BASIC CONCEPTS BUS INTRODUCTION DR. MARK FRUIN January 29-30, 2013

BASIC CONCEPTS/MODELS 1) FROM SOURCES TO SALES –“VERTICAL” SEQUENCING OF BUSINESS ACTIVITIES –DON’T CONFUSE WITH FIRMS’ VERTICAL INTEGRATION STRATEGIES 2) INDUSTRIES & SECTORS; HOW DIFFERENT? 3) FIRMS; WHAT ARE THEY? –GOALS, RESOURCES, HIERARCHY & LEGITIMACY 4) FIRM VALUE CHAINS –INTERNALIZED VALUE ADDING SEQUENCE OF ACTIVITIES –NOT TO BE CONFUSED W/ VERTICAL SEQUENCING ABOVE OR VERTICAL INTEGRATION STRATEGIES 5) FIRM BOUNDARIES –WHAT DETERMINES FIRM BOUNDARIES? 6) ENVIRONMENTS SHAPE FIRMS & NOT VICE VERSA (IN THEORY EXCEPT FOR SOME HIGH-TECH INDUSTRIES)

FROM SOURCES TO SALES: VERTICAL SEQUENCE OF ACTIVITIES ALL PRODUCTS BEGIN & END SOMEWHERE THE SUM OF ALL SOURCING, HARVESTING, DESIGNING, DEVELOPING, ASSEMBLING/MAKING, BRANDING, PACKAGING, & MARKETING STEPS = PRODUCTS OR SERVICES DELIVERED TO CUSTOMERS FIRMS CLUSTER ALONG STREAMS OF ACTIVITIES = –CLUSTERS = SIGNIFICANT STEPS OR STAGES IN SEQUENCING = –CLUSTERS = INDUSTRY BOUNDARIES

INDUSTRIES & SECTORS INDUSTRIES ARE PLACES WHERE VERTICAL INTEGRATION ACTIVITIES COME TOGETHER, CLUSTER & COALESCE FIRMS AT THESE PLACES OFFER PRODUCTS & SERVICES THAT ARE CLOSE SUBSTITUTES FOR EACH OTHER USUALLY INDUSTRIES APPEAR WHERE HARVESTING, PRODUCING, AND DISTRIBUTING ACTIVITIES TAKE PLACE SECTORS ARE INTERRELATED INDUSTRIES, LIKE IC CHIPS, HARDWARE & SOFTWARE THAT MAKE UP THE COMPUTER SECTOR

FIRMS ALL FIRMS ARE CHARACTERIZED BY –RESOURCES –HIERARCHY/MANAGEMENT –GOALS/PURPOSES/DIRECTIONS –AUTHORITY & LEGITIMACY FIRMS CAN BE TALL OR FLAT, MEANING THE NUMBER OF LEVELS OF HIERARCHY HIERARCHY MEANS LEVELS –LEVELS = GREATER AUTHORITY & DECISION- MAKING DISCRETION ALTHOUGH WE THINK FLATER IS BETTER, FEW FLAT ORGANIZATIONS, EXCEPT SMALL FIRMS

VALUE CHAINS I FIRM’S ORGANIZED (INTERNALIZED)WAY OF CONVERTING INPUTS TO OUTPUTS TRADITIONALLY, FIRM BOUNDARIES ENCOMPASS VALUE CHAINS TODAY, MANY STEPS & STAGES IN VALUE CHAINS MAY BE GEOGRAPHICALLY & ORGANIZATIONALLY SEPARATED FROM CORE (PARENT/MAIN) FIRM, BUT STILL VALUE CHAINS FIRM BOUNDARIES BECOME PERMEABLE –IS THIS A GOOD THING OR BAD? –HOW DOES IT AFFECT STRATEGY?

VALUE CHAINS II IN MOST CASES, DOWNSTREAM CONTROL OF ACTIVITY STREAM YIELDS HIGHER VALUE ADDED RETURNS –MORE PROCESSING = MORE PROFIT –MORE CONTROL OF FINAL PRODUCT PRICING THE ORGANIZATION (CONTROL) OF INTRA- INDUSTRY & INTER-INDUSTRY RESOURCES & CAPABILITIES IS KEY TO PROFITABILITY –CONTROL OF MARKET ACCESS IS CRUCIAL –CONTROL OF COMPLEMENTARY RESOURCES –CONTROL OF KEY COMPONENTS & ASSEMBLIES –CONTROL OF FINAL ASSEMBLY PROCESSES

FIRM BOUNDARIES FIRM BOUNDARIES ARE ARBITRARY –A MATTER OF CHOICE AND IMITATION INDUSTRIAL STRUCTURE - HOW INDUSTRIES & FIRMS ARE ORGANIZED –VARIES BY COUNTRY, LEVEL OF ECON DEVELOPMENT INTERNALIZATION OF VERTICAL INTEGRATION ACTIVITIES IS OFTEN COUNTRY- AND INDUSTRY- SPECIFIC –COUNTRY-SPECIFIC MODELS OF WHAT FIRMS ARE –INDUSTRY-SPECIFIC EXAMPLES OF WHAT FIRMS ARE FIRMS CAN BE MORE OR LESS POROUS/ PERMEABLE THAN NATIONAL AVERAGE IN GLOBAL WORLD, INDUSTRY & FIRM BOUND- ARIES ARE DYNAMIC OR FIRMS NOT GLOBAL

FIRM BOUNDARIES HOW MANY VALUE CHAINS CAN FIRMS ENCOMPASS & STILL DO WELL? –THIS IS A STRATEGY OF DIVERSIFICATION –WHAT ARE THE LIMITS TO ORGANIZATION? DEPEND IN LARGE MEASURE ON HOW SIMILAR/DISSIMILAR MULTIPLE VALUE CHAINS ARE –AND ON THE DEGREE OF CONTROL SOUGHT –OR EXISTENCE OF SECRET SAUCE = FIRMWIDE, TOP DOWN SKILLS & COMPETENCES

WHAT IS STRATEGY? SIMPLEST DEFINITION = STRATEGY IS WINNING –WHAT ARE RULES OF THE GAME; WHO ARE PLAYERS OF THE GAME? MORE COMPLEX DEFINITION = DOING BETTER THAN INDUSTRY AVERAGE –DOESN’T SOUND DIFFICULT BUT REGRESSION TO THE MEAN IS A STATISTICAL LAW –LONGTERM SUCCESS DEPENDS ON BEING IN THE “RIGHT INDUSTRIES” & DOING WELL CONSISTENTLY OR, SUPERIOR, SUSTAINED PERFORMANCE RELATIVE TO RIVALS IN SAME INDUSTRY

THREE MAIN MODELS OF STRATEGIC SUCCESS M. PORTER’S INDUSTRY-BASED MODEL –WORKS BEST WITH MATURE, CONCENTRATED, TRADITIONAL INDUSTRIES –MODEL IS DESCRIPTIVE, NOT PREDICTIVE RESOURCE-BASED VIEW OF THE FIRM AND STRATEGY MUNDANE/MUDDLED MODEL = LONG- TERM GOOD CORPORATE GOVERNANCE MODEL –HARDER THAN YOU MIGHT THINK

MICHAEL PORTER MODELS BASED ON U.S. IN THE 1970s & 1980s FOCUS ON INDUSTRIES = EXTERNAL ENVIRONMENT OF FIRMS; OUT-IN MODEL MATURE INDUSTRIES WITH WELL DEFINED PERFORMANCE PARAMETERS BE IN THE “RIGHT” INDUSTRY BE IN THE “RIGHT” POSITION IN THE INDUSTRY –RIGHT POSITION MEANS IN THE RIGHT PART OF VERTICAL ACTIVITY SEQUENCE & WITH THE “RIGHT” VALUE CHAIN

RESOURCE-BASED VIEW RBV OF THE FIRM (AND STRATEGY) APPEARS IN THE 1990s; IN-OUT MODEL FIRM AS A COLLECTION/GROUPING OF RESOURCES & CAPABILITIES FOCUSES ON RARE OR SINGULAR RESOURCES THAT RIVALS DON’T HAVE HOW WELL ARE RESOURCES & CAPABILITIES ARE MOBILIZED/USED –DISTINCTIVE COMPETENCIES: WHAT YOU DO WELL AND RIVALS DO NOT

MUNDANE/MUDDLED MODEL BALANCING INTERNAL & EXTERNAL STAKEHOLDER INTERESTS IS COMPLICATED & DIFFICULT TO DO WELL FIRMS THAT DO THIS CONSISTENTLY, ARE FIRMS THAT “WIN” IN SOME SENSE NOT SEXY, BUT CONSISTENT & BETTER THAN AVERAGE PERFORMANCE “WINS” ESPECIALLY IN HARD-TO-DO HIGH TECH & GLOBAL INDUSTRIES

DONUT RING MODEL IN GENERAL, FIRMS ARE REQUIRED TO ADAPT TO THEIR ENVIRONMENTS OR FAIL OCCASIONALLY, FIRMS HAVE POWER TO SHAPE ENVIRONMENTS; THAT’S UNUSUAL & OCCASIONALLY ILLEGAL DEGREE OF FIT DEGRADES OVER TIME –ENVIRONMENTS CHANGE FASTER THAN FIRMS –FIRMS CONSTANTLY TRYING TO CATCH UP IN RAPIDLY CHANGING ENVIRONMENTS, SUCH AS SILICON VALLEY, SOME FIRMS MAY HAVE MORE POWER THAN OTHERS –CO-EVOLUTION RESULTS (e.g. S.V.)

GENERAL MODEL OF STRATEGY STRATEGY IS MORE THAN A “BUSINESS MODEL” WHAT’S DIFF BTWN BUS MODEL & STRATEGY? –BUSINESS MODEL: HOW WE MAKE MONEY –STRATEGY: UNDERSTANDING ENVIRONMENTS (WHAT’S CALLED FOR) UNDERSTANDING WHAT YOU’VE GOT & WHAT YOU CAN DO WITH IT ORGANIZATIONAL PROCESS, ESPECIALLY INERTIA PEOPLE OFTEN DISAPPOINT HIGH-LEVEL ORG PERFORMANCE HARD TO SUSTAIN FIND BOTTLENECKS & DEVELOP DISTINCTIVE COMPETENCIES TO EXPLOIT BOTTLENECKS –A PLAN PLUS A WAY TO EXECUTE THE PLAN –THE DEVIL IS IN THE DETAILS