage only if competitors have a difficult time imitating them directly or indirectly. Imitation of tangible resources (such as plants, software, or trucking fleet) is easy. Imitation of intangible resources (knowledge, managerial talents, and organizational culture) is much more difficult. Some resources are impossible to imitate (SIA 3. 1: The impossible-to-imitate Terminator) Sometimes you can substitute a resource or capability that is different but is a strategic equivalent.

The VRIO Framework: Imitability and Non-Substitutability (cont’d) Imitation Barriers: Time compression diseconomies: Inability to

The VRIO Framework: Imitability and Non-Substitutability (cont’d) Imitation Barriers: Time compression diseconomies: Inability to acquire in a short period of time rivals’ resources and capabilities over a long history (SIA 3. 2: Mercedes’ failure in learning and practicing the Japanese capabilities of “design to cost”) Path dependencies: History matters (SIA 3. 3: Szczecin Shipyard in Poland) Causal ambiguity: What really causes the success of certain firms? Nobody really knows! Substitutability Barriers: Patents, legal barriers, lack of knowledge, technical requirements, customer behavior

The VRIO Framework: Organization The Question of Organization How is a firm organized to

The VRIO Framework: Organization The Question of Organization How is a firm organized to develop and leverage the full potential of its resources and capabilities? A More Fundamental Question Why do firms exist? In other words, why do people organize firms? Firms exist to develop and leverage resources and capabilities better than individuals could. Complementary Assets: Star power + other talents Social Complexity: Movie production

Reminder: Resources and Capabilities The Resource-based View: (1) A firm consists of a bundle

Reminder: Resources and Capabilities The Resource-based View: (1) A firm consists of a bundle of productive resources and capabilities. (2) The bundles are different across firms. (3) They are not easily moved across firms. Resources The tangible and intangible assets a firm uses to choose and implement its strategies. Capabilities The skills a firm can use to bring its resources to bear. We follow leading resource-based theorists such as J. Barney, D. Collis, and C. Montgomery, by using the two terms, “resources” and “capabilities, ” interchangeably and often in parallel.

Resources & Capabilities: Roots of competitive advantage determined with VRIO Framework Resources Core Competencies

Resources & Capabilities: Roots of competitive advantage determined with VRIO Framework Resources Core Competencies Capabilities Building Blocks Of Value Creation Higher Value • Efficiency • Quality • Innovation • Customer responsiveness Lower Cost Value Creation

The VRIO Framework: Features of a Resource or Capability Valuable Rare Costly to Exploited

The VRIO Framework: Features of a Resource or Capability Valuable Rare Costly to Exploited Competitive Performance Imitate by Firm Impact Yes No No Yes Parity Average Yes Yes No Parity or Less Average (? ) Yes No Yes Temporary Above Average Yes Yes Sustained Above Average Because resources and capabilities cannot be evaluated in isolation, the VRIO framework presents four interconnected and increasingly difficult hurdles for them to become a source of sustainable competitive advantage. Sources: Adapted from (1) J. Barney, 2002, Gaining and Sustaining Competitive Advantage, 2 nd ed. (p. 173), Upper Saddle River, NJ: Prentice Hall; (2) R. Hoskisson, M. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 118), Cincinnati: Thomson South-Western. Table 3. 2

Resources, Capabilities, and the Value Chain The functional activities within the firm that create

Resources, Capabilities, and the Value Chain The functional activities within the firm that create value in the goods and services produced Components of the Value Chain Primary activities Are directly associated with the development, production, and distribution of goods and services. Support activities Assist in the accomplishment of primary activities. Shows how a bundle of resources and capabilities come together to add value.

A Typical Company Value Chain Primary Activities and Costs Inbound Logistics Operations Outbound Logistics

A Typical Company Value Chain Primary Activities and Costs Inbound Logistics Operations Outbound Logistics Marketing and Sales After Sales Service Profit Margin or Performance Procurement, R&D, Technology Development Human Resources Management Administrative Organization/Infrastructure Support Activities

Value Chain – Primary Activities Involved in the creation of the product or service,

Value Chain – Primary Activities Involved in the creation of the product or service, its marketing and delivery to consumers, and after-sales service and support. Area Definition Mftng Service Inbound Logistics Operations Arrival of Inputs Converting Inputs + ++ +/++ Outbound Logistics + - Marketing & Sales Good or Service to Customer Getting Customers + ++ After sales Service Help after sale + ++

Value Chain – Support Activities - provide inputs that allow the primary activities to

Value Chain – Support Activities - provide inputs that allow the primary activities to take place – go across the primary activities. Procurement – Buying what you need on a regular basis. R&D – Developing new ideas/products/services. Technology Development– How a company uses technology. HR Management – How people are managed. Organization/Infrastructure – How the company is organized; financial issues.

Main Points Market incentives and market failures inform us concerning activities within the firm

Main Points Market incentives and market failures inform us concerning activities within the firm and outside the firm. Firm performance depends on understanding its industry and its resources. Analysis of a firm’s industry, resources, capabilities, and value-chain in one country may or may not transfer to other countries. Which resources and capabilities can be used in other countries/markets to create value? What resources or capabilities should we standardize across countries and what should we tailor to local market conditions? (use value chain)

Set up for Tomorrow Reading: Peng Text, Chapter 4 and ‘Spotting Institutional Voids in

Set up for Tomorrow Reading: Peng Text, Chapter 4 and ‘Spotting Institutional Voids in Emerging Markets’ Other Preparation: Read ‘Dubai – A new world’ and ‘Corn Flakes Clash. Consider: How are institutions influencing business in Dubai and in Europe? Learning Objectives: To learn how formal and informal institutions impact the ability of a firm to succeed. These include government organizations, cultural norms and perceptions of corruption.