Systems Model of the Firm Firm OutputsInputs SuppliersCustomers Costs Profits Returns Materials Employees Equipment Facilities Money Products Services Support Resources Capabilities Competencies

Sources of Competitive Advantage  Resources: the assets available to a firm to perform activities to produce value for the market Tangible Intangible  Capabilities: the procedures and processes the firm has developed to use its resources effectively; the ability to put resources to productive use  Core Competencies: the activities that are unique to a firm that allow it to differentiate its products or services from competitors

Ratio of Market Value to Book Value for Selected Companies Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. AnnualMarketBookRatio of Sales Value Value Market to Company($ billions) ($ billions) ($ billions) Book Value Google Genentech Yahoo! eBay Southwest Airlines Union Pacific (Railroad) Ford Motor Company

Intellectual Capital Intellectual Capital = Market Value – Book Value Human Capital: the individual capabilities, skills, and experience of the firm’s employees Social Capital: the network of relations the individuals have throughout the organization Knowledge: the accumulated and integrated experiences of individuals in the organization –Tacit –Explicit

Human Capital Attracting – “Hire for attitude, train for skills” – IQ v. EQ Developing – Train – Evaluate Retaining – Tangible Rewards – Intangible Rewards

Social Capital Combines and leverages human capital Creates ‘social complexity’ and ‘causal ambiguity’ Social Networks –Closure –Bridging Organizational Culture Can have negative consequences –Closed club –Group think –Organizational inertia

Knowledge Tacit knowledge – Embedded in personal experience – Resides within the individual – Shared only with consent Explicit Knowledge – Documented and codified – Can be widely distributed and shared

Source of Strategic Success The willingness and ability of the people in the firm to support the strategy. What is the most important factor in achieving strategic success?

Management’s Profound Challenge We have to meet organizational objectives through individual efforts Individuals have their own needs and motives Individuals are resistant to being managed The tension between the individual and the organization can be resolved through shared values –Management’s responsibility is to create a context of shared values that individuals can commit to –Values convey the message of a common purpose which satisfies individual needs and organizational objectives

Leadership Leader’s success is measured by how effectively they create strategic change Leadership is a process whereby an individual influences a group of individuals to achieve a common goal. Leadership is the art of getting someone else to do something you want done because he wants to do it.

Managers and Leaders Management Custodial Managers Leadership Change Agents Action AgendaRational Process Planning, Controlling Top Down Emergent Process Motivating, Empowering Bottom Up OutcomesStability, Efficiency, Incremental Change Transformation, Growth, Radical Change ConcernDoing things rightDoing the right things RelationshipsAuthoritativeFacilitating PerspectiveShort-term GoalsLong-term Objectives

Bartlett and Ghoshal Building: (attracting and developing) –locating and attracting the best of the best at every level –constantly developing those talented individuals Bonding: (retaining) –developing the engaging, motivating, and bonding culture that will attract and energize people so they commit to the organization –renegotiating implicit and explicit contracts with key stakeholders to reward their value creation Linking: (social capital) –developing social networks that actively link, leverage, and embed individual knowledge and abilities Strategy must be built on a human resource foundation