BASIC CONCEPTS: BEFORE THE COURSE BEGINS BUS INTRODUCTION DR. MARK FRUIN

BASIC CONCEPTS/MODELS 1) FROM SOURCES TO SALES -“VERTICAL” SEQUENCING OF BUSINESS ACTIVITIES –DON’T CONFUSE W/ 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 (EXCEPT SOMETIMES FOR HIGH-TECH INDUSTRIES)

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

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 –MORE LEVELS = GREATER AUTHORITY & MORE DECISION-MAKING DISCRETION BY LEVEL WE THINK FLATER IS BETTER, BUT FEW TRULY FLAT FIRMS, 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 THEY ARE STILL VALUE CHAINS FIRM BOUNDARIES BECOME PERMEABLE –IS THIS A GOOD THING OR BAD? –HOW DOES IT AFFECT STRATEGY?

VALUE CHAINS II DOWNSTREAM CONTROL GENERALLY YIELDS HIGHER VALUE ADDED RETURNS –MORE PROCESSING = MORE PROFIT –MORE CONTROL OF FINAL PRODUCT PRICING 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, INDUSTRY, LEVEL OF ECON DEVELOPMENT INTERNALIZATION OF VERTICAL INTEGRATION OFTEN COUNTRY & 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 R NOT GLOBAL

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 YEAR AFTER YEAR, 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 MODEL = LONG-TERM GOOD CORPORATE GOVERNANCE MODEL –NOT SEXY, BUT HARDER THAN YOU THINK TO PERFORM WELL IN SUSTAINED MANNER

MICHAEL PORTER MODELS BASED ON U.S. FIRMS 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 “RIGHT” VALUE CHAIN –STRUCTURE  CONDUCT  PERFORMANCE

RESOURCE-BASED VIEW RBV OF THE FIRM (AND STRATEGY) APPEARS IN THE 1990s FIRM AS A COLLECTION/GROUPING OF RESOURCES & CAPABILITIES FOCUS 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 DON’T DO WELL –R-C-C-DC MODEL

MUNDANE MODEL BALANCING INTERNAL & EXTERNAL STAKEHOLDERS DIFFICULT TO DO WELL FIRMS THAT DO THIS CONSISTENTLY & WELL “WIN” IN SOME SENSE –CONSISTENT & BETTER THAN AVERAGE “WINS” IN THE LONG RUN –ESPECIALLY IN HARD-TO-DO HIGH TECH & GLOBAL INDUSTRIES

DONUT RING MODEL FIRMS ARE REQUIRED TO ADAPT TO THEIR ENVIRONMENTS OR FAIL SOME FIRMS HAVE POWER TO SHAPE ENVIRON- MENTS; UNUSUAL & SOMETIMES ILLEGAL DEGREE OF FIT (BETWEEN FIRM STRATEGIES & THEIR ENVIRONMENTS) DEGRADES OVER TIME –ENVIRONMENTS CHANGE FASTER THAN FIRMS –FIRMS CONSTANTLY TRYING TO CATCH UP IN RAPIDLY CHANGING ENVIRONMENTS, SOME FIRMS MAY HAVE MORE POWER THAN OTHERS TO SHAPE ENVIRONMENTS –CO-EVOLUTION RESULTS (e.g. S.V.)

GENERAL MODEL OF STRATEGY STRATEGY MORE THAN A “BUSINESS MODEL” WHAT’S DIFF BTWN BUS MODEL & STRATEGY? –BUSINESS MODEL: HOW WILL WE MAKE MONEY –STRATEGY: UNDERSTANDING THE WHOLE FIRM AS A SYSTEM UNDERSTANDING ENVIRONMENTS (WHAT’S CALLED FOR) UNDERSTANDING WHAT YOU’VE GOT & WHAT YOU CAN DO WITH IT ORGANIZATIONAL PROCESSES, ESPECIALLY INERTIA PEOPLE OFTEN DISAPPOINT & UNDER-PERFORM HIGH-LEVEL PERFORMANCE HARD TO SUSTAIN FOR LONG FIND BOTTLENECKS IN INDUSTRY & DEVELOP DISTINCTIVE COMPETENCIES TO EXPLOIT THEM –A VERY GOOD PLAN PLUS WAYS TO EXECUTE PLAN –THE DEVIL IS IN THE DETAILS